Pension funds continue to hunt in the real estate market for attractive long term cash flows and protection against inflation, says Ben Jones, manager of the M&G Secured Property Income Fund at M&G Investments.
“Institutional investors are attracted to the bond-like qualities a well-diversified long lease fund offers, particularly given the yield premium to index-linked gilts,” says Jones. “We’ve seen increasing demand from pension fund clients with liability matching requirements who also like the capital growth that can be generated by the underlying real estate over the long term.”
The GBP2 billion M&G Secured Property Income Fund recently acquired a GBP68m Sainsbury’s superstore in East Dulwich, London, with 25 years remaining on the 30-year lease.
Jones says: “This is a highly attractive asset in an affluent London suburb that was comprehensively refurbished in 2009. What’s unique about it in the current market is the strength of the lease, which offers annual RPI rental uplifts with a valuable collar of 1.5 to five per cent. The long term value of a site can also be measured by its future development potential, which is particularly strong in this case, given its location in a desirable residential area of London.
“This deal is testament to the strength of our combined fixed income/credit and real estate analysis, which is paramount to successful long lease property investment,” says Jones. “Along with our flexibility, scale and resources, this allows us to consistently identify and exploit pockets of value across the entire long lease property market.”
The M&G Secured Property Income Fund is advised by M&G Real Estate which has sourced and invested over GBP4 billion of long lease real estate since 2000.
Kris McPhail, investment director, M&G Real Estate, says: “The long lease market has evolved over the past 14 years and the investible universe now spans all sectors of commercial real estate. Our initial investments tended to be offices leased to either corporates or government bodies, but this changed in 2005, when supermarkets ignited the development of the market through their extensive sale and leaseback programmes.
“Now long lease funds provide institutional investors with a secure way to access a wider array of real estate investment opportunities than ever before. We are currently finding excellent value in larger opportunities and innovative transactions, particularly in operational assets and development finance, where we continue investing clients’ capital for secure long-term income streams that are linked to inflation.”
The M&G Secured Property Income Fund has now undertaken transactions valued at around GBP900m in the past 18 months. Notable deals include:
• Acquisition of 401 private rented units leased to Genesis Housing Association for GBP125m
• Acquisition of 39 health clubs in a GBP92m sale and ground lease back deal with The Bannatyne Group
• Acquisition of 50 per cent of a GBP240m portfolio of 18 car auction sites let to market leader British Car Auctions
• Provided GBP113m of development finance for Scottish Power’s headquarters in Glasgow.