ARC TIME Freehold Income. Too good to be true?

Alexland

aroominyork said:

On a bit more research, this site says "Modern ground rents are 0.1% of the property value per year (£150,000 property would be £150 per annum) however there are still a number of properties which have £250 ground rent as standard." So how is the fund, which was launched by 1993, be generating 4%? Have the recent legislations you mention (what legislations, exactly?) seen ground rents increase from 0.1% to 4%?

Developers will be selling the freeholds for significantly less than the leaseholds to reflect the reduced return expectations. Probably only a few thousand per property to reflect the admin costs in collecting the small ground rent payments. Not much but it adds a bit of extra profit onto a property development. Every so often leaseholders will pay a bit to extend their lease duration which gives extra revenue. It really depends on the portfolio of existing investments as to how much they would be affected by proposals to make some of the more extreme ground rent escalation terms more reasonable.

aroominyork

Alexland said:

aroominyork said:

On a bit more research, this site says "Modern ground rents are 0.1% of the property value per year (£150,000 property would be £150 per annum) however there are still a number of properties which have £250 ground rent as standard." So how is the fund, which was launched by 1993, be generating 4%? Have the recent legislations you mention (what legislations, exactly?) seen ground rents increase from 0.1% to 4%?

Developers will be selling the freeholds for significantly less than the leaseholds to reflect the reduced return expectations. Probably only a few thousand per property to reflect the admin costs in collecting the small ground rent payments. Not much but it adds a bit of extra profit onto a property development. Every so often leaseholders will pay a bit to extend their lease duration which gives extra revenue. It really depends on the portfolio of existing investments as to how much they would be affected by proposals to make some of the more extreme ground rent escalation terms more reasonable.

Yes, of course - thanks. So if you buy the freehold for say 2.5% of the property's value and receive 0.1% ground rent, you get a 4% return.

Alexland

It's an old article from 2015 but "It costs roughly £4,150 to buy the freehold of a £250,000 house, with a ground rent of £250 a year and 995 years left on the lease, according to figures from chartered surveyors Andrew Pridell Associates."

https://www.thisismoney.co.uk/money/mortgageshome/article-3088134/The-great-divide-Buy-165-000-house-left-road-outright-buy-one-right-don-t.html

I guess like bonds the asset valuations will have increased as the income becomes more attractive due to reducing interest rates in recent years which could now be going into reverse.

aroominyork

Alexland said:

It's an old article from 2015 but "It costs roughly £4,150 to buy the freehold of a £250,000 house, with a ground rent of £250 a year and 995 years left on the lease, according to figures from chartered surveyors Andrew Pridell Associates."

And here's a calculator which reaches a similar figure https://www.freeholdcalculator.com/freehold_simple.php

aroominyork

Alexland said:

I guess like bonds the asset valuations will have increased as the income becomes more attractive due to reducing interest rates in recent years which could now be going into reverse.

Regarding the asset valuations increasing, I mapped the Inc and Acc versions. The Total Return is exactly the same (the lines are on top of each other) but if you switch to the Price chart the Income version increased some 10% in 2017 and 2018, and then stabilised.

Although the Total Return line looks quite flat, in reality it increased c.18.5% during 2017 and 2018 and c.18% (140/118.5) in 2019, 2020 and 2021 which is broadly reflected in the discrete calendar year performance (if you compound).

What happened in 2017 and 2018 to make the fund more valuable?

Alexland

Another risk in the news today is that freeholders might be asked to pay for remediation of fire hazard cladding which is unlikely to be what investors were expecting when buying into ground rent income. The fund brochure suggests a fair weighting to modern flats and in the recent fund Q&A they indicate they are not responsible for paying remediation (or can recover costs from leaseholders) but the government may have other ideas...

https://time-investments.com/vault/files/TIME-Freehold-Investor-QA-December-2021-1.pdf

It is important to distinguish that for approximately 75% of the Fund’s property portfolio, the responsibility to manage the property, including aspects of fire safety such as cladding, is that of either the leaseholders’ Resident Management Company (“RMC”) or Right to Manage Company (“RTM”). Although this responsibility rests with the leaseholders’ RMC or RTM, the Fund will still seek to monitor what actions are being taken on the property and will liaise and assist the RMC or RTC, where appropriate.
Over the remaining 25% of the Fund’s property portfolio, where the leaseholders have not set up an RMC or RTM, the Fund has the responsibility for the assessment and management of fire risk, including cladding on behalf of the leaseholders with any related costs billed to them through the service charge. As a result, the Fund has appointed and delegated these duties to a specialist property management company who carries out any relevant tasks, such as fire risk assessments, and maintains a register of the required information.