Land Registry statistics indicate that reported transactions in the seven most valuable of the ten boroughs reached a recent peak of £3.7bn in 2006. They halved to £1.7bn during the global financial crisis of 2008 but have since recovered very well; total value of all transactions in Knightsbridge, Chelsea, Belgravia, Mayfair, Kensington, Holland Park and Notting Hill in 2010 was over £2.35bn.
Stephen Yorke, founder and Fund Manager of the Prime London Capital Fund, comments:
“One of the safest ways to make money out of China and other emerging economies is to own things their new rich will want to acquire. The last twenty years have shown that liberalisation and privatisation of previously ‘closed’ economies leads to a transfer of wealth from state to individual. Much of that new private wealth then bleeds out of its country of origin into mature, prime real estate markets, the most sought-after and best understood of which is prime central London residential property. Amongst other things an investment in PCL is thus an asset-backed, cash generative, liquid, transparent, legally watertight way to play rising wealth in emerging economies.”
Residential property in PCL has provided a superior capital return to most other asset classes over the past 20 years. A £100,000 invested at the end of 1989 would, 20 years later, be worth £354,000 if invested in PCL; £264,000 if invested in the UK housing market, £223,000 if invested in the FTSE 100 and £98,000 if invested in UK commercial property.
The returns of PCL are evenly split between income and capital. Over a five year period, the total return split for residential property is divided as 27% from income and 73% from capital. Over a 20 year period, the total return split for residential property is divided as 37% from income and 63% from capital.
However, UK commercial property investment has historically been an income, not a capital play. According to the IPD All Property UK Commercial Index to the end of December 2009, the annual average returns show that nearly all of the total return comes from income. Over a five year period, 100% of total returns are generated from income, none from capital. Over a 20 year period, the total return split for commercial property is divided as 95% from income and 5% from capital.
The more even distribution of returns between income and capital growth on PCL provides a less risky prospect for investors, as such, residential property is a less volatile asset class than commercial property and FTAS.
A comparison between PCL and a similar prime commercial property asset class (City offices) shows that the income potential of PCL is understated.
Stephen Yorke comments on the appeal of PCL to institutional investors:
“Current population projections, combined with the lack of new housing in the UK, mean that it is likely that the government will build on legislative changes in the recent budget to encourage institutions into this market. We are hoping that, with such positive performance results, institutional investors will begin to look more closely at PCL investment, despite a lack of scale.”
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