Advisers predict increase in popularity of long income property funds
Over half of financial advisers (59 per cent) expect a significant increase in the number of clients seeking to secure a steady income from their investments over the next 24 months, according to new research conducted by long income managers TIME Investments.
A similar number (57 per cent) predict a significant shift towards capital preservation as levels of volatility and uncertainty in the markets continue.
Two thirds of advisers (66 per cent) also predict a greater focus on portfolio diversification by their clients, with 56 per cent citing a move to alternative investments and a shift away from equities and bonds as they seek greater predictability of returns.
With just under three quarters (71 per cent) of advisers expecting inflation to increase over the next 24 months, over half (55 per cent) expect more investors to turn to inflation-linked products. In line with this prediction, half of those questioned expect greater demand for long-income funds which are inflation-linked. These have low correlation with traditional property funds and mainstream asset classes, which have experienced much more volatility over recent years.
Henny Dovland of TIME Investments comments: “Today’s markets are uncertain and with political and economic events dominating the agenda, investors can expect conditions to remain unpredictable and volatile for the time being. Long-income commercial property avoids the volatility associated with some traditional real estate investments and offers the potential to deliver stable, secure income over the long-term, capital preservation and protection against inflation.”
Long income property funds investing in commercial freeholds have long been available to large institutional investors such as pension funds and insurance companies. Now these tried and tested funds are available to the retail market via an FCA authorised fund.
The mechanics of long income commercial property funds are quite simple; they invest in commercial freeholds with long leases and ground rent agreements.
Freehold properties with ground rents are let to commercial tenants at around 15 per cent to 40 per cent of the full market value for the building, for terms of typically 100-125 years. This provides stability of income for the freeholder and incentivises the tenant to maintain their ground rent payments, since failure to do so would mean potentially forfeiting their lease and give rise to a significant uplift to the freeholder. And because the property’s market value can be worth as much as four times the underlying freehold, these properties are often over-collateralised offering additional protection to investors.
Commercial freeholds with long leases are UK properties let to tenants for periods of typically over 20 years and tend to offer a slightly higher income return compared to commercial freeholds with ground rents. In addition assets are usually a profit centre of the tenant and of strategic importance to the business (as opposed to an office which is a cost centre), hence the long length of lease.
With both long leases and ground rents, rent reviews are typically linked to inflation and agreed at outset rather than subject to negotiations as is usually the case with traditional rental agreements over commercial property. These are usually linked to RPI which means income streams can be inflation protected. Additionally, the commercial tenant is responsible for all property insurance and maintenance costs which means these expenses are not passed on to the freeholder.