The property fund hunting for bargains

THE typical property fund holds around 10pc of its money in cash and real estate stocks. David Wise’s £432m Kames Property Income fund has 33pc.

It’s a risky strategy – any money not put to work could be a missed opportunity to generate higher returns.

But it was a choice which meant his was one of the few property funds not forced to close its doors after last year’s EU referendum.

Following the Brexit vote many of the biggest property funds suspended trading, which meant savers could not take their money out or put any more in.

Property funds invest in bricks and mortar, they own shopping centres, offices and blocks of flats. So, unlike funds which own company shares, if a flurry of investors want their money back they have to sell entire buildings.

One of the immediate fears after the Brexit vote was that property prices would plunge.

It proved largely untrue, but the fear alone saw thousands of investors rushing to get their cash out of property funds in case their savings took a tumble.

Funds locked their doors so they wouldn’t have to enter a firesale of their assets just to raise enough money to meet those redemptions. It took months for some to start trading again. And in those months, Wise put his 33pc of cash to work.

HE says: ‘I was still surprised that Brexit happened, I didn’t expect that. But it’s my responsibility as a fund manager to make sure we are prepared for any eventuality, so that’s what we did.’

His fund has returned 10.1pc over the past six months, compared to an average return among rivals of 1.3pc.

Frequently fund managers say they don’t let political events or the economic outlook interfere with their investment decisions. Wise disagrees: ‘These things are important. They affect markets in a very big way and it’s important to be aware of that. We’re cautious about Scotland at the moment because of the chance of a second independence referendum there.’

He’s also cautious on London, where he thinks property prices are too expensive and are due for a fall.

Wise has 37 assets in his investment portfolio and typically spends between £5m and £20m on each – he likes to find bargains.

While many investors have turned their attentions to industrial units and distribution centres – driven by the rise of online shopping – he has kept his focus on regional cities.

Sites in Bristol, Manchester, Leeds and Newcastle are favourites. These cities have been quietly flourishing yet there has been little building work in recent years so supply is limited, which means rents are rising.

‘People are gloomy about the High Street, but there are opportuit nities if you know what to look for and there is less competition for the properties,’ he says.

That’s why he’s just bought a retail location in Nottingham, in an area which is set to benefit from investment. Up-and-coming locations tend to produce better rental yields than expensive assets in popular areas.

In office buildings, media companies are some of his favourite tenants; they tend to attract bars and restaurants to set up nearby and regenerate an area.

With the current trend toward industrial, strippedback décor they’re also cheap to furnish.

Wise has also been snapping up pubs lately. It’s an industry that’s been hit hard in recent years, with pubs closing up and down the country every week.

‘But these pubs are often in amazing locations, so even if doesn’t work and that company goes bust you have the opportunity to redevelop the site into a residential property,’ says Wise.

And he’s not shunning the capital entirely. Among his recent purchases are a gym in Finchley, North London, and a restaurant on the Strand.

Wise says: ‘We’re always rooting around for bargains. I’ll own a lot more in the city in a year or two.’

Investing in such illiquid assets – unlike shares, property takes time to sell – is always a risk for savers, and for that reason many experts prefer to back property investment trusts rather than funds.

Investment trusts trade on the stock exchange like any other company share so they cannot suspend trading if there is a panic in the market. On the other hand they can see their share price plunge if sentiment turns against them.

Ben Yearsley, investment director at Shore Financial Planning, says: ‘The fact this fund didn’t close postBrexit is very positive, but savers should still question whether an open-ended fund is the best way to invest in property.’