While the UK property market has been in meltdown, one fund has beaten the trend by keeping its eye on the hotspots, says Jenny Lowe.

The rich have relied on property in prime central London as a safe and rewarding home for their money for centuries.
For most, though, a piece of prime London property is not a realistic prospect, as the average property price is about £750,000. But it is now possible to snap up a slice of Chelsea, Knightsbridge or Belgravia for as little as £1,000, through a regulated residential property fund, and you can also hold it in a SIPP.

Prime cuts
The Prime London Capital Fund is a Channel Islands-listed, open-ended fund offering an opportunity to invest in true prime central London property. With £40 million under management and modest gearing, the fund invests solely in specific ‘prime’ addresses, as defined by Savills. These include Knightsbridge, Chelsea, Belgravia, Kensington, Notting Hill and Holland Park.

‘Our fund allows access to what has always been a relatively inaccessible asset class,’ explains Stephen Yorke, manager of the fund, which is run by D&G Investment Management.

‘We like to buy short leases on properties in prime London, i.e. with less than 20 years remaining. Most investors can’t, or won’t, buy this type of lease. The trick is to be able to buy these short leases at a price that allows a profit once you have refurbished the property and improved the lease length. Our outperformance by 20 per cent plus of the Savills benchmark over the past three and a half years shows that, on the whole, we get it right. 

‘Prime London property has been incredibly resilient over the past couple of difficult years and has acted as a good protector of wealth.’

When looking at properties for inclusion in the fund, Yorke looks for those that can provide a balance of capital growth and yield within the total return. He enthuses, ‘As a basic rule of thumb, the higher up the cost chain you go, the more your total return is going to rely on capital growth.’

Yorke favours two-bedroom flats in South Kensington Knightsbridge and Chelsea because, he claims, these allow you to add capital value without huge project delays, and extract a reasonable yield.

Yorke points out that the fund is about to acquire over £10 million of prime AAA assets: ‘We recently extended a lease on a flat in Cadogan Square, and have two others under offer in the same area. The fund is also close to dealing on a house in Belgravia and two other flats in Knightsbridge.’

So why should investors consider this fund? Well, as Yorke explains, ‘The founders of the fund are significant investors in it and our sole aim is to make money for our investors.

‘To that end, we will not compromise on quality simply to get assets under management. We will buy when we find the right property and we will pay a price that makes sense, given our yield and return on equity requirements. If that means that sometimes we get outbid, then so be it.’

In the three years since launch, the fund’s assets are up 8 per cent and the unit price is up by 18 per cent this year. This may not seems much, but when compared with the shares of Land Securities, British Land and Grainger Trust, which are all down about 70 per cent over the same time period, it’s not to be sniffed at.

Imminent return
As Yorke says, ‘For overseas investors, who think in terms of euros, US dollars or Swiss francs, prime London property is still more than 30 per cent cheaper than it was three or so years ago. We expect those investors to return to the market when the general election smoke has cleared.’

The fund is modestly geared, currently around 43 per cent of gross assets, and Yorke is keen to remind investors that ‘it is very important for any investor, when they are analysing potential funds, to look hard at gearing levels. When we launched the fund three and half years ago, we always said that we would be modestly geared, between 40 and 60 per cent.

‘The days of being able to gear up, buy and wait for the tide to rise are over. Property fund managers need to show that they can add value to an asset, irrespective of what is happening in the property market.’