TIP OF THE YEAR 2009: London & Stamford (LSP)

Last year was miserable for property companies. However, troubled times create opportunities for cash-rich funds, who can snap up distressed property assets on the cheap and hold them for when the market eventually recovers, generating fat returns for those investors brave enough to climb on board.

This is the plan for Aim-traded property fund London & Stamford Properties (L&S), which raised £238m when its shares were floated at 100p each in late 2007. The company is registered in Guernsey and the intention is that it will have a lifespan of at least seven years. Aside from a small collection of nondescript properties and development sites it has held since inception, the company is effectively a cash shell.

Although the company's management has scrutinised over 200 potential acquisitions, the fact is that L&S has yet to complete a deal. This can be viewed positively or negatively. Having put their capital in more than a year ago, some investors have been nervously waiting for action, with only two small dividends (equivalent to a yield of 3.6 per cent on the placing price) to placate them.

However, non-executive chairman Raymond Mould is in no doubt that the company's caution is to the good. "We make no apologies that it is taking time," he says. "In this case, time is also making for better value."

And, indeed, let's not forget that the early bird does not always get the worm. L&S's nearest neighbour is Terra Catalyst, a property fund run by activist investor Laxey. Its shares now trade 66 per cent below the price at which they were floated last February of 100p. Set up to invest in undervalued property shares, it took stakes in Shaftesbury, Bovis Homes, Spazio Investments and NR Nordic last year, and may well be regretting the fact.

L&S's modus operandi is to target direct property acquisitions, and it has just exchanged conditional contracts on its first deal - the £74m purchase of a City office block previously on the market for more than £100m. At the turn of the year, the company was also rumoured to be close to acquiring a 50 per cent stake in British Land's Meadowhall shopping centre in Sheffield, worth £700m according to British Land's last valuation.

The company could digest a deal of this size because it still has £115m of cash and £127m of unused banking facilities. More important, however, it set up a £200m joint venture in April with Cavendish, a sovereign wealth fund from Abu Dhabi.

"The Cavendish £200m is ungeared, so after adding on a reasonable amount of debt finance, that gives us potential fire power of £800-£900m," says director Martin McGann. L&S has the first pick of any deal involving up to £30m of equity. Above that level, transactions will be funded on a 20:80 equity ratio with Cavendish.

Of course, having been granted a banking facility, and getting the bank's permission to draw it down are two different things. However, the track record of L&S's management should inspire confidence with investors and lenders alike.

[Note: when this article was published in the print version of Investors Chronicle, the price was stated as 87p, which was the price at the time the article was written. The price rose considerably before publication, and the table above has been amended to show a price of 103p, which was the price prevailing at publication. This alteration has had the effect of increasing market value from £248m to £293m, turning a discount to NAV into a premium, and lowering the dividend yield from 2.3 per cent to 1.9 per cent. No other alterations have been made to the article.]

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L&S was formed by Raymond Mould and Patrick Vaughan who have been in the property business since 1970. In 1976, they set up Arlington, the operation that is credited with introducing the modern business park to the UK, before selling out to British Aerospace. Their next listed vehicle was Pillar, set up in the early 1990s when distressed opportunities also abounded. Specialising in developing out-of-town retail parks, they also set up several off-shore property unit trusts, before selling out to British Land in 2005.

Both Arlington and Pillar achieved average annual returns of over 20 per cent, and double-digit returns is the target set for the new vehicle.

Given the management team's background, the obvious hunting grounds for assets that can be turned around are offices in the City of London, and retail warehouses, two types of real estate whose values have been severely hit.

"The risks of tenants defaulting on out-of-town retail sites are pretty significant now, but that's not to say all retail is out," says Mr McGann. "Nor does Raymond and Patrick's background preclude investment in other sectors. Prime property with a long-term income stream from quality tenants is what we're after - that could be in the City of London, in the retail sector, or even distribution centres."

Potential investors in L&S should be aware that heavy management fees, which have hit shareholders' returns in many Aim-traded property funds, encumber L&S, too. Its property advisor, LSI Management, which is Mr Mould's and Mr Vaughan's company, is entitled to a yearly basic fee of 1.75 per cent of net asset value, and a performance fee of 20 per cent of shareholders' returns.