Feb 9 2017

Advertorial: INVESTING FOR INCOME

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Advertorial: INVESTING FOR INCOME

TIME Investments managing director Nigel Ashfield discusses a new type of commercial property fund that goes off the beaten track to offer inflation-protected income with lower levels of risk

 Financial Adviser: What was the genesis of the TIME:Commercial Freehold fund? How does it fit in with the highly successful TIME:Freehold fund?

Nigel Ashfield: The TIME:Freehold fund, which has a strong track record over 23 years, initially as part of Close Brothers before I extracted the business and set up TIME Investments, is based on investing in ground rents in the residential space. In essence, we buy freehold property with long leasehold tenants and on average those tenants will pay us £128 a year in ground rent. The result of 65,000 tenants paying us that regular amount is a very secure income stream that is very unlikely to be defaulted on. It is also liquid and open to trade every month. The strategy has proved popular but it is very hard to find sufficient investments in that space so we set about trying to replicate that long-term income stream from commercial property, which is in abundance in the UK. The result was the TIME:Commercial Freehold fund, which launched in June 2014.

FA: What does the fund invest in and how does it differ from other commercial property funds?

NA: This fund acquires freeholds where there is an underlying tenant with a long lease. Traditionally in the UK, commercial property funds invest in freeholds with leases of less than 10 years. Conversely, our weighted average lease term is around 100 years, which makes it more secure and stable on a long-term basis.

With those longer leases, particularly those of more than 100 years, what you are effectively getting is a ground rent where it is very difficult to envisage the tenant ever not paying it. Indeed, because of the overcollateralisation of the freehold value where the tenant’s leasehold value is worth a lot more than the freehold value, they are very unlikely to default and, if they did, the senior debt provider is likely to step in and pay it as it is in their interest to retain the security over the leasehold. It provides us with a scalable way of being able to offer similar characteristics to our residential freehold vehicle, with a target income stream of around 4 per cent and the potential for capital growth over the long term.

FA: How important is diversification in a fund like this? Is it the quality of the freehold that matters or the sector or business itself?

NA: Where there is a very long lease, the sector and the type of tenant and even its location is less relevant because of the overcollateralisation element, which makes it very likely that the tenant is always going to pay the lease. However, when you get down to a 20 year lease, which is still broadly speaking a long lease, it is much more important to look at the covenant strength and the type of property because, ultimately, we are potentially going to be getting that property back in 20 years’ time so those factors will have a big impact. 

For both relatively short – 20 year – or very long leases we tend to have businesses with a reason for signing up to those long leases. The usual reason is because the property is a core part of the business for the tenant. A good example is a hotel, where the building is purpose-built for the nature of the business, with common areas such as lobbies, restaurants and conference facilities, as well as the bedrooms with en suite facilities. The tenant is using that property as a profit centre and, unlike an office, which is just an incidental cost to the business and can be easily changed without much impact, the property itself is an integral part of the business.

FA: Can you explain the inflation mitigation aspect of the fund?

A key feature of the fund is that our portfolio has rental uplifts built into the leases and over 95 per cent of our holdings have that uplift either every year or every five years, so the lag in getting that uplift is relatively short. In total, 96 per cent of the Fund’s rental income is either linked to RPI or has a fixed uplift, protecting the fund against inflation. This is highly unusual for a commercial property fund. 

Further, the rent reviews are measured back to the quoted index in the lease and, therefore, are entirely formulaic and predictable. This compares favourably with traditional commercial property fund holdings which tend to be linked to open-market value and are subject to a lot of negotiation.

Another form of protection is that the rent reviews are upward-only meaning that, even if there is no increase in RPI, we will still have a base level of rental growth. This is boosted by some of our RPI uplift having floors and caps, which is to say, there is a set minimum level of annual increase of, say, 1-2 per cent. Quid pro quo, we have a cap of 5 per cent, so if RPI was above that, there would be a limit to the amount of rental growth that would be experienced.

FA: TIME Investments has been the first to the UK retail market with this type of fund. Why have we not seen a fund like this before?

NA: We see that most UK commercial property funds are competing in the same, well-trodden part of the market whereas we have moved to an area that most of those funds do not venture into. It is an area that has long been favoured by institutional investors who love it because of its inflationary qualities and the security of income. We happened to come across it five years ago when we were looking to expand upon our residential freehold offering and it was immediately obvious that it has fantastic potential particularly if, like us, you have an experienced team in place. 

The fund is also a product of the changes we have seen in the market over recent years and, specifically, the need for steady income. In the past an income of 4 per cent was not seen as being particularly attractive but now 4 per cent of solid, stable, secure income with inflation protection is suddenly very attractive indeed. As a result I am sure this area will attract other parties in the future but, for now, it is just us and the institutional investors. Luckily, they are not typically looking to buy at the same asset size as us as we target properties around £5m while they tend to look at £20-25m plus, which means there are rich pickings for us. As it stands, we have a portfolio of 40 properties, which is valued at just over £50m. The total annual income on that is around £2.5m.

FA: Who is the fund targeted at?

NA: We do not have a narrow view of who our “target investor” is. We have traditionally tended to work through the financial adviser market and have established a group of IFAs that like the characteristics of the fund and the attractive income level it offers. They tend to invest through Sipps and ISAs and some through offshore bonds. However, we have some institutional investors who come to us directly, in the form of family offices.

The appeal of the fund is broad and, as such, we have a wide range of investors who include it in their portfolios as a source of steady long-term income without the volatility of many other asset classes. The great thing about this fund is it is fully scalable as the opportunity set is so wide and our team is well-versed in picking out the optimum holdings to help us consistently deliver our targets.

If you would like to find out more about TIME and their investment solutions please contact them on: 020 7391 4747questions@time-investments.comwww.time-investments.com

BIOGRAPHY

Nigel Ashfield is the Managing Director of TIME Investments with responsibility for over £600m of funds under management. He is the fund manager of TIME:Freehold, a £270 million ground rent fund with a 23 year track record of inflation beating returns.

Nigel qualified as a chartered accountant (ACA) with PwC in their London SME business assurance division, where he worked from 1997 until 2001 when he joined Close Brothers.

TIME is an award winning provider of tax efficient investment solutions and open ended property funds. Headquartered in London with over 50 staff, they have a nationwide distribution team of 23 supporting financial advisers.