Mill Residential REIT

edited 31 January 2015 at 7:34PM in Savings & Investments
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Drp8713Drp8713 Forumite
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edited 31 January 2015 at 7:34PM in Savings & Investments
I was wondering if anybody had considered this as a diversifier from the usual Commercial Property trusts? Listed on AIM


http://www.ftadviser.com/2014/11/17/investments/investment-trusts/mill-group-launches-first-mainstream-residential-reit-UC2XrH5qZrniqNQt6LpPqI/article.html


BTL has always seemed like an odd investment choice to me for many reasons e.g. CGT on growth, tax on income, fees, illiquidity, risk of bad/ no tenants, paying interest on mortgage etc etc etc


This however gives you the exposure to London property without the above issues if its in an ISA or SIPP.


The board seem experienced and have put up a lot of their own cash.


My first concern is the charging structure, but I guess on these sorts of investments are going to be on the high side, found this below. But holding the property directly would also be pricey and not as tax efficient?


Any thoughts?


Management fees and performance rewards






In accordance with the Investment Services Agreement and Asset Management Agreement, the


aggregate management fees to the Managers will be payable monthly and such management fees being


calculated on the basis of management accounts of the Company at the level of 0.88 per cent. per annum


of Gross Asset Value up to £50 million and 0.755 per cent. per annum of Gross Asset Value from £100


million with a stepped scale between £50 million and £100 million, plus a fee of nine per cent. per


annum of gross rents collected. All such fees are subject to VAT.


In addition, a performance reward will, if earned, be payable annually and calculated on the basis of


audited annual accounts of the Group at the lower of 15 per cent. of:


• the uplift in total shareholder return above the hurdle (being the blended price per share taking


into account all share issues and buybacks from and including Admission, compounded at 10 per


cent. per annum) time weighted for the number of shares in issue during the relevant period; and


• the total shareholder return above the last high water mark (being the total shareholder return that


was achieved when the last performance reward was paid, or if no reward has been paid, the


Placing Price, and in each case such amount shall be: (a) blended to take into account all share


issues and buybacks either (i) from the end of the accounting period in which the performance


reward was last paid, or (ii) from and including Admission (as applicable); and (b) compounded


at a rate of 10 per cent. per annum) time weighted for the number of shares in issue during the


relevant period.


The performance reward shall be inclusive of VAT where applicable and will be satisfied in cash and


will be divided between the Investment Adviser and Asset Manager on a basis of two thirds and one


third of any performance fee payable respectively.


Further information on the management and performance fees as set out in paragraph 10.4 of Part VIII:


Additional Information.

Replies

  • bowlhead99bowlhead99 Forumite
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    I just had a quick look.

    The performance element of the charging structure, which will hopefully be the major moneyspinner for an asset manager, doesn't seem too bad. 15% of profits over a 10% hurdle with high watermark... so if the fund makes 9% you get 9%; 10% you get 10%; if it makes 11% you get 10.85%; 20% you get 18.5%. The fees are only being taken off you if the compound returns are good, so I'd be fine with them.

    Of course if you are getting into the fund at some point after day one, when the assets have already appreciated or the share price gone up to a premium, then you may find yourself paying performance fees for a performance which to you is less than 10% compound, so worth being aware of that for entry point. The initial placing price they'll claim the returns on is 100p in September but it would cost you more like 110p to buy MMR today, so a 10% NAV return won't necessarily have lined your pockets at all, even though they would take a performance fee on it.

    0.88% management fee on its own is not a particularly high fee considering a portfolio of individually selected and managed properties is not exactly a passive tracker. But remember this is on gross assets not net assets so if they have £2.5m of property and owe £1.5m of loans you're paying them the fee on the 2.5, so don't go thinking your paying less than a percent of your NAV.

    Then there is the property manager fee of 9% of rent (so an average yield of 4.5% becomes a yield of 4.1%). That rate isn't far off what individuals pay to agencies to manage their BTLs, but can't be ignored. They published 'net yields' of the initial portfolio in the admission doc but I presume still gross of that management fee.

    If you run the numbers based on where they are at the start, pre IPO, obviously they aren't profitable at this level. If the net yield's 4.5% yield on 2.5m then after the 9% of rent charge it becomes about £100k income and after the main management fee, you're left with about £80k. Their existing kick-off loan from the affiliate Mill Group of £1.5m at 6% over base rate will cost close to £100k so they'll make a loss even before they have any costs of admin and professional fees etc.

    Clearly you would not expect them to be profitable with a portfolio of 5 to 10 small residential properties that they mostly bought off the founders' personal portfolios in order to seed the fund. Instead you would have to be looking at the big picture of how the fund would be operating once it has raised £50-£100m and refinanced its internal borrowings to external mortgages at arms - length commercial interest rates (hopefully they intend to do that once more AIM finance has been raised).

    Unfortunately that 'looking forward at the big picture' is impossible to do, as we don't have any track record to go on. We know the UK and South residential markets have produced good geared returns in recent years but we don't know how well these guys would have done in the good times or in the bad times, how good they are at sourcing or exiting properties, nor how lucrative their strategy of taking over companies that hold properties to get the tax advantages of REIT status would be, compared to bidding for standalone properties.

    Bottom line, if you are looking at investing in a new fund in a relatively less popular investment area (residential Reit) then you need to consider carefully both the macro picture for UK residential generally - which differs from UK commercial - and then the micro picture: the specifics of the portfolio they're constructing and ongoing leverage levels.

    It's hard to do the former, but that should not put you off the sector because I generally think if a sector is accessible and not strongly correlated with other asset classes there is no harm in having a bit of it in your portfolio. But at the micro level - the decision whether or not to go with this specific fund - I would say there's nowhere near enough operating history for a retail investor to decide to jump on board committing blindly to a pool of assets.
  • Drp8713Drp8713 Forumite
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    Thanks Bowlhead.

    I think the idea of a REIT that buys and lets London property is a good one, it would appeal to people who want to diverisfy from Commercial property, people who want a tax efficient and easier way to BTL, people who want exposure to london house prices but are priced out of tne market, even possibly people inbetween selling and buying who dont want to be out of he markets.

    As you say, with such a small start up company, with no track record, and in a niche sector, it would be a gamble to invest now.

    if you got in early and it took off and became a popular sector you could be laughing, on the other side, it could not attract much interest and could be gone in a few years.

    Other than the directors, the CF Miton UK Small Co fund has bought 7% and HL has just under 5%, with a market cap of under £4M i dont know whether its positive they are buying in or negative they have gone for small amounts.
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