So it's ironic that one of the cornerstones of the Tchenguiz empire is a £3.5bn portfolio of ground rents - one of the lowest-risk investments imaginable. Unlike property itself, ground rents on long leases were completely unaffected by the financial crisis. Buying them up - in 2006-07 the Tchenguiz Family Trust was said to be hoovering up three out of every four new-build ground rents in the UK - was probably one of the mogul's best boom-time bets.
Perhaps that's why he is now selling up. Reports surfaced in the property press last week that the Prudential was in talks to buy a quarter of the portfolio. Mr Tchenguiz's publicist won't confirm that rumour - nor give any reason for the sale - but points out that ground rents provide the kind of long-term income stream annuity providers need.
Annuity providers aren't the only ones. Private investors, too, have long valued the unusually reliable returns ground rents offer. Although they are bought and sold at the same auctions as flats and shops, they have a much better claim than either to be a safe haven.
For the uninitiated, ground rents - or freeholds, as they are sometimes called - are a relic of feudal Britain that can now be bought and sold like any other asset. The best way to understand them is simply as a title to land, as distinct from the property that sits on it. The leaseholder owns the property, whereas the freeholder owns the land - and collects a 'ground rent' from the leaseholder who uses it.
Because it is massively over-collateralised, this ground rent is virtually risk-free. If the leaseholder fails to pay the ground rent, the freeholder has the legal right to take over his or her property - even though it is typically far more valuable than the freehold title. No flat-owner in their right mind would risk their £200,000 flat by failing to pay a ground rent of £100 a year, to give two not untypical values.
These days, the freehold and leasehold interests on most houses are unified, but many flats continue to be held leasehold. Freeholders are then typically responsible for managing communal areas and arranging buildings insurance, for which they can collect a fee and a commission respectively, boosting the income return.
There are also capital gains, but these vary hugely with the terms and length of the lease. Shorter leases - those with less than about 80 years left to run - trade at a discount to the value of the flat in question, because the freeholder can theoretically take over the flat when the lease eventually expires. Capital gains on shorter leases are therefore partly linked to the (unpredictable) housing market and partly to the (predictable) passage of time.
Longer leases fall into two camps. A few are unimaginably long - typically 999 years at issue. In such cases, the freehold is valued like a perpetual bond, with ground rent and ancillary income instead of the coupon. But most leases are issued for 125 or 100 years and gradually become ‘short' as the years pass.
The main source of capital gains for the freeholder is then lease extensions. Flat-owners find it hard to sell when their lease falls below 80 years to expiry, so most chose to extend back to 125 years, whatever the cost. One investor I know bought the freehold to a large Victorian conversion in Clapham back in the 1980s for £10,000. He recently received nearly £45,000 for two lease extensions, and expects about £80,000 from the remaining leaseholders in the next few years.
So what's the catch? One problem with ground rents is their susceptibility to inflation. The terms of rental growth are often archaic, with either no provision for the rent to rise or a doubling every 25 or 33 years. But this can be easily managed by buying newer freeholds, on which the ground rent is tied to consumer or house-price inflation. The value of the asset should then rise like an index-linked bond.
A more fundamental problem with ground-rent investments is the lumpiness of the returns. Most of the capital return comes all at once, with the lease extension, on a timetable dictated by the tenant. If you need a more even and predictable income stream, it is better to buy shares in a portfolio, rather than isolated assets at auction.
There are currently three funds open to private investors: the Freehold Income Trust, the Brandeaux Ground Rent Income fund and the much smaller Brooks Macdonald Ground Rents fund. The portfolio owned by the Tchenguiz Family Trust is over six times larger than all these put together. If only it were turned into a fund for investors large and small, grounds rents could become a more mainstream asset class - but, sadly, it seems more likely to disappear into the vaults of an insurer.
