In a post Brexit world of uncertainty and market turbulence, many advisers are seeking less volatile investments with more predictable income streams. Long Income Property may well be part of the answer and should form a core part of many investors’ portfolios.
Historically, Long Income Property funds have been the preserve of large institutional investors such as defined benefit pension funds and insurance companies who prize highly secure cash flows. TIME Investments, the leading property investment firm, has combined its skills in investing in long income ground rents and developing tax efficient products to deliver the first such commercial property fund available to financial advisers enabling their clients to access a new sector to help diversify their portfolios.
TIME:Commercial Freehold is the only retail fund to invest in Long Income Property, avoiding much of the volatility which traditional bricks and mortar funds have been exposed to historically. The main attractions of Long Income Property are as follows:
- The increased income security due to lease lengths normally being between 20 to 250 years versus lease lengths of typically under 10 years in standard commercial property funds,
- The strong income security leads to a lower level of volatility relative to traditional commercial property investments, and
- The level of inflation protection through inflation linked or fixed increase rent reviews compared to rental reviews of most shorter leases being linked to the open market value of the property which is far less certain.
TIME Investments today announced the annual return for its TIME:Commercial Freehold fund, which offers advisers the opportunity to invest their clients in Long Income Property. Despite volatility in the wider commercial property market, the fund exceeded its target annual income return of 4% and a total return of over 5% for the second year running and it also now has over £50 million in assets under management. The fund is fully invested in 36 Long Income Properties in the UK with a total annual rental income of £2.5 million. The freehold portfolio has a weighted average lease length of around 100 years and over 95% of the current portfolio has rental uplifts with a form of inflation protection.
As with all of TIME’s products, the fund is available through financial advisers. The fund is managed by Nigel Ashfield, Managing Director of TIME Investments, who runs a similar fund – TIME:Freehold, which invests in UK residential ground rents. This ground rent fund has a 23 year track record and more than £235 million in assets under management, and it has delivered a total return of over 5% pa since launch. TrustNet described TIME:Freehold as “The best risk-adjusted return record of any fund across the entire IMA unit trust and OEIC universe over five and ten years.”
Nigel Ashfield, fund manager of TIME:Commercial Freehold comments: “Despite the current uncertainty and volatility surrounding commercial property post Brexit, investors can still enjoy stable, predictable, long term income returns with inflation protection by investing in Long Income Property. Since the launch of TIME:Commercial Freehold in June 2014, we have seen an increasing inflow of funds from investors who are seeking to diversify their portfolios by investing in commercial property in an FCA authorised, ungeared fund but with reduced volatility compared to standard commercial property funds. With the markets becoming more uncertain and volatile, and investors seeking reliable income returns higher than most bonds, we expect inflows to increase.”
Sir Frederick Hervey-Bathurst Bt. Director at Clarendon Financial Planning Ltd comments: “Having been a supporter of TIME:Freehold for many years, we have recently diversified our income seeking clients into TIME:Commercial Freehold. The Long Income Property sector is popular with institutions because of the income security, inflation protection and lower volatility. We are delighted that the retail market now has access to this safe haven asset class in these uncertain times.”
Long Income Property is made up of two categories in commercial property: freeholds with ground rents and freeholds with long leases.
Commercial freeholds with ground rents benefit from very long leases (usually over 100 years) on land and buildings, where a rent is paid to the freeholder by a leaseholder, who may sublet the property to a tenant. Ground rents are typically increased on a regular basis, either with inflation linked or fixed rental increases, giving them in-built protection against inflation. The freeholder typically receives ground rents between 10% and 30% of the full market rent and has full legal title on the property. Any failure to pay the ground rent means the full benefit of the property reverts to the freeholder. Given the value of the property can be several times that of the freehold, the investment is over collateralised and rental defaults unlikely.
Commercial freeholds with long leases are typically freehold properties let to tenants at market rent for periods of over 20 years. The security within these investments is primarily linked to the quality of the tenant, the property and the location. Commercial freeholds with long leases tend to offer a higher income return compared to ground rents. Compared to traditional commercial property investment with shorter leases, typically less than 10 years, they offer greater income security due to the longer length of lease and will generally have inflation-linked or fixed rental up-lifts rather than being linked to the open market value of the building. Furthermore, the leaseholder is responsible for maintaining the property so these costs do not affect the return to the freeholder.
Tax efficient structure
The Fund is structured as a Property Authorised Investment Fund (PAIF) – an Open Ended Investment Company (OIEC) specifically designed for FCA authorised property investments. The tax benefits of a PAIF are similar to those of a Real Estate Investment Trust (REIT), and are not subject to tax on capital gains within the fund. UK investors are taxed as if they invested directly in the underlying assets. The fund also benefits from NURS classification as an authorised fund, thereby offering enhanced investor protection.
The minimum investment for retail investors is £5,000. The fund has an annual management charge of 1%. Investors are able to access TIME:Commercial Freehold through ISAs, SIPPs, SSASs and offshore bonds via income or accumulation shares.
About TIME:Commercial Freehold
From the same team that manage the 23 year old ground rent fund TIME:Freehold, dubbed “Best fund in the universe” by Trustnet, TIME:Commercial Freehold invests in commercial property with good yields, reliable cashflows and strong tenants on long leases (known as Long Income Property). The fund aims to deliver a target gross distribution of 4% p.a. with the potential for capital growth, a target which has been met since inception.
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