What is a Property Fund - A Brief Overview
For anyone who is unfamiliar with Property Funds here is a brief overview of how they work.
A Property Fund uses the sale of shares to accumulate money in order to purchase property(s). Property Funds are especially profitable when they acquire property during a depressed market. However in any market the increased buying power of the fund will ensure that discounts can be achieved off market value. Each property fund will have a timescale for which the properties will be held, before ultimately reselling the portfolio when the market is strong, a higher price can be achieved and therefore a profit secured.
Funds using finance from banks along with investor capital can purchase a greater value of properties and increase the profit potential of the fund. The properties are let throughout the term to create an income which will be sufficient to cover finance payments and other associated property costs and in some cases to build up further returns on the investment. At the end of the designated term when the properties are sold the fund is ‘wound up’, the bank finance is repaid and all initial investments and profits are paid out to investors relative to their initial investment.
Below is an example of how £100,000 can produce a profit within a property fund1
Financial Example
(based on a property with a value of £265,000 purchased with a genuine discount of 25% and the use of 50% loan to purchase finance)
| Investor Capital | £100,000 | £100,000 | £100,000 |
| Finance | £100,000 | £100,000 | £100,000 |
| Purchase Price | £200,000 | £200,000 | £200,000 |
| Value of Property | £265,000 | £265,000 | £265,000 |
| Market Growth (over 5 year term) | 0% | 20% | 32% (Savills 1) |
| Property Sale price | £265,000 | £318,000 | £350,000 |
| Finance Repaid | £100,000 | £100,000 | £100,000 |
| Initial Investment | £100,000 | £100,000 | £100,000 |
| Gross Profit | £65,000 | £118,000 | £150,000 |
| Internal ROI (return) | 65% | 118% | 150% |
1 The figures show the internal rate of return for every £100,000 of investor capital actually invested by a fund and these are quoted before tax and disbursements are deducted.
2 Savills Residential Property Focus Research May 2009 (5 year UK average forcast)
