Investing in Real Estate Investment Funds
Small investors now have a more flexible means of putting their money into Czech real estate
Open-ended real estate investment funds offer a proven low-cost method of participating in the many opportunities offered by real estate markets. Now the Czech Republic gives small investors the chance to invest in them. Such a fund makes money from the rents from the buildings its buys, the capital gains (appreciation) made on those properties, as well as the financial engineering used to buy those properties. The structure is designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.
The factors that make real estate investment funds such an attractive investment are investor safety coupled with solid returns, quick access to invested capital, widely diversified risk, and the comfort of professional management. In comparison to other types of real estate investment, real estate funds allow investors into non-residential investments (malls, office buildings, etc.) and are highly liquid -- in other words, you won't need a real estate agent to help you cash out your investment. However, legal barriers preventing banks from launching real estate funds have long delayed the launch of such a service for small investors in the Czech Republic.
Czech Republic enters the fray
Only last year the Czech collective investments act (Zákon o kolektivním investování) was amended to encourage investment into real estate funds and to meet the growing demand for this tax-efficient, liquid, and transparent vehicle. The new legislation is based on the German model and stipulates in detail the requirements for establishing real estate investment funds, valuing their assets, and creating an investment policy. In spring 2007 REICO investiční společnost, a daughter company of the Česká spořitelna bank, opened the first Czech real estate fund for small investors. It started selling shares through Česká spořitelna's outlets and received deposits worth 1.1 billion CZK from its nearly 3,000 investors through the end of the year.
Another of the newly set-up funds is Realtia Investiční, a.s. The company has received authorization by the Czech National Bank for establishing funds and secured its first acquisition by buying 67 percent of the Palác Anděl project in Prague 5-Smíchov from UBM, a successful Austrian developer.
"Our fund's target is to invest in commercial properties with strong income stream, identified potential for rental maximization, and steady capital value growth. A combination of prime asset location and quality with professional asset management will ensure that the fund's targets are met," according to Ilona Meiselová, head of marketing at Realtia. "The fund will also trade to optimize the portfolio structure and returns at the time according to expert analysis of the real estate market development and its various segments." The investment aim of the fund is to ensure the participation of shareholders in the positive growth of the property industry. The fund improves the resources on the basis of revenue from the tenant, which, due to location and quality of the property, must allow for higher than average rentability rates and certain stability. This is true namely for properties such as class A office buildings, shopping centers, multifunctional centers, and possibly even logistic parks and luxury hotels.
Tax-effective real estate investment instruments
The final, and probably the most important, advantage that real estate investment funds provide is that such a regime will offer tax-exempt status on the basis that the vehicle then distributes all or most of its profits to shareholders. This amount is deductible on a corporate level and generally taxed at the personal level. So, unlike with dividends, there is only one level of taxation for the distributions paid to investors. This high rate of distribution means that the holder of a real estate investment fund is greatly participating in the profitability of management and property within the fund, unlike in common stock ownership where the corporation and its board decide whether or not excess cash is distributed to the shareholder.
The traditional features of real estate are a stable yield, a regular cash flow, inflation protection (in most European countries rents are index-linked), and the prospect of an increase in capital value. Small Czech investors are typically conservative, and this type of investment can meet their expectations for low-risk investments with an acceptable ratio of risk to profit. Most research suggests that investors worldwide are looking to increase their allocations to real estate as they seek to diversify their exposures and capitalize on the unique attractions of property as an asset class.
However, with these new funds for retail investors there will also be a more crowded marketplace, whereas there's already too much money chasing a limited supply of property. Evidence suggests that returns on real estate investments might have reached their peak. Either these funds will need to look at a niche that international funds aren't in at the moment, or they will be competing with existing investors, which could have a further impact on property prices and returns.
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