Searching for lower risk and consistent returns? Take a look at ground rent funds.
I'm always on the look out for relatively low-risk investment opportunities. Especially if they provide some diversification away from other asset classes. Having done some research into the subject, I reckon that ground rent investments deserve a place in many portfolios. This article examines the case for ground rents and suggests ways and means of accessing this interesting and profitable market.
What are ground rents?
Ground rents give a whole new meaning to the phrase 'long-term investments', because their origins date back to feudal times as a means for landowners to release capital by leasing ground.
Under the terms of a lease on a property, leaseholders pay an annual rent to the owner of the land -- the freeholder. Furthermore, the freeholder retains ownership of the property therefore as well as an annual income, he stands to make a capital gain when the lease on the property expires and the occupier, or leaseholder loses the right to live there.
Stable and secure income
The income stream from ground rents is very secure and is often index linked. It's probably as close to a government gilt as the property market gets. The reasons are clear: if the rent is not paid the landowner has the right to repossess the property. The landowner even takes precedence over the mortgage, if one applies.
Other income streams are available from rent reviews and insurance commissions as freeholders are often responsible for insuring their properties.
These features of ground rents have attracted the attention of several fund managers who have launched investment vehicles that purchase property freeholds and then manage rent collection, administration and reversions or sales of leases.
Four funds to look at
Ground rent funds are available from four providers: Close Asset Management, UBS, Braemar and Brandeaux.
One of the main reasons why many investors have not heard of these funds is that they are not regulated by the FSA, like many specialist funds registered offshore. This means they cannot market directly to the investing public unlike unit trusts and OEICs. So, to gain access to these funds you will have to contact your broker or advisor.
So let's take a look at the performance of each fund.
Close Freehold Income Trust
Accumulation units in this fund returned 5.8% over the last year, 18.8% over three years and 37.5% over five years.
UBS Secure Income Property Fund
This fund only has a two-year track record. In that time it has returned 4.3% over the last year and 4.8% over two years. Its latest quarterly report mentions the acquisition of a freehold in Scotland for £3.3m with an annual ground rent of £138,000. That's a yield of about 4%.
Brandeaux Ground Rent income Fund
This fund has been in existence since 1996, and returned 5.1% over the last year, 28.3% over three years and 50.2% over five years. Since launch it has achieved an average annual return of 9.0%.
Braemar Ground Rent Cell
This is a new issue and therefore has no track record.
These funds do carry risks
As said earlier, I think ground rents are low risk. However, all property is an illiquid investment and, as with other property funds, you may not be able to cash in your investment immediately. In addition while ground rents are stable, freehold property values may fluctuate. Finally, if things go seriously wrong you have no recourse to the FSA and the usual compensation schemes.
Over the last year only UK gilts provided a better return than these funds. Maybe the risks are worth it.
