Investment Completion: Barwood Capital Regional Property Growth Fund IV

News: Investment News | 31 July 2020

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Opportunity in regional property growth fund as dislocation creates a buyer’s market  

  • HNW private investor clients prepared to take a “contrarian” view
  • Strategy well-positioned to benefit from attractive asset prices and as vendors seek liquidity
  • Closed-ended fund avoids risk of structural mismatch with underlying assets

Private investor clients of Connection Capital, the specialist private client investment business, have signalled that they see opportunity in taking a contrarian view on UK property investment, by participating in a regional property growth fund, as dislocation creates a “buyer’s market”.

Connection Capital clients have committed to the Barwood Regional Property Growth Fund IV, managed by UK regional investment and development specialist Barwood Capital, whose strategy is well-positioned to benefit from attractive asset prices and as vendors seek liquidity in the current climate.

The fund targets development projects, underperforming property assets and undervalued sites, aiming to unlock capital appreciation by applying proactive asset management and/or planning and development expertise prior to a sale to institutional investors. Projects will be spread across a range of geographies, sectors, and development stages, in areas where demand is strongest. It’s an approach which has created impressive results in the past, including during previous downturns and market dislocations.

Founded in 2009, Barwood Capital’s last three growth funds have delivered, or are targeting to deliver, strong investor returns of 13-16% internal rate of return (IRR) per annum with no capital losses to date.

Claire Madden, Managing Partner at Connection Capital, comments, “The Barwood Regional Property Growth Fund IV offers a refreshing alternative to traditional property funds – and that’s something that’s very appealing to private investors right now.”

“History shows that the best returns are made when liquid investors buy assets at this point in the cycle and are able to unlock value and generate growth. Our clients see it as a chance for the fund manager to secure some good deals and they want in.”

“Whereas many funds focus on holding trophy office and retail assets for long-term income, with London often being the prime location of choice, Barwood Capital’s strategy targets niche assets where it can proactively add capital value in regional growth markets around the UK. That has been a successful approach pre-Covid, but it’s really coming into its own in today’s market.”

“As assets prices reduce and motivated vendors seek liquidity, the fund manager will have even greater scope to be opportunistic, using the team’s extensive experience, regional network and hands-on approach to leverage those assets.”

“The market the fund is targeting may be deemed “secondary” but there is nothing secondary about the returns potential here. Upgrading properties via development, repositioning or refurbishment, ultimately closes the yield gap.”

“The UK regions offer a diverse range of sectors and in addition, net migration out of London to the regions has already significantly increased in the past five years and that trend is expected to continue post-Covid. With technological advances taking place and infrastructure programmes underway, many occupiers and investors are recognising the benefits of the regions, and that plays into Barwood Capital’s investment strategy.”

Closed-ended fund avoids risk of structural mismatch with underlying assets

The Barwood Regional Property Growth Fund IV is closed-ended, ensuring that the structure is suitable for the illiquid nature of the underlying assets, avoiding the risk of redemptions that have threatened to de-stabilise some open-ended property investment funds during market dislocations in recent times.

Earlier in the year, several fund managers were forced to “gate” funds with open-ended structures to prevent investors withdrawing their capital in the wake of volatility caused by the coronavirus pandemic. Similar suspensions occurred in 2016 following the Brexit vote.

Claire Madden comments, “Recent events have once again highlighted the risk of liquidity mismatch inherent in many property funds. Investors may feel comforted by the idea that they can withdraw their money whenever they wish, but when conditions become more challenging, as they are now, that freedom can have significant downsides.”

“Our clients are experienced, sophisticated investors who are well aware that a closed ended structure makes sense for property investments, because it gives a fund manager headroom to execute their strategy and ride out any market turbulence.”

The fund has a time horizon of five years, targeting rapid capital deployment, with assets to be sold during the fund life, once the value-add strategy has been fully delivered, resulting in mostly capital returns, rather than being held for long-term income. Modest gearing averaging 35% loan to value (LTV) is anticipated across the portfolio, increasing resilience to market stress.

Connection Capital clients were able to access this institutional asset class in units of £25,000, rather than the usual minimum ticket size of £1m.