An investor looking for a steady income stream 10 years ago could have invested in UK Government bonds and been rewarded with around 5%. Today that reward amounts to just 1%.
Once rising inflation is taken into account the picture looks even starker. The retail price index (RPI) stands at 3.6% currently meaning investors in so-called safe haven bonds are looking at a negative return.
For nearly 10 years since the global financial crisis hit in 2008 the return from UK Government bonds has reached record low after record low as the Bank of England attempted to limit some of the damage.
These crippling low interest rates are made yet worse by the recent return of rising inflation.
At the same time, individuals are expected to take more personal responsibility for securing their financial futures, particularly in retirement.
Defined contribution pension scheme members were granted the freedom to invest their pension pots with impunity from age 55, creating a wealth of opportunity to grow retirement savings long into the future. Yet, just as investment freedom expands so the availability of appropriate income streams contracts.
So for investors grappling with the income trap it may be time to look beyond traditional asset classes.
The long game
Long income commercial property offers the potential to deliver stable income over the long term without the volatility associated with traditional real estate investment.
Long income property funds investing in commercial freeholds have long been available to large institutional investors such as pension funds and insurance companies. Now these tried and tested funds are coming to the retail market via FCA authorised funds.
The mechanics of long income commercial property funds are quite simple; they invest in commercial freeholds with long leases and ground rent agreements.
Freehold properties with ground rents are let to commercial tenants at around 15% to 40% of the going market rate for the building, for terms in excess of 60 years. This provides stability of income for the freeholder and incentivises the tenant to maintain their ground rent payments, since failure to do so would mean giving up extremely attractive rent payments.
And because the property’s market value can be worth as much as four times the underlying freehold, these properties are often over-collateralised offering additional protection to investors.
Commercial freeholds with long leases are UK properties let to tenants for periods of typically over 20 years and tend to offer a higher income return compared to commercial freeholds with ground rents.
With both long leases and ground rents, rent reviews are typically linked to inflation and agreed at outset rather than subject to negotiations as is usually the case with traditional rental agreements over commercial property. These are typically linked to RPI which means income streams can be inflation protected.
Additionally, the commercial tenant is typically responsible for all property and maintenance costs which means these expenses are not passed on to the freeholder.
Blazing a trail
TIME Investments is the first manager to deliver a regulated long-income commercial property vehicle to the retail market.
Building on the 24-years of investment experience gained running the TIME:Freehold fund, which has beaten inflation every year since inception, TIME:Commercial Freehold targets an income return of 4% per annum and is suited to investors seeking long term stable income and the potential for capital growth. Launched back in 2014, the fund has more than three years track record and a NAV of over £100 million.