Geared Property Funds - The risks

This is an interesting article from the Investors Chronicles regarding geared property funds.
It’s common sense, but it’s nice to have it spelt out.
Who has got it right, AIB, BOI, Superquinn who have sold and leased back their property interests or the likes of Friends First who have bought the Superquinn properties, or the public, who are buying it from Friends First.

I would not touch it once you read the small print.

  1. FF buys properties for say €100m
  2. FF leverages a load of the fund . It allows investors in for €20m and lends €80m . This explains where the €100m came from.
  3. The management charge is 1-2% of the €100m including the borrowed bit
  4. This is on top of the interest charged by FF on the €80m …say 6% . FF are loving this .

Only FF will make money on this when these prices fall.

sweet old Savvy and poor dear Canny are unsecured and the fund will be wound up when it loses €20m / 20% …in order not to breach banking covenants of course .

Highly geared funds are dangerous because it does not take much to evaporate worth. AS well as that who values these properties worth €100m ??? eh ??? . So a one off revaluation could literally plunge it from rocking on to totally bankrupt overnight.

Saw a lovely little vehicle like this (not property) a few years back. It was marketed to average UK Joe Schmo on tech stocks, a close ended fund, 5 years. It closed up in 2002 and the investor got 60p for every 1pound he invested. No cap security, obviously. Some of these companies are so sneaky it feels illegal.

Hibernian have imposed an exit penalty to discourage investors bailing out of two of their property funds.

They have reducing the value of units in the UK Property Fund and the UK Geared Property Fund by 4.7pc to discourage investors withdrawing from the funds.

Property funds in Britain have been subjected to panic selling due to rising interest rates. It brings you back to the techie share fund days of a few years back.

& so it begins, this year’s property fund kings, next year’s pyriahs.