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BDO Stoy Hayward targets ugly ducklings

The Hyde Park Fund from BDO Stoy Hayward Investment Management aims to raise up to £30m to invest in ‘ugly duckling’ central London properties that can be turned into prime residences.

Prime central London is defined as the City of Westminster including the West End, Mayfair, Belgravia, Kensington, Chelsea an some parts of Camden.

Unlike some prime residential property funds, this will steer clear of the finished article. Instead, it is looking to add value by refurbishing or extending properties to sell at a profit, acquiring blocks of flats to sell as individual units, converting commercial property to residential, obtaining enhanced planning consents and acquiring property off plan. The intention is to make the changes at a lower cost than the value resulting from the changes.

The company says the prime Central London market has increased, with high demand from wealthy foreign buyers and city workers that were paid high annual bonuses last year.

However, the supply of properties in this part of the market is limited and Knight Frank estimates growth will reach 10 per cent during 2007. It is also seen as an attractive area of the property market because it is more resilient to movements in the broader residential market and is driven by wealthy people who are not panicked by interest rate movements.

The fund will target returns of 10 per cent a year after tax and charges. It is expected to hold 6-12 properties in the portfolio at any given time, with average holding periods for properties between one and two years.
The fund will not diversify across different types of property just for the sake of because it believes opportunistic purchases and active management will potentially lead to high returns.

Investment opportunities will be found by property specialists Coba Asset Management and bank debt of £50-£55m will be used to help fund the purchases. BDO feels it is prudent to borrow no more as some properties may not produce income.

On a positive note, outperformance at the top end of the property market could result from strong demand and limited supply. However, the returns for this fund are only a target and there is no guarantee that suitable properties can be found in such a competitive market.

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