Those looking to invest in residential property through their pension can maximise returns by stumping up cash to fund the actual development rather than simply buying properties.

The suggestion comes from Assetz, which has launched a new property fund providing finance for a landmark development called ‘The Mill’ in Ipswich.

Following the Finance Act at the end of July, which confirmed that indirect residential property ownership is permitted within a pension, the fund will target investors looking for a hands-off approach to residential property investment, with a £50,000 minimum investment.

The fund will help finance ‘The Mill’, a £75 million new landmark waterfront development in property hotspot Ipswich, on the site of a derelict 19^th century grain mill, part of which is being retained.

Developer funding involves providing equity to a developer in addition to bank lending, to finance a scheme. A developer typically requires 10 – 30% of the total scheme cost in cash, with the rest provided by bank lending. It is common to find developers with more opportunities than cash, which presents an opportunity for investors to raise the capital required and receive a priority return.

Assetz managing director Stuart Law commented: "With the passing of the Finance Act a few days ago, investors can finally rest assured that indirect investment in residential property and development funding is permitted through a pension, allowing them to collect the returns tax-free within their Sipp."

"Developer funding is an excellent way to access higher than average returns in the residential property market, by investing in the scheme right from the start and benefiting from a priority share of the developer’s own profits. It is also a totally hands-off investment choice, making it ideal for those who want to enjoy the gains of residential property without the involvement of buy to let."

The fund aims to raise £9.5 million and will be complemented by around £41million of bank lending. Anticipated returns are in the region of 17 – 20% compound growth per annum. The investors receive a priority return, which means that they receive all the profits up to 15% return on investment per annum, after which profits are split between the investors, the developer and Assetz as a performance fee. Returns are not guaranteed, but the priority return arrangement means investors benefit before the developer or Assetz.

The mixed use scheme by developer Wharfside Regeneration, will comprise 334 apartments, 35,000 sq ft of retail space, a hotel/ student accommodation, dance studio and dedicated affordable housing. The development is now under construction and will be completed within 4 – 5 years.

With one quarter of the residential units sold off plan so far, the risk to investors is greatly reduced, says Assetz. The well-regarded Wharfside team includes Spencer Style (‘The Jam Factory’, Southwark) and Brian Tanner (Royal Naval Hospital, Plymouth).