Property has been a store of wealth in the UK for many generations, but liquidity and volatility have always been major investment concerns.
The chaos of post Brexit property fund redemption fever and the suspension of trading or fair value pricing adjustments of several very large, traditional property funds amply evidenced why.
However, long income properties were virtually unaffected, with CBRE’s Q3 2016 MarketView finding: “The market for long income has held strong throughout the recent Brexit turmoil.
"We believe the market post Brexit is strong, with an increasing buyer pool and varied fund mandates providing a healthy market for long income investment.”
This performance seems like a great reason to invest in long income property (LIP) and it was created by six key elements which make it an attractive proposition even in uncertain times.
Robust cash flows
Low volatility is very much connected to the property assets targeted by LIP funds: Those that can deliver stable cash flows, which are generated by tenants who are legally obligated to pay contractually agreed rents over the long term and for which the premises are critical to the tenant’s business. These highly predictable returns are very valuable and have the effect of protecting the value of the underlying asset, even when the price of other property assets is falling.
Indexation and inflation mitigation
Income yields can be protected by indexation, where ground rent or long lease rent reviews are based on an index, such as RPI inflation: The use of indexation is increasing and it provides inflation hedging properties, meaning that the erosion of the real return by the rising cost of living is limited.
Regular, upward-only rent reviews
Rent reviews for LIP generally take place every three or five years, or annually. The more frequent the reviews, the greater the opportunities to generate rental growth by raising the rent and for index-linked rents, the more closely inflationary events can be mirrored.
Since the ground rents (usually with a term of 60 years plus) are typically only around 5 per cent to 20 per cent of the market value rent of the land and buildings, this means that ground rents are significantly over-collateralised, in terms of both capital value and rental value. Consequently, the likelihood of ground rent non-payment is remote.
Over the long term, UK LIP returns can outperform gilts. Although conventional government bonds may be viewed as more secure than LIP because of their government backing, gilts (except those that are index linked) don’t offer the prospect of income growth. LIP funds might target conservative returns of 3 per cent to 4 per cent a year, but statistics show they are fully capable of doubling that and more and outperforming much more risky asset classes over the long term.
Real asset diversification