Charles Hallett, managing partner of Cignet Capital Management, says the London Actively Managed Property Fund, which aims to achieve an annual return of more than 15 per cent from buying and selling discounted residential property, aims to make its margin at the point of purchase, creating an inherent profit without relying on capital growth.
GFM: What is the history and background of your company, principals and fund?
CH: Cignet, along with Chesterton Humberts and SpicerHaart, are property advisers to the London Actively Managed Property Fund, which focuses on buying and selling discounted residential property and targets an internal rate of return exceeding 15 per cent per annum net of fees with minimal volatility.
The fund’s strategy does not rely on increasing market prices. Its strategy is to buy discounted residential assets, add value and sell them back to the market at a profit. Its target is mid-market residential property mainly in London and south-east England, primarily acquired from distressed vendors at good discounts to market value. The fund, which aims to churn funds several times a year, will provides investors with higher than normal liquidity through monthly dealing.
The LAMP Fund was approved by the Luxembourg regulator, the CSSF, in July and ad the close for the first subscription period is the end of October. Distributors are already set actively to market the fund, which is also in discussions with further master distributors across the world, with initial feedback and commitments looking very positive.
Chesterton was established in 1805 and has 60 offices nationally as well as international offices in Europe, Asia, Australasia, Africa and the Middle East. Cignet Group is a specialist property investment, development and asset management boutique based in London’s Pall Mall, offering bespoke property investments to partners and clients. Founded in 1989, SpicerHaart is the UK’s and Europe’s largest independently-owned provider of property services, with more than 190 offices in England and Wales and one of the largest survey practices in the UK.
The fund is structured as an open-ended Luxembourg-domiciled Sicav-SIF that is part of the KMG open architecture Sicav-SIF platform. KMG Capital Markets, the global investment manager, has a board of directorsincluding Vincent Derudder, Hanna Duer, Richard Goddard, Kevin Mudd and Supreetee Saddul.
GFM: Who are your main service providers?
CH: The fund’s adviser is Cyprus-based Soteria Advisers. The auditor is Deloitte, legal counsel is Elvinger, Hoss & Prussen, the fund administrator is EFA and the custodian is KBL.
GFM: What is your distribution strategy and targeted client base?
CH: The fund will be distributed worldwide except for the US. We are targeting high net worth and ultra-high net worth individuals as well as institutional investors, in the longer term utilising direct relationships, master placement agents in certain regions, and our partner International Distribution Partners based in Singapore.
GFM: What impact has the recent global financial crisis and economic downturn had on your business?
CH: The uncertainty in global stock markets has also seen investors turn to the perceived safe haven of London property and will also increase the number of opportunities from distressed vendors.
The fund has seen strong interest in its own right. The growing interest of institutions in residential property has often focused on the continuing resilience of London house prices. Property companies, usually focused on retail or office developments, are making residential acquisitions. London remains one of the most popular safe havens for property investment.
Whilst prime London has been the focus of international investors with significant personal funds, other parts of London and south-east England also provides a market opportunity for investors of any size to benefit from a trading model that acquires distressed properties at a discount to market value and trades them on at a significant profit without the need for personal hands-on management by the investor.
LAMP is an all-weather proposition in that the managers will be buying properties, either individually or in portfolios, at prices that are already below market rate, either from distressed or motivated sellers.
The opportunities for the fund to acquire significant numbers of properties is always there, as distressed vendors are always present in any market, but there are also clear signs that repossession levels could be increasing and that many banks are seeking to reduce the size of their property loan books for the next five years at least; RBS, Lloyds and Ireland’s National Asset Management Agencywill be major contributors to this. The market currently favours cash buyers such as the LAMP Fund that can move swiftly and adapt as opportunities arise.
GFM: What is the investment premise of your funds? What types of property do you invest in, and where?
CH: The LAMP Fund will focus on buying mid-market residential properties in London and south-east England and trade them for a healthy profit within six to nine months. The fund can be geared up to 50 per cent. Typical acquisitions will be of individual properties in the GBP250,000-GBP1m price bracket.
Our strategy is to buy well, add value where possible (and as quickly as possible) and then trade in the open market, but our clear focus is on the first part of this equation. If you are making your margin at the point of purchase, you have an inherent profit without relying on capital growth, as well as a safety net against any market decline.
GFM: How do you make investments for the funds?
CH: The fund manager must respect a clear mandate in terms of factors such as property type and discount to market. The appointed property advisers, including Cignet, source, analyse and recommend appropriate opportunities for the fund manager to consider. Only once the fund manager and global investment manager have approved an acquisition will an investment be made.
GFM: What is your approach to managing risk?
CH: In contrast to prime central London funds, where the unit value can be many millions of pounds, the LAMP Fund specifically targets multiple numbers of mid-market residential properties. This strategy has a number of benefits.
Should one acquired unit (take longer to sell than anticipated, it represents only a small proportion of the portfolio; the purchase discount margins that can be secured on properties in the GBP250,000-GBP1m bracket are much higher than those achievable in the prime markets; the property advisers, who are experienced specialist asset managers, only recommend properties that fit the tight mandate; and they have access to a significant network to ensure that both the sourcing of opportunities and the selling on of properties is effective.
Property is inherently seen as an illiquid asset class, but the LAMP Fund’s strategy provides much greater liquidity than the traditional property fund model of buying fewer high-value units and holding for the medium to long term. There is a much broader market for smaller residential units in London and south-east England than, for example, single GBP100m commercial premises. The strategy provides regular flows of cash into the fund and thus a far more liquid model, which appeals to investors over more traditional, illiquid fund models.
GFM: Are you looking at any particularly attractive opportunities right now?
CH: There are opportunities every day, if not every week, ranging from a single house in Fulham, south-west London, with refurbishment potential to provide a quick return and healthy resale profit to an opportunity to buy a block of 30 units in the borough of Wandsworth at significant discount just prior to repossession. The market moves swiftly with distressed assets, hence the positioning of the LAMP Fund to take advantage of them.
GFM: What developments do you expect to see in the real estate sector in your target market over the year ahead, and in other political and economic areas that may impact it?
CH: Although transaction levels are down from the peak of the market, London and south-east England remain the largest and active markets in the UK and demand for accommodation still outweighs supply by some way. Savills reports that in some parts of London, transactions are only 12 per cent lower than pre-credit crunch levels.
Nationally we expect some gentle softening of prices over the coming year, but it is imperative to focus on micro markets and not national averages. In certain pockets prices are still rising, and several areas of London that have now gone beyond peak 2007 prices. Access to finance is still a stifling the market, and we believe it will be some time yet before this changes, but it also means less competition in the market.
GFM: What differentiates you from other managers in your sector?
CH: Our track record and ability to source discounted property is second to none. While the market in general got carried away with capital growth being the key driver of profits over the past 10 years, our strategy has always been and remains making your margin at the point of purchase, and only buying when you know you are locking in profits from day one. Otherwise we simply move on to the next deal. One should never rely on capital growth as your profit generator – it is merely the icing on the cake.
GFM: How do you view the environment for fundraising over the coming 12 months?
CH: Our feedback to date suggests there is strong activity and interest. Equity and bond markets are experiencing such volatility that many investors are moving into the perceived safe havens of gold and London bricks and mortar. Exchange rates remain extremely favourable for oversees investors to move capital into sterling assets as well. Although it is clearly a challenging environment, we believe the LAMP Fund provides many investors with an attractive proposition.