While savings rates remain suppressed, one residential property company is looking to Isa holders to float its bulk purchase of prime apartments skirting London’s Hyde Park.
London Central Portfolio hopes to raise £100m by November with its recently-launched fourth fund, London Central Apartments II (LCA II).
The mandate for LCA II follows the model of LCP’s previous three funds.
It acquires a portfolio of properties in the prime postcodes, which will then be refurbished and offered on the rental market.
Customers are charged a 1 per cent annual management charge and a 20 per cent performance fee of any overachievement of the 8.5 per cent yearly hurdle rate.
But that pales next to the fund’s annual return target of 12 per cent, based on projected capital growth and rental returns.
A £15,000 investment (the maximum initial New Isa allowance) would earn a tax-free payout of £12,150 at the end of a five-year term.
“A far cry from the earnings afforded on cash Nisas”, blazons LCP’s press release, entitled “Join the Knightsbridge set for £15,000.” It is certainly eye-watering by Nisa standards.
Investments
The HMRC said a record amount of Isa cash has flowed into stocks and shares in the last financial year as people avoided cash accounts in favour of investments.
The number of stocks and shares Isas leapt by 3m in the 2013/2014 financial year, compared with the previous year. But the trend for banks to slash their Isa rates following the chancellor’s raising of the maximum cash allowance to £15,000 can hardly tempt smaller investors back.
LCP’s chief executive Naomi Heaton is intentionally looking for tax-conscious investors: “Most investors are more than aware of the strong and consistent returns that can be achieved from Central London residential. However, traditionally significant levels of upfront investment have been required. We are delighted to provide an exceedingly attractive option for a new generation of savers and tax-conscious investors alike.”
Credentials
The company – which has property assets in excess of £500m – has impressive recent credentials. Its first two funds have demonstrated strong returns, both exceeding their performance targets.
Its third fund, LCA I, which was fully invested in December 2013, has already shown a 27.8 per cent increase in value since acquisition.
That was on the back of London residential property prices rising 30 per cent above their pre-crisis peak – growth rates similar to the late-1980s boom.
According to the Office for National Statistics, they rose by 19.3 per cent in the year to June.
But, of course, that was then. This is now.
Fears about impending interest rate rises, tougher mortgage approval rules and a stronger sterling that has made London more expensive for the market-driving foreign buyers are all thought to have taken some of the heat out of the capital city’s market.
Property website Rightmove showed asking prices slumping nearly 6 per cent in August.
And the proportion of high-end homes in the capital being snapped up by overseas buyers has dropped 20 per cent year-on-year, figures from estate agent Knight Frank show.
Foreign buyers made up 40 per cent of the prime central London property market in the seven months to July, down from 50 per cent in the same period the previous year, although the portion of buyers of prime central London housing who come from the eurozone has increased.
At least LCP may be able to take advantage of cooling demand and more realistic asking prices.
Exposure
Some sellers are motivated by a desire to act before the election, according to Knight Frank’s Tom Bill, who said the ‘safe haven’ appeal of prime central London property is still alive and well.
However, property economist Matthew Pointon from Capital Economics warned that price growth in the London property market will slow rapidly and the yield on some London properties is already very low.
Richard Troue, head of investment analysis at Bristol-based Hargreaves Lansdown, said now might not be the time to pitch in with property in the capital.
“The central London property market has been incredibly strong in recent years. I’m not calling the top of the market, but I would be nervous about investing in any asset after such a strong run.”
Mr Troue said that anyone who already owned his own home had enough exposure to the residential property market, and that there are a number of risks to consider when investing in property, such as higher transaction costs and the time lag of acquiring, redeveloping and then renting a property.
“Therefore,” said Mr Troue, “they will presumably not necessarily produce a return immediately, and there could be delays or problems with the upgrade works. This could add to costs or delay returns further. I would not see this type of investment as an alternative to cash, and while the London market could continue to perform well for me now is not the right time to be investing.”
He added, “I would suggest anyone interested tread with caution and seek full details of the costs and fees involved, how quickly the portfolio will be fully invested and generating returns, and what could happen if the market falls, or interest rates rise and London property is out of fashion again.”
And LCP’s Ms Heaton said she can not envisage a drift of foreign buyers heading across the Atlantic, as has been mooted. “We don’t think that if you invest in London or New York you will just invest in one or the other. London geographically and historically is attractive. If anything, now is a better time to be doing it. We have seen a slowdown with the election coming up. But almost always after an election you see a bounce back in terms of growth.”
LCP said the investment should be looked on as a medium-term commitment. It is possible to sell up within the five-year term under a ‘matched bargaining scheme’, wherein investors looking to get out are matched with would-be buyers on a waiting list.
LCP shares are listed on the HMRC-recognised Channel Islands Securities Exchange (CISE) so the five-year fund, regulated by the Jersey Financial Services Commission, is eligible for inclusion within stocks and shares ISAs.
LCA II is not available through stockbrokers. Mayfair brokers Killik & Co will accept it as part of their Nisa and Isa wrappers, although Killik’s David Worrall said the company had not done any research on the product and are not advising on it.
Ian Leech is a freelance journalist
Key points
* One residential property company is looking to Isa holders to float its bulk purchase of prime apartments skirting London’s Hyde Park
* Fears about impending interest rate rises, tougher mortgage approval rules and a stronger sterling are all thought to have taken some of the heat out of the capital’s property market
* It is possible to sell up within the five-year term under a ‘matched bargaining scheme’
