Partnerships review

Restrictions on limited property partnership fund structures are on course to be removed on 31 July.

At present no more than 20 partners can invest in a limited partnership but a regulatory reform order in Parliament, due to receive royal assent at the end of July, will eliminate this restriction.

The result should ease administration burdens on larger partnerships, particularly those that wish to expand. Following public consultation, the government said it wanted to remove unnecessary regulations, which serve neither business nor the consumer.

Equity Partnerships, which helps to runs such funds, believes that while it will retain its institutional focus, the changes will enable such fund structures to be available to intermediaries and their clients.

Property fund providers use the limited partnerships for tax transparency, according to Rob Corlett, director at Equity Partnerships, as pension fund investors are taxed at their own rate, and no corporate tax is paid as is the case for corporate structures.

Limited partnerships also satisfy institutional investors wanting to keep down the number of investors sitting alongside them in a fund.

He said the removal of the limitation on the number of partners was 'almost inevitable,' and it could bring forth many more, and smaller, funds for retail investors.

Corlett said the removal of minimum numbers would allow smaller amounts to be run in more specialised funds, such as single property, multi-tenancy portfolios, attractive to private and institutional investors lacking experience in niche areas of the property market.

'Unlimited partnerships also give access to unusual assets bases, like one big shopping centre. From a pension fund's point of view there's also access to bank debt. A lot of pension funds cannot gear up but this window to gear up funds has only just opened with interest rates where they are,' Corlett said.

He said the difference between borrowing money at 6% and rental yields of 7%-8% make gearing attractive presently, and this profitable gearing also magnifies yields.

As a result, Equity Partnerships is hoping to be involved in the launch of a fund, holding one shopping centre property, with a portfolio of £22m, including gearing of 70% or more, with tenancies in Scotland in September or October, with a minimum investment tentatively of between £250,000 and £500,000.

Corlett said the fund, with about 20 tenants such as Next, Morrison and Dorothy Perkins, would utilise an unlimited partnership structure, but gearing may be shunned if interest rates rise.

'But gearing depends where interest rates are in September,' he added, 'because if interest rates go up before then we may have no bank debt in it at all, because you can't get the margin. There is only a relatively short window for borrowing so highly.'

'The private market is a vast market and people may want a slightly different home for their money given what equities have been doing. Buy-to-let is phenomenally risky, whereas a good shopping centre yielding a lot is fairly secure by comparison.'

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