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D&G The Fund

HOW TO OWN A SLICE OF KNIGHTSBRIDGE FOR £1000

Interview with Stephen Yorke, Co-Founder and Chairman of D&G Investment Management Limited, Fund Manager of The Prime London Capital Fund.

Q: Where do you invest?

SY: The area that Savills have defined as "Prime Central London" since 1979 unchanged. "Prime" includes Hampstead, St Johns Wood and Regents Park but the Fund sticks to Knightsbridge, Chelsea, Belgravia, Kensington, Notting Hill and Holland Park.

Q: What sort of property does the Fund buy? 

SY: We like short leases. Most people cannot/ will not buy these. This is because lenders will not lend on them and the process of extension/ enfranchisement can be quasi-litigious and frightening for all but the most experienced. This means that we are not competing with as many other buyers for this stock. Foreign buyers in particular shy away from anything other than a long lease or freehold and in "Prime" they have been the main buyers over the last couple of years and we think will remain so (see below). As a Fund we are able to borrow to buy these short leases because the Banks
trust us to know what we are doing and this can have a significant bearing on the returns on equity we can produce on these investments. Everything we buy we improve, whether it is through extending the lease and/or refurbishing the property itself.


Q: Flats or houses?

SY: We will look at both but we seek to have a balance of capital growth and yield within the total return. As a basic rule of thumb the higher up the cost chain you go the more your total return is going to rely on capital growth. This is fine if you are able to improve the asset but the sweet spot, to my mind, is two bedroom flats in good Knightsbridge, Chelsea, South Kensington addresses. With these you can add capital value, without huge project costs and delays, and extract a respectable yield. Strong cash flow and a decent surplus of rents over mortgage costs and expenses is vital to my
mind if you want to run a sustainable, low volatility property Fund. But these sorts of properties are in short-supply and it requires all our contacts and market intelligence to acquire them.


Q: So, how has the Fund done since you launched over three years ago?

SY: We launched this Fund in December 2006, and listed it in February 2007 on the CISX. It has been dealing every month. So, every month investors can buy or sell their units in the Fund. Since launch the Fund's assets are up 8%. This compares pretty well to other property investments. For example shares of Land Securities, British Land and Grainger Trust are all down by about 70% over the same period. During the same period the FTSE 100 is down 14%, the FTSE All Share down 15% and the S&P 500 down 22%. I think we have managed to protect investors during a very tough
time and the Fund is moving nicely now with the units up about 17% this year.


Q: Have you taken a lot of risk to get those returns?

SY: No - when we launched the Fund we always said that we would be modestly geared compared to other Funds. By that I mean we stick to a gearing level between 40%-60%. We are currently at about 43% of gross assets. It is very important that any investor, when they are analysing potential Funds, looks hard at gearing levels. The days of being able to gear up, buy and wait for the tide to rise are over. Property Fund managers need to be really expert in one particular area and stick to it. They need to be able to show that they can add value to an investment irrespective of what is happening to "the property market" which is, of course, in reality a huge number of different micro-markets.


Q: What sort of size is the Fund now ?

SY: Over the next year we should be between £30m-£40m under management, given the current equity in the Fund and similar gearing levels. We will never be a huge Fund (i.e. £1 billion +) like so many of the open ended commercial property Funds and we do not want to be. The founders of
the Fund are significant investors in it and our sole aim is to make money for our investors and, to that end, we will not compromise on quality simply to get assets under management. We will buy when we find the right thing and we will pay a price that makes sense given our yield and return on equity requirements and if that means we sometimes get out-bid, so be it.


Q: What is your view of the market now and over the next six months?

SY: In our 3rd quarter 2008 manager's report, in the midst of the financial crisis, we forecast that Prime London property prices would snap back. At the same time the other main forecasters were predicting big falls during 2009-10. Why did we get it right and others wrong? They under-estimated
the effects on Prime London property from big sterling depreciations. We have charts, going back to 1979, that show that the relationship between prime London property prices and sterling is a very close one. In short, when sterling falls prime London prices soon start to pick up. In the period from Autumn 2008 to March 2009 prime London prices fell about 26%. They have risen about 20% since. That is quite a V shaped recovery and we predicted it because of the collapse in sterling. Since December 2009 sterling has fallen further and if you look at the combination of currency and
underlying asset price moves then for non-sterling investors prime London property is cheaper by between 40% (Swiss) and 30% (US$) now, March 2010, than it was in December 2006. If history repeats itself, and we think it will, then prime London prices have further to rise over the next twelve
months. It may well be that the smoke from the General election needs to clear and overseas investors get a clear look at the new Government's policy positions before the next move starts but the Fund is investing right now and will continue to do so over the coming months.

Q: So, the only buyers in Prime London will be from overseas for the next year or so?

SY: Non-sterling investors have always grabbed prime London stock when sterling goes through one of its periodic sell-offs. Those investors are unlikely to dive in until they think that sterling has found a bottom but at, for example, $1-50 a US $ investor is buying prime stock at a 10% discount to the long term average of the US$-£ rate.

Q: Aren't overseas investors spooked by the prospect of the General election?

SY: We think that the significance of the UK election is overstated. Whoever wins, or whatever the complexion of the parliamentary majority, the fiscal requirements are for a tightening of between £80-£100 billion over five years. The example of Greece in recent months has been a chastening one for all developed countries' governments and it will, we think, ensure that the next UK government will take action on debt reduction that the markets approve of. Many of the real pessimists of UK plc are from an era when the policy-making framework was much less credible and robust than it is today. During the 1970s-1980s, when the UK got itself into terrible trouble with inflation and overindebtedness, there was no independent Bank of England and elected politicians had more control over the policy levers. The moral of the last couple of years is that policy-makers in the UK, EU and
USA have done a pretty good job in rescuing the global economy from deflation and/or collapse and we think they will continue to do the right thing from the perspective of the Gilts market. There is so much bad news priced into UK Plc that we think the greater probability/risk is that there is a post-election bounce, not sell-off, for UK assets. We think that gilt yields will not rise much, if at all, over the next 4-5 years, and they may even drop. So, for equity-rich, non-£ investors the benefits of low funding costs and an undervalued sterling looks set to continue for a while yet. Unless
either prime property stock levels rise (unlikely) and/ or their is some further policy shock to London the outlook for prime London property looks pretty good. We are positive.


Q: Can anyone invest in the Fund?

SY: The Fund is an unregulated collective investment scheme for UK regulatory purposes, and so is only open to investment by certain categories of investor in the UK. It can only be made available to investors who meet the qualifying criteria. If you are interested in finding out if you qualify and/or receiving further information, you should contact me on syorke@dngim.com and/or look at the website www.dngim.com. Alternatively you could ask your IFA to contact me.


Q: What is the minimum investment ?

SY: If you qualify as an investor (see above) you can invest as little as £1000 but the average investment is probably between £25,000 and £50,000. You can invest your SIPP in the Fund. You could also trade your Prime flat/house for units in the Fund and thereby swap an illiquid asset for a more liquid one (units that can be traded every month). This enables you to take a bit of money off the table but leave some invested in the Prime market. We have also been able to help when someone has a short lease on a flat and they cannot afford to extend it. Again, we can buy the short lease for cash and/or units.


Q: So for £1000 I could have my own slice of Knightsbridge?

SY: If you qualify, yup.