Every day those with money to spare are offered a tantalising array of potential investments. One that tantalises – but fails to persuade me – is the chance to invest in a portfolio of posh London flats, parcelled up into a fund run by a specialist property management agent called London Central Property Limited. The plan is to buy 15-20 London flats, hold them for 5-10 years and then sell them either in one lot to an investor, or piecemeal.
Now my doubts are not particularly about the current level of prices in the capital, even though according to the latest report from agent Knight Frank annual house price inflation in ‘prime central London’ hit its highest level for a decade, 30%, earlier this year. And it is not because a provincial town-dweller like me fails to see the attraction of living in an overcrowded, dirty, infrastructurally-challenged city, and fails to understand why it has become the most expensive address in the world. A market is a market and if foreigners think that London is today’s Shangri-La, then I don’t suppose I will be able to convince them otherwise.
What would really dissuade me from stumping up the minimum £50,000 necessary to acquire a share of the action is London Central’s own publicity material. In one brochure it states that, ‘ Capital growth has increased by 40 times since 1969. Coupled with rental income, the value of an investment has increased by 60 times.’ While in a background paper it says that, since 1969, ‘ values have doubled six times, on average every 5-10 years, which represents an average capital appreciation of 8.5% per annum.’
Well, if you get your calculator out you will find that these figures are inconsistent. Doubling a number six times gives you a 64-fold appreciation. An annual appreciation of 8.5% per year since 1969 turns £1 into £22. So which is correct? 64 times, 22 times or the 40 times quoted in the brochure.
To find out I contacted London Central Property’s Chief Executive Naomi Heaton. She sent me yet more figures, including a table that showed that the average house price in Greater London has risen from £5,700 in 1969 to £305,400 in 2006. This gives us yet another number, this time a 53-fold appreciation, equivalent to an annual rate of 11.5% per year.
Olympic sprint
In fact London Central’s fund is to invest in the Westminster, and Kensington & Chelsea, on the basis that this is "an international investment market, relatively uncorrelated to factors that influence the domestic housing market, such as employment levels and interest rates, instead being closely allied with the international economy and global events." Furthermore, it foresees a boost from London’s hosting of the Olympics, claiming that, ‘research indicates that host cities experience an uplift of 20% above trend and that prime locations sustain this growth.
In fact a further statistical table questions the premise that the top of the property market has done best. This shows that property prices in Westminster, Kensington and Chelsea have appreciated by 8.5% per year over the last decade, which is in fact lower than the 12% annual appreciation for Greater London as a whole as recorded by Nationwide.
So, London Central’s promotional material raises as many questions as it tries to answer. And a further one is just what potential investors can expect. Crucial is the fact that of the £20m that will be committed to the fund, £9m will come in the form of a bank loan. With rental yields on prime London property now at 4.3% and one third of that, according to Naomi Heaton, going towards the properties’ running costs London Central will struggle to generate enough income to meet the bank interest. Assuming somehow that it can, investors will be putting £11m of their own cash into £20m of properties, so their return should be about double that of the underlying assets – whether that be up or down.
If London Central really believes its own publicity – which includes its claim to have generated for its clients a return 48% ahead of the London average since 2000, then investors really should not expect anything less than a 15% annual rate of return. Instead ‘the Fund aims to double an investor’s stake. A target of 10% compound growth per annum (IRR) has been set.’ And, surprise, surprise, having set expectations artificially London Central is awarding itself an ‘incentive bonus’ if the internal rate of return exceeds 10%!
No doubt there will be enough investors with £50,000 to spare and an unshakeable belief that London property represents a one-way bet to get this fund off the ground. But I will not be amongst them.
Regards,
Tom Bulford
for The Penny Sleuth
