A Buy to Let fund could shelter your savings!

With savers facing another possible cut in interest rates, will they eventually turn to bricks and mortar to generate income which many need in their later years?

According to UHY Hacker Young, one of the UK’s top 20 accountancy networks, record low interest rates and Bank of England measures to handle the crisis, such as the £325bn quantitative easing programme, cost savers nearly £18bn a year in lost income.

Although the consumer price index rate of inflation dropped from 3% to 2.8% in May, UHY Hacker Young says the average Isa savings account rate pays only 2.6%.

Mark Giddens, tax partner at UHY Hacker Young, said: “Savers are losing a staggering amount of money as inflation slowly erodes away billions from the nation’s savings.

“Central banks are doing all that they can to keep interest rates low and that feeds through to deposit rate. This intervention ensures that savers are unlikely to see rates raised in the near future. Savers need to be proactive and shop around in order to get the best rates for their savings.”

The Bank of England figures reveal that more than £115bn is currently deposited in accounts yielding 0% interest.

UHY Hacker Young says money deposited in non-interest-bearing accounts, and in any account offering interest rates below inflation, will decline in value on a monthly basis as the cost of living continues to rise.

Using the May inflation figure of 2.8%, financial data agency Moneyfacts says basic-rate taxpayers need an account paying 3.50% per annum, while higher-rate taxpayers need at least 4.70%, merely to maintain the value of their money. Yet Sylvia Waycot, director of publishing at Moneyfacts, says: “The average no-notice savings account pays only 1.05%, underlining the problem which savers face.”

Now, there are fears that the Bank of England base rate – held at a record low of 0.5% since March 2009 – could halve to 0.25% within months. And another £50bn of quantitative easing is likely from the Bank in July.

Do savers just take the punishment? To some extent, they are trapped in a cul de sac with nowhere better to go. But finding a medium to long-term home for your savings is trickier.

In a society where governments have decided to back banks and hard-pressed borrowers, rather than savers, property investments could become more attractive as a store of value.

Amid the latest euro mayhem, for example, with Spain collecting a £100bn bailout and the Greeks narrowly voting against a rejection of the eurozone, the Rightmove house price index, which measures asking prices in 90% of the UK market, showed sellers’ prices actually rose 1% between May and June.

So can bricks and mortar deliver capital growth in the current maelstrom – and income too?

Pinsent Masons, the international law firm, reckons private investors sank £6.3bn in commercial properties in the year to March 2011 – and a total of £42 billion in the past five years.

Many see houses and flats as a safe haven too, though average UK house prices are down by about 20% since the peak of summer 2007. But the housing market is protected for the time being by rock bottom interest rates.

In July, small savers will hear details of a fund which aims to build a £250m portfolio of houses and flats to be rented across the UK in its first two years. Hearthstone is a new fund management business established to provide retail and institutional investors, including pension funds, with a range of collective investment opportunities in residential property.

A 25% stake in Hearthstone is held by Connells Group, an estate agency with 481 branches and a subsidiary of Skipton Building Society.

Hearthstone’s first fund, approved by the Financial Services Authority (FSA), will be the UK’s first residential PAIF (Property Authorised Investment Fund) and will enable individual investments through Isas and personal pensions, either directly or through platforms, with a minimum investment of £1,000. Investors can also make regular monthly payments into the fund.

Christopher Down, founder and chief executive of Hearthstone Investments, said: “At over £4 trillion, residential property is the largest asset class in the UK – bigger than UK equities and commercial property combined. Despite this, there have been no authorised funds in the sector, and most investors have been offered little choice other than direct ownership of bricks and mortar. Hearthstone’s fund platform will correct this anomaly, offering both retail and institutional investors the same investment options in residential as they have in other asset classes.”

While investors can deal directly with Hearthstone, financial advisers will form a key part of the distribution strategy for the new fund. Investors should seek advice before they consider this investment.

While pension funds could be the key to the success of his venture, Down expects to attract two types of private investor. Some will allocate part of their portfolio to residential property alongside cash, shares, possibly Premium Bonds, fixed-income funds, gilts, commodities and commercial property. Others might still be living in their first home and keen to build savings to ease themselves up the property ladder.

Operated like a managed fund, the fund will quote daily prices for purchases and sales, with around 15% of the fund held in cash and liquid assets to meet redemptions.

Because the fund is approved by the FSA, it does not have a borrowing facility; it will acquire homes around the country as funds are invested.

Connells chief executive David Livesey, a Hearthstone director, says the fund could buy new homes from builders keen to get the properties off their books. It will acquire a range of units, from family houses to small flats.

Can it succeed where residential property funds have stumbled in the past 30 years? It doesn’t intend to pay regular income, which might deter some investors struggling to generate income elsewhere. For steady income, commercial property funds have a proven track record and yields in the 4% to 6% per year bracket.

Henry Lancaster, senior investment analyst at private bank Coutts & Co, remains bearish on bricks and mortar. He said: “While recent booms and busts have shaken the idea of being ‘safe as houses’, the UK residential property market has been supported by international investors keen to hold sterling assets and London’s broader attractions as an international city. Momentum is neutral. House prices bounced back from their 2009 lows, but have more recently fallen back. In London they achieved new highs, but elsewhere are well short of previous peak levels. As with other assets, UK residential property is far from risk-free.”

In difficult times, however, investors often like to hold money in assets they can see. As the fearful euro muddle continues, Hearthstone might have timed its entry perfectly.