Own a share of 'super prime' London housing for 60k, will a property fund boost your pension?
Wed 30 Apr 2014
London Central Portfolio Limited has already launched three funds aimed at the capital, its fourth and latest, London Central Apartments II is aiming for a target return of 14 to 18 per cent a year over five years, but this doesn't take account of the costs of disinvestment at the end of the investment cycle. LCP says you should get a return of your investment of 81 per cent, which takes account of the costs of selling the properties and closing the fund.
Unlike with a more traditional fund or investment trust this isn't something you simply buy into at any time at the given price on that day. You have to buy during the offer period and you cannot sell your shares straight away. If you wanted to sell your shares before the end of the investment term you can use LCP's match-bargain facility which sells your share to other investors or partners. You can get a guaranteed sale within 16 weeks, so investors can exit if they need to but it will be at a market rate which may be a discount to what the fund is worth and could be less than what you put in.
The minimum investment is 85,000 but this can be reduced if investing through a platform to 25,000. You can also access this fund through an Isa, meaning any capital gains made would be tax-free. The fund will buy properties in prime postcodes around Hyde Park and renovate them to appeal to corporate clients.
Rental income is used to cover the costs of the properties and returns are generated through a combination of adding value through refurbishment, capital growth within the marketplace and surplus rental income. Its first fund, the London Central Portfolio Property Fund, was closed to new investors in September 2007 and has grown 58.6 per cent in value. It is due to close in 2016.
Its second fund, the London Central Residential Recovery Fund has grown 50.8 per cent since April 2010. It will run until 2018. Once the funds close there is a winding up process that is voted on by investors. If some want to stay invested and some want to leave then the remaining investors can either buy the others out with new cash or the fund can use additional bank finance to do this.
There is also the option to sell some or all of the portfolio to an institutional investor such as a pension fund or family office. The numbers on offer look attractive and investing in London property might look good now with house prices buoyant, especially around the in-demand areas in the centre of the capital.
But both of these funds' returns are built on capital appreciation and that means you need to be confident prices will keep going up. The average home in a prime area of London, of any size, is worth 1.5million, according to estate agents Marsh and Parsons. But the average price will exceed 2million by the end of next year, if prices continue to rise at their current pace of 4.3 per cent every three months.
London Central Portfolio says that the combination of demand from the world's super-rich with a highly constrained number of properties available to buy and very little new building, means the market can keep rising. Yet others are not so sure and claim that London's property market has all the hallmarks of a bubble. According to the Office of National Statistics, property values in London soared by 17.7 per cent in February compared to the same month a year earlier. It prompted one estate agent Urbansalesandlettings.co.uk to suggest London was now in the grip of a house price 'super-bubble'.
The Adam Smith Institute has also warned that it thought Buying a property in London is expensive, so these funds are a novel way of becoming a pseudo buy-to-let landlord and investing without the hassle of actually needing to deal with tenants or stump up huge amounts of cash for the property. Property is also a classic portfolio diversifier and has the potential to give pensioners decent long-term returns. Values will not necessarily rise or fall with the stock market, and returns are likely to beat cash. But there are risks and higher costs with these funds than what would typically be associated with funds, cash or shares.
The minimum investments are high for most investors, as are the charges. These may be reduced if you access the funds through a platform, but even then you would need to check if your platform will allow these types of investments. Traditionally, property investors look for rental yields to deliver their long-term returns and capital appreciation from rising prices is seen as the icing on the cake. These funds on the other hand specifically target rising property prices.
The other issue with these types of funds is that they are based offshore. This means there is no protection from the Financial Services Compensation Scheme if the companies go bust. You have to rely on the regulatory regime where the fund is listed. For example. The LCP fund is listed with the Jersey Financial Services Commission. Investors hold shares in the titles of properties that are invested in. So, for example, if LCP collapsed, which we should highlight there is no suggestion of happening, investors would still hold shares in the properties, you would then expect a new asset manager would come in or they would be sold off to return money to investors. The biggest risk is that you are taking a big punt on values going up in one highly-specialised area, house prices in prime cental London. Unless you have a lot of money to spread around this could leave you over-exposed.
Jason Hollands, of broker Bestinvest, says it is best to mix both commercial and residential property to diversify your investments, particularly if there is a property bubble brewing around London. He explains: Theres a place for using commercial property funds as part of an income-generating portfolio for a Sipp in drawdown, as these can provide a useful stream of rental income. Here the key is to find funds with diversified exposure across offices, industrial and retail properties, with high quality tenants and long unexpired leases. We like Henderson UK Property.'
Mr Hollands is less keen on property development funds. He says: 'They are a considerably more risky proposition than commercial property funds. While the London prime and super-prime property market has been one of the hottest property markets on the globe, sucking in international buyers from Russia, China and the Middle East attracted by the UKs relative stability, prices are now so astronomical you have to wonder for how much longer this can go on.
Savills have predicted a cooling of prices in London prime property over the next couple of years. Reasons for this include a toughen up of the tax rhetoric, with measures have been introduced to deter purchasing properties through companies and foreign investors face the introduction of capital gains tax on properties from 2015, and the additional impact of a strong pound. A potential stepping up of sanctions on Russia is a further factor to throw into the mix.