Friends First is adopting a novel stance on the British property market with a new fundraising round for a £100.8 million portfolio which it aims to sell off by 2010.
In a revival of a strategy pursued some years ago by Green Property, the company aims to dispose of the portfolio in the next five years as a way of capitalising on renewed institutional interest in the British market.
While Irish money is still piling into British property, Friends First sees some slowing of growth there and says that finding value has become harder.However, the company is not saying that the time has come to sell out of Britain, according to property investment manager Donal O'Neill. "Friends First are still selective buyers in the UK at the moment," he said.
The company is highlighting the disposals strategy in its marketing for the Fourth Insight Property Fund, which opened a fortnight ago. It wants to raise some €32 million from investors to fund a £22.1 million equity share in the portfolio. The remaining £80 million will financed by bank debt.
The fundraising round, which has already attracted strong interest, is likely to close at the end of this week. The product is structured as a unit-linked life fund with a minimum investment of €75,000 and a maximum of €1.5 million.
The purchase price of the portfolio is £100.8 million, plus set-up costs and professional fees of £1.3 million. The company says this acquisition cost - at 1.3 per cent - compares favourably with a market norm in Britain which it puts at 5.765 per cent of price.
The company explains the disposal strategy by saying that a considerable volume of capital is overhanging the British market.
According to a memorandum on the fund, this means that "significant value" can be unlocked by breaking up the portfolio and gradually selling the assets. "UK institutions and international institutions are back into the market in a big way," said Mr O'Neill.
With Friends First forecasting total returns from British commercial property to grow in the 8-9 per cent range in the years to 2009, the company expects to be selling into a strong market.
"We intend to actively manage the disposal over the investment period and at the same time collect the strong current rental income." Friends First said that rental income together with the proceeds from property sales will be used to reduce borrowing within the fund.
Because of its 80 per cent gearing, the fund is categorised as medium to high risk. As such, Friends First says the fund is suitable only for investors who understand that borrowings in a fund increase its risk profile.
The company has managed the portfolio of 51 properties since 1999 and says that bad debts averaged less than 0.05 per cent in the period. With tenants including Barclays, Natwest, Vodafone, Xerox and Orange, the portfolio delivered a 142 per cent return for a previous Friends First fund. The term of that fund ended early when investors decided to take their profit from the scheme.
The investment is mostly in the office and retail markets with the remainder mostly in industrial property. The average unexpired lease term on the properties in the portfolio is 11.2 years. The net initial yield is currently 7.17 per cent with a revisionary yield of 7.35 per cent.
Banking on the portfolio has been secured at 1 percentage point above the London inter-bank offering rate. Some 4 per cent of the portfolio is described as high risk while 6 per cent is medium high risk and 3 per cent is low medium risk.
Some 30 per cent of the portfolio is in southwest England, 27 per cent is the southeast, 23 per cent is in the midlands region and 7 per cent is in London. Investors should always take independent financial advice before joining a fund. The value of investments can fall as well as rise.
