Property funds are hugely popular among investors at the moment although their investment motivation may be based on traditional preferences and marketing hype rather than reality. There is no doubt property is a good way into the market for first time investors because it is a product that is easy to understand.
Unfortunately, the success of property fund investment is akin to the stock market in that the trick is still knowing when to get in and when to get out.
Professional opinion on the potential future performance of these funds is split. Some experts say their popularity means any possibility of a decent return is dead as the dangerous herd mentality takes over. Others argue they still offer value for money.
Moneywise Financial Planning's, Mr Owen Morton, believes they are still a good deal. "They are looking good, particularly commercial property funds. For maybe six of the last 10 years property funds have done nothing but they've had a burst in the last few years," he said.
Companies who have offered these funds in the past include Norwich Union, Irish Life, Friends First and Canada Life. Several of the large auctioneers have also offered them to high net worth investors.
The accompanying chart shows that from 1989 to 1993 growth was non-existent or negative but in 1994 property prices began heating up. From 1994 to the present day, some funds like Norwich Union Property 1 have increased by more than 200 per cent. Even those with a more lacklustre performance, like Canada Life, have delivered a return of in excess of 100 per cent on an investment made in 1994.
It is not all a bed of roses and investors should think carefully about the market. "Historically, there always comes a time when they disappoint. The market turns around and people get stuck," says Mr Morton.
If the market turns within the first five years and people want to get out they may be clobbered with exorbitant exit charges. The majority of funds are promoted as a long term investment so exit charges are structured to deter short-term players.
According to research conducted by Moneywise, Norwich Union and Irish Life have been the best property fund managers over the last 10 years. Irish Life's fund has grown by more than 37 per cent tax-paid since it opened in June 1998.
Canada Life and Norwich Union are the only providers with a fund open at the moment. Norwich Union's Irish commercial property fund is due to close on October 31st. It is projecting 15 per cent growth per annum over the next three to five years.
In the past, many funds have predicted capital growth of 20 per cent and rental growth of 10 per cent. Investors are wise to remember that despite such projections past performance is no guarantee of future results.
The majority of commercial property funds are Dublin-based with commercial property in the city experiencing its lowest vacancy rate at 2.4 per cent. This is a clear sign that demand is still outstripping supply.
Other funds are expected to open periodically for "short, sharp bursts over the coming year", says Moneywise's Mr Alan Morton
Many funds are now investing in commercial and residential property in Britain, which has seen substantial growth over the last year after a long period of low prices.
There are clear benefits to property funds in that they are a pooled investment and therefore spread risk. Professional management of the funds is also a plus. Owners of single properties have the hassle of property maintenance, rent collection, insurance and liquidity issues should a downturn occur. The required investment amount is small, with most funds hovering around the £5,000 mark.
The downside includes the longterm nature of the investment and the lack of liquidity when the fund is closed.
Despite the hype, property funds are not for the faint-hearted short-term investor. Long term investors may find they still offer good value.
