Finding value: the key to higher returns in property investments

Written By: Lucy Williams Head of Business Development and Client Services Lothbury Investment Management

Property investors looking for a higher return with a risk that is well spread need to seek out funds that can offer something that is different from the mainstream. Lucy williams of Lothbury Investment Management explains

Outside some of the top performing areas in London and the south east, the property market is largely static or at best unspectacular. In secondary locations, investors are seeing virtually no growth in capital values and rental income that is sliding back, with landlords struggling to fill vacant properties or increase rents. But despite this apparently gloomy scenario, property remains a very solid investment as long as the portfolio is managed imaginatively and a proactive approach is taken, as much to the quality of the assets as to the strength of the tenants and lease terms, as well as location and sector spread.

This, we believe, is where finding value plays a key role. While many funds are purely focused on income return for investors, if you are going to achieve additional value and higher capital growth, a pro-active approach that seeks out opportunities for increasing the value of those assets is the one that will deliver the highest rewards. It is certainly the approach that is working for our UK Fund, Lothbury Property Trust, which is consistently outperforming the market. As at Q3 of 2012, the fund recorded a quarter performance of 1.1% against the AREF/IPD Pooled Property Fund Index, All Balanced Property Funds Index of 0.4%. The fund is outperforming over Q3, one, three, five and 10-year periods.

We already operate a combination of well-managed core assets comprising prime, well located properties secured on strong covenants, across a variety of commercial sectors, and with very low vacancy rates. Our unique active portfolio runs alongside this. This element of the portfolio, which makes up between 10% and 20% of the Fund and which is managed wholly by our own in-house team, is generating additional value through the reconfiguration and refurbishment of existing core assets and the development of new sites. This has the benefit of adding new assets for the Fund without buying costs, as well as generating development profit. This strategy in itself offers investors above average returns. Finding value takes the process of managing the portfolio one stage further, and is best illustrated with a couple of specific examples.

Covent Garden is home of Lothbury’s flagship retail holdings in London and is valued in excess of £60 million. Throughout the fund’s ownership, we have actively targeted these assets to realise premium rental levels. Exploring opportunities to identify any latent value in the assets is what brings the additional value to the core portfolio. Here, an existing tenant was looking to vacate and was negotiating to transfer the lease to another tenant. By intervening and negotiating directly with the outgoing tenant, we were able to agree a surrender of the existing lease, put the property out into the market and attract a new tenant at a rent that represented a 9% increase in rental tone for the parade. A rise from £674 to £733 Zone A combined with positive yield movements resulted in an increase in value of 11% across the entire holding during the third quarter. In this case, had we not approached the outgoing tenant, no additional value would have been gained and the opportunity to increase the rental and capital value of the assets would have been lost. In Kingston-upon-Thames, we had a retail asset in a prime location that had been in the portfolio since its inception. On expiry of the lease in 2010, we appraised our options for the property, which comprised either selling it, re-letting in its existing form, or redevelopment. We determined that the best outcome was to redevelop and expand the existing space in order to attract a higher calibre of tenant. By increasing the floor plate and extending the trading area from one to two floors, nearly 4,400 sq. ft. of extra Grade A retail space was created. This attracted a record rent, reflecting strong retailer demand in this particular, highly popular location. In fact there were two competing retailers looking to take the space. This initiative produced a total return of 33% and a profit on cost of 19%, thereby becoming the second best performing asset in the fund in 2011. By recycling this asset, the fund saved on acquisition and disposal costs that would have otherwise been incurred while adding new value into the fund.

While much of the property market outlook is uncertain, Lothbury Investment Management* feels positive about the future in the knowledge that Lothbury Property Trust, with its dual approach and the highly successful team behind it, is extremely well positioned for difficult market conditions. Large investors are backing this up and demonstrating their confidence by investing with the niche fund managers who can offer something that is just a little bit different, as Lothbury’s success continues to show.

* Lothbury Investment Management Limited is authorised and regulated by The Financial Services Authority.