Kames looks to provincial property

Kames’ property team is abandoning London to seek out secondary property opportunities in unloved regions of the UK.

The Kames team launched its first retail property authorised investment fund (Paif) in March, based on its Active Value property strategy, which it had been running for institutional clients.

And the head of the team, Phil Clark, said the fund was focused on finding better income-generating opportunities outside London, which he said was looking expensive.

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He said: “We have been sellers of London property for two years now. It is very highly priced and we are going to look away from London until we see value come back.”

Mr Clark is instead looking for opportunities in the more unloved regions around the UK, where he said banks are pulling out of the market due to their need to de-lever and leaving attractive opportunities for the Kames team to invest in.

In addition to the supply opportunities thrown up by banks being forced to sell, Mr Clark said there were significant returns available in regional property, especially secondary property, due to the overly negative sentiment to the sector since the financial crisis.

He said the difference in yield between UK prime property and secondary property, excluding central London, had widened from 100 basis points in January 2007 to 505 basis points in January 2014.

“The yield gap between prime and secondary is at an historically high point,” Mr Clark said.

The manager added the ballooning yield gap had been caused by “a flight to safety” from investors who flocked to prime property.

“A lot of the property capital within the UK assumed everything that could go wrong in regional property would go wrong,” said Mr Clark.

The Kames team is mainly concentrating on properties costing between £2 and £10m. Mr Clark said high net worth individuals dominated the market below £2m while institutions focused on properties of more than £10m.

A recent purchase for the fund in April was a large Carcraft store in Rochdale. Kames bought the property for £6m in April 2014 and it has a net initial yield of 8.7 per cent and is on a 25-year lease, with 2.5 per cent rental growth per year.

In the value strategy on which the new retail fund is based, the average yield from the property assets is 8.5 per cent and the average lease time is 12.5 years, meaning the returns are locked in for a considerable period of time.

While secondary properties are typically viewed as much riskier than prime properties, Mr Clark said 50 per cent of his current property portfolio had tenants with the equivalent of an AA credit rating, just below the highest rating for credit-worthiness.