How bricks and mortar funds can add value to your portfolio
21 March 2016
David Wise of the Kames Property Income fund shines a spotlight on some of his holdings to show how he adds value to his fund without sacrificing liquidity.
Property funds are split into two types: bricks and mortar funds and those that invest in equities.
The former has been a highly profitable strategy over recent years as well, as direct commercial property funds have benefitted from the ongoing demand for income and an improving UK economy.
According to FE Analytics, the average IA Direct Commercial Property fund has returned 36.12 per cent over three years. This compares with a respective 16.34 per cent and 10.87 per cent return from the Barclays Sterling Gilts index and the FTSE All Share over that time.
Performance of sector vs indices over 3yrs
Source: FE Analytics
A recent FE Trustnet article showed that members of the IA Property sector are among the most widely held funds in discretionary fund manager and wealth manager model portfolios.
However, there is still some confusion about the underlying structure of bricks and mortar funds.
Manager of the Kames Property Income fund David Wise has split his portfolio into three main components: active value properties, which he uses to add value; core/prime properties, which are more desirable buildings that are always in demand; and cash/indirect property for liquidity purposes.
Here he shines a light on some of his holdings and explains what role each of them plays.
10/44 Cornwall Street & 152 Armada Way, Plymouth
This property forms part of the active value component of Wise’s fund.
“We acquired this from a very large property fund for £9.1m at the back end of October last year,” the manager said.
“The tenant line-up is a solid list of national retailers, nothing spectacular and day one this was yielding 9.25 per cent.”
“In most high streets, rents were historically higher than they are now. This town is no different to that: historically rents in this property in Plymouth were around £80 and at the time of purchase they were around £60. With an average lease of seven years, that would take us down to a yield of the low eights, which we still think is quite an attractive position.”
“But what we have managed to do in the few months that we have owned this property is to start to move those rents forward again. We are now expecting that number to go to 8.75 per cent and that is more attractive than we expected.”
“We are having a very positive engagement with our tenants there and some of them want to take on more space, which is a nice story and is very typical. We can either buy these properties from banks or more often nowadays some very large property funds that think a £9m property is not big enough to get out of bed for. We think there’s great value in those properties.”
Lockmead Leisure Park, Maidstone
Another example of a property that forms part of the active value part of the portfolio is Lockmead Leisure Park in Maidstone, which Wise bought from REIT Land Securities last year.
“Again, £18.5m is something that is way too small for them, but we think this property is rather good value,” Wise said.
“It has been yielding 7.25 per cent from day one and has a very solid tenant line up. It has some very secure income – the average lease length is over 10 years and we are already actively talking to a number of the food and beverage groups that are in there about taking longer leases. We are also talking to one or two new parties to come into that.”
“So, a relatively healthy story – this is something Land Securities sold to us without actively marketing it, so we got this on a one-to-one transaction.”
Paperchase, George Street, Edinburgh
One of the biggest criticisms of bricks and mortar funds is that during times of crisis, such as the financial crash of 2008, it can be difficult to get your money out quickly – especially if all the other investors have the same idea.
As a result, Wise keeps a number of core holdings in his portfolio that he would be able to sell quickly for liquidity purposes – and Paperchase on George Street, Edinburgh fits into this category.
“For those of you that don’t know Edinburgh, George Street is Edinburgh’s version of Bond Street,” Wise continued.
“It’s a very attractive shop at a great location, but with a much lower yield than we typically target, 4.5 per cent for 6.5 years to Paperchase, which has pretty solid credit. We expect the rent to rise from £150 to around £180 when the rent review occurs in 2016.”
“Don’t get me wrong, this won’t deliver stellar performance, but were we to get people knocking on our door and asking for their cash back, this is the sort of thing I can sell any day of the week to any number of investors.”
HSBC, Wimbledon Hill Road, Wimbledon
Another similar core holding is HSBC on Wimbledon Hill Road in Wimbledon, which Wise bought for £8.4m in December last year.
“For those of you that know Wimbledon, this is adjacent to Wimbledon station. It has an 11 year lease to HSBC and is an asset that is very liquid and very marketable. It won’t deliver stellar performance for us, but again it underpins our solid liquidity.”
The Hive, Manchester
The property that Wise is most keen to discuss, however, is The Hive in Manchester. He says this property is typical of the way this fund adds value compared with its peers, as it was discovered through scouring the north of England.
“Property is a very London-centric market,” Wise explained. “Property fund managers are more lazy than most, so they like to do their business in either golf clubs, bars or restaurants and they don’t really like to travel out to Manchester or anywhere further afield if they can possibly avoid it.”
“We aren’t afraid to do so. This is a building we purchased in the middle of last year from a large property company. It is in the area of Manchester known as the northern quarter, but in shorthand terms that is Manchester’s version of Shoreditch.”
“It’s a very happening, lively place and I feel like a complete fish out of water if I ever turn up there in a suit because it’s very cool and trendy and everyone is my kids’ age.”
Wise says this holding has gone from strength to strength in the short time he has owned it.
“We acquired this asset for just over £16m in the middle of last year, with a day-one yield of 7.25 per cent, so quite an attractive place to start from.”
“Coming up to one year that we’ve owned it, we have completed five new lettings and are having a very positive dialogue with all of our tenants there and have actually increased the rents within the building. We have also done one or two bits of cosmetic work.”
“This is an asset that has performed exceptionally well for us and its value now is probably close to £23m and some of the big retail funds are starting to knock on our door and saying “can we buy this from you?”, and if they are ambitious enough in their pricing, we may let them have it.”
Data from FE Analytics shows that Kames Property Income has made 15.59 per cent since opening for business just over a year ago, compared with gains of 19.83 per cent from the IA Property sector and 2.36 per cent from the FTSE All Share.
Performance of fund vs sector and index since launch
Source: FE Analytics
The £441.9m fund has an ongoing charges figure of 0.96 per cent and is yielding 4.75 per cent.
- 10 December 2018
- 10 December 2018
- 07 December 2018
- 07 December 2018
- 07 December 2018
07 December 2018
06 December 2018
05 December 2018
03 December 2018