Investing in high quality freehold property let on long secure leases, known as “long income property” is no longer reserved for just institutional investors, with products on the market now opening up the sector to retail investors.
So why invest in long income property?
Many retail investors seek secure predictable income returns, continuous liquidity, inflation protection and prospects for capital growth. Investing in long income property can achieve all of this. Long income property is similar to traditional commercial property investment, but with greater income security due to the long leases and fixed or index linked uplifts.
Long income property is made up of two categories of commercial property: freeholds with ground rents and freeholds with long leases. These are set out in the illustration below.
Commercial freeholds with ground rents
Commercial freeholds with ground rents are typically UK freehold properties let to commercial tenants at rents below full market levels and for lease terms in excess of 99 years. A ground rent is paid by a leaseholder to the property owner (the freeholder) for use of the property. The leaseholder can then occupy the building themselves or sublet the building on normal commercial terms at a higher rent.
At the start of the lease, which typically runs for 100 years or longer, the ground rent is usually set at a low percentage of the market rent, typically around the 15% level. This means that it is very unlikely that the leaseholder will not pay the ground rent as they would, in effect, be giving up the right to enjoy the property at a significantly lower cost than available under normal market conditions and in turn losing a valuable asset. The freeholder has full legal title to the property, and the right to receive the ground rent ranks ahead of all other leaseholder obligations (such as a mortgage).
One of the benefits of investing in commercial ground rents is that typically the market value of the underlying property is between two and a half times and four times the value of the freehold ground rent interest, making them significantly over-collateralised. What’s more, typically the leaseholder is responsible for maintaining the property so these costs do not affect the return to the freeholder.
To protect against the effect of inflation on the return to the investor, there are usually regular increases in the amount of the ground rent built into the lease, often these increases are inflation linked.
Commercial freeholds with long leases
Commercial freeholds with long leases are typically UK freehold properties, let to commercial tenants at market rents for periods of over 20 years. As with ground rents, in order to protect against the effect of inflation on the return to the investor, funds can focus on acquiring properties where the upwards only rent reviews are fixed or index linked. Again, the tenant is typically responsible for all property and maintenance costs.
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 commercial freeholds with ground rents.
Key features of long income property:
- Predictable returns
- Lower risk
- Inflation protection
- Long term contracted income
- Portfolio diversification
About TIME Investments
TIME is an award winning investment manager specialising in tax efficient investment solutions and long income property funds. Our original residential ground rent property fund TIME:Freehold, boasts an impressive 23 year track record of delivering steady positive returns and sustained liquidity for investors. TIME:Commercial Freehold, the sister fund to TIME:Freehold, was launched in 2014 and invests in long income property targeting annual distributions of at least 4% plus capital growth. The fund is a fully retail open ended fund structured as a NURS, with all the tax advantages of being a PAIF and is available via financial advisers for direct investment or through ISAs, SIPPs and offshore bonds.
If you have any questions or would like to find out about any of our tax solutions, please contact us on 020 7391 4747 or firstname.lastname@example.org.