London Central Portfolio (LCP)

Naomi Heaton

LCP was founded in 1989 by Naomi Heaton. Having graduated from Oxford University she went into advertising and held directorships at Saatchi & Saatchi and Young and Rubicam, providing strategic input for a variety of high profile clients. Subsequently, she put these business principles to work, setting up her own company, London Central Portfolio Ltd.

LCP specialise in prime London Central residential property, assisting private high net worth investors to maximise their profit opportunity through a one stop service, which includes property sourcing, renovation, interior design and letting and management. LCP is also asset manager to two property funds, providing another way for investors to access this market whilst benefiting from diversification and professional expertise. They have just launched their third fund, London Central Apartments Ltd.

James Thomlinson: There has been plenty of press lately regarding the fundamental arguments for investing into prime Central London residential property and few would argue with the logic of injecting funds into this historically safe and presently popular asset class. Investors are well known to take this 'flight to quality' as a result of: the psychological comfort of being able to view and feel ones bricks and mortar investment, weaknesses in other investment options such as equities and hedge funds, et al. In your view are there any other perhaps more subtle factors that contribute towards making this such a sound financial decision?

Naomi Heaton: Well James I think to answer the question I must just define where central London is to start with. It's actually just 6 square miles and is located around Hyde Park and houses some of the best known and most prestigious addresses and sites in the world - and it's that fact that contributes to the sound financial position. First of all it is the most visited destination in the world and secondly it is the international centre: financially, geographically and culturally. That means that it is a natural investment decision when people are looking outside their own country. The other really important factor is that it's a tiny market. Few people are aware there are only five thousand transactions in a year, only about 100 to 150 per week. The other fact is there is almost no new stock. There is almost no land development potential; you can't tear buildings down and put up higher ones; there are conservation laws and that means that you have a very interested investment market around the world but you have no extra supply. As a result you have consistent pressure on prices, consistent pressure of demand on supply and that really is the key factor the fact that there is it is a scarce but desirable resource with world wide appeal.

JT: One of the issues we are faced with when working on commercial property transactions is a demonstrable conservatism on the part of chartered surveyors. They continue to carry out an admittedly difficult role but during the past 24 months we have often witnessed a disparity between the 'market value' provided in valuation reports and the subsequent sale prices of the properties – with the valuers' opinions consistently undercutting the eventual sale prices by a significant margin. To what extent are you seeing a similar trend in Central London residential?

NH: Well I think we have to remember that commercial property across the UK is a mixed palette of colours. You've got retail, light industrial and offices and therefore it is a very complex sector to value. The other thing to remember is that during the credit crunch, commercial property suffered particularly badly with a 40% fall in values from peak to trough so not surprisingly surveyors are nervous. On the other hand London Central residential shows a far less volatile performance. In fact prices from peak to trough fell by 14% in one year and that drop was reversed in 2010. And now prices are about 15% above their pre-credit crunch high. So there is not the same nervousness in the central London market when it comes to valuation. Having said that at the very top end of the market which is an obviously highly discretionary market it's much more difficult to value because people buy for love rather than for rational reasons. But the sector that LCP operate in which is the one and two bedroom sector shows much more linear growth and therefore is a much more straight forward category to value which is why it is a good asset class to get into because it's much more predictable both for the investor and for the valuer.

JT: Commercial property has been a well know asset type in the UK for many decades. On the other hand many larger investor and institutions have shied away from residential property because of the small lot sizes and the perception that both the acquisition and the management will be more labour intensive. In view of the fact there is a now a clear shift into investing in prime Central London residential as an alternative asset class are there any particular ground rules that should be considered to make successful investment decisions?

NH: Interestingly, it was the credit crunch that highlighted the true worth of residential; multiple properties with multiple tenants provide much more diversification and spread of risk than a single commercial unit with one commercial tenant and if that tenant goes then you have a non-income generating asset with very little capital growth prospects. I think with regards to ground rules what the investor has to realise is that central London as an investment class is as complex as any other asset class and it needs to be taken with the same degree of seriousness. That means that you must very carefully consider and assess the suitability and value of the candidate property, you need to cost out the renovations, understand the interior design that is necessary to attract good quality tenants, and you need to make sure that your strategy yields the highest possible return. Also to approach it as an asset class as an investor you have got to have an absolute handle on the yield that can be obtained but in terms of capital growth and rental income and to have a firm handle on cost and income centres. From our experience to maximise the returns on an asset class the investor should be, however high net worth they are, looking at smaller properties, maybe a portfolio of properties rather than one big property because smaller properties deliver the same capital growth but are much more easy to quantify, as we discussed, value wise and yield wise so in this asset class small is beautiful.

JT: Whilst the 'super prime' residential market comprising of properties with a value in excess of £5m is arguably somewhat immune to the domestic mortgage market those looking to acquire the types of properties that LCP focus on would typically rely on a loan. How have you seen the mortgage market evolve since the downturn and to what extent do you believe mortgage availability has an impact on the value of such properties?

NH: You're absolutely correct James that clients buy property with a loan if they are buying for rental investments but it's not because they need to - because generally our clients are high net worth - but it's because it makes the best commercial sense. By leveraging up in a market that sees high capital growth, returns are enhanced and for offshore clients there is no capital gains tax liability. Moreover the loan interest on such properties can be set against rental income and so the investment is income tax neutral. In other words, for an offshore investor, they can structure through gearing an income tax neutral, capital gains tax neutral investment. Having said that, mortgages are certainly more difficult to obtain; particularly from the private banks because they are now looking for full client relationships and are therefore not willing to lead with their lending. Nevertheless there are still good retail mortgages around and what is really interesting is that it's easier to get a buy-to-let mortgage if you go to a UK bank abroad i.e. offshore than onshore. So the reality is that although there is more difficultly it is still possible. Having said that most of our clients because they are cash rich can always buy with cash so that they get in first - and that is pretty much a necessity in this market - and then leverage up once they have acquired the property. With regards to the effect on prices I don't think there has been any effect on suppressing prices because the kinds of people that are buying in the central London will and can get mortgages.

JT: Despite the strong relationships you've built up with agents over the years how are you finding the process of acquiring new properties and what is their feedback when you are unsuccessful in securing units? Are the majority of competing bidders you come up against from overseas? Cash-bidders? Perhaps prepared to pay above asking price or market value to secure properties? Where properties are in need of refurbishment are you still able to secure a discount to asking price?

NH: We have strong relationships with all the agents and other property providers in town and we would normally be the first port of call when they are taking on a valuation or an instruction which has the LCP 'kite mark' on it. We would also be the preferred bidder and that's because we have a track record and credibility in the marketplace and a seamless buying operation. As a result it's very rare for us not to secure the units we target and as a result we're not really aware of competing bidders. Nevertheless you do have to be the first to view a property and the first to offer on a property because any good property that stacks up from an investment point of view will go under offer in a matter of days.

With regards to where clients come from: our clients are largely from overseas and that is because there are more overseas buyers than UK buyers – that's just a question of geography. You will find that 80% of buyers are from abroad and generally they are able to pay cash, so if cash is needed to secure that property they will pay it that way and then get their loan. We will not over-bid on a property simply because we work to strict financial models. We know what rent we should be achieving, we know what yield the market will deliver and like commercial property, this market should be yield driven in terms of your financials and as such we would never be prepared to pay over the correct value for a property. We very rarely get into sealed bids because that tends to hike up the price nor Dutch auctions. We generally secure the properties we want and at the prices we want because of our strength within the marketplace. We will buy competitively and we will generally be buying properties that need refurbishment simply because most property in central London is held for a long time either by a second-home owner or an investor who is di-vesting you then need to do it up to appeal to the tenant and you therefore provide added value for the investor.

JT: How do you see the prime London residential landscape evolving over the coming 12 months and beyond and what do you identify as being the factors most crucial to the continued strength of the asset class?

NH: We've seen the market double in value every 8 to 9 years so that is growth of about 9% per annum and we see no reason why the market won't continue to follow those long term trends. Even taking the credit crunch into account, residential prices in central London increased per annum over the last 15 years by 8.2% per annum. So first of all we see continuing growth and the main drivers of course are lack of new stock and increasing wealth around the world, so if anything the lack of new stock and that increasing wealth will lead to even more intense demand in an environment where there is very little supply so you could see increasing pressure on prices. So our overall view is an optimistic view. As you said at the beginning there is much more store being put onto safe haven investments which are tangible and blue chip and the correlation between central London prices and gold is astounding. So there are more drivers than ever before for this marketplace and ironically the weakness in the UK economy, which leads for example to a weak sterling, which leads to high inflation, are good news for central London. So if anything central London has more appeal as the rest of the country has less appeal. That's why we have and we are launching our third property fund London Central Apartments because we see the continuing strength of central London as an investment market place and it enables investors to come in in a way which provides diversification and management expertise the final reason that I think gives London such a strength is the fact that it is actually 'brand London'.