Review of 2021: Asset portfolio outperforms targets
In another year of uncertainty and upheaval for the UK economy, our diversified, actively managed and asset-backed investment model has provided security, tax-efficiency and above target returns.
How we deliver across the cycle
Free from inheritance tax
Investing in assets that qualify for Business Relief eliminates inheritance tax liabilities after just two years, rather than the standard seven for a gift or a trust. Unlike a trust or gift, it also enables clients to retain full control over their investments and the proceeds from them.
We diversify our portfolio across a variety of non-correlated asset classes, all tangible and all located in the UK. As the economic impact of COVID-19 has underlined, diversification is the most effective risk mitigant.
Realistic return expectations
We set a realistic long-term target return – typically a 5% internal rate of return (IRR). But we do not stop there. Unlike many other firms, our investment returns are uncapped, so clients get their rightful share of the benefits when yields exceed target.
With support from specialist partners, we buy off-market to maximise the opportunities and get in ahead of the pack. Once our job of developing and enhancing the assets is complete, we sell on-market through agents to maximise the return. The strength of our investment pipeline means that once an asset is sold, we can recycle the proceeds to acquire new opportunities.
Highlights of the year
Residential development exemplifies our strategy of buying low off-market and selling at a premium on-market. We have a constant throughput of sites identified and acquired, plans developed and construction underway. Even though there were some inevitable delays due to the pandemic, developments have kept to time and budget in 2021.
Projects completed and properties sold in 2021 include 17 homes in Great Oakley, Essex. All sale prices exceeded the original appraisal. As a result, the development earned a well above target IRR of 8.5%.
Developments underway include construction of 68 apartments on the Barker Building site in Northampton. With prices starting at £130,000 and the nearby station offering rail links to Birmingham and London in less than hour, the development is affordable and accessible to a broad range of occupiers. The final phase is nearing completion ready for sale in 2022.
Our development programme also includes nine new homes in Nayland in Suffolk which are now underway. The homes are located in an area of outstanding natural beauty. The resulting planning restrictions mean that new homes are in limited supply and highly sought-after locally. Completion ready for sale is due in Q2 2022.
Commercial property development
The buy off-market, sell-on strategy can also be seen in our commercial property developments. Our extensive contacts with local agents across the country mean that we can get an early heads-up on potential opportunities and acquire at favourable prices as sites go onto the market. With the kind of small and mid-size commercial units we focus on now attracting premium prices, this approach is especially important in curbing costs and sustaining margins.
Highlights in 2021 include the completion and sale of 20 units in the Tavis House Business Centre in Haddenham, Buckinghamshire, which is close to junctions 7 and 8 on the M40. Sites acquired ready for development include 20 units in Hoddesdon in Hertfordshire. The site has close links to London via the nearby A10.
Golf is a sector with huge and still largely untapped potential for investment and development. Additions to our portfolio in 2021 include the acquisition of Bramshaw Golf Club and the adjacent Bell Inn Hotel. By upgrading the facilities and integrating the hotel and club, we aim to provide an easily accessible and quality destination for golf holidays for people coming from London and the South-East, as well as visitors from abroad via Heathrow and Southampton Airports.
The hotel and course will be integrated with our nearby Paultons Golf Centre to create the New Forest Golf Group. At Paultons, our investment has helped to create attractions that range from a championship course, to a state-of-the-art driving range complete with video game options for all the family. We have also refurbished the dining, meeting and conference facilities.
As with our golf portfolio, we seek to identify and acquire hotels in need of investment and then maximising their revenue potential.
The jewel in crown is the Murrayshall Country House Hotel and Golf Club in Perthshire. Following acquisition in 2015, we brought in a new management team and have invested £2.5 million to uplift and extend the facilities, both on-course and within the hotel. Six years on, this is now one of the country’s leading courses (ranked 52 and rising). The rooms have been beautifully refurbished and the catering elevated to deliver what is now award-winning cuisine.
As a result, Murrayshall is thriving. While closed at the beginning of 2021, the staycation boom meant that occupancy and revenues quickly bounced back. In the first three quarters of 2021, the average daily rates for the hotel were around £150, compared to less than £100 historically. When our enhancement job is done and it is time to sell, it should be at a premium.
Forestry is typically a long-term investment. By acquiring forests off market, the crop composition can be changed over time by harvesting and re-planting. Planting higher yielding crops should result in an appreciation of the forest’s value and this added value can be realised on disposal.
The double digit IRR on the eight woodland sites we sold in 2020 and 2021 attest to this. Most of our forestry portfolio had been acquired at a time when timber and woodland sale prices were flat or falling. By 2020, when we began to sell, valuations and investor appetite for forestry had soared, enabling our agents to quickly secure buyers at prices that exceeded our target return.
We have retained one of the woodland sites in our portfolio. The 200 hectare site in Aberdeenshire was the most recently acquired. There is therefore still scope to add value to the investment and generate cash income in the short-to medium-terms including planting high yielding crops.
We partner with specialist providers to fund bridging loans. The loans provide short-term capital to individuals or SMEs, who mainly use the money to finance property acquisitions. Our target internal IRR on bridging loan portfolios is 5%. This threshold enables us to focus on high quality but low risk investments. The security of the physical collateral is in turn backed up by stringent loan-to-value (LTV) and other lending criteria.
Our checks on creditworthiness are exacting. But no due diligence, however extensive, can be 100% effective. A borrower did default in 2019. But we quickly stepped in. Following re-possession, repair and re-decoration, we got a very good price for this desirable property when we sold it in 2021. We were thus able to return the full loan capital to investors with a profit. The bridging loan partnership as a whole delivered an IRR some way above our 5% target.
We believe this demonstrates the care, tenacity and solid risk mitigation we bring to the effective protection of investors’ capital. In the case of the defaulting borrower, we were not going to rest until the value was recovered and the interests of our investors fully upheld.
The farming sector has been hit hard by shortages of labour and uncertainty over subsidies following Brexit. However, with new subsidy arrangements in the pipeline, the sector is beginning to turn the corner. In 2021, we completed the sale of our farm in North Runcton in Norfolk at a more than 50% profit on our purchase price. This bodes well for other farms in our portfolio.
To find out about how we fared in 2021 overall, please see our earlier article ‘Review of 2021: Coming through stronger’.
If you would like to know more about our asset portfolio and investment strategy, please get in touch with one of our team today on 020 3195 3500 or contact email@example.com.
Written by Jonathan Gain
Stellar Asset Management Limited does not offer investment or tax advice or make recommendations regarding investments. Prospective investors should ensure that they read the brochure and fully understand the risk factors before making any investment decision. The value of investments and the income from them may fall as well as rise and is not guaranteed. No assurance or guarantee is given that any targeted returns will be achieved. Forecasts of potential future results are not a reliable indicator of actual future results.
Stellar Asset Management Limited of Kendal House, 1 Conduit Street, London W1S 2XA is authorised and regulated by the Financial Conduct Authority.