AIM welcomed the first real estate investment trust focused solely on the Central London residential market as trading in K&C Reit (LON:KRC) shares got underway earlier.
The company, which raised £3.57mln at 10p, is serial property entrepreneur Tim James’s latest venture.
Some will remember him as the driving force behind Gander Holdings, one of the junior market’s founding members, although his career and successes span more than four decades.
K&C will use it its real estate investment trust (REIT) structure to minimise the capital gains bill incurred when special purpose vehicles (SPVs) created to acquire properties decide to sell up.
James also thinks he can negotiate a discount on the price of the assets he purchases by offering to complete any transaction in just six weeks.
SPVs can take months if not years to liquidate their assets.
“These companies are marooned when they want to sell because their profits are so great,” the K&C boss explained.
“By the time they pay all the tax, that lovely piece of Chelsea or Stoke Newington property is worth 60p in the pound. So they [vendors] are completely marooned.
“K&C is an app for the property business which Google would buy if it was an Internet app.”
So, the scenario is win-win. The vendor forks out less to the tax man, while K&C gets a cut of that saving.
Looked at another way, K&C will be getting its hands on prime residential properties at a discount to the normal market rate because of its REIT structure.
Not just that, because the deal is effectively a shares based transaction, stamp duty is 0.5% rather than the 5-10% that would normally be charged.
K&C, which is chaired by former Sportingbet boss Nigel Payne, is actively targeting homes it can develop, which provides a quick and easy uplift to valuations.
Many potential sellers have been monitoring the firm’s progress towards IPO. So, K&C has letters of intent for properties worth more than £40mln - and it was quick off announcing its mark first deal on listing this morning.
It has agreed to acquire Silcott Properties, valued at £4mln, for just £3.63mln. Silcott owns 25 Coleherne Road, in Chelsea, home to 10 studio apartments. It also owns three smaller properties.
Moving forward, the plan is to fund future acquisitions from cash, debt and equity.
As it grows, K&C will come back to the market to tap investors.
Limitations imposed on it because of its REIT status, mean K&C is unlikely to gear up as heavily as some of its competitors, so the loan-to-value ratio is unlikely to nudge much above 40%.
But that REIT status is a boon for income investors as 90% of declared profit must be paid out in dividends.
Because of the way it purchases its stock of housing, K&C is targeting over time a rental yield in the order of 5% - that’s two full points above the average for to Central London properties.
Eventually, James hopes to build a £500mln property empire - although the £100mln mark is the first staging post.
“We open the market. By opening the market we give institutional and private investors the opportunity to get into an asset class they couldn’t ordinarily get into – which is residential central London,” the K&C chief executive said.