Regarding these terms and conditions and the general modalities of the scheme my comments are as follows
The 1% management charge on the fund value is within industry norms; especially as stated by earlier participants, property management has to be very hands on and is a credible amount to charge. What does disturb me however is the low bench mark of internal rate of return of 8% or IRR. This fund only needs to return an overall growth rate of 2% from the total fund before the principles reward themselves - taking one fifth of every percentage point over this target. The IRR is the annualised effective compounded return rate, which can be earned on the invested capital hence 8% is based on the initial money invested. Inflation rises in property prices and rent reviews should mean, even without any insightful input this target should be easily attained.
However, my initial reaction on the people directly involved is they have a skill set for making money, not necesscary through canny property opportunities but through terms and conditions which are swayed to their advantage.
I think their brochure is very non specific and not very strong on property investment strategies. Anyone believing there is still some value in either the Irish or UK commercial sectors needs their heads examined. Rental yields in both markets have been seriously compressed in recent years because of huge property value increases. London now has the highest cost per square metre compared to any other worldwide capital city. Rental return from properties either in UK or Ireland bought in 2007 is at best 4%, whilst the cost of borrowing is 4.75%+. Banks are now becoming more stringent on money lending since the sub prime debacle and this should mean capital repayments will be expected also during the 10 year investment cycle. To achieve this and for the investment to wash its face, yields would will have to be in excess of 7% - which are impossible to realise in either of these markets. As far as other area’s within the UK, London commercial in the medium term is forecast to slacken due to contraction in the services and banking sector and any deterioration in London will have a knock effect across whole of the UK. London is the only tax paying area of the UK making profit for its government and effectively every other region barring the Home Counties surrounding London are subsidised - North East England, Scotland and Northern Ireland being the highest drainers on its exchequer in ascending order.
On Germany, they are correct about opportunities within the market especially retail. In this sector, Germans for the first time in years are beginning to open their wallets and spend money. To date retail planning is a highly restricted practise compared to other EU countries and therefore the amount of retail square footage per capita of population is much lower than most other EU countries. The yields of 6% to 7.5% are presently being achieved across the board and these look set to enjoy decent rent reviews with increasing yields of 8.5% to 10.5% by 2009 - these for years have been stagnant due to depressed spending activities. Office space especially in the south western regions can also return up to 10% presently so it is also a good area to investment. Finally Germany is introducing real estate investment trusts (REIT’s) from hopefully about 2009, which will stimulate the market and create new avenues of cash flow and liquidity.
I do not know much about Portugal but I would have thought similar to Spain it has a lot of sub prime borrowing, and to much residential development in the last decade, especially within the holiday homes sector. Any affect on the residential market could have implications for its commercial sector and general economy.
Although the 8% IRR should be a given on an investment vehicle with a 75% debt ratio, this could be in doubt if they consider some of the above locations - a burning of investors money could ensue as you are only as strong as your weakest link with debt gearing - however this will not be a negative equity product after its ten years but I do not think it will not set the stars alight either.
Regarding the future of property - the stimulus behind property growth in what I would describe as “mature property markets” such as Ireland, UK and Portugal (Spain, certain area’s of the States, Dubai etc are the same) has been kept bumping along fantastically as a result of nothing other than the world economy been driven by a huge credit market - which is sadly beginning to fall apart.
The global economy (particularly America) has not seen a serious protracted recession for at least 20 years. America has staved off recession after the dot.com bubble by ridiculously cutting interest rates which caused a false sense of security but made the banks go into overdrive to learn new ways of driving the economy and making profits. Now a few years on, the good old days seem to be over as the yen carry trade (the main credit culprit) of 0.5% borrowing by world banks and investing elsewhere e.g. Australia at 7.5% interest accounts etc is over, as the yen is starting to appreciate against the dollar and the credit derivatives markets with collateralised debt obligations (CDO's), paper margins etc are now all in mass panic and this will spread to affect any market based on credit – hence property.
Agflation from wheat, corn, pork, beef plus other commodities are rising steeply and looks to me, like a re-run of the 1970's. If there is going to be a credit crunch globally with inflation rising outside the control of governments then - should recession ensue, would holiday homes in the Algarve, (which I am sure are not the cheapest) be the best investment vehicle out there to protect your income in the medium term?
I’m all for property investment because of its leverage but only within under valued regions with some strong fundamentals. If I had my say in a fund – I’d be buying farmland in either Argentina or Iowa, due to agflation, which is here for a while (corn still 75% lower than 1975). Both have seen huge rises in value of 40% to 19% respectively (2006) and since early 2006 many American & Europe Hedge funds having been buying land worldwide in blocks of 30,000 acres and spending in the billions. For any investment to work their must be good financial discipline and the fundamentals must be right – without either is sheer madness. Excess credit and inflation are like loose woman and rum – both are sure to lead to ruin. I hope the principals of Brendan Investments take this into account?