UBS Launches £250 Million Ground Rent Investment Fund

Property Week - March 16, 2007

UBS Global Asset Management this week revealed a pioneering initiative to create a £250m-plus ground rent portfolio.

Instead of chasing small individual ground-rent lots for its flagship open-ended Secure Income Property Fund, UBS has appointed CB Richard Ellis and Colliers CRE to approach owners of large freehold property estates with a view to carving out ground leases that UBS would then use for the fund.

The scheme, which UBS has painted as a viable alternative to the traditional sale-and-leaseback transaction, will enable owner-occupiers to unlock cash from their assets but retain much of the market value of the property by holding on to its long-leasehold interest.

UBS will negotiate the purchase price and the length of the ground lease with the freeholder, which could range between 75 and 999 years. The ground rent will then be subject to five- or seven-yearly reviews rising in line with inflation benchmarks such as the Retail Prices Index.

Richard Tanner, managing director of real estate at UBS, believes the initiative takes active fund management to another level. "Ground rent investments have always appealed to liability-driven investors but the difficulty has always been getting hold of product," he said. "As far as we know we’re the only people to take such a proactive approach and, in theory, it gives us a chance to grow the fund to whatever size we want. "

"The yield differential between the average freehold central London office property and the comparable long-leasehold property is only around 250 basis points. This gives owners the chance to strip out considerable income at a low yield."

The initiative has sparked interest from investors as well as corporate property owners and local authorities. They see the scheme as a chance to access cheap capital, which they can raise from UBS at the same time as acquisition, and therefore gain a competitive edge in the marketplace.

"Some owners have asked us where the catch is, but there isn’t one,’ said Tanner. ‘We are simply interested in securing long-term, stable income that matches the liabilities of the institutional investors in this fund."

"We’re long-term investors. We won’t be packaging up lots to trade at auction and the owner is not liable to pay Stamp Duty in this sort of transaction." Sphere: Related Content