What it means to be one of the landed: Investment in property can still bring in a tidy income as Nic Cicutti finds out

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The Independent Online
IMAGINE telling your grandchildren that by the time they are as old as you are, they will own swathes of property on a scale matched only by the Duke of Westminster.

For those who buy up dozens or even hundreds of freeholds of properties on the cheap to earn income from ground rents, this is not such a silly dream. When the leases on properties - blocks of flats or even streets - run out in a few decades' time, they revert back to the freehold owner.

Even if leaseholders in a block of flats muster the two-thirds majority needed to buy the freehold, as a new leasehold reform act passed last year allows them to do, its owner can still negotiate a decent price for it.

It was this prospect of a steady income stream with the possibility of capital security that first propelled Clifford Murphy, a retired chartered surveyor, into the market for freehold properties seven years ago.

Mr Murphy, 70, formerly a senior partner at a firm of property auctioneers, says: 'I had always been interested in ground rents as a way of earning an income.

'Then, it was possible to pick up properties with about 80 or 90 years for about four or five times the yearly ground rent. This means the gross income yield is about 20 per cent before expenses. Now one is looking at between eight and 10 years' yield.'

Further income can be earned by a commission-sharing arrangement with insurance companies who provide cover for the building. This only applies if the freeholder has the right to insure it.

'In some cases, there is also the possibility of re-negotiating the ground rent every 25 years or so, which means that income can rise even further,' Mr Murphy adds.

Managing a portfolio of about 1,500 properties was not too difficult with his previous experience, but did take quite a few hours each week. Those less willing to devote so much time to their savings can always invest in a unit trust in the same market.

The Freehold Income Trust, launched a year ago, has just paid out income of 10.2 per cent, with additional capital gains of 5.9 per cent. The trust is similar in risk to long- dated gilts because it is backed by underlying property.

Run by Collective Investments, a small fund manager based in London, the FIT is an unregulated offshore unit trust managed in Britain. This allows it to borrow money to pay those who want to redeem their units without having to sell assets. It also means the trust does not have to hold at least 20 per cent of its investment in cash. Its base in the Isle of Man allows it to pay income to investors gross of tax.

Ian Read, a director of Freehold Managers, the company which looks after the trust's properties, says: 'The stock of ground rents in the UK is large, over pounds 500m of residential flats alone. It is spread among a large number of investors, many of whom are reluctant holders. We are reaching more and more potential vendors who hold suitable ground rent properties.'

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