World homes in on ‘Treasure Island’

If London is the prime place on the planet to own a home, why, wondered Naomi Heaton, do advisers give residential property so little attention? She founded London Central Portfolio.

How is it that despite the worst financial crisis to hit London in half a century, prime residential property in the capital keeps going up in value? Naomi Heaton of London Central Portfolio (LCP) says she has the answer.

Heaton is the founder and chief executive of LCP, which manages residential properties worth about £500m. She is staggered that despite residential property outperforming commercial property, it has never achieved recognisable status as an asset class among financial advisers. But after the successful launch of a property recovery fund in April – which raised £15m – she is already planning another product, scheduled for September, aimed at advisers.

The secret, says Heaton, is to invest only in the two central London boroughs – Westminster, and Kensington and Chelsea – which are the focus of the international market. The extraordinary thing about these two boroughs is how supply is tighter than in any other leading city in the world. In total last year only about 500 new units came on to the market, and it will remain impossible for the market to be flooded by new-build, unlike Docklands. (article continues below)

“We believe in the power of the scarce resource in the most desirable location in Europe,” says Heaton.

But she is not interested in the “trophy” properties that line Kensington Palace Gardens. Her experience tells her that the best mix of yield and capital growth comes not from £5m-plus houses but from one and two-bed flats in the £800,000-£1.5m range. “Trophy properties are highly volatile and don’t give you much of a yield,” she says. “We tend to go for smaller properties that we rent to professionals coming to London on short-term contracts.”

Put simply, Heaton creates funds that buy property cheaply (usually because it needs updating and renovation), let it at a yield of about 5% and hold it for five to eight years for capital return. Bank finance covers 60% of the purchase price of the properties, with the investor covering the other 40%, thereby gearing up returns.

The idea is that the rental yield, after LCP’s expenses, will cover the cost of servicing the bank loan. There is no income or dividend for investors, who should view the fund as an investment for capital growth.

But isn’t this just another, albeit highly upmarket, version of a buy-to-let property investment club? And didn’t so many of those rapidly deflate after the property bubble burst? Heaton readily acknowledges the failings of buy-to-let in the broader market, and the foolhardiness of investors who bought new-build off plan in places such as Leeds or Nottingham. Prime central London property, she says, has to be viewed as a completely distinct market from the rest of Britain, and indeed even from the rest of London.

Another of her extraordinary facts is that across Westminster, Kensington and Chelsea, there are typically only 5,000-8,000 transactions a year. Few flats come on to the market, so all it requires for the market to be sustained is buyer interest from that many people from around the world. Mind you, it also suggests that valuations for an enormous amount of fancy real estate are based on a tiny number of sales.

Heaton acknowledges that with the onset of the credit crunch, prices fell from peak to trough by about 15%, but she says they have already climbed back to peak levels. Yet she also suggests that they are running at below their long-term growth rate, suggesting opportunities for investors.

”We believe in the power of the scarce resource in the most desirable location in Europe”

“Since 1969, property prices have doubled in central London on average every eight years. People will always say that property looks so expensive, but I remember people telling me that in Singapore and Hong Kong in the late 1990s. Look what’s happened since then.”

She shows me a graph with Land Registry figures dating back to 1996, which suggests that prices have fallen below trend level, with a projection that if they return to trend growth they’ll double by 2016.

Any graph of British property prices that starts in 1996 should be a cause for concern, as that was the low in the property cycle. Equally, the mathematics of the implied 9.5% compound annual growth in LCP’s projections can soon result in some pretty fanciful figures.

But Heaton comes back to the fundamentals that support the central London market. International investors love it, she says, for its sophistication and lifestyle, but also for tax reasons. “New York has vicious taxes for offshore investors. Paris has horrible planning laws. In London, you don’t pay CGT [capital gains tax] if you are an offshore investor, and if you are a non-dom, you don’t pay inheritance tax either. It’s a treasure island where you don’t have to pay any tax.”

It’s difficult to pierce the armour in Heaton’s investment story. What does she think are the risk factors? Oddly enough, the worst event in London property investment was not the credit crunch but 9/11. “September 11 had a marked impact on London as the Americans stopped coming to work here. Some parts of the market went dead in the water. But in the credit crunch, in the locations we were, we hardly felt it at all. Our rentals have remained at 97% occupancy throughout the last few years.”

One vital element of LCP’s success, she says, is its total approach to property management. It selects and buys the flats, renovates them, handles the lettings and it conducts the final sale. Other agencies – and their fees – are not involved.

Heaton’s next product, at present called “Plan 3”, will be structured to enable advisers to create their own fee package, with up to 5% available upfront or as trail, or to be rebated to clients. Minimum investment is £50,000, although LCP are willing to discuss options. The fund will be able to be included in a Self-Invested Personal Pension.

The £15m raised for the Recovery fund in April has been invested in 19 properties, and many are already renovated and let. Many of the purchases have been around Pimlico rather than Knightsbridge, which Heaton reckons is over-valued. And in a sentence that Romford-born mortals like myself will never be able to utter, she says: “I almost never stray north of Mayfair.”