As economic recovery progresses in world markets including the US and UK, investors are increasingly targeting bespoke and added value opportunities in traditional asset classes including real estate. In the UK this month, Gatehouse Bank PLC, the latest Islamic investment bank to be authorized by the Financial Services Authority (FSA), has launched a GBP350 million Shariah-compliant London Office High Income Recovery Fund.
The investment strategy of the fund is to purchase real estate in the London office sector as well as greater London and the London Orbital Sector locations let on long leases to high quality tenants. The fund will distribute excess rental income on a quarterly basis and seek an exit strategy after four to six years.
Gatehouse Bank and its sister company in London, Global Securities House (UK), which are both wholly-owned by Kuwaiti Islamic investment group, The Securities House KSCC, recently merged their operations under the Gatehouse brand. Gatehouse Bank, according to CEO Richard Thomas, has further refined its investment strategy “but with a much greater emphasis on the management of bespoke assets for the market. We are still concentrating on the development of capital market products; on putting together funds that would be attractive to the institutional market like our Water Fund and the London Property Fund; on doing direct investments and bilateral business.”
Placement of the fund started in earnest after the Eid break and the aim is to raise GBP150 million through equity and another GBP200 million through additional Islamic financing facilities. Gatehouse Bank and Global Securities House Kuwait will co-invest a seed equity of 5 percent in the venture.
London Office High Income Recovery Fund is a four-year fund with two one-year options to extend the tenor. The fund has a target IRR (Internal Rate of Return) of 11 percent with a potential to exceed 15 percent in “strong recovery conditions.” According to Gatehouse Bank “investors will receive high cash dividends (of a target of up to 8 percent) from stable cash flows, with the opportunity to benefit from a recovery in the value of the London office market following its unprecedented falls.”
The bank has already identified a portfolio of property acquisitions totaling GBP130 million whose tenants currently include a top pharmaceutical company, a housing association, a top accountancy firm, and a leading food services company. The main focus is for properties with leases in excess of 10 years which would be attractive to institutional investors especially as the market improves due to the recovery. Gatehouse sees the fund as part of a multi-class portfolio with strong fundamentals including a physical asset with an inherent value backed by secure contractual cash flows; where returns can be enhanced through financial structuring; with good diversification of risk and a hedge against inflation; and which is less volatile and higher yielding than other asset classes.
According to Thomas, the UK real estate market is a mature and transparent market. The planning regime creates supply-side constraints, which in turn drives rental and capital growth. The tenant responsibility for maintenance and insurance minimizes the ownership cost. The UK has upward only rental reviews which ensures cash flow cannot fall during the lease term, which is typically between 10-17 years in tenor.
While Britain has suffered from a serious recession, including record government and personal debt, economic recovery is forecast for 2010 with a return to long-term growth trend between 2011 and 2013.
Others stress also the positive impact of the London Olympics 2012 and from major planned infrastructural projects including the GBP16 billion Crossrail project in London. However, the UK faces a general election in six months time and the economic management policy of the opposition Conservative Party, which is strongly tipped to win the next election thus ousting the incumbent Labour government of Gordon Brown, is diametrically opposed to that of the current government.
The Conservatives are essentially opposed to continuing the economic stimulus package and are more focussed on reducing the public debt which has mushroomed to about GBP160 billion. If the Conservatives do get into power, it remains to be seen whether the economic recovery forecast will be on the projected track. This may impact on sectors such as the London and UK property investment market at least initially as the new government sets its priorities.
Gatehouse Bank stresses that the recent weaknesses of sterling against the US dollar and the Euro has made UK property inherently cheaper in US dollar terms.
Most banks tend to agree that the long-term average of the value of sterling of $1.69 would deliver currency returns alone of 13 percent in investments in the UK market.
