Fund of the Fortnight: Kames Property Income
Commercial real estate is a good source of income and returns from property are (normally) uncorrelated to both bonds and equities, so this asset class should be a good diversifier for clients’ balanced portfolios.
Institutional investors Kames, Aviva and Ignis have recently forecast 14-18 per cent total return from UK commercial property for the whole of 2014. The long-term total return is more modest than this however, settling down at around 7 per cent each year over the next 3 years.
IPD, the property data firm, compiles a monthly index of UK commercial property values. The most recent data shows that the total return for the month of July was 1.6 per cent. Over the 12 months to the end of July the UK IPD All Property Index delivered total returns of 18.6 per cent, the highest since October 2010.
This data and forecasts are for the UK as a whole, yet values in prime Central London locations may have already peaked. This means that the best opportunities lie in secondary locations in the UK regions.
The Kames Property Income invests predominantly in physical commercial property in secondary locations in the UK, but it also holds some prime properties, listed property securities and cash. The target dividend yield is 6 per cent per annum, paid monthly.
The fund is structured as a Property Authorised Investment Fund (PAIF) and a “feeder fund”, each with its own share class. The PAIF pays income gross of tax and is suitable for SIPPs and ISAs, but is unfortunately not available on many fund platforms.
The fund launched in March 2014 and by October it will have invested in 20 properties valued at over £120m. On average it buys buildings at 7.5% initial yield, which means that the 6 per cent dividend yield is well covered.
Simon Moore is Head of Research and Senior Research Analyst at Tilney Bestinvest.
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