By Citywire Middle East
Investing in UK long income assets across the residential, commercial and social sectors is proving to be a perfect blend for Rasmala in Dubai.
The firm’s Rasmala Long Income fund reached over $70 million in three months after its launch, with even more capital waiting on the sidelines.
So, what is the fund’s secret recipe for success? Co-portfolio manager Ruggiero Lomonaco spill the beans in an interview with Citywire Middle East.
AR: The Rasmala Long Income fund was launched last December. How has the take up been since its inception?
RL: We have received an excellent response from investors. As at today we have reached over $70 million in assets under management and have a queue of subscriptions for end-March which will take us over $100 million.
AR: Where does the fund invest? Who manages it?
RL: The fund invests in UK long income assets. That is residential and commercial ground rents, commercial long leases and social long leases.
The fund is co-managed by Naseer Aka, head of real estate and myself. The underlying property portfolio is managed by Nigel Ashfield, Roger Skelton and Stephen Daniels of Time Investments.
‘At present we are taking full advantages of the dislocation that Brexit has created in financial markets to enhance the yield of our portfolio.’
AR: In terms of sector allocation, the fund’s biggest exposure is in UK residential, followed by social. What are the trends proving to be promising for these sectors?
RL: Due to the large inflows of subscriptions during the month of March, and the scarcity of residential ground rents – the allocation of the fund has tilted towards commercial ground rents and commercial long leases.
In general, we believe that UK and international investors will continue to deploy capital in the UK long income sector, because of the security of income and stable capital values.
Opportunities to invest in the residential ground lease will be limited even though last year it was one of the UK real estate asset classes which performed better with a 10% total return. The limited supply of new homes in the UK coupled with the impending regulatory changes limits our ability to deploy capital in residential ground rents.
Conversely, we see exciting opportunities in alternative sectors such as healthcare and hotels where it is possible to acquire assets with long leases and strong covenants. Care homes in particular offer plenty of opportunities to deploy capital at the time when government funding for the healthcare sector is being rationalized.
AR: Long lease vs ground rent – what do we need to know?
RL: Both long leases and ground rents provide stable and secure long-term income, often with inflation indexation or fixed upward escalation. More importantly, capital values of long income properties have proven exceptionally stable over the last 15 years, providing a valid alternative to fixed income and equities.
We prefer ground rents due to the overcollateralization of the investment relative to the investment amount. However there is limited availability of these assets and often, as in the case of commercial ground leases, they need to be “manufactured” through bilateral negotiations with the existing property owner and occupier.
‘UAE investors are not willing to take the same risk they take locally. International investments are seen as part of asset preservation and portfolio diversification, which is typically translated in the demand for core, income producing assets.’
For Long Leases it is important to pay a lot of attention to the strength of the covenant and to how strategic the asset is for the user. We like properties which are “profit centres” for their users, as opposed to a “cost centre”.
For example, the location of a fitness centre is more important to a gym operator as opposed to the office out of which administrative functions are run.
AR: Is Brexit a concern?
RL: One of the positive aspects of long income investing is that we don’t have to worry about short term issues like Brexit. Our concerns are more strategic in nature and centre around long term shifts of the underlying structure of the economy.
For example, we don’t like investments in Petrol Stations because we see electric vehicles radically transforming mobility infrastructure but are positive about car parks because the growth of autonomous vehicles will continue to support demand for urban spaces to keep cars whilst they are idle.
In the long run, if Brexit goes ahead, we expect that limiting the free flow of labour will increase salary levels in the UK and will push prices up, something which has a positive impact on the value of our inflation-linked property portfolio.
At present we are taking full advantages of the dislocation that Brexit has created in financial markets to enhance the yield of our portfolio. Because most of the capital we manage is hedged in USD, as long as the Bank of England is forced to keep interest rates low, we will be able to lock in attractive rates on the forward market and boost the yield of the fund’s portfolio.