Property investment could work as a fixed income alternative for high net worth individuals as bond markets are losing their spark, says James Lloyd, director at Mayfair Capital Investment Management.

Speaking to WealthBriefing, Lloyd says that he believes that the long-running bull run for bonds is coming towards the end of its cycle, and that investors need to look for alternatives. He thinks that HNW investors and family offices are looking for a mix between long-term investment and more “exciting” individual property developments.

“The banks are deleveraging and can no longer fund residential developments the way that they used to, so there is a funding gap,” Lloyd says. “What developers really need is a partnership with equity to come alongside them, while they still use the banks for maybe up to 60 per cent of the funding.”

Mayfair Capital has been involved in three such projects so far: “One example is when we backed a developer in Bayswater in London for the construction of a mix of 36 apartments between £750,000 and £2.5 million,” Lloyd says. “We came in with £5 million, some of it from one of our funds and we also brought in an institutional investor and a group of private high net worth individuals. We had a coupon of 10 per cent per annum as long as the investors’ money was in the project and then we shared the profit with the developer over and above that. It turned out to be around 20-25 per cent over 24 months.

“But we had agreed with the developer that he had the option to take us out after 12 months but then he had to pay us a 30 per cent return for those 12 months,” he says. “In the end, the developer exercised that option and returned net 27 per cent our investors over 12 months.”

London: not so good for income

At a time when the UK economy is shrinking, Lloyd highlights the difficulty of finding capital growth in the commercial real estate sector, which he thinks would require a buoyant occupancy market and GDP growth of above 2 per cent.

Because of the absence of growth, Lloyd believes that the best opportunity in real estate is in income rather than capital growth: “If you look at the equity market and the property market over the past 15 years, they have been pretty flat and the returns have come through income,” he says.

In order to find returns, investors should look for regions and sectors in the economy where there is economic growth thanks to the local industry: “There are pockets of specific sectors where the regions are doing extremely well,” he says. “The car industry in the UK is doing extremely well at the moment and all the smaller engineering firms and component manufacturing that feed into that benefit. In that space, the Midlands and the North-east are performing very well.”

Lloyd also says that in the search for income investors might have to shun London: “Our charity portfolio has maybe 40 per cent invested in the South-east, but we have very little in central London because it is not income-producing,” he says. “If you buy prime in London, you don’t get much income; you may get a yield of 4 per cent.”

At the same time, Lloyd highlighted London’s ability to perform well even when the rest of the country is struggling: “The majority of buyers of commercial property in London are from overseas,” he says. "It has been a way for people from some of troubled European countries to get money out of their countries. We also saw a flight of money to London after the Arab Spring.

“Ultimately, London has global city status and we don’t see that going away,” he says. “There are fundamental reasons why people want to be in London, not just from a business point of view but also from a personal point of view and the fact that we are a multicultural society.”

Knight Frank, a UK property firm, said in its latest research that prime central London residential real estate rose by 1.1 per cent in March, translating into a 11.3 per cent gain for the past 12 months.

Mayfair Capital Investment Management is a real estate-focused fund manager focusing on family offices, charities and institutional mandates.