Ground Rent Income Fund plc

[ivahunch]

It seems that GRIF plc is currently on a 8% premium with z-score(1yr) of 1.59. Does anyone think this justified and so worth a punt to diversify as an alternative?

[toofast2live]

On the face of it a 8% premium for a plain vanilla Ground Rent IT is, of course complete madness and down to the BoE crucification of income seekers.

I would buy on one condition; that you are after the income stream only and for a very long time - in other words you do not anticipate selling at any time in the non too distant future. Or if you do you don't mind a loss as compensation for that income flow.

It is entirely possible (though not probable) that income trusts will return to discounts of 5% to 10% at some time in the next ten years. Since the asset value is unlikely to shoot the lights out you should be prepared for a loss of up to 15% to 20%.

If I were investing in a SIPP, and intending to drawdown over, say 20 years I might go for it.

As for simple diversification? Its too pricey IMHO. At 1% or 2% i would be tempted.

[argoal]

I don't think that you can reasonably compare this to most other ITs such as the equity income trusts nor judge the discount on that basis.
It has more in common with something like HICL Infrastructure which trades on a premium of 12.5% and was at a higher premium until recently if I recall correctly.

GRIO has two great attributes - its reliability of income plus the index linked nature of the income.

I bought this in reasonable quantity as a diversifier around 6 month ago at a smaller premium and it behaves exactly as I hoped and expected. The 8% premium is probably higher than I could tolerate buying it for now but I have no intention of selling if it keeps on doing what I expect it to do which is to provide a slowly rising income at or above inflation, and a Nav that is resilient when other assets values start to wobble.

I do agree though that it should be bought for the long term rather than with a view to trading it.

[UncleEbenezer]

Before investing in ground rents, I'd want to investigate whether the fund had significant exposure to those that have been hitting the headlines of late for bad reasons, and if so, how they are valued.

'Cos in a society that believes in saving people from their own stupidity, at least when that stupidity starts making headlines, a ground rent whose terms are outrageous (and should have prevented the leases ever being sold in the first place) might end up being ruled unenforceable. Or something.

[argoal]

I agree with you that Ground Rents are an anachonism that don't really make any sense the way they work. However the income streams are based on enforcable contracts.

I guess there is a small risk of some kind of legal challenge and change of law that blows up the business model here. I probably wouldn't bet the house because of that but I think it unlikely that any of the ground rents will not pay out as expected.

[ModernMicawber]

Before investing in ground rents, I'd want to investigate whether the fund had significant exposure to those that have been hitting the headlines of late for bad reasons, and if so, how they are valued.

'Cos in a society that believes in saving people from their own stupidity, at least when that stupidity starts making headlines, a ground rent whose terms are outrageous (and should have prevented the leases ever being sold in the first place) might end up being ruled unenforceable. Or something.

Indeed, in fact last time it only took a "rumour" to put a significant dent in the share prices of the bad guys (in this case the life and pension companies) http://www.telegraph.co.uk/finance/personalfinance/insurance/10731731/Tyrie-says-FCA-statement-on-insurance-industry-was-an-extraordinary-blunder.html.

This trust has been in my income portfolio "watch list" forever and a day - or for at least as long as it's been around, I think it's a fairly recent launch - but I've never got around to pulling the trigger. I do think that, regulatory risk notwithstanding, it might be a useful income diversifier. I have a fixed allocation to "diversifiers" and I'm some time away from having more funds to allocate in this area, so back to the watch list it goes.

[PeterBill]

When they first came to my attention a couple of years back, I bought the warrants, GRIW. They still have some way to go to expiry and I intend to exersise some and sell the rest. Any other holders of the warrants?

PB

[argoal]

Interesting information from GRIO this morning:

' The Directors are mindful of the recent media attention on the ground rents market, specifically doubling ground rent assets. In respect of the Company's portfolio of doubling ground rents (18% of the portfolio capital value), the Directors believe that the valuation may now be lower, based on recent market sentiment, by approximately GBP5.5-GBP6.0m.

Were this to be applied to the reported NAV, the NAV would reduce as follows:

-- Net asset value per ordinary share of approximately 132 pence as at the date of this announcement

-- Diluted net asset value per ordinary share of approximately 130 pence as at the date of this announcement

Which would represent an increase of 0.12% over the audited net asset value of 131.83 pence per share at 30 September 2016.

Although the Directors feel it is right to share this information with the market, it must be stated that these figures are purely estimation and the fair value of the portfolio has not been adjusted. The next valuation date is 30 September 2017.'

I wonder if the Nav reduction is on the basis that these contracts would not be potentially renewable or whether they would be potentially not be legally enforcable. A quick fag packet calculation suggests that the doubling ground rent contracts (18% of portfolio value) have been devalued by around 25%.

[Kidman]

Interesting information from GRIO this morning:
[i]I wonder if the Nav reduction is on the basis that these contracts would not be potentially renewable or whether they would be potentially not be legally enforcable. A quick fag packet calculation suggests that the doubling ground rent contracts (18% of portfolio value) have been devalued by around 25%.

I understand that in the early days, centuries ago, ground rents were often little more than a peppercorn. As time went by they started to not only rise but also to include clauses that meant they rise by a specific rate.
That has now reached the point where a property could be sold with a starting ground rent of say £100 p.a. but with a clause stating that it will double every ten years. For the next 10-20 years that doesn't sound too bad but we all know how exponentiation works and if the lease is long enough the ground rent will eventually be more per annum than the value of the property would be if it were freehold.

It's all gone too far so there are calls for legislation and if this comes to pass who knows what the outcome will be? Maybe all rises would be prohibited or rises would be limited to CPI. Until there is any legislation we can't tell but too many people/companies have got too greedy so many think the time has come to stop them and if and when that does happen then the value of those ground rents will fall if not tumble.

[Hariseldon58]

The danger of buying an Investmenttrust at a premium is that you are paying over the odds due to demand exceeding supply for an asset category, this is compounded by the NAV of the underlying assets being expensive because of demand and that you may be paying two sets of premiums.

Should circumstances change, perhaps a change of legislation to reform Ground Rents or a change in the bview on underlying interest rates that under pin the valuation model, the intrinsic value of the underlying assets fall and this is compounded by a loss of demand and additional fall in the market price and the IT can then see a premium fall to a discount and you may suffer a potential double whammy and significant fall in market price.