Richard Peacock and David Wise, co-managers of Kames Property Income, give Edmund Greaves the lowdown on their fund – a Moneywise First 50 Fund for beginner investors
What is Kames Property Income?
Kames Property Income fund is a pooled investment vehicle for investors to get an exposure to the UK commercial property market.
We have three key objectives that we're trying to deliver for those investors. To deliver an attractive income return for investors. To deliver above-benchmark performance over rolling three-year periods. And to provide investors with liquidity if they require it.
In the market stressed period of 2016 we were one of only two funds in that custom peer group who were able to remain open throughout Q3. We've been open every day since the fund was set up.
We're primarily about investing in property that we think is going to give attractive returns and we'll actively manage the portfolio to do that. Many managers just say they do it, we actually do.
What do you look for when you’re buying commercial property?
We’re not prescriptive, we very much select stock based on whether it can deliver attractive returns.
The key theme is looking for sustainable income returns, looking for buildings that meet tenant needs in a changing world, meeting requirements of occupiers in locations where hopefully there is an imbalance between supply and demand.
At the same time, we are in some cases looking for shorter-term leases because that offers attractive income returns and defensive stock. We have different elements in the portfolio.
What’s your favourite type of commercial property?
You can talk about sectors that have the strongest fundamentals but there is an overlay of market pricing. The sector that looks most attractive to us at the moment is probably regional offices. But at the same time, you've got to be very selective where you find those.
The supply and demand dynamics in a lot of regional centres are very supportive and suggest the income returns will be stable and that there's potential for rental growth. That’s very positive, but we're not the only people who recognise it. Market pricing and herd mentality mean many chase the same kind of stock.
We've always been very selective in trying to identify buildings we think will offer value. We've acquired good quality buildings in poorer locations which are improving, or poorer quality buildings in good locations that we can upgrade.
We expect some decent growth to come out of the industrial sector, but the value of that sector is high. It’s the property equivalent of a ‘FAANG’ tech stock: very highly rated but cannot afford any slip up in the growth in earnings, otherwise it could see major setbacks.
Within our fund we own no shopping centres, no department stores and no large-format food stores. There's a good reason for that. We believe that those are legacy formats and not the sort of assets that we want to own, or think will deliver a good return.
What properties have you recently bought and sold?
We've had a very active couple of years. The fund’s been seeing very strong inflows. Since the beginning of last year we've bought over 50 buildings. We've deployed the capital quite well.
We've bought regional office buildings in places like Sheffield and Cardiff that show an imbalance between supply and demand. They are cities with really good graduate retention rates where occupiers are fighting for talent.
We have also bought a portfolio of restaurants and pubs around the south east of England for around £20 million, an average lot size of 2.5 million square feet, in towns like St Albans and Beaconsfield.
We're very much looking at having the right tenants in the restaurant sector, we're naturally shyer of heavily-leveraged businesses but investing in that sort of stock so we fall back on the old property mantra of good quality locations.
What has been your best investment decision?
A building called The Hive in Manchester (pictured). It encapsulates the themes that we're trying to introduce to the portfolio. We identified an opportunity before the herd had recognised that Manchester is really on an upward trajectory. We brought a grade-A office building in an area called the Northern Quarter. Its Manchester's equivalent of Shoreditch.
When the fund acquired the building it was 22% vacant and it needed a few cosmetic improvements. We spent some money on the reception and within 18 months we'd let all that vacant space.
When we bought the building, the average rent in the building was around £15 per square foot, compared to core central Manchester where the cost was £30-£35 for similar quality buildings.
We've now achieved rent of £21.50 within the building and if we had more space we'd be confident quoting £25 a foot. That's a quantum leap from where the building was only a couple of years ago.
We've also added 25-30% capital value while receiving a solid income return.
And the worst?
Our biggest disappointment was one of the earliest deals that we did. We backed a car supermarket called Carcraft. We did a standard lease on a former food store site in Rochdale, and ultimately tenant failed and we ended up with an empty property.
However the good news coming out of that eventually was that we managed to get residential consent for what was a very strong underlying site. One of the things that we always look at when we're buying an asset is what is Plan B if the worst does happen.
What is the first thing you ever invested in?
David: At the time of decimalisation I managed to work out that the old 1/2 penny coin at the time was worth precisely the same as the new 2p coin.
I invested in a large bag of the old 1/2p coins and managed to convert them into 2p coins which at the time generated a phenomenal return for an 11-year-old. I was very happy with that.
Richard: My introduction to investing was a bit later because I’m not sure I had a great deal of free cash until I had a job. I did become a student landlord for a while. I lived in London and I had buy-to-let student house in Reading. My dad was basically the janitor for some students for a couple years.
If you had one tip for an investor getting started today, what would it be?
Understand the market dynamics and herd mentality. You can get investment fashions and that can lead to herd-like behaviour. Understand the impact that it has on the value of the assets that you're investing in.
Make long-term decisions, not short-term ones based on fads and looking at short-term track records. Get comfortable with something as a long-term investment and be willing to commit for the long haul.
Kames Property Income Key Stats:
Launched: 2014 (i)
Number of assets: 61 (i)
Yield: 4.35% (ii)
Ongoing charging figure (OCF): 0.87% (ii)
Sources: (i) Kames Capital, (ii) FE Trustnet, 4 December 2018.
The team behind the fund
David Wise joined Kames Capital in October 2007. He is head of the Direct Property Investment team and co-manages the Kames Property Income Fund. David was previously at Morley Fund Management (now Aviva Investors) for 21 years. David has 36 years’ property industry experience.
Richard Peacock is a fund manager in the property team and co-manages the Kames Property Income Fund. He joined in 2016 from Aviva Investors, where he was manager for the Aviva Investors Pensions Ltd Property Fund. Richard has 21 years’ industry experience.
Five-year discrete performance of Kames Property Income
|Year||2014||2015||2016||2017||2018 to date|
|Kames Property Income||—||8.3||3||6.1||2.3|
Source: FE Trustnet, 4 December 2018
Top 10 property holdings
- The Hive, Lever Street, Manchester
- Lockmeadow Leisure Complex, Maidstone
- St James’s House, Cheltenham
- New Hall Hey RP Phase 1 & 2, Swaney Lodge Road, Rawtenstall
- The Martletts, Crawley
- 2 City Walk, Leeds
- Central Court, Orpington
- Units 40/98 Queensway, Stevenage
- Ventana House, 2 Concourse Way, Sheffield
- The Balance, Sheffield