Introduction to Alpha Real Capital

Transcription

1 August 2011 Introduction to Alpha Real Capital Alpha Real Capital ( Alpha ) is a specialist property investment and fund manager whose partners and co-investors (before the addition of Alpha Real Property Investment Advisers LLP) comprise well known entrepreneurs such as Philip Gower, Sir John Beckwith and Michael Spencer. Alpha has a large team of seasoned property professionals with collectively over 100 years of property investment and management expertise. The Alpha team has created a range of property focussed investment funds including Alpha Pyrenees Trust, Alpha German Property Income Trust and Alpha Tiger Property Trust for a range of UK and overseas institutions, family offices and private investors. Alpha brings a new level of property expertise to the management of the ex-close Brothers property funds and services. This will be increasingly evident over time but has already been demonstrated in a number of ways: The injection of 4.75 million of convertible capital into Alpha UK Multi Property Trust plc (AUMP) (formerly Close High Income Properties PLC (CHIP) strengthening the Company s balance sheet and providing the Company s portfolio with additional working capital to retain existing and attract new tenants. The successful 1 for 10 consolidation of AUMP shares, which reduced dealing margins (bid/offer spread) by nearly five times, resulted in an increase in the share price of 18%. The proposed reverse auction tender offer of Property Investment Portfolio PLC (PIP) (formerly Closepip), to provide some liquidity for those investors who require short term liquidity. Alpha Real Capital The pedigree of additional skills provided by Alpha is shown below in terms of the skills and experience of its key partners: Phillip Rose Chief Executive Officer and Partner Non Exec Director of Great Portland Estates plc Management Committee member, Hermes Property Unit Trust Brad Bauman Partner Previously MD, CBRE Financial Services Mark Rattigan Chief Operating Officer Previously COO, Deutsche Bank Real Estate Funds Management Group Sir John Beckwith Partner Founded LET in 1971 Rutland Trust PLC Thames River Capital Philip Gower Founded Antler Homes Michael Spencer Partner CEO, ICAP 1

2 Introduction A tale of two cities Commercial Property has now experienced two years of recovery with the IPD Index revealing an average capital growth of 15.1% for the period. However the average conceals significant variations between different property types. So are we in a sustained property recovery? If you lived in Kensington and Chelsea you would reply Crisis, What Crisis? as over the last five years Savills estimate the value of executive units have risen by 26%. Prime West End offices now change hands at a yield of 3.75% reminiscent of 2007, whilst City offices are pursued by overseas investors who it is estimated committed over 10 billion to UK property in Central London is in boom time with the West End consolidating its position as the global retail destination (wrestling this crown from New York). Kensington and Chelsea are the focus of US$ billionaires (whose numbers are estimated to have increased by 20% in the last two years), and the City has retained its position in financial services despite the loss of some yodelling hedge fund managers. All are oblivious however to the plight of UK PLC. Commercial Property Yields Typical property in Kensington and Chelsea The chart shows the movement of annual income yields for a range of commercial property sectors. At the peak of the market rental yields were compacted by the weight of money seeking to enter the market. With a finite quantum of prime property, investment flows increase into secondary stock and by 2007 only a yield difference of 1.5% divided West End Shops and Regional Office Parks. Four years later the yield gap is nearly 4%. Yield % Q1 Central London Shops Central London Offices Rest of UK Offices Rest of UK Office Parks Shopping Centres Source: Jones Lang Lasalle. Without a recovery in the fortunes of the service sector (comprising 74% of the UK s GDP) demand for space is unlikely to increase. Whilst there is some improvement in the more prosperous South East, further into the regions commercial property is in the doldrums and vulnerable to the contraction of the public sector. In fact, in less buoyant regions of the UK such as the North East, the yield on secondary offices can currently be over 10%. As and when economic activity and sentiment change, the pace of recovery could be rapid, as witnessed in respect of prime property in the second half of In the meantime prudence dictates that investors should compromise on returns in exchange for minimising risk, or else seek out sectors where a shortage of capital offers value opportunities for those with cash. Freeholds are a classic example of a defensive niche and house-building an example of the latter. 2

3 Ground Rents The Freehold Income Trust (FIT) FIT celebrated its 18th birthday on 31 March 2011 with distributed income of 4.58% for the financial year (above the 4.25% pa target). The total return for 2010/11 was 5.5%. The Fund has now delivered its 18th year of positive returns which are in excess of inflation. Such a track record should provide advisers with the confidence to recommend the Fund in the knowledge that FIT has endured periods of high interest rates and low growth, and periods of high growth and low interest rates. It has withstood the turbulence of the credit crunch and produced positive returns when commercial property returns were negative. As may be seen from the graphs, and in our current FIT newsletter (available at the Fund has outperformed gilts in the period and continued to perform undisturbed through the property recession of the last four years. The underlying security of the Fund is the freehold land let on very long leases (84% being in excess of 99 years). The long lease lengths mean FIT carries virtually no risk of voids, letting or refurbishment costs. Whereas the erosion of lease lengths over time in commercial property funds can reduce the value of their properties, in the case of FIT, shortening leases increase the reversionary value of the portfolio and increase the likeliness that the lessee will pay a premium to extend his lease). FIT performance* since launch vs UK RPI Percentage Growth (%) Years Freehold Income Trust *Total yield and capital uplift (on bid price at 31 March), contains estimated data UK Retail Price Index Source: ARPIA and Lipper. FIT vs Gilts and RPI Percentage Growth (%) Westbourne Terrace W2 (FIT) Freehold Income Trust Acc Units* IMA UK Gilt (IN) UK Retail Price Index (IN) Source: Lipper, to *Contains estimated data 3

4 Ground Rents continued the popularity of ground rent investment is set to continue... it is a safe haven in the uncertain times ahead Salford Quays (FIT) Westfield, Camden NW3 (FIT) John Churchouse, Director, Savills Owing to the Unregulated Collective Investment Scheme Status of FIT there has been an assumption that the Fund might be high risk. This is far from the case and, in addition to the Fund s consistent performance over the last 18 years, advisers can refer to CBRE research notes (available on our website) to support their judgement. CBRE in its Residential Ground Rent Investments September 2010 reported that against the backdrop of the economic and property market turbulence of the past two and a half years, residential ground rent investments have provided the secure income and low risk profile that most investors have been striving for. They concluded that residential ground rent investments constitute one of the most secure and low-risk property assets available. In winter/spring 2010 Savills produced its market insight Ground Rents Uncovered which used as its illustration a portfolio acquired by FIT. In a subsequent article John Churchouse (director of Savills) concluded that the popularity of ground rent investment is set to continue... it is a safe haven in the uncertain times ahead. Of the circa 64,000 freeholds owned by FIT 69% have some form of rent review. They vary in nature from stepped increases (defined increases every x number of years) to those indexed by reference to RPI or the Halifax House Price Index. FIT s consistent positive returns and low volatility make it an ideal vehicle for those seeking higher income than is available from cash vehicles, a long term wealth accumulation and inflation protection investment for pensions and a convenient means (using accumulation units) for medium to long term saving. Given that income is distributed gross it should also be an investment considered by Charities and certain offshore investors. Residential ground rent investments constitute one of the most secure and low-risk property assets available. CBRE, Residential Ground Rent Investments September 2010 West End Quay (FIT) Imperial Court, Kennington Lane SE11 (FIT) 4

5 IHT Mitigation House Building Business Property Relief CTC Our Business Property Relief service for IHT mitigation is now in its 15th year of operation with circa 150 million of assets being invested by circa 1,500 individual companies. Residential property development is the principal trade as has been the case throughout the history of CTC. House-Building House building has been through massive change since the heady days of the early part of this century when the private sector was building some 170,000 houses a year. Today around half as many houses are being built in the private sector and for a very different market. With many first time buyers excluded from the market by the size of the deposit required, house builders have focused upon the 2nd or 3rd time buyer who has more accrued equity to invest. Building has also consolidated in the more affluent parts of the South East where strong demand remains for properties with prices in excess of half a million pounds. From a profit perspective the case for building has been enhanced rather than dented by the credit crunch. Traditionally house-builders operated on a one third, one third, one third apportionment between land cost, building cost and profit margin. However by 2007 land was representing 40% 50% and margins were sometimes halved. Development land values have fallen enabling CTC to access more affluent areas where there is the greatest demand. And the land element has fallen from 40% to below 30%. Building material costs have risen, but labour has fallen back significantly leaving the construction cost much the same at around one third of final value. These two components now might represent 65% of the sale price. Conversely however, property transactions are slower to complete in the current climate which means that it is prudent to allow 2 years for a project period rather than 18 months as was the case before the credit crunch. Alpha is also now more conservative in terms of what they allow in the case of contingencies often now assumed at 5% of the project cost. The net effect of the changes has been to enable CTC to target margins of 26% on house building activity (even after greater contingencies) compared to 20% four years ago. And this is not the only benefit by comparison with the historic situation. With scarce development finance CTC is able to strike tougher bargains with its developers. CTC often now requires the developer to contribute the land at a discounted price to leave equity in the project. It has also enabled CTC to be more selective of their partners in terms of their financial strength. Further benefits to participants of house building projects come in the form of increased warranties and indemnities from the developers, which protect CTC from project overspends, and finally the ability to compel contractors to obtain performance bonds in the event of breaches in their performance. All these factors have enabled CTC to reduce risk in the building activity. Case Study: Park Circus, Glasgow This is a classic example of a project where we are now able to target top quality property at the luxury end of the residential market where demand remains strong. Park Circus is in the most fashionable West End of Glasgow and the CTC partnership acquired a Grade A listed late 19th Century house built for the wealthy merchants. During the economic slump of 1960/1970s this property, like many, was converted into offices for mainly professional occupiers. The area is now returning to its former glory and the development proposal was to convert the building into three top quality 2 and 3 bed apartments, whilst building a mews house on the site of the rear garage. The property was bought for 750,000 in December 2009 and over the next 14 months the building was converted by Detail Partnership (our Joint Venture Partner) a specialist interior design and property development business focused upon listed and historical property. Since the works were completed this March, three out of four properties have sold at prices above budget and there is active interest in the last flat. The total anticipated gross margin from this project was 26%, with the partnership s share representing 277,000 on a total budget of 2.5m. 5

6 IHT Mitigation Forestry Forestry Activity CTC is a significant private sector forestry owner with over 14 million invested in 8,250 acres spread over five CTC Forestry Partnerships. CTC has had five years in the forestry sector during which the IPD forestry index has achieved total returns over 10% pa, far higher than their historic average of circa 6% pa. The credit crunch had an initial impact on timber prices, but since then the 20% devaluation of sterling has been more significant. This has made home grown material far more competitive with imports, and the story ever since has been of home grown material gaining market share at the expense of imports. In the last decade home grown timber s market share has increased from around 15% to 25%. Prices for the grower have increased as our domestic processors have improved the quality of their offerings and competitiveness with imports. This has provided stability to UK timber prices, which as the following graph demonstrates, are beginning to return to the levels observed prior to the economic downturn. It is only to be expected that returns from forestry plantations will slow down but a number of factors still operate in favour of woodlands. Land prices remain the cheapest for any land use and as agricultural land prices increase, so forestry land values are appreciating. CTC pro-actively looks for opportunities to take profits on selected assets where pricing has moved ahead of return prospects. Accordingly, some of the properties in the earlier Forestry Partnerships are being sold. One has already completed generating a 127% appreciation for the CTC Forestry Partnership Number 1 and another two are in the process of being marketed. In the last decade home grown timber s market share has increased from around 15% to 25%. IPD UK Forestry Total Return Index vs Timber Price Index Index Values (1992 = 100) IPD UK Forestry Total Return Index Timber Price Index Case Study: Lambhill Forest Plantation of c.357 acres, located in Eskdalemuir, Scottish Borders. Purchased in August Sold in November Generated 127% net return to CTC Forestry Partnership Number 1. 1 Source: IPD UK Forestry Index. 6

7 IHT Mitigation Farming Farming Enterprise CTC is now the owner of two farms; one of which is arable and the other is a dairy enterprise which required capital to double the size of its milking parlour and associated facilities. CTC investors have acquired 450 acres plus a range of farm buildings for 4 million. Some of the farm buildings which are required for the agricultural enterprises and others offer development potential. The Partnership will use its remaining capital to fund expansion of the farming enterprises and for cashflow. It is clear that there is a demand for the kind of facility that CTC can offer. For some farmers, already indebted on the purchase of their land and houses, the prospect of taking on additional debt in order to finance the agricultural improvements needed to remain viable is a stretch too far. The alternative of selling some of the farm subject to an agreement whereby they retain the use of that land can be a more comforting option. Agricultural land continues to be in huge demand, whether to provide privacy along with a decent house for those leaving London, or for those seeking Agricultural Relief from IHT (slightly different to Business Property Relief). Such purchasers have at times been responsible for more acquisitions than traditional farmers and as such, there are now a greater pool of potential buyers of farming assets, which assists in giving further support to UK farmland values. CTC seeks to buy high quality farmland and assets on an off-market basis, and will use experienced farmers and local contractors to maximise the farming income. Case Study: Nadrid Farm Farmland in England (Average Value for Grade 3 Arable) 6 5 Per Acre (,000) Source: Savills Research. Dairy Farm of c.100 acres, located in North Molton, Devon. Purchased in June Permission acquired to expand dairy usage to accommodate up to 200 cows Investment planned to redevelop farm buildings. 7

8 IHT Mitigation Self Storage Self Storage Enterprise Self Storage began as a business in the USA during the 1960s and in the UK about 15 years later as the boom in building flats developed offering minimal space to their occupants for all the possessions they collect over the years. In 2009 the UK had 800 facilities with an annual turnover of 345 million. CTC is working alongside Storage King and other leading operators. Self Storage usually operates out of large 30-50,000 sq ft sheds with internal partitioning aiming at bulky heavy goods on the ground floor with smaller space offered above. There are a mix of users varying from private individuals, (especially those who have moved out of their houses) to businesses using the facilities to store stock or documents. The latter tend to be longer term stayers but all are likely to be on rolling monthly contracts. The facilities require continuous management and Storage King charges a percentage of turnover to organise and manage all the lettings, with a further profit share once the operation has achieved a given level of return on capital for investors. Breakeven is generally achieved between 50% to 60% occupation after which additional revenue achieved is very nearly all profit. Worcester Self Storage Partnership was launched in 2008 and opened for business in the first quarter of Despite the difficult economic conditions at this time the project has now reached 58% occupancy (as of April 2011) and is profitable. It is expected to increase occupancy in the year ahead, generating attractive income returns for investors. Further opportunities are being explored with the aim that CTC will be able to offer additional partnerships in the sector. Case Study: Worcester Self Storage Partnership Circa 31,000 sq ft of available self storage space. New build facility located in Worcester Development commenced June 2008 Facility opened for business in February 2009 Second stage of self storage fit-out completed December 2010 Facility now over 60% occupied For further information contact: Russell Jarvis Sales and Marketing Director Tel: Mob: questions@alpharealcapital.com Alpha Real Capital LLP 7-9 Swallow Street, London W1B 4DE Fund websites Important Notice: For Professional Advisers Only. General information: Issued in the UK by Alpha Real Property Investment Advisers LLP ( Alpha ) which is a subsidiary of Alpha Real Capital LLP, both of which are authorised and regulated by the Financial Services Authority. FIT information: Please note there is no guarantee that the Trust s investment objective will be achieved. The value of investments and the income from them may fall as well as rise as a result of fluctuations in market, currency or other factors and investors may not get back the original amount invested. Any past performance data cited is not a reliable indicator of future results. Alpha may source data from third party data providers but accepts no responsibility or liability for the accuracy of data. This document does not constitute investment advice and potential investors are recommended to seek professional advice before investing. Applications for units in the Fund can only be made via an Application Form and reviewing the Information Memorandum and investors should carefully read the risk warnings contained within. All documentation is available on request. The underlying investments in the Fund consist wholly or substantially of real property; the value of the real property concerned will generally be a matter of valuer s opinion rather than fact; under certain market conditions investors seeking to redeem their holdings may experience significant restrictions or delays. Fund Status: FIT is an unregulated collective investment scheme within the meaning of the Financial Services and Markets Act 2000 ( FSMA ) and the distribution and promotion of units are restricted by law to persons who are themselves authorised under the FSMA or who otherwise fall within the categories or exceptions made under Sections 238 of FSMA. All or most of the protections provided by the UK regulatory system do not apply to investment in the Fund and compensation under the Financial Services Compensation Scheme will not be available. CTC information: Alpha is the adviser to the CTC service. Please note there is no guarantee that the investment objectives will be achieved. The value of investments and the income from them may fall as well as rise as a result of fluctuations in market, currency or other factors and investors may not get back the original amount invested. Any past performance data cited is not a reliable indicator of future results. Alpha may source data from third party data providers but accepts no responsibility or liability for the accuracy of data. Applications for shares in a CTC and investment in any Partnerships can only be made on the basis of the current Information Memorandum and relevant Trading Activity supplement and investors should read carefully the risk warnings contained within. All documentation is available on request. This document does not constitute investment advice and potential investors are recommended to seek professional advice before investing. Participation in CTC should be only considered by those investors who are informed and experienced in such trading activities and should be regarded as higher risk and long-term in nature. The tax treatment depends on the individual circumstances of each client and may be subject to change in future. The value of shares in a CTC will depend on the ability to identify trading activities and the success of the trading activities undertaken. The ability of a shareholder to change trading activities will be restricted if the CTC s funds are committed to other projects. Since the underlying investments in a CTC consist wholly or substantially of real property, under certain market conditions, shareholders seeking to realise trading investments may experience significant delays. Further, the value of the real property concerned will generally be a matter of a valuer s opinion rather than fact and may fluctuate. Investment in CTC involves the establishment of a private limited company. There is no market for the shares in a CTC and accordingly it may be difficult to obtain reliable information about the value of shares and shareholders seeking to redeem their holdings may experience significant delays. Issued August