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.