The property market was hit hard after the EU referendum, leading to many large retail funds closing their portfolios, effectively locking investors in. The closures came amid large-scale redemptions from investors, who were worried about property values plummeting as a result of the vote to Brexit.
The Kames Property Income fund avoided the suspensions that other funds had to impose. Instead, it went into the Brexit period with 33pc of the fund in cash to meet redemption requests. It also imposed a “fair value adjustment”, an effective exit fee for investors who wanted to redeem their money, of 10pc at its peak. It removed this adjustment at the end of September.
An investor who had remained in the fund through the Brexit period to the present would have lost 1.8pc, according to data from FE Trustnet, the investment analyst. However, if they had redeemed at the end of September, just before the adjustment charge ended, they would have lost 8.8pc.
David Wise runs the fund alongside his co-manager, Alex Walker. However, Mr Walker is leaving the company in December, to be replaced by Richard Peacock, who joins from Aviva Investors, the fund house.
Mr Wise tells Telegraph Money about his views on the property market, how holding high levels of cash will affect the fund’s performance and the hardest month of his working life.
How did you manage the fund through Brexit?
We managed to escape the worst of it and we were one of the few that stayed open through the post-Brexit period.
Brexit was a challenge and July was one of the most challenging months of my working life.
While in general we are very “bottom-up” and focused on the individual assets, we’re not afraid to make some big calls when we need to. One of those was on June 23: we were sitting on 33pc in cash and other liquid investments, which was a contrast to the very low levels that one or two major competitors were holding.
However, those cash levels went from 33pc to 15pc at our lowest point in the Brexit aftermath.
We have found that about 50pc of the money that went out of the door in that panic period has actually come back in from those same investors.
Have you sold any properties since Brexit, and what were valuations like?We sold four properties post-Brexit, and all of those have been either at or above the valuations we had pre-Brexit.
I’m not saying we could have sold every asset above pre-Brexit levels, but we believe smaller assets are more resilient, and those four sales are the hard evidence of that.
What’s the outlook for the UK property market?
Brexit does cast some element of a shadow. If you look across the market as a whole valuations are down by around 5pc, but what that masks is some variation.
If you look at London, perhaps the area most exposed to Brexit, valuation falls there have been greater, although there has been some underpinning from the fall in sterling.
London tends to lead the cycle in real estate, and London is getting pretty late in the cycle, so one can’t see rents rising much further. London is a very expensive place, but it is likely to get cheaper, although I don’t see it falling off a cliff.
In general we are buying in locations that are fundamentally cheaper and can give us higher income returns, typically in big northern cities such as Manchester, Sheffield, Leeds and Newcastle.
How does your investment approach differ from your peers?
We invest in properties worth around £5m to £20m, so smaller assets than our peers. The returns and liquidity at the lower end of the market are more attractive.
It gives us a much more diverse range of investors to sell to, meaning there tends to be better liquidity.
It means we will never be able to take the fund assets beyond £1bn, and means we can’t become one of those big funds, but we don’t want to.
Do you worry about the effect that high cash levels will have on the performance of the fund?
Our cash level is currently 30pc. If I were holding hefty cash levels for five years it would be very damaging to returns, but I don’t anticipate that we will have 30pc cash well into next year.
I am happy with that cash level. It provides some buffer if there are any more Article 50 bumps in the road, but it also gives us firepower to take advantage of opportunities. We tend to do a lot of buying around Christmas, when a lot of other people in the property market are putting their feet up.
Do you have your own money in the fund?
I do, yes. I don’t want to say exactly how much, but it is a reasonably significant sum.
What would you have done if you hadn’t become a fund manager?
I did a degree in zoology and before I got into real estate I had a position to research the malaria parasite.
The Kames Property Income fund invests in physical commercial property with the aim of providing investors with a reliable monthly income stream.
It targets a yield 0.75pc higher than similar funds, in the region of 5.5-6pc a year. However, the yield is likely to vary as property prices rise and fall.
Having launched in March 2014, it is too soon to say whether the fund can meet its objective over the long term, although it has made a positive start, currently yielding 5.6pc .
The fund is a little different to other commercial property funds. The focus on income means that the managers will invest in smaller properties, of between £3m-£20m.
This includes small leisure parks and office buildings, which tend to have a higher yield than large flagship buildings that often trade at a premium.
The fund will also try to take advantage of the yield differential between so-called “prime” and “secondary” property. Prime property tends to be big, located in major metropolises and in excellent condition. Secondary property may need a little refreshing or perhaps be in a smaller town or city.
It is still early days but we like that Kames has launched a property fund to cater for income-hungry investors and it’s an interesting one to watch.However, investors should be aware that commercial property is an illiquid asset class and that, at times of market stress, property funds may apply significant downward adjustments to their prices or shut their doors.
While this fund was one of few property funds not to suspend trading in the aftermath of the Brexit vote, it did reduce the property prices in the fund.
This is a risk investors should consider carefully before buying any commercial property fund.
Victoria Hasler is head of research at Square Mile, the fund research firm.