Property investment in the capital’s prime residential areas can be hassle-free if you have £50,000 to spare. And Naomi Heaton at London Central Portfolio insists it will stay profitable.
Property prices in central London will keep going up by a gravity-defying 8-9 per cent per year, with just the odd bout of volatility, making bricks and mortar around Kensington and Knightsbridge probably the best asset class on earth.
Millions will disagree. London property is hugely over-inflated, with an undeserved global “safe haven” status during the crisis, and is ripe for a fall.
I have no idea which view is correct. But Naomi Heaton, who runs London Central Portfolio, made an astonishingly prescient prediction during the dark days of 2009 after the UK —-banks were largely nationalised and the doomsayers were in full force.
At the 2009 launch of LCP’s Recovery fund – a closed-ended Channel Islands-registered vehicle for Sipp and Ssas investors, and one of the few avenues for retail investors seeking residential property exposure – Heaton said that prices would rise by about 11.5 per cent per year over the next three years, predicting that by the time the Olympics came round the average value of a property in central London would be £1.25m.
It’s the sort of breathtaking forecast that normally leads to ridicule. But last week the latest Land Registry figures came out, detailing prices in the best parts of the capital. And what was the average price for all properties in “London Central” in the secod quarter of 2012? £1,302,292. Heaton wins the gold medal for property price forecasting.
But the problem with trying to earn a return on these sorts of price rises is how to invest. Few apart from the ultra-wealthy can bag £1m-plus apartments in London to stash in their portfolio. And property takes rather more time and effort than buying shares in BP or Shell. Estate agents, letting agents, stamp duty, tenant checking, voids, maintenance and so on – it can be a bit of a nightmare.
But LCP seem to have systematised the process so that investors can buy into central London from as little as £50,000 without the hassle of direct ownership.
At the core of Heaton’s approach is cherry-picking. She leaves the super-trophy, £5m or £10m properties to the absurdly rich. Instead she picks one-bed flats below £1m or slightly more than that for the two-bedders, spends about 10 per cent of the purchase price renovating and upgrading the property, then lets it for the term of the fund, usually five or seven years.
“We buy for a period of time only and buy for capital growth, while maximising the rental yield during that period,” says Heaton. Almost none are new-build, which of course is one of the attractions of investing in central London – there is virtually no new-build supply coming on to probably the world’s most super-constrained market.
LCP’s experience is that while there appears to be almost no upper limit to prices, there is an upper limit to the more prosaic world of what tenants will pay. “We find that most tenants will pay up to £500 a week for a one-bedder and £850 a week for a two-bedder. It’s very difficult to push rents above the £1,000 a week level.” (Given that’s more than £50,000 a year to be found from net income, you can sort of understand why.)
It would, superficially, be easy to buy a whole block and manage it directly, but LCP says that would be foolish. “You pick up a much better return by buying individual units in a building, which can vary enormously,” says Heaton. So far, LCP has bought 350 individual units in the central London area, broadly defined as the boroughs of Westminster and Kensington & Chelsea.
The funds are leveraged, although relatively modestly. LCP’s third fund, currently open for investment, will consist of roughly 60 per cent investor equity and 40 per cent bank loans.
Interestingly, despite the drive for yield from tenants, the fund is not designed as an income play. LCP uses the yield to pay stamp duty, renovation and maintenance costs, and its own fees. “CGT is lower than income tax, so we prefer to distribute gains that way,” says Heaton.
About half of LCP’s investors are UK IFAs, mostly for Sipp and Ssas purposes. The Recovery fund, launched in February 2009, did not close until September 2010 and it took time to buy and renovate the properties for letting. Yet it is still enjoying a net asset value gain of 23 per cent. It is listed on the Channel Islands Stock Exchange in Jersey.
Visibility and transparency is always difficult in such an illiquid market, and Heaton tries her best to deal with the issue. Investors can view the early purchases into a fund while it is open to investment (she buys some to put into the fund before closure) at lcpfund.com.
LCP seems to achieve some miraculous purchase prices. For the fund that’s currently open, London Central Apartments Ltd, she has acquired a one-bed mansion block flat off Marble Arch for £380,000. If you’re a non-Londoner, that may sound like a lot. It’s not. I instantly offered to buy it off her. She politely declined.
There are, of course, multiple risk factors. Tell the average young Londoner that prices will continue to rise by 8-9 per cent a year and they will cry with disbelief. Rents, as Heaton admits, have ceilings. But she says it’s all about supply
“There are only 5,000 sales in central London a year. It’s a market where supply can’t expand in any significant way. Chelsea Barracks – with 385 units – is the only large development that can come to market.
“The price rises in central London are not just about the problems with the euro and arrival of lots of Italian and Greek buyers. We have barely scratched the surface with the Chinese. So far they have only been buying new developments on the periphery, because that’s what they have been sold. The potential number of buyers from China and India is enormous, yet there is almost no stock.”
A bubble waiting to burst? Maybe. But Heaton insists the fundamental supply and demand factors prove that it’s not. Her major worry is tax. Driven by (understandable) discontent over the rich not paying stamp duty to buy Chelsea mansions, there is a major clampdown under way. Heaton thinks it is misjudged (and says in any case LCP funds always pay stamp duty) but even if property is targeted for more tax, it only dents rather than destroys the story.
Heaton is an indefatigable advocate of this investment story. I didn’t believe it in 2009, and got it wrong. Do you now jump in, or stick to your belief that property will correct like any other asset class? It’s a very tough one.