london central residential: a class apart its potential as a viable asset class in a diversified...
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London Central Residential:A class apart Its potential as a viable asset class in a diversified portfolioLondon Central Portfolio Limited
Who are LCP?What is London Central?What makes it an attractive asset class? How has it performed vs. other asset classes?The impact of the credit crunchWhat now possible scenarios
For 20 years LCP have approached London Central as an alternative asset classLCP do not SELL residential real estate but enable investors to maximise their profit opportunity through sound business modelling Offering a full service solution: property finding, refurbishment and furnishing, letting and rental managementLaunched the only two closed end residential funds targeting London CentralBased on financial criteria(income/expenditure and return targets)Who are LCP?
International market with low correlation to the UK Only 440,000 people in 6 square miles What is London Central The Royal Borough of Kensington & ChelseaCity of WestminsterJust 2 boroughs out of 33 Average price almost 1 million Who are LCPLondon CentralAn asset classPerformanceCredit CrunchWhat now?
Prime London Central The bullseye of the capital Who are LCPLondon CentralAn asset classPerformanceCredit CrunchWhat now?
Globally desirable: the best real estate in the worldInternational centre: geography, culture, finance, educationScarcity of stock (215,000 units)Lack of new supply (500 new units per annum) What makes London Central an attractive investment class?Low transaction levels (Ave. sales p.m. 600, 3.4% turnover p.a.)High levels of rental occupancy (97%)
Average price is 1/4 of London Central (230,562)...and Docklands & Canary Wharf30,000 units developed since 2000: oversupply of rental units42 major developments approved 08/09 vs 17 in London CentralDifferentiated from the rest of the UKMore impacted by Credit Crunch Average price 1/3 of London Central Affected by domestic factors: unemployment & mortgage availability
The Simplified Map of London
How has London Central performed?Past performance is not a guide to the futureLies, damned lies and statistics
A Strong PerformerCapital values have increased more than 12 fold since 1980, 4 times in real termsRepresenting 8.7% compound growth and a doubling of values approximately every 8 yearsCapital growth in London residential (1980 = 100) London Capital GrowthIndex = 1,292RPIIndex = 312Source: CML/ODPM/Office for Communities & Local Government/Office of National Statistics/LCP In-house
A Competitive PerformerDemonstrates significantly less volatility and outperforms UK commercial property and the UK stock marketSource: HM Land Registry, IPD, Reuters, LCP In house researchComparative performance 1970 = 100UK Commercial Capital Growth Index = 506FTSE 100 Index = 1,646London Central Residential Capital GrowthIndex = 5,069UK CommercialTotal Return Index = 5,532London Central Residential Total ReturnIndex = 7,132
A Consistent PerformerIRR over 10 year period (total return)Despite adverse conditions (1989 and the credit crunch) a 10 year hold has always shown real growthSource: CML/ODPM/Office for Communities & Local Government/Office of National Statistics/LCP In-house10 year IRR shows a spread of 5-12%.
Investment returns can be further enhancedEvery case differs & you should seek specialist tax adviceNet residential yields allow 60-70% gearing Income tax mitigation CGT exemption for non-res and non-doms Inheritance tax mitigation through offshore holding vehiclesSignificantly increasing returns over an 8 year period
The impact of the credit crunchLondon Central has shown a resilient performanceSector % Drop Peak to Trough % Change peak to dateLondon Central- 15%+3%FTSE 100- 47.75%-27%UK commercial - 40%-22%(total return)
Source: HM Land Registry, IPD, Reuters, LCP In house research
What has underpinned London Centrals resilience? Desire for transparency: retrenchment into tangible assetsOpportunistic buyingBelief in long term desirability & longevityHigh dependence on international vs domestic economy (investors & tenants)Diversification
Weakness in sterling increased affordabilityLondon Central pricing relative to different currenciesLondon Central Residential Capital GrowthExchange RateUS$ : 26% Drop from PeakExchange RateSingapore $ : 28% Drop From PeakExchange RateMYR : 28% Drop From PeakSource: HM Land Registry (RBKC &CoW)/xrates.com
Reduced borrowing costs increased accessibility Source: Bank of England Base RatesAn unprecedented fall in interest ratesGearing on London Central property is relatively low and is primarily a tax planning mechanism
Press reporting on UK property market should be handled with careWhat now? Possible scenarios
Factors affecting London Central performance differ from the UK Different price trends London Central vs England & Wales 2003 = 100Source: HM Land Registry HPI (RBKC &CoW)
Continued weak UK economy (low interest rates/weak sterling):Incentivises the foreign investorHigh levels of inflation: historically reflected in property pricesIncrease in base rates: already factored in at about 4% for 5 year fixLondon loses its allure: not convincing (10m HNW, $39 trillion)Lack of buyers leads to major price reductions: evidence suggests a floor to price fallsDespite risk of double-dip or triple-tumble, past performance is probably our best predictor
Major falls in transactional activity result in limited falls in pricesTransaction falls peak to trough vs price falls Source: HM Land Registry (RBKC &CoW)
Source: CML/ODPM/Office for Communities & Local Government/LCP In-house. Assumes 7.5% day 1 uplift and 3.5% net rental yieldHistoric data shows lowest 10yr IRR at 3%, average capital growth at 8.7%Capital Appreciation OnlyUngeared 3% Ave. Cap.App. 3.8% IRR & 44.5% RoETotal ReturnUngeared 3% Ave. Cap.App. 6.6% IRR & 88.9% RoECapital Appreciation OnlyGeared (60% LTV) 3% Ave. Cap.App. 7.8% IRR & 111.2% RoECapital Appreciation OnlyUngeared 8.5% Ave. Cap.App. 9.3% IRR & 143.1% RoETotal ReturnUngeared 8.5% Ave. Cap.App. 11.8% IRR & 203.6% RoECapital Appreciation OnlyGeared (60% LTV) 8.5% Ave. Cap.App. 16.4% IRR & 357.6% RoEUsing these as downside and upside parameters projections, un-geared and geared growth can be assessed
SummaryShown robust performance outperforming conventional asset classesPotential spread of returns makes London Central a strong candidate for inclusion in a balanced portfolioLondon Central is a unique market benefiting from: Scarcity of stock Increasing global demand Consistent returnsUpside potential due to inherent market desirabilityDownside possibility due to uncertain economic future10 year ungeared IRR shows a spread of 5%-12%, ave. growth 8.7%
Who are LCPLondon CentralAn asset classPerformanceCredit CrunchWhat now?