What is a real estate investment fund and is it a profitable option?
The majority of realtors (81%) believe that
However, such a mode of investment is set to become more popular. “We expect Russian nationals to learn more about collective investment (crowd funding) and real estate funds, and to gradually begin moving in this direction
This guide explains how to use an investment fund as a tool for investing in projects related to property and the construction of real estate.
The fund operates in the following manner:
- the fund appoints a management company (fund managers);
- investors make a capital contribution to the fund;
- fund managers purchase properties with the money from investors;
- fund managers generate profits and direct them to the fund;
- profits from lease and/or resale of property are distributed among the investors in the fund proportionately to their share.
Fund investments have many advantages:
- low entry threshold:
€1,000–30,000(when compared to the minimum price of a liquid property, which is €100,000);
- shares are easy to buy and sell (on any working day
- professional management (saves time);
- investment portfolio diversification;
- greater liquidity in comparison to direct property investment.
However, there is also a significant disadvantage: foreign funds are difficult for
Tranio expert, Alexander Chernov, comments: “It is difficult for individuals to invest in the US for a number of reasons. Most investment platforms are organised as REITs (Real Estate Investment Trusts), exempt of taxation, which move the property investment income tax burden onto their shareholders (investors). Such a structure is favourable for US residents who often invest in these types of funds using the money from their retirement investment accounts that also have tax preferences for investment purposes. However, foreign investors who put their capital into similar American funds will have to pay a significant amount of income tax and submit a tax return in the US on their own, as the funds do not act as tax agents. In addition, tax returns are laborious and expensive to prepare.”
However, according to the Head of Financial Services at Tranio, Kirill Schmidt, it is possible to invest in REITs on the stock exchange, like in securities. “In this scenario,
Types of funds
First, it is important to know what different types of real estate investment funds are out there before looking at profit accrual models.
1) By profit use
|Accumulation (Acc.) fund||Income (Inc.) fund|
|Ways profits are used||Profits are reinvested into the fund to buy other properties or shares||Profits are deposited
|Purpose of fund||Boost and increase the property base to generate incremental income||Only earn income|
|Most real estate investment funds combine expansion and income generation.|
2) By trading on the stock exchange
|Share issuance||Issuing shares||Optional|
|Legal status||— REITs; — private equity real estate companies.||— unit trusts or mutual funds; — pension schemes; — limited partnerships.|
3) By term of investment:
|Terms of sale and purchase||An investor can buy units or call on a management company to purchase units on any business day.||Established for a fixed term
|Most funds with development projects are
Funds financing construction projects are generally
There are four main real estate investment strategies: Core, Core Plus, Value Added and Opportunistic. An investor should know the strategy of the fund in order to assess the risks and returns.
|Core||Buy and Hold||Real estate acquisition for rental purposes without leverage.||Low||Low (2–3%)|
|Value Added||Redevelopment (real estate acquisition for renovation, future repairs and resale at a higher price).|
|Opportunistic||Construction, purchase of undeveloped land and encumbered properties.||High||High (over 10%)|
Most funds adopt just one strategy but some choose to combine two or three concurrent strategies (e.g., pursuing Core, Core Plus and Value Added all at once). “In Europe and the US, Core and Core Plus funds prevail by capital volume, as they include a significant percentage of the largest and the most expensive institutional properties,” Alexander Chernov says.
Core funds usually choose established
Fund and strategies: case studies
“Objectives differ from investor to investor: some want to preserve their capital with minimum risks and returns; others have a good appetite for risk because they are looking for higher yields on their invested capital. The Western real estate fund market has a wide range of strategies, risk levels and returns for investors,” says George Kachmazov.
|Fund||Aberdeen Property Trust||Henderson||Legal & General||PropFund||US Masters Residential Property Fund|
|Type of fund|
|Strategy||Core||Core||Core||Core Plus||Value Added|
|Minimum budget||£5,000||£1,000 (Acc.), £3,000,000 (Inc.)||£500||€30,000||N/A|
|Geography of properties||UK (London)||UK
||UK||Germany (Berlin and suburbs, cities with over 50,000 inhabitants)||USA (New York, New Jersey, undervalued locations)|
|Types of funds||50% retail, 20% office||Retail and office property||22% industrial, remainder: shops, offices, retail parks, warehouses||Apartments||Affordable housing
|Return, % annual||3.1||2.8||N/A|
|Leveraged capital (LTV, %)||-||-||-||N/A|
In a survey by the European Association for Investors
However, the Opportunistic strategy is more popular in certain markets. For instance, JLL reports that in Spain in 2015, 28% of investment strategies were Opportunistic whereas Core and Core Plus accounted for 35%. It is worth noting that Spain and its investors have a higher risk profile than the UK and Germany.
Mitigating risk and diversifying the portfolio
Real estate funds, as with any type of investment, entail risks: the higher the returns, the higher the risks. Return on investment (ROI) depends on: whether the fund asset value increases or decreases, rental demand; and rental rate dynamics. Returns are not guaranteed for investors.
“One of the key risks in fund investment is posed by dishonest managers. It is crucial to choose a company with a good background, reputation, transparent auditing and a clear strategy,” says George Kachmazov. Most of the funds do their best to mitigate risks by mixing various strategies and diversifying their portfolio.
|Risks||How funds insure risks|
|Macroeconomic risks (crisis, inflation, etc.)||Choice of stable markets (e.g. investments
|Market risk (real estate price decrease, lower rentals)|
|Forex risk (e.g. an Australian fund investing in the US faces exchange rate risks if the US dollar weakens)|
|Regulatory risk (changes in legislation)|
|Price risk (buyer offer lower than the asking price)||Buying in neighbourhoods with expected or ongoing gentrification or regeneration.|
|Credit risk (the fund cannot get beneficial lending terms in the future)|
|Tenants defaulting||Reliable tenants with a good credit history (major companies such
|Idle capacity risk||Choice of leased properties with minimum occupancy
|Maintenance cost risk||Choice of quality properties (not requiring renovation, “green”
Many funds diversify their investment portfolio, meaning they channel capital into real estate of various types in different countries using several investment strategies. Alongside real estate, funds can retain a minor part of the funds in cash or securities. There are also such funds that invest into other funds or into real estate companies abstaining from direct real estate investments.
How should I invest?
Core and Core Plus projects are the most secure, but the Value Added strategy allows you to earn more.
“There is no universal recommendation. the choice depends on the investment goals and where
According to George Kachmazov, those wishing to invest in Value Added strategies should choose understandable markets and reliable funds to minimise risks.
“It would be a good idea to select funds with promising strategies, for instance, investing in a class of property that will be popular within
Annex: Specifics of European real estate funds
|Country||Legal status||Requirements for fund||Pros||Cons|
|Austria||At least 10 investments in four years.||For any investor; No taxes at fund level; Well-regulated; The fund buys units upon investor request.||Restrictions on types of real estate; Capital gains are taxed whether the property is sold or not.|
|At least 5 investments in four years.||Flexible tool for institutional investors.||Restrictions on certain types of real estate; Only accepts investments from legal entities; Usually long-term investments; Capital gains are taxed whether the property is sold or not.|
|UK||Limited Partnership (LP).||None||No taxes at fund level;
Lower tax rates
||The structure is more suited
|Tax Transparent Funds, TTFs: authorised and regulated limited partnership vehicle (ALP) and contractual
||None||No taxes at fund level;
Lower tax rates for
||TTF is a new functional type of real estate fund; Uncertainty in terms of its recognition by international organisations.|
|Property Authorised Investment Fund (PAIF),
||Conditions are determined on a case-by-case basis.||Most
|Germany||Bank leverage of no more than 30% of the total real estate value.||Common and reliable tool for any investor; No taxes at fund level.||Minimum
|Bank leverage of no more than 50% of the total real estate value.||No taxes at fund level.||Only for professional or semi-professional investors.|
||Bank leverage of no more than 60% of the total real estate value.||No tax on profit distribution for any investor.||Double tax treaties and EU directives not applicable; The fund may be subject to German trade tax.|
|None||No taxes at fund level.||Double tax treaties and EU directives not applicable;
Only for professional
|Luxembourg||Undertakings for Collective Investments, UCIs:
- Fonds Commun de Placement, FCP;
||Maximum 20% can be invested into one investment property; Bank leverage of no more than 50% of the total real estate value; Minimum asset value €1.25M.||Flexible investment tool; Popular among foreign investors; No taxes at fund level.||Taxation of investors depends on their country of residence.|
|Specialised Investment Funds, SIF (FCP, SICAV, SICAF).||Maximum 30% invested into one property; Minimum asset value is €1.25M.||No taxes at fund level.||Investors can only be companies, professional investors or individuals investing at least €125,000 or those willing to provide documentary proof of investment experience; Taxation of investors depends on their country of residence.|
|None (Opportunistic investment strategy)||No taxes at fund level.||Only for professional investors; Taxation of investors depends on their country of residence.|
|France||€500,000 capital during the first three years after establishment; Minimum 60% should be property; Minimum 85% of rental income (for SPPICAV) and 100% capital gains are distributed among investors.||No taxes at fund level; Public funds can be exempt from the 3% tax.||Double tax treaties not applicable; Few FPIs available.|
The material contained within this article is for informational purposes only. Real estate investments come with risk, which can extend to the loss of capital invested. Tranio strongly recommends discussing plans with a professional investment advisor before making any investment.
Yulia Kozhevnikova, Tranio
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