Max property returns

Buying shares in a property company set up by a celebrity tycoon with a grand call on the cycle can seem like little more than a punt - which is not what property investing is supposed to be about. But in the case of Max Property, launched by Mayfair-to-Med 'secret millionaire' Nick Leslau in May 2009, the glitzy narrative has been backed up by impressive deals.

First came Industrious, a sprawling portfolio of industrial warehouses and estates. If the asset wasn't glamorous, at least the price was eye-catching. Max bought it out of receivership at the very bottom of the property market in October 2009 for £244m. That sum compared with an estimated replacement value of £544m and a dizzy pre-crisis valuation of about £700m.

Max secured such a steep discount because the outlook was so grim. Yet, having bought the space cheaply, it could afford to undercut the market to attract new tenants and still make a healthy return. The vacancy rate, which stood at 21 per cent on acquisition, has fallen to 16 per cent as a result of some 430 lettings and lease renewals. That means the income stream is growing even though the market for letting industrial space remains highly competitive. Max has also sold some units to owner-occupiers, raising £77m, 30 per cent more than pro-rata cost.

This is a good example of Max's aim: buy cheap from distressed sellers and work aggressively to re-let or sell. Its two purchases in 2010 were smaller than the Industrious deal, but similar. First, it spent £39m on a suite of offices with a vacancy rate approaching 50 per cent. It has managed to let some space since then, reducing void rates to 34 per cent. Second, it picked up a portfolio of 14 night clubs, two of which it has already sold for twice the purchase cost.

The flow of deals has continued this year. In January, Max announced a sale-and-lease-back deal with the embattled pubs operator Enterprise Inns. And most recently, it paid £156m for St Katharine Docks, a mixed-use development next to Tower Bridge in London, in a joint-venture deal with a family trust. These transactions take Max into the more buoyant London market. Yet Mr Leslau's chief executive, Mike Brown, who used to run the developer Helical Bar, still sees scope for turning the docks around. "It has always been marketed as a City fringe estate, whereas we think it could be a prime riverside estate. Where else can you bring your branded boat up to your offices?" he asks.

Focusing on turning around failing sites is sensible in the current property market. At the same time, however, Max is a play on the cycle. Not only was it launched in the property market's darkest hour, but Mr Leslau and Mr Brown also structured it as a fixed-life vehicle. They aim to buy assets for the first five years and then sell them for a further two and half years to return cash to shareholders - although the term can be extended "depending on prevailing market conditions".

The fixed term, more common in the private-equity world, was designed to offer a credible alternative to the 'oil-tanker' business model of big property groups such as British Land and Land Securities, which built glass-and-steel empires during the boom only to see their values collapse during the bust. The fact that Max will probably be wound up by the autumn of 2016 makes the discount to net asset value at which its shares trade look all the more odd (see table).

The discount partly reflects investors' desperate need for income in a low-yielding world (Max does not pay dividends) and partly nervousness about lower-quality regional property in the current climate of austerity.