How the first 5 year anniversary mechanic unfolded
Investors originally purchased shares in Fairholme Road for 22.66p. As part of the 5 year exit process, a RICS accredited independent surveyor valued this property in order to help investors make an informed decision on whether they would like to hold or sell their shares. The result of this valuation was a share price of 26.19p, an increase of 15.6% in capital value. This combined with the dividend income distributed over the 5 year period resulted in a total return to investors of 36.1%.
Despite this good performance to date, there was a strong case for investors to hold onto their shares due to further potential upside.
1. Market conditions
The valuer has sighted slowing market conditions in recent months, given the climate of acute political uncertainty, accounting for the 4.1% fall in their assessment of the value since the September 2019 revaluation. We believe this is temporary, with good prospects for the property value to increase when market conditions and transaction levels return to normal.
2. Discount to vacant possession value (VPV)
The market value of the property reflects a 19% discount to VPV in respect of the assured tenancy in place. If the current tenancy comes to an end, the property can be marketed for sale at VPV, i.e. a 23% premium to the assured tenancy market value. Should this happen during the period of our ownership, Property Partner will immediately conduct a discretionary shareholder vote to consult on a potential sale at VPV, outside of the 5 year exit mechanic process.
3. Value enhancing improvement work
The nature of an Assured Tenancy means that refurbishment and modernisation works tend to lag behind the average level required to secure Assured Shorthold Tenants (AST’s), with the assured tenant themselves often preferring to put off improvements to maintain a lower level of rent. The valuer refers to sales evidence of comparable properties in better condition to suggest that additional value could be added through refurbishment work and modernisation. Should we achieve vacant possession, we will appraise the potential to increase the capital gain for investors through cost effective improvement work.
4. Rental Yield
The market value of a property subject to an assured tenancy is lower than one let to an AST, thus the market rent of an AT delivers a higher rental yield than equivalent properties acquired at VPV. The current annual dividend yield is over 20% higher than would be achieved if the property were acquired at VPV and let on an AST basis.
When the vote opened to shareholders, Property Partner proposed that shareholders hold their shares rather than sell at the 26.19p price. When the shareholder vote concluded on 6 January 2020, 17% of shareholders voted to sell their holdings and 83% elected to hold (46% voted to hold and 37% did not vote).
The 17% that voted to sell represented £44,041, which was made available for investment on platform at the fair market value of 26.19p as a ‘block sale’. The block sale was successfully funded in less than 4 days.
Investors that acquired shares through this block sale benefited from zero property purchase costs and no Property Partner transaction fees, with stamp duty reserve tax of 0.5% being the only cost of acquiring the shares. As a result, investors who bought shares in the Fairholme Road block sale acquired them at a lower gross price than it would cost to acquire the property on the open market. They also benefited from a higher dividend yield of 4.04% before the AUM fee, a standout yield for a single unit London property.
With the 5 year exit process for Fairholme Road now complete, the property will recommence trading on the Resale Market at 11 am on Thursday, 16 January 2020.
Interested in other properties approaching their 5 year anniversary? Click below to view these properties.
Capital at risk. The value of your investment can go down as well as up. The Financial Services Compensation Scheme (FSCS) protects the cash held in your Property Partner account, however, the investments that you make through Property Partner are not protected by the FSCS in the event that you do not receive back the amount that you have invested. Past performance is not a reliable indicator of future performance. Forecasts, if stated, are not a reliable indicator of future performance. Interest and capital returned may be lower than expected. Gross rent, dividends, and capital growth may be lower than estimated. 5 yearly exit protection, exit on platform, exit in line with a specific investment case or fund strategy, subject to price and demand. Property Partner does not provide tax or investment advice and any general information is provided to help you make your own informed decisions. Customers are advised to obtain appropriate tax or investment advice where necessary. Financial promotion by London House Exchange Limited (No. 8820870); authorised and regulated by the Financial Conduct Authority (No. 613499). See Key Risks for further information.