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There’s confidence in global property markets again as real estate investment trusts glisten | Page 6

Property magnate Donald Trump is getting hot and bothered over China | Page 8

If prime property isn’t your forte, it might be time to look further afield to new developments in Asia | Page 12

Commercial mortgage-backed securities are back on the straight and narrow. But for how long? | Page 16

PROPERTY INVESTMENT

September 2012 | business-reporter.co.uk

An investor’s playground London’s riding high on the property market rollercoaster

Distributed within the Sunday Telegraph, produced and published by Lyonsdown which takes sole responsibility for the contents

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Business Reporter · September 2012

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Editor’s letter

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Making a comeback Publisher Bradley Scheffer info@lyonsdown.co.uk

Project Manager Lee Robertson lee@lyonsdown.co.uk

Editor Nick Martindale editor@lyonsdown.co.uk

For more information on any of our supplements please contact us: Telephone 020 8349 4363 Email info@lyonsdown.co.uk

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Contributors Andrew Rosenbaum regularly edits Business Technology reports for Lyonsdown. He is a journalist specialising in law, business, telecoms and technology. Before going freelance in 2004, he worked for Euromoney and Screen Digest.

Paul Bray has written about almost every topic from business and technology to travel and education, for titles such as The Daily Telegraph, The Sunday Telegraph, The Guardian, Britain’s Top Employers and Computing.

Kathleen Kiley is a business journalist based in New York. She has covered finance, consumer markets, lifestyle issues and sustainability. She has written for The New York Times, magazines and online news services.

With thanks to the following organisations

As the global economy grapples with recovery, experts cite real estate as a wise investment choice because it provides stability in times of economic uncertainty As Donald Trump says in our interview, conditions are right for investors to move in on global properties. Whether you invest directly, or choose to pick a fund or a real estate investment trust, prices are low and good value is available. This is not just hype. The theory is that we’ve hit bottom, and are now coming back. The world property market has been depressed for several years, a victim of the 2008 financial crisis in which one of the most toxic ingredients was real estate debt. The crisis in 2008 lasted through 2010, and, against expectations, into 2011. During this period, prices first fell sharply, then stagnated. But now we see at least a feeble recovery in the US, and a recovery of sentiment in Asia. All the signs point to 2012 being the first year of the real global property recovery. As a recent study by property

The world property market has been depressed for several years. We’ve hit rock bottom, and are now coming back

firm Knight Frank puts it: “Globally, commercial property investment volumes rose moderately in 2011 compared with 2010. It is anticipated that annual transaction volumes in 2012 will be similar to 2011, albeit the second half of the year is expected to be stronger than the first half.” Oddly enough, the European sovereign debt crisis is helping to drive that investment. With investors turning from government bonds in disgust, and desperately in search of yield, real estate provides a relatively stable and relatively high offer. Yields in Australia, for example, average around 7 per cent. In the US, some rental properties

UNSURPRISING FACT: Residential Property has beaten inflation every decade for the past four decades.*

are up to 8 per cent. So there is an increasingly large pool of investor money, much of it from Asia, that is seeking a home in the prime markets for property investment: New York, San Francisco, London, Paris, Frankfurt, Singapore, Hong Kong, Sydney, and Tokyo, just to name the most sought-after. Then, the risk-takers are willing to look at China, and perhaps the Asian frontier markets. Will there be another bubble? Some say it could happen. But, before competition becomes too challenging, it’s time to buy. Andrew Rosenbaum Editor

Hearthstone Investments Plc New Broad Street House, 35 New Broad Street, London, EC2M 1NH Sales Team T: +44 (0) 20 3301 1330 E: sales@hearthstone.co.uk W: www.hearthstone.co.uk

SURPRISING FACT: You can now invest in residential property via your ISA or SIPP. *Source: Hearthstone compiled data using Acadametrics, ONS, Savills, ARLA.

Hearthstone – changing the way the UK invests in residential property. Hearthstone is a fund manager focused entirely on residential. The TM Hearthstone range of funds provide access to long-term, stable returns from residential property without the need for investors to manage the investment personally. We invest in high quality, well managed homes that give solid returns to our investors and are valued homes to tenants.

Visit www.hearthstone.co.uk and read our Guide to UK Property Investment to find out more, or speak to your Financial Adviser. You can also call or email our team. Important information Information on past performance is not necessarily a guide to future performance and you may get back less than the amount invested.

If you are an experienced investor, have a think about how you could benefit from residential property being included in your existing tax-efficient portfolio. Or for those wanting better returns than cash, investing in a child’s future via a Junior ISA, or saving for a house deposit, you may find this opportunity interesting too.

© Copyright 2012 Hearthstone Investments plc. All Rights Reserved. Hearthstone Investments plc is the parent company of the Hearthstone Investments Group. Regulated business is carried out by Hearthstone Asset Management Limited. Hearthstone Asset Management Limited is an appointed representative of Thesis Asset Management plc which is authorised and regulated by the Financial Services Authority (114354).

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29/08/2012 14:07:20

Business Reporter · September 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Property investment

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Jamie Sneddon

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Foreign buyers flock to London As London enjoys the rosy after-glow of the 2012 Olympics, investors from across the globe are flocking to the city, seeking a safe haven from turbulent markets elsewhere. Upmarket estate agents report huge interest in prime real estate in the capital from Europe, the Middle East and even India and Malaysia. Prices, which fell further than the rest of the UK during the credit crunch, have now bounced back and are at record highs. Commercial property is also attracting huge influxes of cash from both wealthy individuals and international fund managers, keen to park their cash in uncertain times. So what is it that makes London such a top target for buyers? From an investment point of view, the chief attractions include liquidity – the ability to buy and sell easily, with low fees and minimal red tape – and political and economic stability. The eurozone crisis has seen an influx of buyers from Greece and Italy, while the threatened 75 per cent top tax rate in France has seen a huge spike in property web searches by the French, according to Gráinne Gilmore, head of UK residential research at estate agents Knight Frank. Commercial real estate is also booming, thanks largely to political stability and the liquidity of the market. Major deals in the second quarter of the year include businessman Moises Safra’s acquisition of 1 Plantation Place for almost £500m (see infographic). Overseas buyers have invested £15.8 billion in London offices since 2010, according to the commercial property and real estate services adviser, CBRE. In a recent speech a CBRE director, Simon Barrowcliff, said: “Clearly the recent appreciation of sterling has had little effect on overseas investor’s views that central London is providing both good value and a safe haven.” Richard Reed

Source: Commercial property data: CBRE Residential property data (international figures): Chesterton Humberts

In brief TMT drives volumes In London commercial property, the Technology, Media and

Telecommunications (TMT) subsector continued to buy, accounting for 24 per cent of the 1.7 million sq ft let over the first quarter of 2012, according to property firm Jones La Salle. Low levels of activity were seen from the banking and finance

sector, accounting for 8 percent.

Spanish investment grows The Bank of Spain tells us in July that foreign investment in Spanish real estate grew by 2.4 per cent through March 2012 compared with the same

period last year, with €1,163 million. In spite of what is happening in Spain, many property investors still remain confident about the market, and they recognise that the Mallorcan property sector is one of the most resilient.

Buffet boasts low prices Billionaire investment guru Warren Buffett said that now was the time to invest in residential property in the US. Buffett said prices were lower than ever before, and that inventory was tremendous due

to the number of foreclosures banks had been obliged to make. US hedge fund Och-Ziff Capital Management Group, working with McKinley Capital Partners, has acquired 300 distressed single-family homes in the San Francisco Bay Area in California.

Business Reporter · September 2012

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Property investment

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comments Tim Murphy, CEO of the Hong Kongbased property firm IP Global. “These are places where you have growing service economies, large upscale demographics, and growing retail and logistics to service them.” In Europe, foreign investment continues to pour into London and the South East, which offer both security and a depth of market that only a few other regions can match. Switzerland is one of those, a location where property values and rents have gotten so high that the Swiss National Bank has issued a warning to banks about them, lest the global economy fail and prices plunge. “Parts of Germany are strong as well,” explains Duncan Owen, head of Property Funds at Schroders Investment Management, “as is the île de France. While these are regions reasonable level in these fast-growing countries with some negative macroeconomic indicators, where great gains are to be had from a burgeoning they are all producing goods and services which a variety of people around the world middle class. But many analysts agree that the Americas want to buy and as a consequence will look likely to see the fastest growth in investment provide good growth for commercial and activity again this year. In the office sector, residential property.” The same argument applies in Asia, where $58 billion in sales volume took place in 2011 – more than doubling the $26.4 billion total for Tokyo, Singapore, Hong Kong and major 2010, according to a study by global property Australian cities are the current hotspots, as Marc Giuffrida, executive director, Asia Pacific firm Knight Frank. Investment volume across the major property Capital Markets at property firm Knight Frank, types in the US will grow by 50 per cent to points out. China continues to be a challenge, offering approximately $300 billion in 2012, according to Don Fasulo of the New York-based researcher great growth opportunities but at a high level of Real Capital Analytics. “We think there is a good risk. “The potential for growth driven by the chance for a surprise to the upside,” Fasulo adds. emerging middle class in China is tremendous,” “Commercial real estate remains a very attractive says Owen of Schroders Investment Management. relative to other asset classes, and it is likely that “But we have to see if the Chinese government equity capital will be both more plentiful and can fine-tune the economy so that growth occurs in a framework of stability.” more motivated over the coming Nonetheless, the Beijing market year.” While the US hasn’t seen recorded exceptionally strong a robust economic recovery, American investment rental growth in 2011, with Fasulo thinks the economy will activity prime rents rising by 46 per cent. improve still, and that means that $60 Beijing and Shanghai are both rents and occupancies will start $50 $58.0 forecast to see continued rental to rise. growth in 2012, according to But the improvement isn’t $40 $26.4 Knight Frank. general all across the US. “You $30 So property investment is should look to the so-called resuming its traditional safe‘coastal’ cities for the most value, $20 2010 2011 haven role, even if only the most for example, San Francisco, Source: Knight Frank Boston, New York, Miami,” overqualified investments are benefiting for the time being. Coastal cities like San Francisco offer the most value owing to growing service economies

The safe-haven status As property investment continues to focus on established markets, higher risk areas lose out By Andrew Rosenbaum The overall trend in global property investment in 2012 is set to be very predictable – a flight to safe havens where economic order and at least some growth is expected. The good news is that the move will be faster than last year – expect a 20 per cent increase in global property investment markets in the second half of 2012, analysts at global property firm Cushman Wakefield say. They forecast that

Foreign investment continues to pour into London and the South East, offering security and a depth of market only few other regions can match “Whole swathes of the country could be left in blight.” That’s a prediction to strike fear into the heart of any property investor – but according to Bill Gloyn, chairman of the British Property Federation’s insurance committee, it’s all too likely to come true. This summer’s record rainfall has highlighted fears that property investors could be left to pick up the tab if insurers refuse to provide cover for buildings in flood-risk areas. Ministers are locked in negotiations with insurers in search of an agreement over cover for residential properties – the existing deal expires in June next year. Unless insurers get investment and support from the government on flood defences, they could refuse to provide insurance cover to areas at risk of flood. The news is even worse for investors in commercial properties, as the government leaves this to the open market. If insurers decide to withdraw from high-risk areas, that could mean insurance cover for commercial properties could be either unobtainable, or ruinously expensive. Already, some far-sighted fund managers are looking at pulling out of areas at high risk of flooding. “If I was a property owner, I would be looking at my portfolio and asking what I should divest,” says Gloyn. “This is a major risk, and many investors are not as conscious of it as they should be.” Ellen Bennett

volumes for the year will be little changed overall on 2011, at $710 billion to $720 billion. But within this total, a potential 20 per cent increase between the first and second halves of the year is expected, with activity picking up due to stronger demand as well as increased investment supply. Part of the reason for the trend is that property investment offers a relatively high return compared with other asset types. “Currently, for multi-asset investors, real estate assets that are located in relatively robust locations with reasonably financially secure firms as tenants are likely to continue to produce a compelling positive sustainable income yield that compares favourably with the depressed yield on a range of other ‘defensive’ type assets,” explains Jason Baggaley, manager at Standard Life Investments Property Income in London.Investment is flowing from institutions and retail investors to those regions where risk can be managed – China and Brazil continue to be exceptions to this rule, but investors feel that they can control risk to a

Business Reporter · September 2012

an independent report from lyonsdown, distributed with the sunday telegraph

REITs

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Fund managers reveal property hotspots By Andrew Rosenbaum and Richard Reed INVESTING DIRECTLY IN property can be complex. Some countries won’t allow foreign investors to do it. Others offer difficult climates in which to understand the relevant law and taxes. Then, judging just what makes a prime property so attractive involves a lot of evaluation. Many investors prefer to access the property market through funds and real estate investment trusts, and managers of those vehicles are keen observers of the global property market. This makes their reactions to the global economic context somewhat different from those of, say, George Osborne. David Simon, who manages the world’s largest REIT, the New York-based Simon Property Group, insists that the sovereign-debt crisis in Europe isn’t having much effect on the success of firms like his. “As long as we have economic and wage growth, the American will consume,” he said,

speaking at an industry conference in June. “It’s just part of our culture.” Net profit at the REIT was $645.5m in the first quarter of 2012, so he has some basis for his remarks. Retail-based REITs like Simon’s, investing in prime mall properties, profit from strong covenants with well-known retailers. But the office market in the US appears to be improving too. “The sub-prime crisis has hindered reconstruction on the commercial side, so if you are the owner of existing real estate, that’s a very good thing,” he says. “The lack of new supply with a gradually improving economy means occupancy is improving and rental rates are improving,” explains Joe Rodriguez, lead manager at Invesco Powershares Active US Real Estate fund. “If one takes a longer-term view, and focuses on the underlying fundamentals in the commercial real estate market, we feel quite good about those and their improvement, along with the improvement in the US economy. I don’t think we are going to see 4 to 5 per cent GDP growth that we have seen in the past, but I think we should be content with a 2 to 3 per cent growth.” Australia is another hotspot favoured by fund managers. Standard Life’s Global REIT is an active fund that invests almost exclusively in other funds. The fund focuses on buying into REITs that own prime commercial property, such as large-format shopping malls in top locations like London’s Brent Cross. Fund manager Andrew

Jackson says Australia has performed particularly well. “Australia has done very well for us; this year at parts during the downturn it was more resilient,” he says. “We are concerned that we are moving towards the top end of the market in Canada [where the fund has also invested successfully]. We think there’s much more to go in the Australian market.” Some fund managers exhibit that same kind of confidence about the UK and Europe. Gerios Rovers, CIO and managing director of the ETF Cohen & Steers European real estate securities business, sees potential in northern Europe, despite the eurozone crisis – with Germany holding all the cards. Germany showed 5.8 per cent returns as of May 2012, with gains by residential companies offsetting declines among office REITs. But, at Goldman Sachs’ newly formed private REIT, the focus is on Tokyo, the launch of which will be in August with as much as 30 billion yen. “We are close to the bottom of the real estate cycle [in Tokyo],” said Taro Squires, head of real estate investment management at Goldman Sachs in Tokyo, in a recent interview. “I expect the market to bottom out within the next six to 12 months.” The trust will seek funding with Japanese banks and pension funds. The markets it will concentrate on will be more than half office buildings, with some residential and retail. Tan Ser Ping, CEO of A scendas, a

Singapore-based REIT, plans to expand its commercial holdings in China. Despite the risk, Ping says the growth in the industrial market is too good to miss out on. “Over the next 3 to 5 years, if we find enough opportunities we could have about $1 billion (in assets).” One thing all the managers agree on is that property is going to be profitable in the future. “It is likely to be a good performer in coming years,” insists Andrew Nicholas, manager of the First State Global Property Securities fund. “We are expecting anaemic growth in most non-Asian industrial economies and a low interest rate environment.” Ping: too good to miss

A source of stability in a time of turmoil With global markets in turmoil and the European debt crisis, investors are looking to preserve assets, even if it means forgoing returns. They are moving into property investment, which, although not necessarily providing the highest return as the chart shows, offers high stability. “Given the choice of protecting the principal

$645.5m

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Simon Property Group profit in Q1

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hieves broke into an empty vicarage and stole all the copper piping, leading to floods that caused £25,000 worth of damage. To avoid a repeat or other criminality, the diocese that owned the property subsequently became our client. They’ve had no problems since,” says Zoë Oakes, marketing manager at Ad Hoc Property Management. Ad Hoc has an innovative solution to the problems that owners of empty properties can experience – it provides ‘property guardians’ to live in the buildings as their homes, thereby protecting them from criminality and squatting.

Value accommodation The property security company has offices UK-wide and manages temporarily vacant buildings for property owners and uses them to provide great value accommodation to local working people. “Thieves and other criminals look for empty

buildings, so they are deterred if someone is living in them. As the building is not empty they are as protected as any other lived-in building. This means they are no longer attractive to squatters and criminals,” says Oakes. For property owners, installing guardians saves money. “Using our guardian model of property protection can be up to 80 per cent cheaper than employing traditional security guards,”says Oakes. Ad Hoc manages residential and commercial buildings including flats, houses, sports centres, libraries, churches and vicarages, where live-in guardians report back to Ad Hoc if any maintenance issues occur. The number of guardians in a building depends on its size and guardians will be strategically

placed in larger buildings to make sure all areas are secured. “Most properties, even those which are not usually lived in, can become temporary homes,” says Oakes. “We have guardians who are delighted to be provided with a spacious classroom to use as their bedroom as they can take advantage of the generous space.”

must provide references and documentation and are interviewed before being selected and being offered a property. Guardians receive a guardian handbook outlining the rules of living with Ad Hoc, such as no smoking in any of

*Guardians can live in London for as low as £300 a month

Taking care Where facilities are lacking, Ad Hoc provides temporary units such as hobs and showers so that guardians can use the building as a home, but no structural alterations are carried out. Ad Hoc is a property protection company so vets its property guardians carefully. Guardians must be employed and are often key workers such as nurses, teachers and police officers. All guardians

the buildings and no parties. Guardians are licensees rather than tenants and have none of the usual tenancy rights, though they do benefit from good value for money and Ad Hoc re-houses around 98 per cent of its guardians once a licence agreement expires. Property owners need only give Ad Hoc a minimum of 16 days’ notice to have their properties returned. As well as the live-in model of property security, which is available UK-wide, in London Ad Hoc can provide Commercial Guardians.

Using this model, Ad Hoc provides office or workspace in the buildings it manages to small businesses at around 50 per cent of the leased market rate. This means businesses save money on overheads whilst business rates are mitigated for the property owner. All commercial guardians need three months’ company bank statements, proof of public liability insurance, two utility bills and proof of signature. Rates are from £210 per calendar month for 14sq metres, less than half the usual commercial lease rate. The monthly licence fees for live-in guardians can be as low as £300 in central London and £150 elsewhere Ad Hoc’s live-in guardian service for commercial and domestic properties is available throughout the UK. Commercial workspaces are currently only available in London but are expected to be available more widely soon. 020 7354 5458 www.adhoc.eu

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or chasing a return, protecting the principal investing in REITs, low-risk bonds, and blue-chip comes first,” says Mitch Roschelle, a partner and stocks, is the ‘new normal’. “Our capital markets practice leader in PricewaterhouseCoopers’ are integrated and that isn’t going to change. (PwC) US real estate practice. Many investors We will go through periods of lots of volatility haven’t shaken off the devastation of the recession then quick corrections,” adds Roschelle. All of and the global economy is still fragile, he says. which points the investor to the relative stability So where are investors finding stability? US of property. Kathleen Kiley Treasurys are still a stable global currency for many investors, despite the downgrade from triple-A to double-A. Blue-chip stocks can also offer safety with a dividend, because they usually have stable balance sheets and a predictable revenue source. Real estate investment trusts (REITs), which have been generating stable returns, are also favoured by certain analysts as a way to hedge against risk and still get a decent THE REVIVAL OF global property investment return. has given birth to a new index, making it easier “Treasurys have become a reserve currency for investors to enter the market. The great for global investors and it’s driving down yields,” value of these real estate exchange-traded funds Roschelle says. “But investors want to know their (ETFs) is that through the real estate investment money will be there and so returns become trusts (REITs), they enable investment in prime secondary to preserving principal.” real estate. Reacting to weak US employment data, the The new TR/GPR Global 100 Index is composed benchmark 10-year Treasury notes yield hit an of the 100 most liquid real estate stocks. Liquidity intra-day low of 1.44 per cent on 1 June, the is the key word here. Thomson Reuters says it lowest level since the early 1800s. launched its range of indices as a result of market “US Treasurys have negative real interest feedback, which revealed a gap for a highly liquid rates, yet when the market gets volatile, investors investable index that allows access to a recovering buy Treasurys,” says Hal Ratner, chief investment commercial property sector. “The ETF market officer in Europe for Morningstar’s Investment only wants to deal in highly liquid securities, so Management division. “The economy is going that’s what this index is designed to achieve: to continue to slow down so expect lower rates both the master index which is global with 100 of returns,” Ratner says. “This isn’t bad if inflation stocks, and then the three regional sub-indexes, remains low.” 40 in the US and 30 in the other two regions,” As an alternative to the super-safe US explains Steve Carroll, head of indices for Treasurys, blue-chip corporate bonds Thomson Reuters. are paying out a higher yield, Ratner The European Public Real Estate Association says. “Blue-chips have a stable balance tracks roughly 300 stocks and nine regional sheet and more reliable revenue indices. There are 16 passive funds tracking sources.” UK companies paid out those indices, and active funds that use them as the highest dividends in the first a benchmark. quarter, jumping 25 per cent, to According to Fraser Hughes, director of £18.8 billion, according to Capita research and indices at EPRA, the latest research Registrars, UK’s largest provider shows that listed real estate companies added of share registration services. to an EPRA sector index had seen permanent But, increasingly a large pool of increases in their share prices and trading international capital is seeking a volumes. He said ETFs are the best route for safe haven in REITs. “Real estate investors seeking to access a safe, low-cost, has the capability to provide stable income-driven property investment. “The key income when managed and structured is asset quality, and we are confident our members correctly, says Maikel Speelman, senior own very good quality property. Listed property analyst research and indices at European Public companies in Europe own around €250 billion worth of property. Real Estate Association (EPRA). Dividend yields from European REITs “ETFs are a very easy, cost-effective way to have remained consistently above get exposure to countries or sectors. To buy equities and bond yields over the bricks and mortars directly is very costly,” says past five years, according to the Fraser. “As a retail investor myself, it’s the only EPRA in Brussels. Between 2007 thing I invest in - broad market exposure, a whole and 2011, European REITs basket of companies – very simple to trade through generated an average dividend your bank or your broker.” of 5.1 per cent, compared with Another advantage is relatively high dividend €250bn general equities at 4.1 per cent, yield. Fraser adds: “In Europe it’s around 5 per of property owned government bonds at 3.3 per cent, cent, which is extremely attractive to institutions by European and average annual inflation in and retail investors, particularly when it’s companies the eurozone of 2 per cent. underpinned by very good quality assets.” Even in the event of an ETF providers are already talking to Thomson economic downturn, large urban Reuters about making use of the new index. centres with a diverse employment “We’re in conversation with ETF providers, in base, such as New York, London and Europe and elsewhere,” says Carroll. Hong Kong, won’t get hit quite as “At this stage there are no released hard, PwC’s Roschelle says. products yet that are tracking this This need to protect benchmark.” Investment in UK Richard Reed principal, whether it’s by

ETFs: it’s the new index on the block

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dropped by $7.8bn from 2010-11

Business Reporter · September 2012

REITs

Business Reporter · September 2012

Property investment

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A different perspective A new method of direct property ownership promises long-term and stable income returns INDUSTRY VIEW

ustodian Capital, part of the Mattioli Woods Group, is a property investment and fund management business providing a structure for Self Invested Personal Pensions (SIPP), Small SelfBentley, Knutsford is part of our portf olio Administered Schemes (SSAS) and private investors to build diversified portfolios of directly owned, institutional-grade, commercial property assets in small denomination investments. Richard Shepherd-Cross, managing director and former director at Jones Lang LaSalle, has been working in the commercial property investment market for the last 18 years. He said: “We believe we have a genuinely fresh approach to direct property ownership offering an affordable route to investing in commercial property and an interesting alternative to the institutional property funds”. Custodian Capital has £135m in 85 commercial property syndicates under management, funded by more than 1,200 individual investors, mostly investing through a SIPP or SSAS. A typical investor holds a diversified portfolio of 5 to 10 property syndicates in individual investments of only £10,000 to £50,000. This is an attractive proposition for investment professionals who can add direct property ownership to their portfolio of client services. While the business identifies and secures suitable properties, it is the investor and their adviser who create the bespoke portfolios. The potential liquidity risk of property ownership is largely mitigated through small denomination investments and independent, biannual valuations, which give investors a current and fair market price should they wish to sell. “We facilitate a secondary market in syndicate holdings, which trade at net asset value. With the demand for secure, high-yielding investment being high, we are currently experiencing a strong second-hand market in syndicate holdings,” added Shepherd-Cross. Custodian Capital is authorised and regulated by the Financial Services Authority to operate each limited partnership as an unregulated collective investment scheme and works with a range of wealth managers and independent financial advisers to promote them. Adhering to the strategy allows investors to build a diverse portfolio, in low denomination investments, of tangible property assets with low or no gearing. ShepherdInvestors can expect Cross: We have a fresh average net income approach to returns of over 6 per property cent per annum and total returns of 8 per cent per annum over the long-term. This is intended to be a real alternative to the institutional property funds, providing long-term, stable income returns. www.custodiancapital.com

Why is China getting Trump so tee’d off? Donald Trump imparts his property market expertise as he praises Asia’s major development but warns China is ripping us off You could forgive Donald Trump for having other things on his mind. Fresh from a rollercoaster “will he-won’t he” saga over a potential presidential bid, the controversial billionaire has made headlines with his fiercely combative attacks on China. But property is where he made much of his estimated $3 billion fortune – and in an exclusive interview with Business Reporter, he reveals that it is still close to his heart. “I’ve bought some tremendous properties, including the 800-acre iconic Doral Hotel and Golf course in Miami,” he says, referring to the deal he picked up out of bankruptcy court for a cool $150m earlier in the year. And he won’t stop there. Trump himself has been in and out of the bankruptcy courts (not to mention the divorce courts) – but the chequered experiences haven’t dampened his ardour for a good deal. “Property investment is being driven by investors with cash,” he says. “It’s a buyers’ market and a great time to buy if you have the cash flow. [A 20 per cent expansion in property investment globally] could happen – this is the time to buy.” In a career that spans five decades, many of Trump’s triumphs and adversities have taken place in his home nation, the United States. From the early success of the iconic Javits Convention

Center, built on his land on the 1980s, to the gut-wrenching low of his business’s bankruptcy in 1990, Trump has always maintained numerous business interests stateside. He has long crossed the line from businessman to celebrity on both sides of the Atlantic, hosting the original Apprentice show before it was a mere gleam in Alan Sugar’s eye, and even having a Real Estate Tycoon board game named after him. Hardly surprising, then, that he is optimistic about property investment in the States. Asked whether property prices in coastal cities will continue their recent recovery, he replies: “Coastal cities are always desirable and that will continue. How quickly the market will recover is difficult to predict, as the volatility in the financial sector keeps the public on guard. The recovery is in no way complete—yet.” Due diligence needed Trump is even more cautious about opportunities in developing countries. “There are some viable options, but as with any investment, due diligence is required,” he says measuredly. “I would suggest that the investor be very solid in other areas of their portfolio and in cash flow.” Perhaps he has himself in mind with that description, because today he is in rude financial health – and has interests in developing

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- although they have been rather fraught of late. In mid-July, amid great fanfare and Scottish bagpipe players, he cut the red ribbon to open his three-mile golf course resort on the northeastern coast of Scotland, near Aberdeen. The course, along with resort, will be among the resorts in Europe. There are also plans for a luxury hotel, along with 500 houses and 950 holiday homes. But this part of the resort plan is in limbo until a final decision is made on the proposed offshore windfarm proposal. Trump is opposed to the alternative energy project because the “ugly” windfarm will ruin the beautiful views from his resort, he said.

countries. Among them is a luxury residential development on the Black Sea coast of Georgia, formerly part of the Soviet Union. He unveiled plans for the 47-storey Trump Tower Batumi project with Georgian President Mikheil Saakashvili and investment partner Silk Road Group in April. Turkey is also an investment target. In Istanbul, he’s built two skyscrapers in the city of Mecidiyekoy. The Trump Towers, Europe’s first, range from about 85 sq metres to 680 sq metres, and are among the tallest buildings on the continent. Trump also has a number of UK holdings

Property investment

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Chinese attacks The fight over planning permission goes on – and there’s one other part of the globe that still gets Trump hot under the collar. His visceral attacks on China stunned US pundits earlier this year, and his call for a 25 per cent tariff on Chinese goods polarised opinion. Trump was angrily reacting to a widespread belief that China is deliberately holding down the value of its currency to give its manufacturers an advantage when selling their goods in the US. He believes a tariff would redress the balance. Others believe it would spark a trade war with consequences beyond imagining. Today, Trump holds his tough line on China. “China is and has been ripping us off in a very obvious way,” he tells Business Reporter. “Their manipulation of their currency is unacceptable—it boosts their exports and wreaks havoc on our domestic industries. Obama has not dealt with them in a way that protects our interests and it is clear that China does not respect us. They are getting away with a lot and they know it.” He is more relaxed on the matter of Europe, despite its almost-equal impact on US economic stability. “Europe is complicated by the variety of cultures being present, and the euro crisis,” he says coolly. “It’s a situation that is still volatile, and it may take some time to smooth out. The world markets are not secure and this is reflected in the unrest in Europe and elsewhere.” With Trump having decided to abandon his political ambitions – for now, at least – his focus is firmly back on his property empire. And if past form is anything to go by, aspiring investors could do far worse than follow his lead.

THE WORLD ACCORDING TO TRUMP

“Asia is a major force. They have developed very quickly and have a global impact that cannot be overlooked”

Europe: “It’s a situation that is still volatile, and it may take some time to smooth out”

The US: “Coastal cities are always desirable and that will continue”

“China is and has been ripping us off in a very obvious way”

Georgia is looking good

farms Wind esort gr ruinin ns pla

Trump cooling on politics

G IN GO

W DO

G IN O G

Moving business into Scotland

China is ‘getting away with a lot’

The upside of decline In this tough economic climate, investors need sound strategy for managing the property market INDUSTRY VIEW

istorically, during downturns, savvy investors have turned to gold, treasuries and defensive equities as a hedge against market risk. In my opinion, gold has had its run, the majority of treasuries are yielding next to nothing and defensive stocks are over-valued. Yet, according to business

magnate Warren Buffett, “Be fearful would question how much more when others are greedy and greedy room there is for continued growth. when others are fearful.” Should Income-producing properties: now not be optimal time to invest? The purchase of properties with And if so, into what? long-term tenants It depends. The on RPI/CPI indexed euro crisis is not leases is an effective going to resolve itself means of hedging anytime against a market soon. However, here downturn and future are a few propertyinflation risk – as long based strategies on as your tenant is London property is a safe bet making the most of recession-proof. The the current economic only issue is that the climate: stronger the tenant, the better the location, the lower the yield.

Hedge against downturn

London residential: According to a recent UBS survey, London residential is deemed the premier property safe haven globally. I

Profit from the downturn Distressed properties: As banks continue to suffer, they will be forced to shed properties on a

discounted basis. The challenge here is that these types of opportunities tend to be very labour-intensive to obtain and reposition. Furthermore, since you are required to purchase the properties on an as-is basis, distressed properties can house myriad risks. Structured property investments: These are property investments that incorporate some form of insurance protection and/or corporate guarantee as a hedge against market risk. These programmes require that the investor forgive some of their upside in exchange for downside protection. These strategies also incorporate a predefined exit strategy with a longstop date.

As banks continue to suffer, they will be forced to shed properties on a discounted basis Each strategy has its pros and cons. However, we typically prefer structured properties because they allow investors to participate in the property market without the market risk. Eric Jafari, chief economic advisor for IPIN Global 0800 047 0597 www.ipinglobal.com/st

Business Reporter · September 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Property investment

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London in the limelight The world’s movers and shakers are beating a path to London – and not just for this summer’s games WHERE TO BUY If money is no object, Belgravia and Knightsbridge are the addresses to have. Surprisingly quiet, the area offers social cachet, unrivalled shopping, and green areas of Hyde Park and Kensington Gardens. A more affordable alternative is Mayfair, dubbed “hedge fund city” for its popularity with financial types. Replete with Michelin-starred restaurants and parks, its location is near shops of Knightsbridge and Bond Street. South Kensington is popular with European and American residents. Along with Kensington and Chelsea the area boasts plenty of good older houses and mews properties, with boutiques and small restaurants galore. Islington is an area to watch. The new Eurostar terminal at St Pancras has given the area’s residential market a major lift, especially with settlers from the near continent. Regent’s Park and St John’s Wood with their green spaces are popular with locals and the international community alike.

INDUSTRY VIEW

“

London is the best place in the world to invest in high-end residential property; only Monte Carlo comes close,” says Penelope Court, head of residential sales at Beauchamp Estates, which specialises in luxury homes in London, the south of France, Italy and Greece. “London is the place everyone wants to be, from young people to business tycoons to tourists. We have great art galleries and auction houses, theatres and concerts, restaurants and shopping. Not many cities come close to what London has to offer, and everyone with serious money is coming here.” Although the volume of sales in the capital is down compared with last year, the top end of the market remains strong. Prices wobbled at the start of the credit crunch in 2008, but recovered very quickly. Over time London property prices have outperformed most other locations and types of investment. Research suggests that this trend is likely to continue, with prices predicted to rise by around 20 per cent over the next five years. The housing stock here is of very good quality. It’s easily saleable or rentable to people who work for the big international companies that operate here, and because London has a finite amount of space, and a limited supply of properties, this helps to keep sale and rental values high. The “subliminal advertising” effect of the the Diamond Jubilee and the summer games,

with live images of London watched by billions around the world, can only have enhanced the city’s brand among well-heeled aspirant residents. But London has been truly cosmopolitan for centuries, and lively interest from France, Germany, Italy, Spain, Russia, the Middle East and beyond underpins much of the high-end market.

Return and security Like British investors, international buyers want the potential of a medium-term return combined with security for their investment. Many are afraid to keep their money in the bank and are choosing to offload cash and buy tangible assets instead. The boost to sales, and the fact that the London market is predominantly international, is good for UK investors because it’s created huge price stability. Investors in London property can expect to see strong returns in terms of both regular income and capital growth, predicts Penelope. “On a £1m two or three-bedroomed flat in Islington you could expect a rental income worth 2.5 to three per cent,” she says. “That’s better than a lot of banks will offer, and you don’t have to keep moving your money to another bank when the ‘introductory’ interest rate stops! In addition, you should almost certainly get some uplift in value when you sell, even after quite a reasonable period.” Investors seeking good rental returns are most likely to get them from a property worth up to £2m. So if you’re lucky enough to have

£50m to spare, better to buy 50 £1mproperties than one £50m-mansion in terms of rental return. Of course, if you were to invest a £50m in a London mansion in your own name, as your primary residence, any capital growth will not attract capital gains tax – a wonderful choice to be able to make. An increase in sales at the lower end – especially in the £1-1.5m bracket because of the rise in stamp duty from five to seven per cent on sales over that sum – is predicted. Flats and houses each have their pros and cons as an investment. Some people prefer

houses because they like the idea of buying freehold. Court adds: “The price per square foot tends to be lower for houses than flats, and of course there’s no service charge. “On the other hand, flats may offer better security, which can be important if the property will be left empty, and external maintenance should be taken care of by the freeholder.” Unlike some owner-occupiers, the majority of investors prefer to buy properties that are in good decorative and structural order and “ready to go”, rather than wrecks that require doing up.

Ideal solution

INVESTOR TOP TIPS

Be location-led: choose the most appropriate area for your requirements and budget.

A new, ready-to-go development can be more profitable and easier to let.

Take proper advice on the rental income you can expect.

Examine any service charges and factor these into your figures.

Check local amenities as if you were going to live there yourself.

Visit the area at night and day.

“Many buyers from the UK are keen on new-build properties, with the NHBC (National House-Building Council) guarantee and it’s easier to quantify your outlay and how much rental income you’ll receive,” says Court. An ideal solution is to put down a deposit on a new development. Then you will be able to line up tenants to move in as soon as the property is complete, by which time your investment will hopefully have appreciated. It may even be possible to sell your interest at a profit before construction is complete. Above all, Penelope advises don’t forget that any residential property will be somebody’s home. “Think about what you would want if you were living there yourself: maybe some day you will be!” 020 7499 7722 www.beauchamp.co.uk

Business Reporter · September 2012

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The rising risks of real estate Property investment isn’t something you trade on-screen – it requires thought and careful measuring of the risks involved

If you choose to invest directly in property, how can you evaluate the risks? We all know the mantra: ‘Location, location, location,’ but, in fact, the experts say that location is really only one of the major factors in gauging the risk in a property investment. One might, for example, look to the Shard tower in London, and wonder about the risks involved in that £1.5 billion investment which, when it opened this year, was largely untenanted. But the owners weren’t worried. “We have confidence in the London market and a long relationship with London,” said Sheikh Abdullah

“The Shard tower was a brave achievement. I expect it to be fully rented in the near future” – John Slade, CEO of BNP Paribas Bin Saud Al Thani, governor of Qatar Central Bank – the Qatar sovereign fund was the majority investor in the building. And experts say they are probably right. “The Shard tower was a brave and impressive achievement,” comments John Slade, CEO of BNP Paribas real estate in London. Slade is a great believer in the value of prime sites, where there are good demographics and solid industrial fabric to support them. Of these sites, around the world, there is currently a sufficient number to satisfy demand. Strategy of analysis Chris Taylor, CEO of London’s Hermes Real Estate Investment Management, says: “Our strategy involves undertaking detailed analysis of the retail location, the demographics and competition.

Ideally, the scheme should be anchored by a major non-discretionary retailer of strong and undoubted covenant, such as Walmart.” Timothy Murphy, CEO of the Hong Kong-based IP Global property firm, advises investors to look at fundamentals, “even if those fundamentals seem too obvious to consider first, when investing in a foreign market, make certain that the legal title to the property is sure. Some countries have uncertain legal systems,” he warns. “If you borrow to invest, borrow in the currency you are buying the property in. Foreign exchange fluctuations can add very significant amounts to the cost of your loan, especially in the volatile markets that we see today,” Murphy points out.

1,016ft tall

£450m

72 floors 200-bed five star hotel

Three floors of restaurants

1,200,000 sq ft

Find a market After that, it’s research, research, research, explains Marc Giuffrida, managing director of Capital Transactions at Knight Frank. “Find a market you have or want a connection with. Then find out what makes the city tick,” he insists. “Look at where pricing and rents are today versus the long-term average. It’s not scientific but it does give you a feel for where you are in a cycle,” Giuffrida explains. “Make sure your asset has a point of difference in the market it competes in. For example, if it’s retail - is there enough foot traffic and will it attract the right tenant base? If it’s logistics - is it near the right arterial roads and close to ports or rail links? If it’s office - does it provide tenants with the services and image they require?” These are the kinds of questions that are part of the research that should go into property investment. But here is the most important message, according to Duncan Owen, head of Property Funds at Schroders Investment Management: “Real estate can’t be traded onscreen. That means you invest in it for the medium or long term. Think of three to five years as the minimum period, and have good, fundamental, long-term reasons for the choices you make.”

Rising demand in Europe The revival of cross-border investment reveals demand for European real estate, staying highly focused on core risk-averse and capital-preservation strategies

EUROPE CROSS-BORDER PROPERTY ACQUISITIONS

€160

30%

€140

25%

€120 Billions

By Andrew Rosenbaum

20%

€100 €80

15%

€60

10%

€40

INDUSTRY VIEW

ross-border investments into Europe have been growing. Of the world’s €108.1 billion (£92.2 billion) of crossborder acquisitions over the past year, 52 per cent, worth €56.1 billion, was captured by Europe, according to REAL Capital Analytics (RCA), the independent research firm that specialises in tracking the capital investment markets for real estate. After dropping considerably in 2008-2010, property acquisitions in Europe by nonEuropean or global investors reached 26 per cent of total transactions in the first half of 2012, a level that exceeds 2007 (though total

Property investment

Public viewing platform

investment volumes are well below 2007 levels). So what’s the attraction? “We are seeing an increased appetite for diversification among cross-border investors,” says Joseph Kelly, director of market analysis at RCA, who adds that even for prime properties, global buyers can expect yields on initial investments approaching 5 per cent, which compares well with returns on stocks and bonds. Top European destinations for crossborder capital are Paris and London. Nearly 45 per cent of recent European acquisitions by global property investors were in the two cities, an increase from 25 per cent in 2007. “Cross-border investment is clearly

recovering, and remains predominantly focused on core risk-averse and capitalpreservation strategies, primarily why London and Paris capture the lion’s share of activity,” says Kelly. RCA, which collects transactional information for property sales and financing in more than 130 markets worldwide, also interprets the data to identify market trends, pricing, sales volumes and yield levels. Its 450-plus clients range from global investors to local advisory firms. RCA research shows new sources of cross-border capital are emerging. “Since the financial crisis, investors in the newly-emerging Asia Pacific markets are

€20

0 08 Global

*Trailing 12 months

Continental

Global % of total

Source: Real Capital Analytics

targeting the EMEA region and the Americas,” says Kelly. In Europe, investment from Malaysia, China and Korea has increased significantly in recent years, and represents new capital sources that have not been active in the past. 0207 2976 860 www.rcanalytics.com

Business Reporter · September 2012

an independent report from lyonsdown, distributed with the sunday telegraph

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The new frontiers If you’re a die-hard contrarian investor who doesn’t want to invest in prime properties, perhaps it’s time to become a pioneer on the new frontiers in Asia By Andrew Rosenabaum

Risky as it sounds – and it is – there are some good reasons to consider investing in Burma, Mongolia, and Papua New Guinea. The theory is

that these countries are 10 to 20 years behind China in growth, but they are chock-a-block with natural resources. As soon as they canalise the money from the resources into internal investment, they will follow the pattern set by Brazil, for example,

Frontier Asia

Papua New Guinea 12%

Bangladesh 20% Pakistan 33%

Laos 12%

Vietnam 19% Others Sri Lanka 10% 9%

Mongolia 12%

Burma 9%

Maldives 4%

Percentage of combine total economies

Cambodia 22%

Nepal 29%

Bhutan 3%

Source: Leopard Asia Frontier Fund

and develop a new middle class. Mongolia and Papua New Guinea both have BB-level credit ratings from Standard and Poor’s (Burma, which is just transitioning to a market economy, isn’t rated yet). Appetite for risk According to Mark Mobius, executive chairman of Templeton Emerging Markets Group, there is increasing investor enthusiasm for frontier markets. “We started about three years ago and now we’ve got $1.2 billion in frontier markets, which is amazing. The risk appetite is definitely there, and people are willing to take the risk to get higher returns.” The Templeton funds tend to group a range of frontier markets, but they offer access to the advantages (and risks) these markets provide. There are more specific funds for those who want a pure play.

For now, these countries boast a yo ut h f u l d e mo g r aph ic , t he government debt is low, and they don’t have a lot of other investors to

Countries like Burma are behind China in growth but full of natural resources

compete with. What an opportunity to grab off bargains! Greatest reward Burma is perhaps the most challenging target, yet the one that could offer the greatest rewards for determined, longterm investors. For now, it is a primarily agricultural economy with the main share of its GDP derived from

agriculture, livestock and fisheries, and forestry, as a report from the World Bank points out. But it has resources of natural gas and other commodities that could bring in significant revenue. There are companies in Burma trying to access the resources, and investments in them offer high-risk premiums. Funds like the Leopard Asia Fund would offer access to this kind of investment.

Go cold turkey on UK property If you’re lured by the investment of a place in the sun, figures show Turkey is coming up trumps INDUSTRY VIEW

sun’ – it is no doubt a dream proposition for most of us. Previous favourite locations such as Spain and Italy are crippled with widespread economic issues and property prices no longer offer sustainable growth. Investors are looking elsewhere – Turkey. In Turkey there are currently five prime locations for investment: Istanbul, Bodrum, Fethiye, Kalkan, and Antalya. All offer a safe, secure and great return on investment on Turkish property. So what exactly can you get for your money in Turkey? An average property bought in Turkey can expect to yield annual rental returns of up to 8 per cent and some come with a rental guarantee for up to 10 years. Such is the demand in Turkey that developers can offer such guarantees without risk.

ifty years ago, the thought of investing money in Turkish real estate over British real estate would have seemed risky. However, with the current economic problems and uncertainty around the UK and Europe – coupled with the surge of growth in recent years in Turkey – Turkish real estate currently offers investors a secure and safe market to lay their financial trust in while real estate around Europe is left unsold and Home or away unwanted. Using current market figures, if you compare In the past five years, investors the financial benefits of a holiday from around the world have been home in, say Kalkan, Turkey flocking to Turkey. Turkey was against a UK buy-to-let Income and growth over five years second only to China in 2011 for investment just outside of economic growth and is ranked as London, both bought at £300,000, the 15th largest economy in the at the end of year five – after having five full years of benefits world, with major plans to break – both properties are sold at into the top ten by 2023. To say that market value and the total profit is Turkey is rife with development measured; Turkey outperforms and growth at the moment is an 5 year net Cap growth the UK by a long way. understatement. rental income year 5 In short, rental income Investors have always been UK buy-to-let Home in Kalkan achieved in Kalkan over the taken by the lure of ‘A place in the

an expected annual growth rate measured as 6 per cent on average while the UK has an expected annual growth rate of about 2 per cent. By the end of year five, the Kalkan holiday home would be worth £414,900 while the property in the UK would be worth £331,203, according to the growth predictions. Of course things can always change, predictions and averages don’t always pan out

Soak up the sun in Turkey five-year period outstrips UK buy-to-let averages by 41 per cent and capital appreciation in Kalkan is expected to be 268 per cent higher than UK averages. Based on rental yield averages of a property in the UK and a property in coastal resorts of Turkey, the net rental income (after mortgage interest is serviced) on the property in Kalkan over a five-year period stands at £99,461, while the net rental income on the same basis on the property in the UK stands at £70,452.

Price predictions In line with current GDP and growth predictions in Turkey and the UK, Turkey has

An average property in Turkey can expect to yield annual rental returns of up to 8 per cent – but for the time being and for the foreseeable future, Turkey is stable and secure. Despite challenges facing European economies and the struggles afoot for investors in finding worthwhile projects, Turkey offers a booming market of opportunity – a Turkish nest egg may prove to be fruitful for years to come. Coupled with the fact that Turkey does not tax UK pensions, unlike say, Spain, the country is also exceptionally appealing for those planning to relocate to warmer climates. Finchley, London www.placeoverseas.com

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Mongolia offers a somewhat more developed climate for investment, given that mining companies are competing for access to its vast mineral and oil and gas resources. Investing in resources The Mongolia Fund takes a diversified approach to the natural resource sector by investing in precious metals, basic materials and a wide cross-section of the mining service industry, including energy and transportation. The fund invests in development, companies involved in the exploration, production and processing of coal, iron ore, gold, copper, zinc, petroleum, natural gas and chemicals, the mining services sector, infrastructure project, the medical industry, news and media, technology and others.

Papua New Guinea boasts m i n i ng, ga s, a nd pet roleu m resources. The legal climate is somewhat complex, and determining ownership and mining rights can get into all kinds of conflicts. Some of the larger emerging market funds, like Advance Frontier Markets, offer access to investment in Papua New Guinea. Mobius: We started about three years ago and now we’ve got $1.2 billion in frontier markets

11 – the December 20 s. so in 50 year

Burma

Property investment

Find us online: business-reporter.co.uk

,584,650 Population: 54

A si a, ut he as te rn Lo ca ti on : So a an d Se an m da e An bo rd er in g th h and es lad ng al, between Ba the Bay of Beng Thailand d by a in g be en ru le Po lit ic s: H av 20 11 , to 62 19 a fro m milita ry junt ilian civ a to ing now transition the country is ent ruled by m rn ve go n A civilia ch government. power in Mar ein Sein took r role ajo President Th m a s ha military still 2011, but the Se cret ar y of e co un tr y. US th g in nn ru in e country in th d ite vis n Clinto State Hilary

cial to do first US offi

economy e Burmese Business: Th significant ry ve of r be ficial faces a num multiple of , including ck of la , its challenges fic tes, fiscal de ra ge he re T an . ch on ex d so al cr ed it , an t control, co m m er ci en m rn ve asive go try is is also perv y. The coun and povert from ns tio nc corruption sa of to a number and on ni U also subject pean ates, the Euro has recently the United St y tr un co e ever, th fo r Canada. How pr os pe ct s to im pr ove taxes, rt po at te m pted ex g in er stors by low cial foreign inve on its finan l restrictions e th ng si ea te rn at io na in to g in d tu rn se ct or, an . ce an st ns for assi organisatio

Investing in afar Get ahead in the property game and put your money in some more unusual places. Now fire up that private jet...

Mongoli a

Populati on: 2,75 0,000 Locatio for demo n: Mon cracy wh golia is o ha Central A c o rr u p ti in E si o n a n d sp s pledged to figh a a s , t bordere North, a and t re a d th e d by Russ nd China Mongolia p ’s minera to the So ia to the l wealth m ro fi ts o f uth, East and We ore widel st. y. Politics B u s in e s : In 1970 s: Mong , M o ngo Soviet-st o li a h a s a amoun lia ende yle one a numbe vast d party ru is relative t of mineral wea r of politi le and p lth, whic ly untap cal and in motio u t h e p c e massive onomic d. It is w n . The c amounts reforms elcomin ountr y by Pres g of foreig is curre ident Ts in to a n n n investme um b e r o tly ruled akhiagii Democra f major m nt n Elb that are se tic Party ining pro t to transf , a seaso egdorj of the jects orm its ec ned cam direct fore onomy. T paigner ign invest his ment has cent grow driven 17 th rates in per 2011, and in the firs 16 t quarter .7 per cen of 2012. t

feud ged political ter a prolon New a pu [August] af Pa e. ar ichael Som , with rival M monwealth m Co e th ill part of ate. st of Guinea is st ad he the Elizabeth is Guinea and Queen Papua New st majority hile the va siness: W ,310,129 6 Bu n: tio bs is ts on la Popu ul at io n su of th e p op g in significant s ud cl ha in y s tr nd un roup of isla ture, the co er al ul ric ag ew N Location: G s an d m in land of s re so ur ce half of the is ortium is h na tu ra l ga ut ns the eastern co So e d th -le d l Sea an n American ral een the Cora deposits. A uefied natu Guinea betw tructing a liq donesia. ns In co n of gi tly st be en ea , d ul an curr Pacific Oce cility that co to oduction fa ed pr is ct s a pe ga ne ex ui G his is pu a N ew in 2014 . T ical Guinea’s P ol it ic s: Pa exporting merous polit le Papua New nu ip tr by d ed an P ris D G le e ub th characte t do ns it io ns ag ai exports. rm in g co al revenue from eating pa rt ie s fo loyalties, cr y rt pa g in shift r O’Neill backdrop of ability. Pete political inst month st la er significant st min ed as prime rm nfi co was

Real estate in the real economy

Westfield’s Stratford City development: the listed sector is a vital generator of economic activity

Investing in listed property could be a decision based solely on returns and assets, but the fundamentals behind the sector make it even more rewarding INDUSTRY VIEW

hat does real estate mean to you – an investment, a building, a place of work, leisure, or shopping, or perhaps just a landmark? But did you know that real estate plays a vital role in every aspect of the European economy and environment. Businesses and society cannot function without the services of commercial property, including the provision of offices, shops, factories, housing and many other forms of property. The commercial property sector delivers the infrastructure needed for entrepreneurship to thrive – a fundamental source of employment and economic growth, and a major part of the solution to two challenges of our time: providing liveable and functioning cities for a growing urban population and reducing our environmental footprint.

Listing confidence At the forefront of this sector are property companies listed on the public stock markets. The success and effectiveness of listed property companies in all areas (financial than an accessible, cost-effective performance, community means for investors to access the engagement, environmental benefits of professionally managed credentials, quality of service) is real estate returns anywhere in scrutinised by the public and Europe. These firms drive the real shareholders, and is measured economy by providing the by their share price. platform for societies to It’s therefore no Dividen function through the built surprise that these ds p environment that companies undertake by UK-li aid sted surrounds and supports the most impressive compa nies everything we do. and complex urban last yea r Investing in the listed developments, deliver property sector (sometimes the most sustainable called REITs) has many benefits, buildings, and provide the most and the European Public Real comprehensive and innovative Estate Association (EPRA) produces accommodation services to the the research, professional standards business and individuals that and measurement tools to support occupy their buildings. the industry. The listed property sector is more

£2bn

Why invest? • Strong dividend yields and cash flow, particularly from UK-REITs averaging around 5 per cent per year and also significantly above government bonds and general equities. • From investing in a REIT to investing in an index of REITs, investors gain exposure to a broader portfolio of buildings – something which is simply unachievable for most investors without a huge pool of capital. Buying the EPRA UK Exchange Traded Fund offers exposure to approximately £75 billion of top-quality commercial property,

in prime locations. Many of the best property assets in Europe are also accessible via the European indices. • UK-REITs own a large share of Britain’s top-end commercial property including well-known properties like the Bullring in Birmingham or the Trafford Centre in Manchester. Of the independently-ranked top 20 retail properties in the UK, listed companies own 13. It is a similar story in the office and industrial/ logistics property sectors. www.epra.com f.hughes@epra.com

Business Reporter · September 2012

an independent report from lyonsdown, distributed with the sunday telegraph

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Private selling potential Buyers looking overseas and current owners looking to sell can benefit hugely from selling privately INDUSTRY VIEW

nterest in overseas property has soared with Rightmove, and existing owners looking to sell can take advantage by selling privately. “Visitors to the Rightmove Overseas website rose by 30 per cent in the first half of 2012 compared to the same period last year,” says Shameem Golamy, head of overseas at rightmove.co.uk. In July alone the site attracted 600,000 unique visitors, up from the usual half a million a month, and enquiries to advertisers were up by

As well as the website, 93 per cent in July 2012 compared advertisements are listed on with July last year. Rightmove’s iPhone, iPad, and The wet summer, extra public Android apps. holidays, euro exchange rates Private sellers must write and website enhancements, their own advertisements. have all helped boost However, overseas interest. property advertisements Existing property are not constrained by the owners should know UK property description private sales are an option. laws, so you are free to “Many people do not realise that overseas property Golamy: helping market your property in a overseas sales more attractive fashion. can be advertised privately,” “Private owners’ says Golamy. Rightmove fees descriptions are often far more start from £299, compared with colourful and attractive. They can agents’ fees of around 2 per cent, or include details of the local £3,000 for a £150,000 property.

UNIQUE VISITORS TO RIGHTMOVEOVERSEAS.CO.UK

30 %

700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 Jan

Feb

Mar

2012

Apr 2011

restaurants, or the pretty walk down to the beach,” says Golamy. Private advertisers can upload up to 99 photographs. “A wide range of attractive photographs help persuade buyers to hop on a plane,” Golamy adds. The site advises about the best kind of photographs to post. Vendors must arrange viewings

Opening your options Real estate investment trusts are fast becoming an attractive and reputable asset for investors INDUSTRY VIEW

exposure to commercial property as part of a balanced portfolio, without the risks and responsibilities of direct ownership, but with the same tax treatment, REITs are an attractive option with diversification benefits and high liquidity.

REITs pay no corporation tax on profits arising from their property rental business and in return for this tax treatment they must comply with a series of business conditions. For instance, they must distribute to their shareholders at least 90 per cent of their property investment profits every year. By launching in 2007 into an economic maelstrom, UK REITs have endured a baptism of fire. Investor and public sentiment shied away from property and REITs soon found their share prices trading at a discount to their

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and negotiations, but, as Golamy points out: “Overseas property owners often have the skills, business experience and confidence to handle the marketing and sale themselves.” 01908 712 044 www.rightmoveoverseas.co.uk

China’s first REIT in Beijing, left, is set to help create 36m homes by 2015

Tax benefits

ews of Beijing’s housing bureau’s proposed launch of China’s first real estate investment trust (REIT) barely raised an eyebrow in the UK, despite an astonishing pledge to build 36 million homes by 2015. Unsurprising, given the UK’s own REIT regime remains relatively unknown among the plethora of investor options. Even the FTSE 100’s REITs struggle for reputation among household names from other industries. Yet for those wanting to gain investment

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net asset value (NAV), the industry benchmark for valuing a property company. Yet REITs’ recent performance looks rosier having posted some encouraging results over the last year or so as the property market has recovered since its nadir in 2009. REITs are, like property itself, fundamentally

a long-term investment and they do involve risk. Their share price fluctuates more than, and independently of, their net asset value. Indeed, in the short-term REITs have a stronger correlation to the FTSE 100 than to the underlying property market. Yet their fundamentals remain solid, and many UK REITs have an extensive investment and development pipeline in areas of strong demand and constrained supply like the City of London. REITs may have had a difficult birth, and are not going to be building millions of homes anytime soon, but they’re maturing into an attractive and recognised asset class worthy of investor attention. Liz Peace is chief executive of the British Property Federation 020 7802 0113 www.bpf.org.uk

An investment that grows Investors can take advantage of valuable land with a new UK farming prospectus INDUSTRY VIEW

he outlook for long-term growth in the capital value of farmland is compelling, and something that is underpinned by a broad range of demographic, economic and legislative trends. Global population is predicted to grow to 9.1 billion by 2050, an increase of 34 per cent against the estimated global population in 2009, and, as developing nations

continue to adopt western diets, food consumption is predicted to double during the same period.

Fossil fuel reserves continue to diminish and bio-fuels continue to be promoted by governments to reduce fossil fuel use and carbon emissions. Farmers rarely sell up, except in the event of death, divorce, settlement of debts or quitting the industry. Farmers seeking to expand their holdings generally prefer neighbouring land, so the opportunities for expansion are limited. This has provided support for agricultural land prices, even during periods of crisis in the

agricultural sector. These factors are driving demand for cereal crops, and thus farming profitability, and the demand for arable land. They are likely to maintain the long-term upward trend in arable land prices. To give private investors access to farmland and a farming business, Brooks Macdonald Funds has launched a prospectus to raise up to

£20m by way of an offer for subscription for UK Farming plc, a new asset-backed UK farming business which is expected to qualify for Business Property Relief (BPR). UK Farming plc is an unquoted public limited company targeting investment in existing arable farms. The land will be farmed by established contractors for the company for the production of

cereal crops, taking advantage of their demand for both food and, potentially, bio-fuel production. Once established, the company is expected to qualify for BPR, which may enable UK tax-paying investors to shelter their investment from inheritance tax. 0161 870 3860 www.uk-farming.com

Business Reporter · September 2012

an independent report from lyonsdown, distributed with the sunday telegraph

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Property investment

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Invest in an old friend Property in London is proving itself to be a dependable, secure and profitable way for investors to increase their portfolio INDUSTRY VIEW

nvestment in UK residential property – especially in and around London – has been a very sound and steady investment for many home-owners and buy-to-let investors with constant, if not particularly high income and good capital appreciation, especially if augmented by substantial borrowing. Over the past three decades residential property has shown a consistent and steady rise in value, with average growth across the UK in any 10-year period being about 2 per cent above inflation. By the standards of the other main asset classes in which we are all encouraged to invest, housing has remained a remarkably stable asset class throughout the recent turmoil, especially in London. The international scene remains cloudy and is looking stormy in the near future. Other UK property sectors have been particularly hit by these economic uncertainties meaning we are now faced with investment market volatility – and, of course, inflation which is looming over the horizon. All of this suggests that now may be a good time to look at UK residential property as a part of a sophisticated investment portfolio.

Expertise and time

the hassle of voids and the inevitable re-letting costs. One option that has been creating quite a buzz recently is the co-investment approach, currently available from Mill Group. This enables an investor to jointly purchase the property with a part- owner who occupies the whole of the property on a long-term basis. Co-investment therefore accesses longerterm mainstream residential investment without many of the hassles and risks of renting, resulting in better net income as well as capital appreciation. A large pool of untapped demand exists for co-investment from those that have been blocked from becoming first-time buyers after the changes in mortgage availability and requirements. Despite interest rates on mortgages being at their lowest, people do not have the cash to put down the large deposits that are now required, preventing them from being able to make the first step on to the property ladder.On top of this, mortgage lenders are themselves short of cash to lend

and are required by the regulators to back their loans with increasing levels of scarce equity, making loans even more difficult to access in practice. Looking into the future there is no shortage of people that want to live in London and the surrounding areas, but a shortage of new homes in the region is likely to continue for many years – factors which could underpin the sustained long-term strength of house prices.

Long term investment Co-investment responds to this demand by providing a new way of bringing together longer term investment money (instead of mortgage money) to make it possible for people to buy a part of a home that they live in and effectively pay rent to an investor on the part they do not own, whilst capital growth is shared in proportion to ownership – it’s just another way in which investors can help people to get on to the housing ladder, while

A group of investors can join a fund to gain a long-term return making a good investment return. Co-investment in property can be done directly by one, admittedly wealthy, investor or by gathering a larger number of investors together in a fund with suitable people that have been carefully vetted, and in properties that have been selected with long-term capital gain in mind. For those that are also interested in the broader economic contribution, coinvestment is a strategy that brings new investor cash to a market that is suffering from the withdrawal of mortgage lending and one that is demanding more equity to secure that lending.

A new generation Government is rightfully concerned at the low volumes of lending and the supply of new-builds in general, as well as new viable planning consents, and the bigger and more immediate contribution that the broader housing market makes to the economy is being recognised. There are new ways of investing in an old and reliable friend – the UK housing market – and in doing so, making new friends with a new generation of home owners. www.millgroup.co.uk

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The Mayor’s London Housing Strategy calls for new intermediate housing options for people in the capital which are essentially both in order to help alleviate the demands and pressures on the social rented sector and to help thousands of Londoners achieve their ambitions to becoming home owners. I am therefore impressed by the Mill Group’s Coinvestment model and the housing fund, Investors in Housing. This innovative model could provide a practical solution for those priced out by high loan-to-value requirements by making it possible for buyers to make the required deposits while simultaneously improving new income yields and facilitating institutional investment in the residential property market and increasing the mainstream housing options for Londoners. The potential benefits of the fund and its successors are clear and we hope to see this initiative receive the widespread support that it deserves.

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Buy-to-let investment is an obvious way to access this market but it requires expertise and time that most are not able or interested in giving. It also suffers from relatively low net income as landlords are required to maintain and repair the properties they own as well as bear the cost of insurance. Renters tend to want shorter-term arrangements and Investing in property can buy-to-let lenders tend to new generation of hom help a e owners insist on them, resulting in

Richard Blakeway, Director of Housing for the Mayor of London

Business Reporter · September 2012

Property investment

an independent report from lyonsdown, distributed with the sunday telegraph

Find us online: business-reporter.co.uk

Rebuilding a reputation

Commercial mortgage-backed securities are cleaning up their image, promising a brighter future for investors – but only if Europe can pull together 2012

and that freed up bank credit for other officer Robert Benmosche. “CMBS is very Federal Reserve sectors have not By Andrew Rosenbaum sale of CMBS investments. compelling in an environment where fully retraced to whets investor Unfortunately, the quality of the underlying interest rates may remain low for some their late-March appetite Commercial mortgage-backed securities loans wasn’t assured, and CMBS were one of the time,” said Richard Hill, an analyst at Royal levels. We have are coming back. Until last year, the market all factors that led to the credit crunch of 2007 Bank of Scotland in Stamford, Connecticut. also seen activity pick around the world was almost entirely shut down, to 2008. The toxic loans that investors wound “There has been a lot of cash on the sidelines that up in the past week,” Now due to the bad reputation that the bonds earned up with brought on heavy losses as the market is now being put to work as investors search commented Credit Suisse Fixed for higher yielding assets.” Income Research in New York. for themselves during the financial crisis. shut down. Eurozone crisis 2011 The extra yield investors demand to But in 2011, there was $28 billion in issuance Then, finally, in 2011, conditions It is not surprising that dampens CMBS Blackstone/ confidence in CMBS, and analysts forecast $21 billion in began to change. In the UK, Blackstone DB deal signals hold top-ranked commercial-mortgage Switzerland’s largest bank, UBS, confidence back issuance in 2012 – ironically, the European crisis worked with Deutsche Bank on a £350m bonds rather than Treasuries had dropped is one of the most bullish toxic in UK has created a higher level of risk than that of last issue in January 2011 to fund its purchase to 184 basis points since 11 April and was commercial property assets, actively selling debt year and put a slight damper on the otherwise of Chiswick Park. There have been three deals down from 261 basis points in December, created at the height of the pre-crisis boom. The burgeoning market, according to analysts at since then for a value of about £1.5 billion. before jumping to the levels seen in May. The bank is seeking buyers this week for collateralised Wells Fargo bank in New York. The US has been more active. In May, the majority of analysts indicated that the conflict debt obligations assembled in 2007 with a face value of $1.5 billion that contain securities tied “There is a definite appeal that CMBS can Federal Reserve Bank of New York held a sale in Europe was the cause of the jump. offer in this low-interest-rate of $7.5 billion CMBS that had been held since Before that, conditions had been improving. to skyscrapers, malls and hotel loans. “The CMBS market has rallied over the past Risk contagion from Europe is not the only 2004+ climate,” says Larry Brown, the government’s takeover of American president of the New York-based International Group. Hedge funds, insurers few days [May 3] after the large $7.5 billion factor that immediately affects the market for CMBS selling like Archetype Mortgage Capital, a and money managers bought the bonds to gain MAX CDO list traded. The sale appeared to go CMBS in the US, however. There is considerable hotcakes commercial real estate lending/ higher returns as the Fed is reasonably well and demonstrated the depth concern from potential buyers about oversupply. securitisation firm, originating expected to keep interest and liquidity of the sector. We The Federal Reserve sale was closely watched commercial mortgage loans. “CMBS offer better rates near zero to at least 2014. would argue that the supply for takeup, but, fortunately, banks picked up the yields than corporate bonds.” AmericanInternational brought out demand and debt and flogged it off to insurers who had an 2007 Selling bonds backed by property loans Group (A IG) itself reinforced our notion that there eager appetite for it. CMBS partly helped fund the boom years of 2004-2007. bought $600 million is a large amount of money Appetite is keen, so if Europe can pull together available for investment. somewhat – and it must – the future looks bright Banks could lend to property investors responsible for of the debt, according credit crunch Although CMBS spreads are for investors who can get much better yields and then quickly sell the loans, rather to the New York-based than holding them on their balance sheets, insurer’s chief executive tighter across the board, most from these deals than in many other investments.

£350m