Income from ground rents

A lot of my income comes from renting properties. I am interested in expanding my property investment portfolio into the UK residential sector and to receive income from these investments. I do not however wish to commit a large amount of capital at this stage so I am interested in any investment funds that produce a regular income from ground rents etc. for an investment of £40,000. What types of properties would a typical 'ground rent' fund own?

Ground rent funds have been in operation for over ten years now in the UK and they offer a very solid investment return. The composition of property investments in a fund will differ between funds and below is a list of typical types of assets a fund may hold.

Long leasehold residential rent properties: a freehold property occupied by a tenant on a lease, traditionally with an unexpired term of 99 years or longer, paying a nominal rent known as a ground rent. The tenant can sell his right to occupy the property to others. The tenant also has the right to extend the lease and in some instances the right to purchase the freehold.

Statutory tenanted properties: the tenant is protected by law for his right to occupy the property at a rent less than the full market value. The tenant cannot sell his interest which expires on death.

Life tenanted properties: the tenant occupies the property by an agreement which expires on death. The rent is set by negotiation.

Retail shops existing within residential blocks of flats: certain residential purchases can contain a retail element within the freehold interest that cannot immediately be separated.

The investment strategy of such property funds tends to focus on ownership of freehold residential properties which have reversionary value and a running income. Reversionary value is the increasing capital value of a property to the freeholder (the fund) as a result of the approaching date the occupier (leaseholder) loses the right to live there.

Thus a property becomes more valuable to the fund as the lease expiry date approaches. At the lease expiry date the full freehold value of the property accrues to the fund as a capital gain.

At the moment I would expect most funds to be focused on residential properties with an emphasis on central London in affluent areas like Knightsbridge and Kensington.

Such ground rent funds have a good and consistent track record of annual returns, year after year of seven to nine per cent in sterling over the last ten years. They therefore offer attractive returns to income investors looking for the yield to act as an income.

(Source: Friends Provident International)

Mark Hollingsworth is the director of Hollingsworth Inter-national Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 (office hours) or e-mail mh@hollingsworth-int.com

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.