By Claer Barrett, 08 September 2010
A slew of property recovery funds set up to capitalise on the crash have been out-manoeuvred by the speed of the correction. In the last year, funds have attempted to raise over £770m to target cheap residential and commercial property assets. However, Investors Chronicle research shows only a tiny fraction of this sum has been stumped up by UK private investors.
Our findings show that:
■ Just 2 per cent of the £770m targeted has been raised
■ Only one recovery vehicle successfully hit its initial fundraising target
■ Two high-profile funds have already been scrapped
■ Many funds have pushed out closing dates
The slump in residential and commercial property values enticed all manner of property vultures to scrap for investors’ cash. All the investment vehicles detailed in our table below are aimed at private investors and high net-worth individuals (to use fund manager speak). Promising annual returns as high as 15 per cent diverted attention away from the downsides – the majority are unregulated closed-ended funds, requiring a substantial upfront investment, locked away for up to seven years. In the last six months, the value of houses, shops and offices has soared. And the result? Investors have shunned recovery funds, believing managers have missed the market, and that returns are no longer achievable.
However, fund managers are quick to argue that they have not missed the boat. Many of the smaller funds have managed to raise some cash – albeit in much smaller amounts. Now, they must prove they can invest that cash wisely, and hope to attract more investors in via a second close.
“It’s a bit like a school disco. Nobody likes to be first on the dancefloor, but as soon as someone gets out there, it all goes crazy,” So says Joe McTaggart, managing director of Walls & Futures. Launched in November, its London Growth Fund aimed to raise £10m from private investors to buy residential property in south west London. Its first close next week is only expected to bring in £750,000. Even so, to close at all is an achievement.
The IC can reveal Standard Life’s plan to launch an £180m recovery fund targeting mispriced European property has been scrapped. The closed-ended fund had targeted annual returns of 12 per cent over a five-year period, commanding a minimum investment of £50,000 from “sophisticated investors”. A spokeswoman explains; “Demand for this type of product across the board has dwindled somewhat since the end of the year.”
Coba Asset Management hopes to adjust the model of its Strategic Income Fund, which launched last September, targeting repriced commercial property assets. With a minimum investment of £100,000, target returns of 10 per cent have not tempted sufficient volumes of small investors.
“We’re having serious discussions to raise £20m to seed the fund from one source, and will bring in private investors afterwards when we’ve got the scale,” confirms managing director Graham Gould. “There’s always a catch 22; if you haven’t got the property, people are reluctant to invest. But if you haven’t got the funds, you can’t buy the property.” Coba has already identified future investments, and hopes to reach its first close by the end of June. “We’re either going to do it properly, or not do it at all,” he adds.
LONDON STALLING
Central London has proved a minefield for would-be residential fund managers. Funds hoping to pounce on cheap property reckoned without an influx of foreign cash buyers, attracted by the weak pound. Competing directly against owner-occupiers, prices are back up to 2007 levels, and fears of over-paying abound.
The launched in a blaze of publicity in November, aiming to raise £100m to invest in London’s “golden postcodes”. It was withdrawn in January, blaming the “faster than expected recovery” of the central London residential market. Wealth managers were also discouraged that the residential developer behind the fund hadn’t ruled out buying its own properties.
Listed property giant British Land’s involvement with the gave it a real edge, but it has yet to reach its ambitious £300m target. CR Property partner Charles Crosthwaite confirms the first close has been put back from May to the end of July. The fund is eyeing up to 500 London rental properties, seeking a minimum of £100,000 from wealthy investors, many of whom are based overseas.
Property firm King Sturge has come in as a third joint venture partner, which has caused delays. “We are talking to a number of very wealthy private individuals as seed investors who are close to committing,” says Mr Crosthwaite. “It’s a double edged sword: bargains are not as obvious, but the appetite for London property is stronger than ever.”
London Central Portfolio’s was a rare success, reaching its £10m target at its first close last week. The closed-ended fund, LCP’s second, has already bought four one and two bed flats for refurbishment, which it will lease to corporate tenants. Chief executive Naomi Heaton says half of the equity raised was from overseas investors, attracted by the currency advantage. “Our intention is to buy rapidly and capitalise on reticence in the election period,” she says. The aim is to double the value of equity invested within eight years - but only time will tell if London’s over-inflated market continues to rise.
ON THE HOME RUN?
Prime central London is an easy concept to sell to investors. Further down the residential food chain, RPAM’s “unglamorous” raised just under £3m from private investors at its first close this week. Four months later than planned, the fund’s target is distressed property in the north and Midlands which can be leased to students and housing associations.
“We’re looking to have monthly closings from now on, and hope to get £10m equity by the end of the summer,” says Barney Buik, director of fund manager RPAM. He is already chasing two small portfolios, direct from administrators. “For our specific market, we can still achieve 25 per cent below vacant possession values,” he says.
A UK-wide residential recovery vehicle from has not lived up to its fund manager’s ambitions. At its first close last week, £1.5m of equity was raised, rising to £3m with gearing. Chief executive and founder Stuart Law says “there will be about five times as much in the next fundraise,” believing once investors see the promised returns (targeted at 15 per cent per annum) interest will snowball. “A lot of people think it is all over, but some still think it’s just starting,” he says.
Residential funds with a more complex story than “buy cheap, sell dear” have battled to win the hearts and minds of investors. , the residential income fund promoted by Smith & Williamson, has optioned £100m of buy-to-let property from landlords in need of cheap financing, but has struggled to convince private investors that a 7 per cent return can be achieved. “We have raised some money, but not enough to get the plane in the air,” says property manager Harvey Shulman. By next month, the fund will be available inside an ISA tax wrapper, which could lead to it taking off with IFAs.
As market pricing continues to rise, fund managers are under pressure. Those that have raised cash now have a mountain to climb, sourcing the promised bargains. For funds which have yet to raise money, the future is unclear. It is possible that more could silently fall victim to the property recovery. But with fears of a double-dip building, if they hang around for long enough, another crash is bound to come along.
TOP OF THE FLOPS: HOW PROPERTY RECOVERY FUNDS HAVE FARED
VULTURES TAKE AIM
Commercial property opportunists have enjoyed greater success on the equities market, with Nick Leslau’s Max Property and Tim Walton’s LXB Properties among those listing on London’s Alternative Investment Market in the past year. Max Property raised £211m last May, and landed its first deal in August - a £227m distressed industrial property portfolio once valued at £630m.
"Even though we could have raised twice that amount, we deliberately did not, as we didn't want the cash sitting there on the balance sheet doing nothing for investors," says chief executive Nick Leslau. "In those days, the big recovery story was we're going to work with the banks, whose coffers are full of rubbish. Well, that clearly has not occurred. The banks have been much cleverer this time around, and will turn around the right stock as and when the market improves. We didn't raise money on that basis, but it's amazing that the market has moved so quickly."
In January, Max snapped up a £40m portfolio of office building from UBS Triton. It has already turned several properties for a profit, and trades at a 9 per cent premium to NAV.
LXB Properties, which pulled off a £110m flotation in October, intends to acquire "subprime" retail park property for redevelopment. It made its £18m maiden purchase in January, buying long leases on a retail park in Greenwich, south east London, and has since spent £10m on an adjacent freehold site. At 90p, LXB's shares are trading 10 per cent below its list price. The value of retail parks has soared up to 40 per cent in the last 12 months, and the market is clearly pricing in the risk of striking further deals.
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