29th April 2014

Prime London Resi Fund Ticks all the Boxes

Prices in Prime Central London (PCL) have risen a formidable 60% since the heady days pre-credit crunch, compared with a meagre 7% nationwide as the UK suffers pressure on employment, earnings and mortgages.

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Prime London Resi Fund Ticks all the Boxes

In contrast, PCL is a global capital whose international appeal remains undimmed and buyers have little reliance on credit. It has enjoyed growth of 9% per annum since the swinging 60s. These returns can be boosted by investment into the booming private rented sector (PRS), which now represents 40% of the market.

Accessing this highly desirable asset class and building your own buy-to-let portfolio, however, may seem a pipedream for most investors and savers. Average prices in the two most prime boroughs which make up PCL, The Royal Borough of Kensington and Chelsea and The City of Westminster, have now reached almost £1.5m.

Aside from the entry price, mortgages are increasingly expensive and difficult to obtain whilst inflation pushes up running costs. Not to mention the hassle of finding a tenant, on-going management and cash flow worries. Becoming a buy-to-let landlord can quickly lose its appeal.

Owning bricks and mortar directly, though, is not the only way into the market. One route is buying shares in a listed developer. The fate of companies such as Taylor Wimpey or Barratt is tied to the housing market, meaning you get exposure without hassle. However, their focus is nationwide rather than on high performing areas like PCL. There are other downsides. Investment is not asset backed and factors outside market performance can jeopardise returns.

Another option is residential property funds, which are backed by solid assets and avoid the wild gyrations of equities. Since the 2007 down turn, they have carved a place in a balanced portfolio. No longer commercial properties’ kid brother, residential is becoming the preferred choice. These funds allow investors to enter the market at a far lower ticket price and without the stress.

Thanks to changes in the 2014 Budget, issued in detail just a few days ago, residential funds have just become more attractive. Those which qualify as having Genuine Diversity of Ownership are set to be excluded from CGT charges to be felt by every foreign buyer from April 2015. In fact, by virtue of undertaking a ‘genuinely commercial activity’ residential funds are exempted from all the new levies including higher rate 15% SDLT and the Annual Tax for Enveloped Dwellings.

For UK residents, these funds are shortly to become more tax efficient. ISA investments do not attract income tax or CGT. In July, the allowance increases to £15,000 and the new ISA (NISA) will be introduced, investable in any combination of cash and shares. This includes qualifying listed residential funds. A few options exist in this space; HouSA investments track the Halifax house price index and the recently launched London Central Apartments II (LCA II) will invest in a portfolio of Prime London property for the PRS.

The drawbacks? Your money is tied to the performance of property. It can be lost if the market falls. Also, beware the liquidity trap. Whilst open-ended funds offer liquidity, money is held back to cover redemptions so you may not get the property exposure anticipated. Some funds have suspended redemptions when investors flood in to withdraw money in a falling market, with disastrous consequences, epitomised by New Star’s UK Property Trust. A closed-ended structure does not have this problem but investors need a medium term horizon (typically 5 to 7 years) as money is locked up for this period.

This is usually no problem for SIPP investors and, despite Chancellor Brown’s famous 2006 U-Turn, you can actually put money into residential via your SIPP, benefiting from 100% tax relief. Whilst only a few funds are structured to accept SIPP money (such as LCA II) they generally offer solid investment returns.

With cash holdings generating almost no returns; volatility and high risk from equities and the sky high entry price attached to direct buy-to-let purchases in PCL, investors have struggled with where to lock up their hard earned savings. However, thanks to a good package of Government backed tax incentives, residential property funds in PCL tick all the investment boxes making buy-to-let investment the domain of the smart saver rather than the exclusive province of the very rich.

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