These rents are generally revised every five or ten years to bring them into line with changes in inflation.
In the current record low interest rate environment and gilts yielding so little, investors have been looking at alternative ways of generating income in a portfolio, rather than traditional bonds and gilts. The Ground Rents Income Fund has a stable and predictable income and 68% of the rents collected are linked to the Retail Price Index (RPI).
The popularity of these investments has caused an increase in ground rents valuations and therefore the performance of Ground Rents Income Fund has been strong. This has compressed the yield that the holdings generate. One concern for the Ground Rents Fund is that investors’ hunt for yield has forced the price up to levels which are no longer attractive. However management have identified this, stating that ground rent valuations may have peaked and do not think it likely that there will be significant asset purchases in the next year, other than the current pipeline.
Despite its popularity and recent strong share price performance the fund is still yielding 3.1%. This is a yield which will continue to rise with inflation and is a significant uplift from index-linked gilts. The fund also offers diversification of income generation within a balanced portfolio.