Flurry of funds target residential property

Candy & Candy, the luxury property company, this week became the latest group to launch a residential fund, unveiling plans to list a £100m Guernsey closed-end investment company on the London Stock Exchange, to be funded by private investors contributing a minimum £25,000.

Amid increasing signs of recovery in the housing market, the fund is one of many residential property funds to appear in recent weeks, seeking to attract investors with promises of double-digit returns.

But a study of the fast-growing sector, published in this week’s edition of Investors Chronicle, the FT magazine, concludes that few will succeed in raising cash, and those that do will struggle to achieve promised returns.

Residential property investment has returned to favour as price forecasts have risen. Knight Frank estimates that the value of prime central London properties over £1m will jump by 40 per cent in the next five years, and Savills predicts that average UK house prices will rise by 27 per cent between 2012-2015.

However, the buy-to-let market has never been harder to access. The number of buy-to-let mortgages has fallen 94 per cent since the market’s 2007 peak, according to Moneyfacts.co.uk, and 40 per cent deposits and 3 per cent arrangement fees are now common. This is providing an opportunity for residential property funds.

The Candy & Candy Growth Fund is seeking properties of up to £10m in value in central London. These will be rented out for five years, then refurbished and sold. But a prospectus won’t be available until Christmas, the fee structure is still being “negotiated” and it is doubtful that anticipated rental yields of 3 per cent will be enough to service interest on the debt. However, target growth “equivalent to an annual internal rate of return (IRR) of 10 per cent” is anticipated over the fund’s seven-year life.

Many financial advisers question how the fund can find value, given the scarce supply and huge demand for prime property. “What you think is expensive could be what we think is cheap!” said Nick Candy at the fund’s launch.

The fund hasn’t ruled out buying in stock from current Candy & Candy developments, including its flagship Knightsbridge scheme, One Hyde Park.

Bijou residences in the capital are also the target of the smaller £10m London Central Residential Recovery Fund. With a minimum investment of £50,000, it aims to double investors’ money in eight years. However, the property manager charges a 2 per cent fee on all acquisitions, a project management fee on refurbishment and 15 per cent fee on the rental.

At the other end of the market, the Residential Property Recovery Fund is chasing £25m of discounted property in the Midlands and northern England, which it will lease to students and housing associations before selling in seven years. Any rise in capital values is likely to be less dramatic than London prices, but the current postcode lottery of how housing benefit rents are calculated could boost rental yields.

Distressed properties are also the target of a £25m fund from fast-growing investment group Assetz, which is seeking below market value property in UK cities. With a minimum investment of £20,000, the closed-ended fund is targeting a 15 per cent compounded annual return, driven by rental yields on undervalued properties. When the fund is wound up, investors receive the first 20 per cent of value uplift.

But property analysts warn that valuations and projected returns are questionable. “The only truly distressed area of the market is cruddy buy-to-let properties where people overpaid in the first place,” says Graham Gould, managing director of Coba Asset Management. “Just because they’re worth 40 per cent less now, doesn’t mean they’re cheap.”

For the full report, see this week’s edition of the Investors Chronicle. Claer Barrett is property correspondent of Investors Chronicle