The survey, conducted by Tranio in 2017, have shown that the majority of realtors (81 %) believe that Russian investors rarely put money into real estate funds.
Soon, however, this method of investment may become more popular. «According to our forecasts, in the years 2017-2018 will be the Russians to learn more about real estate funds, and will gradually move in this direction. It is often more convenient format than an independent purchase and subsequent management of the facility,»— says the managing partner Tranio Georgy Kachmazov.
In this article we will explain how using funds to invest in projects related to the construction and operation of real property.
Real estate funds work on the scheme:
The investment funds a lot of advantages:
- small threshold to enter — from 1 thousand to 30 thousand euros (for comparison: to buy liquid apartments requires a minimum of 100 thousand euros);
- ease of purchase-sale of shares and units (in public funds this can be done at any time);
- professional management (not required to spend personal time management);
- diversification of investment portfolio;
- greater liquidity compared to investments directly in real estate.
However, there is a significant drawback: it is difficult to non-residents to invest in foreign funds.
Says the expert Tranio Alexander Chernov: «Invest in the American funds physical entities non – resident it is difficult for a number of reasons. Most platforms are organized as real estate investment trusts (Real Estate Investment Trusts, REITs), which are exempt from taxation and shift the burden of taxes on income from real estate investment for its shareholders (investors). This structure is advantageous to US residents, which is often used for investment funds from their retirement investment accounts, which, in turn, also have a preferential mode of taxation. But foreign investors who invest in such U.S. funds would have to pay significant income tax and self-file a tax return in the U.S., as funds are not tax agents. In addition, the Declaration is a laborious and expensive process. Potential investors from Russia will also face difficulties when transferring funds from Russian banks in the American Fund accounts and to the return of capital to the accounts in the Russian Federation. Most platforms are not designed to work with foreigners and assume that investors have a Bank account in the United States. At the same time to open a us Bank account without a social security number, a U.S. address or a long-term visa is problematic and in any case require the personal presence and travel in this country.»
However, according to the Director of financial services Tranio Cyril Schmidt, to invest in REIT in the stock exchange — in securities. «In this scenario to file a tax return in the US don’t have,» he says.
Types of funds
For those who still decided on such investments, for starters, it is important to know the type of Foundation to understand how and during what period will accrue a profit.
There are several types of funds.
1) the use of profit:
|The Fund aimed
|Method of use of profits||Profits are reinvested back into the Fund to purchase additional features or stock||Profit is credited to the investor’s Bank account|
|The purpose of the Fund||The growth and increase of base objects to generate additional yield||Only income|
Most of the funds are focused also on the extension and generating income.
2) by bidding on the exchange:
|Issue of shares||Issue shares||Not issue shares|
|Legal status||— real estate investment trusts (Real Estate Investment Trusts, REITs)
— the company real estate joint stock company
|— mutual funds (unit trusts or mutual funds)
— pension funds (pension schemes)
of a limited liability partnership (limited partnerships)
«Information not listed funds available to investors is not less than listed. It is a well regulated industry. Investing in mutual investment Fund retail investor simpler than the Fund on the exchange, and this segment of the market as transparent as possible,» says Cyril Schmidt.
3) in terms of investment:
|Time before the sale of shares||The investor can buy the units or to present shares for redemption to the management company on any working day||Created for a limited period (5-10 years). During this period the investor cannot withdraw their funds from the Fund. Redemption of a unit occurs when the liquidation of the Fund|
Funds specializing in real estate renting, you can be open and closed. However, most of the funds involved in construction— closed, as long as the object is being built, the money to withdraw it is impossible: they invested in the plot, a pit, a building under construction. Withdraw from the investment after completion of construction and sale of buildings, when the Fund appear in the funds (however, the investor can resell his share to another investor). For example, the Fund opens in 2015, collecting the desired amount of funds from investors and builds on the money objects for five years. After the money is collected, the Fund is adjourned, in 2020 he sells the object and the proceeds pays the investors a profit.
Funds should be distinguished crowdfunding platform, also constituting collective investment schemes. «The main difference is that unlike funds in the crowdfunding investor often chooses which projects to invest, and not be bound by the obligations in advance,» says Alexander Chernov.
Investor is important to know what strategy works the Fund to assess the risks and profitability. Strategy there are four types.
|Core||Buy and Hold
(«buy and hold»)
|Buying property for rental without the involvement of loan||Low||Low
|Core Plus||Buying property for rental in off-center locations using the leverage||Average||Average
|Value Added||Value Added
|Redevelopment (purchase of properties for renovation, repairs, and sales at a higher price)||Medium-high||Medium-high
|Opportunistic||Construction, purchase of undeveloped land, objects with encumbrances||High||High
* in Western Europe and the United States
Most of the funds work only on one strategy. But some choose two or three for example, Core, Core Plus and Value Added. «In Europe and the United States in terms of capital funds is dominated by Core and Core Plus, as they is a substantial proportion of all the most expensive and large institutional facilities,» says Alexander Chernov.
Those funds that operate under the Core strategy, choose a well-established, low-risk markets with stable demand and higher prices, and therefore offer a low rental yield (2-3 %). Funds, which prefer a Core Plus strategy, give a higher yield (7 %), because investing in less Central locations and use leverage. Finally, funds specializing in Value Added, can provide the ultimate yield up to 10 % due to the fact that investing investors ‘ funds in emerging markets, e.g. those where the expected gentrification, and acquire facilities under reconstruction for resale at a higher price.
Examples of funds and their strategies
«Investors have different tasks: someone needs to preserve capital with minimal risk and returns and someone is willing to big risk and expects a higher percent on invested capital. Western market real estate funds offers a wide range of strategies, level of risk and return for its clients»— said Giorgi Kachmazov.
Some foreign real estate funds and their strategies
|Fund||Aberdeen Property Trust||Henderson||Legal & General||PropFund||US Masters Residential Property Fund|
|The Fund type||Outdoor listed||Outdoor listed||Outdoor listed||Closed, not listed||Outdoor listed|
|Strategy||Core||Core||Core||Core Plus||Value Added|
|Minimum budget||5 000 £||1 000 £ (Acc)
3 000 000 £ (Inc)
|500 £||30 000 €||N/a|
|UK (London)||UK (South East England)||UK||Germany (Berlin and surroundings, and also cities with population over 50 thousand people)||USA (new York, new Jersey; undervalued locations)|
|A 50% commercial, 20% offices||Commercial and office real estate||22 % of industrial facilities; rest — shops, offices, retail parks, warehouses||Apartments||Cheap house for 1-4 family and multi-family buildings at 20 to 100 apartments|
% per year
|2.0 to 2.5||3,1||2,8||7,0–10,0||N/a|
|The debt load
According to a study by the European Association for investors in non-listed real estate funds (European Association for Investors in Non-Listed Real Estate Vehicles, INREV), the majority of investors in 2016, chose the strategy Value Added or Core. Compared with year 2015, the proportion of Core and Value Added increased (from 82,2 to 86.2 %) and Oportunistic has decreased (from 17.8 to 13.8 %). This suggests that in 2016, investors were less willing to take risks than previously. The study also reported that the most popular markets for investment — low risk (Germany, France and UK).
In certain markets the share of opportunistic strategies may be higher. For example, according to JLL, Spain in 2015, it was 28 % (whereas Core and Core Plus — 35 %). This country is characterized by greater risks than, for example, the UK and Germany, and investors who choose Spain as a rule, are willing to take more risks.
Risk minimization and diversification
Yield funds to investors is not guaranteed. It depends are more expensive or cheaper assets, and the demand for rental and rental rates dynamics.
As with any investment, investments in real estate funds involve risks. The greater the yield, the higher the risk.
«One of the main risks of the Fund — defaulting managers. It is important to choose a company with a good history, reputation, transparent reporting and clear strategy,» says George Kachmazov.
Most funds try to minimize risk by combining different strategies and diversifying the portfolio.
Principal risks and ways to minimize them
|Risks||As the funds are insured against risks|
(crisis, inflation, etc.)
|Selection of stable markets (e.g., investments in «big seven» in Germany) and diversification (for example, 80 % of the capital may be invested in shopping centres or offices and 20% in logistics centers and nursing homes)|
(falling real estate prices, cheaper rent)
(for example, the Australian investment Fund in the United States there is a risk of depreciation of the U.S. dollar)
(changes in legislation)
|Selling at a price below the purchase||Buy in undervalued areas that are expected or are gentrification or regeneration|
|The risk associated with the financing
(in the future, the Fund may not receive favourable terms on loans)
|Loans with fixed rates, LTV not more than 50 %|
|The non-payment of rent by tenants||Reliable tenants with a good credit history (large company such as Sainsbury’s, state-owned enterprises), several tenants|
|The risk of downtime||The choice has already been leased objects with a minimum occupancy rate of 80-95 % in areas with developed transport links and the labour market; long and hard of the lease|
|The risk of increased maintenance costs||A selection of quality facilities (housing, do not require repair, «green» office building class A, etc.)|
Many funds diversifitsirovat your investment portfolio, i.e. invest an investor in the real estate of multiple types in different countries using several strategies and areas of investment. In addition to real estate, a Fund may keep a small portion of funds in cash or securities. There are also funds that do not invest directly in facilities, and invest in other funds or companies involved in real estate.
An example of structuring the Fund’s portfolio subject to diversification
How to invest?
Projects Core and Core Plus is the least risky but you can earn more through Value Added strategies.
«A single recommendations no. The choice depends on the purposes of investments and designated investments in the client’s portfolio. For example, if 80 % of the funds have already been invested in reliable tools and necessary tool for increasing profitability, it is still 20% could be directed to projects Value Added,» says Alexander Chernov.
According to George Kachmazov, those who wish to invest in Value Added, especially it is recommended to choose clear markets and secure funds to minimize risks.
«It is recommended to choose funds with promising strategies, i.e., investing in this class of real estate that will be in demand on the horizon 10-20 years— said Giorgi Kachmazov.— In our opinion, this micropatent and nursing homes. It is also important to choose a growing area where there is gentrification, which, for objective reasons, will become more liquid after 10 years. Funds that invest in prospective and current strategy, will likely bring the investor the income.»
Appendix: features of European real estate funds
|Country||Legal status||Requirements to Fund||Pros||Cons|
|Austria||Real estate Fund (Immobilien-Sondervermögen) is a Fund of the open type, not a legal entity; managed by an Austrian management company (Kapitalanlagegesellschaft, KAG) is either OOO (Gesellschaft mit beschränkter Haftung, GmbH), or joint-stock company (Aktiengesellschaft, AG)||Investment at least 10 times in 4 years||For all investors; no taxation at the Fund’s level; a good uregulirovanii; the Fund redeems shares at the request of investors||Restrictions on the types of real estate; the increase in the value of real estate is subject to tax, regardless of whether it is sold|
|A special real estate Fund (Immobilien-Spezialsondervermögen) is a Fund, not a legal entity; managed by an Austrian management company (KAG) is either OOO (GmbH) or AO (AG)||Investment at least 5 times in 4 years||A flexible tool for institutional investors||Restrictions on some types of real estate; the Fund only for legal persons; usually only long-term investments; the increase in the value of real estate is subject to tax, regardless of whether it is sold|
|UK||Funds are partnerships with limited liability (Limited Partnership)||No||No tax at Fund level; lower taxes for non-resident investors||Structure is more suitable for funds of the closed type|
|Fiscal transparent funds (Tax Transparent Funds, TTFs): authorised and regulated limited liability partnership (authorized and regulated limited partnership vehicle, ALP) and the structure based on the joint agreement of ownership (contractual co-ownership arrangement, CCA)||No||No tax at Fund level; lower taxes for non-resident investors; non-residents may be exempt from tax on capital gains||TTF — new mode of operation of the Fund, i.e. there is uncertainty in the recognition of international organizations|
|An authorised Fund investment in real estate (Property Authorised Investment Fund, PAIF), an investment company of open type (open-ended investment company OEIC)||Conditions are discussed individually||Most of the articles of the Fund’s income is exempt from corporate tax (but income investors are taxed)||Strict regulation of the activities of the Fund (Service for monitoring financial transactions, the Financial Conduct Authority)|
|Germany||Real estate Fund (Immobilien-Sondervermögen) is a Fund of the open type, not a legal entity; managed by a German management company (KAG) is either OOO (GmbH) or AO (AG) or LLC and limited partnership (Gesellschaft mit beschränkter Haftung & Compagnie Kommanditgesellschaft, GmbH & Co. KG)||Bank financing 30% of the total value of real estate assets||Common and reliable tool for all investors; no tax at Fund level||To the redemption of units as minimum two-year holding period and an annual period of notice of withdrawal|
|Outdoor special Fund (Spezial-Sondervermögen) — not a legal entity; managed by a German management company (KAG) is either OOO (GmbH) or AO (AG) or LLC and limited partnership (GmbH & Co. KG)||Bank financing not exceeding 50 % of the total value of real estate assets||No tax at Fund level||Only for professional or semi-professional investors|
|A closed-end Fund (Investmentkommanditgesellschaft geschlossene Investment-KG) is a limited liability partnership; the partner — usually OOO (GmbH). investors are partners with limited financial liability||Bank financing of 60% of the total value of real estate assets||For all investors; no tax on distribution of income||Not available agreements on avoidance of double taxation and the European Directive; the Fund may be subject to German trade tax|
|Special Fund (Spezial-Investment-KG); investment JSC (Investmentaktiengesellschaft) or limited liability partnership (Investment-KG); main partner — usually OOO (GmbH). investors are partners with limited financial liability||No||No taxation of income on the level of the Fund||Not available agreements on avoidance of double taxation and the European Directive; it is only for professional or semi-professional investors|
|Luxembourg||Funds regulated by the agreement on collective investment schemes (Undertakings for Collective Investments UCIs): Fund colocation (Fonds Commun de Placement, FCP), an investment company with variable capital (Société d’investissement à Capital Variable, SICAV) investment company with fixed capital (Société d’investissement à Capital Fixe, SICAF); managed by a Luxembourg management company (Alternative Investment Fund Manager AIFM)||A maximum of 20 % of the funds can be invested in a single investment; Bank financing no more than 50% of the total value of real estate assets; the minimum value of assets — € 1.25 million||Flexible investment instrument, is popular with foreign investors; no tax at Fund level||Taxation of investors depends on the country of residence|
|Mode of specialised investment funds (Specialised Investment Funds, SIF): the FCP, SICAV, SICAF||A maximum of 30 % of the funds can be invested in a single investment object; the minimum value of assets — € 1.25 million||No tax at Fund level||Investors can be only companies, professional investors or individuals who invest a minimum of 125 thousand euros or willing to provide documentation of experience and investments; taxation of investors depends on the country of residence|
|Society of investing in risk capital (Société d’investissement en Capital à Risque, SICAR); can take different legal forms (LLC, limited liability partnership, and others)||No (because the investment is opportunistic)||No tax at Fund level||Only to professional investors; taxation of investors depends on the country of residence|
|France||Real estate investment Fund (Fonds de Placement Immobilier, FPI) and the company whose primary activities are operations with real estate (Société de Placement à Prépondérance Immobilière, SPPICAV); managed by the French or registered in another EU country management company||Capital in the amount of 500 thousand euros in the first 3 years after establishment; at least 60 % of assets must be real estate; at least 85% of rental income and (for SPPICAV) 100 % of capital gains is distributed to investors||No tax at Fund level; public funds may be exempted from the 3 percent tax||Not available agreements on avoidance of double taxation; funds FPI small|
This material may be used for informational purposes only. Real estate investments involve risks, including the risk of loss of the amount of invested capital. To understand the nuances you will help qualified experts in investment. Tranio recommends to consult him before investing.
Yulia Kozhevnikova, Tranio