Heritage follows trend with resi property fund launch

It is the latest company this year to launch a residential property fund to take advantage of depressed UK property prices, but unlike a number of the other offerings to date it will be available to retail investors. The Sapphire 100 fund only requires a minimum investment £1,000, as oppose to the £20,000 to £25,000 typically expected by residential property funds.

However, Sapphire 100 is not a regulated investment so if it fails investors are not entitled to up to £48,000 compensation as with regulated investments. But Alison Guyton, director and head of operations at Heritage Capital, said the fund is FSA compliant.

Sapphire 100 will be the first in a series of property funds with investment periods of three to five years. The minimum fund size for Sapphire is £200,000 and the maximum it can take from retail investors is £1m.
 
However, if high net worth individuals decide to invest in it Heritage will raise the £1m ceiling. The funds will invest the money raised with bank debt up to 50 per cent of the cost of each property in at least three residential properties.
 
These will then be let out to suitable tenants. After three to five years, once property prices have recovered, the properties will be sold and any profit made along with the initial investment will be paid to investors.

The funds will focus on areas with high rental and resale demands principally providing housing opportunities for young professionals and key workers.

Heritage said that Sapphire 100 is targeting gross profits in excess of 50 per cent on capital invested. It said this could be achieved because all properties will be bought at prices below open market value - in the current climate at a discount of around 25 per cent.

Guyton said in addition to this Heritage anticipates that UK residential property prices will increase 20 per cent over the next five years. She said: "Prices in certain areas of the country still have some way to fall but in most parts of the country they have hit the bottom."

She added: "However, growth will be gradual and a noticeable uplift is unlikely until 2010. We expect a gradual increase over the next three years and a spike in the last two years. Historic UK market data has shown this pattern repeatedly."

She admitted that price increases in some areas are premature, however, and said rising unemployment would have an affect. But Guyton also said there are still many people renting at expensive rates who wish to buy and this should help fuel price increases when bank lending loosens up.

However, first time buyers are unlikely to obtain loans in excess of the value of their property as in the past.

Guyton said Heritage’s house price projections are based on research by Savills and Oxford Economics. Savills' August forecast for 5 year residential house price growth between 2009 and 2014 is 27 per cent, while Oxford Economics only predicts 8 per cent.
 
Andrew Goodwin of Oxford Economics said: "We are not predicting a huge renaissance. The current uptick in house prices is reflecting current supply and demand, but prices should return to stagnation in the next year or two. However, in two to three years house prices will pick up again."

Meanwhile, institutional investors are also not certain about the prospects for residential house prices - certainly in the short-term.

Sapphire 100 will also make returns from renting out properties, and Guyton said void periods of 1.5 to two months a year have been factored in.

The fund is open to investment for three months until 31 October, though this period can be extended.

Heritage aims to roll out two or three funds a year launching them every four or five months, and recommends investors spread their investments across the various funds it launches. The size of future funds may vary and they might also invest in commercial property.

Sapphire 100 will not invest in commercial property because Heritage is concerned about rising voids in this sector at the moment. However, Heritage will try to diversify Sapphire 100 by ensuring it does not own more than two properties in any one road or apartment block.

Sapphire 100 will charge a fee of 5 per cent if its gross profits are 0 to 50 per cent, or 25 per cent if it returns in excess of 50 per cent. This is in addition to a 1.5 per cent annual management charge.

Heritage Capital was set up in 2007, though Heritage said its founders and advisers collectively have 60 years experience in property investment, finance and asset management.

Property advisers such as James Sullivan, managing director of alternative asset fund specialist PILinvests, stress the importance of an asset manager with the right expertise and experience.