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‘Build, build, build’ plan could boost Ground Rents fund

6 July 2020

Ground Rents Income fund manager James Agar believes its portfolio of freeholds will help it ride out the impending recession, particularly as he plans to benefit from Boris Johnson’s plan to ‘build, build, build’.

Ground Rents Income (GRIO ) fund manager James Agar believes its ‘counter cyclical’ portfolio of freeholds will help it ride out the impending recession, particularly as he plans to benefit from Boris Johnson’s plan to ‘build, build, build’ in response to the coronavirus downturn.

Agar, who took over running the fund after the real estate investment trust (Reit) switched management from Brooks Macdonald to Schroders last year, has had a busy 12 months. Even before Covid-19 swept the globe, he was having to deal with a strategic review of the trust, government reform of onerous leasehold rules, and a tightening of rules post-Grenfell. 

In the last six months the £79m listed fund has made leaps that Agar will no doubt hope will hold up the share price and reduce the 25% discount below net asset value (NAV) at which the trust trades. While the shares are down 9.1% this year the monthly NAV has gained 1.8%. 

The portfolio of 19,000 investment units, of which 87.8% are residential, 10.5% are student accommodation, and 1.7% are commercial, is still at the mercy of the Competition and Monopolies Authority’s probe into leaseholds and whether property owners should get more protection.

As a freeholder, GRIO saw its share price tank two years ago when reform proposals were first announced. Agar maintained it was working with the government to ‘bring more equity’ to the relationship between freeholder and leaseholder. 

In the meantime, he has sought to shore up the balance sheet of the fund with a new five-year £25m revolving credit facility that will provide headroom to ‘take advantage’ of opportunities in the market. 

Although property transactions were put on ice during the Covid-19 lockdown, with surveyors putting a ‘material uncertainty’ clause on all valuations due to a lack of transactions in the market, Agar said he has been focused on asset management of the existing portfolio.

Over the past six months, the trust has restructured six leases with build-to-rent and student accommodation company Vita Group, generating £1m in revenue.

‘The company entered into new long headleases with Vita, who assumed a direct relationship with 848 underlying tenants and removed the company’s day-to-day repairing and maintenance responsibilities,’ said Agar. 

The Reit also negotiated ‘key supplier agreements’ that generated another £115,000 a year in income. 

The outlook for property in the UK is uncertain but Agar believed GRIO’s freehold investments were uniquely placed to weather the storm, pointing out that the ‘material uncertainty’ clause has already been removed from his part of the sector.

‘We are very different to other companies that we are often lumped together with that have large-scale exposure to 25 year leases,’ he said. ‘The average lease in our fund is 300 years…GRIO is completely different [to other long lease trusts], we have extremely robust and very secure income streams.’

Ground rent income growth was ‘modest’ over the six-month period to 31 March but 43% of leases as a percentage of income are due to be reviewed over the next six years, providing an opportunity to grow the trust’s income. 

The NAV dipped lower over the period, falling to £106.8m, or 110.1p, per share from £108m, or 111.3p per share at the end of September last year as a result of the pandemic but Agar said rent collection remained ‘robust’. As of 31 May, 88.5% of rent owed had been collected, up on the 87.9% collected in the previous year. 

Covid-19 could in fact provide some opportunities for the fund as prime minister Boris Johnson implements a ‘build, build, build’ strategy to get the UK economy moving again. 

‘The ‘build, build, build’ mantra that will follow through this year will potentially provide opportunities for us to generate capital upside and add income,’ said Agar. 

‘[Johnson’s strategy] would bring forward new assets for us to acquire in residential and commercial parts of the market and GRIO’s structure could be used as an alternative form of funding. We will hopefully see a greater number of assets and liquidity brought to market.’  

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