Property funds are a traditional route for investors to gain exposure to bricks and mortar but could investors be better off opting for a property-focused Innovative Finance ISA (IFISA)?
There are peer-to-peer lending platforms that let investors back a range of property loans, including bridging, development, commercial property, and buy-to-let finance.
Many platforms enable investors to do this tax free with an IFISA.
Like property funds, property-backed IFISAs allow people to invest in the sector without the hassle of buying a property.
Both products are regulated, so investors will be able to complain to the Financial Ombudsman Service if they are unhappy with how they are being treated.
Fund investors also benefit from Financial Services Compensation Scheme protection of up to £85,000 if an asset manager goes bust, which does not apply to P2P lenders.
But there are still benefits to using an IFISA.
Here is what to consider.
A property fund will give investors exposure to assets such as commercial buildings, developments and leases.
But this access is not always cheap and minimum investments can range from £1,000 upwards.
There may also be a fee to pay an adviser or DIY investment platform to arrange investing in the fund.
In contrast, many IFISAs do not charge fees and can have minimum investments as low as £1.
Read more: IFISAs six years on
Performance is not guaranteed with any type of investment and there are always risks.
Funds in the Investment Association’s (IA) UK Direct Property sector returned 10.44 per cent last year, 1.73 per cent over three years and 2.77 per cent on a five-year basis.
In contrast, investors can target returns of between six and seven per cent through a property IFISA on platforms such as CrowdProperty, Proplend and Kuflink.
Property funds have been particularly volatile in recent years and some even had to suspend access during the pandemic amid excessive requests.
Some P2P property platforms such as Octopus Choice had similar issues and closed but most have remained open throughout the pandemic and have been able to continue repaying investors and allowing access to funds.
Investors should still do their due diligence on both funds and P2P lending platforms though, and in the case of the latter you should consider the type of security, defaults, arrears and loanbook performance.
“The phrase ‘property funds’ covers a very wide range of property investing. However, generally speaking, you can access a property P2P IFISA much more easily than a property fund, as the minimum investment can be much lower. Indeed, as low as £1,” says Neil Faulkner, founder of P2P analyst 4th Way.
“Comparing P2P property IFISAs, and getting a huge amount of detail and data about performance, risk and the key people, is generally easier than with property funds.
“This level of transparency is reflected in decisions by the Financial Ombudsman Service. In searching its database of decisions over the past two calendar years, I found just two cases where the ombudsman upheld a complaint against a property IFISA provider.
“In contrast, I found 1,720 cases where property funds were found wanting.”