Why we invest in commercial property funds
08-16-2014
By Matt Hoggarth
Thesis Asset Management has expanded from ‘prime’ into ‘secondary’ commercial property
Investing in commercial property is not without its risks, but those who invest in it can often see some good returns. So, how have we been investing in this sector?
We increased the weightings to commercial property in May 2013 and since then have monitored property market developments closely to assess whether we should retain our preference for higher quality “prime” property, or if other opportunities are attractive. Prices of the ultra-prime Central London assets that have been the best performers over recent years continue to be supported by overseas buyers, but the improved backdrop of economic growth is reinvigorating the market. Liquidity is now spreading out into secondary areas, as banks continue to rationalise their property portfolios, and at the same time have become lenders to property buyers once again.
There are increasing numbers of active participants in the market: retail funds have seen significant inflows and are joined by debt funds, opportunistic investors and on-going overseas interest. Investors’ return to the asset class has provided support to pricing, but more importantly rental growth is again more in evidence as companies look to expand their footprints.
Which funds?
So, which funds have we been investing in? Much of our weighting remains in funds that are largely focused on prime UK assets, but we have recently switched some of the holding into the new Kames Property Income Fund. Launched in March, this has now grown to £60m and is building a portfolio of properties to exploit current opportunities in the secondary property market in the £2m to £10m range. This is too small to gain the focus of the larger institutional investors in property, but too big for many individual investors, especially whilst debt has been hard to come by to finance property purchases. This deficit of natural buyers has resulted in an attractive yield gap between this area of the market and larger properties.
As property demand continues to spread out of London and to smaller lot sizes this gap should narrow, giving the potential for capital growth. Being a new fund, Kames Property Income is unencumbered by an existing stock of property holdings and so is building a portfolio to exploit the current opportunity, purchasing from motivated sellers such as banks and private equity firms, and looking to take an entrepreneurial stance, adding value where possible via refurbishment and the signing of new leases with new or existing tenants.
This is a marginally higher risk fund than those we have trimmed in order to buy it, as the illiquidity that provides the opportunity could also hurt the fund if the property market were to go into reverse. The higher yield provides compensation for this however, and there is potential that by investing in a smaller and more specialised fund we could avoid some of the pro-cyclical effect of the mass of retail money which tends to flow into large property funds as the market goes up and to exit when prices turn.
The new fund also has the advantage of being a Property Authorised Investment Fund (PAIF) meaning that ISA, SIPP and charity investors can receive distributions of rental income from the fund tax free.