Research for a soon to be released report on Long Income Commercial Property has revealed how fund managers are now looking further afield than the traditional mainstays of the Office, Industrial and Retail sectors. Managers are seeking out assets with reliable long term returns and the ability to ride out short term market volatility, and LIP investments fit the bill.
One such deal was made in February 2016 when CareTech PLC sold a portfolio of 41 care facilities on a 150 year term ground lease for £30 million. It has been billed as the first such arrangement in the care sector, but is thought unlikely to be the last and mirrors a well-established trend in the hotel and leisure industry .
It makes sense for care home providers to enter into these sale and leaseback arrangements to free up the value locked up in their properties, and the UK’s changing demographics mean that these should be strong, defensive businesses who will be tenants of the property for a long time to come – the strategic importance of these assets to their business mean that it simply wouldn’t make sense for them to move elsewhere.
This kind of certainty is exactly what Long Income Property fund managers look for in order to get exposure to secure income streams for periods of longer than 20 years. Conventional property funds usually have a weighted average lease term (WALT) of under 10 years and while the lower cost of purchasing leases mean that they can generate a higher yield in the short term, over longer periods LIP come out on top:
AREF/IPD UK Quarterly Property Fund Index
| Annualised total return %: 1 years | Annualised total return %: 3 years | Annualised total return %: 5 years | Annualised total return %: 10 years | |
| All (Pooled) Property Fund Index | 10.2% | 12.5% | 8.7% | 2.7% |
| All Balanced Property Fund Index | 10.6% | 13.0% | 8.8% | 3.7% |
| Long Income Property Fund Index | 7.4% | 9.3% | 8.4% | 5.7%* |
| UK Bonds | 3.8% | 3.5% | 6.5% | |
| UK Inflation | 1.6% | 1.6% | 2.3% | 3.0% |
Source: Pooled Property Funds Results for the quarter to 31 March 2016 AREF, Q4 2015 AREF/IPD PROPERTY FUND VISION HANDBOOK 10 year annualised returns), ONS
Guy Tolhurst, Intelligent Partnership’s Managing Director commented:
“Dependable returns are extremely attractive, especially in times of uncertainty and advisers should be looking at all of the possible routes to achieve this outcome, including long income property.”