Property law: Real-estate funds in a nutshell

Just two years ago investors interested in investing in real estate (regarded as one of the most profitable and safe capital investments) had a choice of purchasing real estate or investing in development companies listed on the Stock Exchange. Now, following foreign markets, Polish investors also have access to real-estate investment funds.

The foreign example

In many countries, real-estate funds are extremely popular forms of investing money. As an example, in Germany in 2004 their share in public-fund assets (available to all) was almost 20 percent. In Poland, the first real-estate funds only appeared in 2004, their share in the trustee market currently amounts to approximately two percent of the total value of net assets of all national investment funds, but interest in this form of investment is growing constantly. In comparison with EU countries, the real-estate investment market in Poland still has enormous potential.

The popularity of real-estate funds is due to several characteristic features, the most important of which is that they give the investor the possibility to obtain high income whilst restricting the level of risk. In 2003, most countries' real-estate funds enjoyed a very high rate of return: in Great Britain - 26.17 percent, Japan - 32 percent, Switzerland - 19 percent; USA - 38 percent.

However, due to the high degree of variation in results, they should be considered over a perspective of several years. The funds do not guarantee that a specified level of profit will be generated, but they do provide estimates of 10-12 percent per annum.

Market independence

Real-estate funds enjoy recognition worldwide due to their significant independence from stock markets. During declines on stock markets, real-estate funds do not incur acute losses. On the contrary, they usually generate profit for investors. They are usually more profitable than bank deposits and bonds.

It is these factors that make them attractive. The offer of funds specializing in real-estate investments is particularly attractive for smaller entities that are unable, for example, to purchase an office block or residential building in order to benefit from the boom on the real-estate market.

Bide your time

Real-estate funds are for the patient, as they are long-term funds, usually for eight to 10 years.

This arises from, among other things, the fact that the real-estate market is characterized by investment cycles. In developed markets, these last on average from five to six years. During such a cycle, demand first of all exceeds supply, which gives rise to an increase in prices and profit from real-estate investments.

In the next stage, investors enter the market and satisfy demand. As a result, prices and, therefore, income from real estate fall. The Polish market is currently in the first phase. We have a deficit of appropriate real estate, which is giving rise to an increase in prices. In addition, Poland's accession to the EU is also having an influence on the increase in real-estate values. However, many investors are also appearing. This is particularly apparent in Warsaw, where many new buildings are currently being erected. Hence, the coming years should give rise to high levels of return for such funds.

In terms of their legal classification, the vast majority of real-estate funds belong to a group of specialist closed funds. They issue securities in the form of investment certificates. The number of certificates is fixed and the only way of increasing the pool of certificates is for the fund to make new issues. Investors purchase certificates by way of public subscription. Subsequently they can sell them in stock-market trading.

Next week's column will look at how real-estate funds work and how to get the most for your money from them.

Ewelina Laskowska is an associate at Linklaters

law firm. E-mail: ewelina.laskowska@linklaters.com