Alpha Beta Fund Management LLP is launching a UK Residential Index Fund, which will give pension funds, fund of funds managers and other investors, easy access to Britain's largest investment asset class.
"We are the first to launch a residential derivatives fund based on the UK Halifax House Price Index (HHPI) which is a conservative market tracking (beta) product that can be leveraged, or non-leveraged, according to investor requirements. It is equivalent to an investment in the average UK house," Alpha Beta Fund Management (ABFM) partner Robert Page said.
Robert Page is a founding partner of ABFM, which is a London-based investment boutique specializing in property derivative products. He has 15 years experience in senior positions in proprietary trading and derivatives for major investment banks, including Credit Suisse, Lehman Brothers and Gen Re Securities. He was also the co-founder and Chief Executive of NorthBay Investment Management in the UK.
Institutional investors have long been frustrated in accessing the UK residential market. They face the potentially high costs of managing multiple small units in physical portfolios, low yields (rent as a proportion of the capital value of the house), and competition from home-owners and small private buy-to-let investors prepared to pay high prices.
This means they have generally been missing out on impressive returns in a market that is much larger, as a whole, than UK equities. Residential property now makes up a negligible amount of UK institutional real estate investment portfolios compared with Continental European markets such as the Netherlands (40%) and Germany (13%).
Residential index funds diversify investment risks across the market. With house prices much more closely correlated to trends in wage growth than other assets, such as equities, bonds and commercial property, they can also provide a closer match to pension fund liabilities.
In May this year the average UK house price was £196,893, representing a 10.6% return over the previous 12 months.
The Halifax Index is the UK's longest running house price series with data covering the whole country going back to December 1982. The index typically incorporates around 15,000 house purchases per month. From this data a 'standardized' house price is calculated on a like-for-like basis.
Since inception, the HHPI has averaged returns of 8.1%, ranging from a peak of 34.4% in 1988 and a low of -7.8% in 1992. The index returned 15.5% and 23.1% in 2001 and 2002, at the height of the post dot.com equities slump, possibly reflecting the flow of capital from stocks to bricks and mortar.
"Residential derivatives have been around for about five years, but have only been actively traded in the last couple of years and there's probably been about £2 billion notional value traded on the Halifax index in the OTC (over-the-counter) derivatives market by banks hedging their risks," ABFM's Page said.
"We believe the time is now right for a medium to low cost index fund which gives investors pure access to residential property in a tax efficient way for the medium and long-term," he concluded.