I had a text message today from my friend, Gladys, asking if I had enjoyed the full force of birthday joy. To tell you truth, I had not given it much thought.
The tone of the day had been set by a card from my wife featuring the face of a particularly glum-looking bloodhound and advising me, at my age, not to get too excited on my birthday. Like most men with 20 years of marriage behind them, I take my wife's advice seriously and managed to limit my joy to a Krispy Kreme doughnut with a cup of tea between brain-draining meetings with the boss.
But Gladys's text message set me thinking. Perhaps I should make more of an effort to experience the full force of birthday joy - whatever that is.
The day started badly when a client who had wanted to buy an investment property in the UK discarded my carefully analysed proposal for a London property (where rental yields are high and the potential for capital growth is driven by foreign demand, local demand and short supply), for one in Yorkshire where prices are on the decline and the scope for rental increases is low.
What is it about property that makes investors think irrationally? It was revealed recently that the Halifax house price index for UK property fell by 3.7 per cent in 2010 and economists are forecasting that values will fall even further over the next 12 months. This excludes the contribution from rental income but even when this is added in, the annual return was only 1.2 per cent. And some analysts are predicting price falls as high as 20 per cent over the next two years, suggesting that it might take as long as five years for the market to recover.
These figures, of course, are averages for the whole country and there will be areas, notably in Central London, where special market forces will possibly keep prices up. But prices in Central London are already high with few two-bedroom apartments less than £350,000 (Dh2,122,070).
So what do you do if you are hell-bent on property as an investment, are worried about the recent fall in national prices, can't afford a deposit for a property in Central London and are not willing to consider the more sensible alternative of stock markets?
You could look at commercial property funds. These rebounded strongly last year but only after falling by over 35 per cent in 2009. Most analysts are forecasting tough times ahead for this sector. So, is there something else? Well, of course there is, otherwise I would not be writing this article.
Student accommodation or funds that specialise in this market could be what you are looking for. Brandeaux is one of the most experienced companies in this field. It owns and manages properties that provide 15,000 beds in 17 different towns in the United Kingdom. Its student accommodation fund has produced an average return of 9.7 per cent per year in UK sterling since its launch in June 2000 with extremely low volatility. Despite the government's plans to increase university fees, demand for university places in the 2011-2012 academic year will be 2.4 per cent higher than in the previous year. Brandeaux offers quality accommodation in university towns where supply is limited and therefore expects its properties to be fully occupied in the coming year.
The performance statistics for the Brandeaux Student Accommodation Fund are exceptional. The variation in performance from one year to the next is almost zero. Year after year, it churns out 8 per cent to 10 per cent when other commercial property funds have suffered.
The main reason for this is that Brandeaux uses accountants and surveyors to value its properties by discounting future rental income streams, whereas prices for commercial property funds are determined by the whims of the stock market.
Also Brandeaux operates at full occupancy since demand for places is high, whether or not the national economy is prospering. By contrast, demand for offices and other commercial property is critically dependent on national prosperity.
I am a great believer in this fund but have always been wary of the pricing mechanism. It is fine so long as markets are moving along steadily but if, as was the case recently, a large investor wants to redeem his investment during an economic downturn, and there is insufficient cash in the coffers, then Brandeaux is forced to sell one of its properties when there are few investors who want to buy.
Rather than sell a property when prices are low (ie a fire sale), thereby affecting all investors, it chose to shut up shop so that nobody could sell. This protected the value for investors who wanted to remain invested but stopped other investors from selling. This situation lasted for over a year with investors having to wait as long as six months to get their money out. While performance is good, liquidity can therefore be an issue.
Brandeaux has dominated this market for many years, but recently several competitors have appeared on the scene, offering different business models.
Coral Student Portfolio, for example, spreads the risk by offering a fund of different student accommodation operators. Unlike Brandeaux, it does not manage the accommodation itself, it simply buys into existing companies that run student accommodation projects.
Mansion Student Accommodation specialises in refurbishing old buildings and running its own projects.
These last two companies offer similar performances to Brandeaux but with better liquidity characteristics. Their funds are also subject to the stricter regulatory regimes of Luxembourg and Guernsey, respectively, whereas Brandeaux is regulated, less transparently, in the British Virgin Islands.
Bill Davey is a wealth manager at Mondial-Dubai. If you have any questions on this article or any other financial matter, he would be happy to hear from you at bill.davey@mondialdubai.com.
