Real Estate Funds
What is a real estate or property fund?
According to The Association of Real Estate Funds (http://www.aref.org.uk/faqs.asp)
A property fund is a collective investment scheme with a portfolio comprising mainly of direct property but may also include other property related interests. Property funds take a numberof different legal structures depending on their domicile and target customer. The following are the most common forms of property fund:
- Unit Trust
- Open-Ended Investment Company
- Limited Partnership
Real Estate Funds offer opportunities for both growth and income investors seeking long-term returns outside of the stock market arenas. Smaller and private investors can invest in larger, corporate scale investments that would typically be out of their financial reach through Real Estate Funds. However they should understand that investing in these funds has a new set of risk/reward scenarios that are not under their individual control, but overseen by fund managers. If you are able to hold the investment for the long term, then you should reap some excellent returns.
Since the mid 1990’s the real estate fund market sector saw incredible growth across the globe, with many new funds being offered almost every month. Whilst the bull market rampaged through property circles, life was very rosy, with strong returns shown each quarter. Unfortunately the bubble burst and real estate funds began to falter more than other investments due to their lack of liquidity and reliance on rental returns, which in a falling market had to be continuously adjusted downwards just to keep tenants in place.
These real estate funds are professionally managed portfolios of diversified real estate holdings. Most real estate funds invest in commercial, corporate or rental properties, and sometimes invest in residential products. This type of fund can invest in properties directly, indirectly through REITs or even through construction companies both nationally and abroad.
Property funds are a good investment, subject to positive market conditions, but in fairness so is everything else. As an example
Morgan Stanley raised $4.7bn for its most recent property fund in May, which has not been invested. In April, the firm’s $8.8bn international real estate fund told investors it expected losses of up to two-thirds of its value.
According to the Financial Times on the 10th of August 2010 http://www.ft.com/cms/s/0/4e6f05c6-a4b9-11df-8c9f-00144feabdc0.html.
Was the raised capital not invested because they were having a major overhaul of strategy, or was it because a loss of over $5.5 billion the month before was a lot for investors to swallow?
Many an outsiders views on Real Estate Funds are that the fund managers rarely visit the real estate involved and in many cases, have their heads buried so far in the sand that even when alarm bells start to ring, they continue to invest “other people’s money”.
In our opinion smaller, more “accessible” property funds are far more viable than corporate monsters. The fund managers are much more inclined to monitor the local market in order to keep ahead of it especially if they specialise in localised funds.
