We are pleased to announce that we have successfully completed the £15m sale of our clients’ investment in a portfolio of residential ground rents acquired in 2010.
Each £25,000 invested at that time delivered total proceeds of c.£61,000 equivalent to an IRR of 24% per annum. This far exceeded the base case returns forecast at the time of the investment in 2010. During the five year hold period our clients benefitted from the 7% per annum distributable coupon.
- Investment date: August 2010
- Exit date: March 2015
- Investment size: £3.45m
- Return to investors: c2.4x, c24% IRR
- Property advisers: Riverside Capital
The investment was managed jointly by Connection Capital and our property partners, Riverside Capital. The portfolio manager (and co-investor) was Eyre & Johnson Group. Ground rents are the regular annual payments paid by the leaseholder of a property to the owner of the freehold. They are viewed as relatively safe investments given that they are backed by the underlying collateral of the land and buildings through lease extensions. The leases tend to run for a long period, often hundreds of years, which can mean a long-term secure income for investors. There are also opportunities for capital gains through lease extensions. The stability of the income, plus the legally-binding contracts, ensures that a portfolio of ground rents is able to pay a regular income to investors with little volatility.
Investors are attracted by the uncorrelated nature of the asset class and, with rent reviews generally linked to RPI, the assets often provide investors with a hedge against inflation. In addition, ground rents are seen as a low risk investment. Leaseholders are legally obliged to pay their freeholders and if they default, the freeholders have the right to repossess their properties. However, the chance of this happening is remote: it is extremely unlikely that the owner of a flat would risk losing their property by failing to pay the ground rent of just a couple of hundred pounds a year. Connection Capital clients’ original £3.45m investment, made via an English Limited Partnership structure, was supported by £8m of bank debt provided by RBS.
“The investment in a portfolio of residential ground rents is an excellent example of the type of opportunity that Connection Capital is able to present to its clients. The investors in this transaction were attracted by the uncorrelated asset-backed nature of the investment and have been rewarded with a return well in excess of the original target.” - Claire Madden, Partner