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April 2008 21 May 2009 The Search for Income: Delivering Secure, Rising Long Term Returns from Real Estate Ben Jones and Stefan Francis.

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Presentation on theme: "April 2008 21 May 2009 The Search for Income: Delivering Secure, Rising Long Term Returns from Real Estate Ben Jones and Stefan Francis."— Presentation transcript:

1 April May 2009 The Search for Income: Delivering Secure, Rising Long Term Returns from Real Estate Ben Jones and Stefan Francis

2 2 April 2008 The search for secure, rising income streams Many investors have strong demand for secure, income producing assets Preference for stable, inflation mitigated income streams capable of matching long term liabilities Long dated bonds are natural investments, however: – future inflationary pressures may erode real returns from fixed income investments – demand for index-linked Government bonds has made pricing less attractive – anticipated increased supply of Government bonds may impact returns – corporate bonds have asymmetric downside risk and low recovery rates on default This has led a number of pension funds to seek alternative sources of inflation mitigated long-term income……….

3 3 April 2008 Long lease real estate: an alternative to bond investing Long lease real estate has some characteristics in common with long dated bonds: – long duration to match liabilities (lease lengths of years) – predictable, contracted cash flows Unlike bonds, long lease real estate offers both increasing income and capital growth potential – fixed or inflation linked rental increases provide contracted, rising income – long term capital growth delivered by ownership of the underlying real estate Offers the added security of owning the underlying real estate – the asset can be re-let to an alternative tenant to re-establish the income stream and capital value

4 4 April 2008 Real estate investment characteristics C “Residual Equity” A Rent “Guaranteed” 7 Market rent review B Expected average market rental growth (uncertain) Expected rent received (uncertain) Income Years left on lease Source: M&G – for illustrative purposes only Real estate’s fixed and equity components 0 A Rent “Guaranteed” Rent reviews – contracted fixed or inflation linked uplifts (“guaranteed”) C B 25 0 Years left on lease Income Exploiting UK real estate’s fixed income characteristics Traditional property fundLong lease term property fund

5 5 April 2008 Long lease real estate Long term income security with capital value protection and upside potential Key features UK commercial property with long-term, contracted leases which have fixed or inflation-linked rental uplifts High quality investment grade tenants Fully repairing and insuring leases where the tenant is responsible for all outgoings, maintenance and capital expenditure Long term capital upside from owning real estate whilst mitigating many of the risks and costs of traditional real estate investment: – Long term leases mitigate against the risk and costs of vacancy (loss of rent, capital expenditure and incentives to attract new tenants, etc) – Fixed/inflation linked rental increases provide income growth regardless of the market rental cycle – High quality tenants mitigate against the risk of default

6 6 April 2008 Long lease real estate Historically superior returns with lower volatility The long term benefits of inflation linked rental increases Inflation linked rental increases provide income growth regardless of the market rental cycle Historically, in most cases inflation linked leases would have delivered superior and less volatile long-term income returns than market linked leases All property rental value growth vs RPI ( ) All property rental value growth vs RPI ( )

7 7 April 2008 M&G’s Expertise and Commitment Since 2000, M&G has invested over £2.5bn in long lease real estate on behalf of the Prudential’s annuity funds as a complimentary asset class alongside traditional fixed income investments in matching their long-term liabilities Based on this experience we launched the M&G Secured Property Income Fund in 2007 to provide institutional investors access to this innovative strategy The Fund has the following characteristics: – UK commercial property in predominantly “prime” locations – Long term, contracted leases with weighted average maturity of c. 23 years – 100% of leases have fixed or inflation-linked rental uplifts – Diversified, high quality investment grade tenants (average “A” credit rating) – Focus on both the quality of income and long term capital growth prospects Longstanding and significant commitment to long lease real estate Delivering our long lease real estate investment strategy to UK pension funds

8 8 April 2008 Example Assets BUPA Care Homes Portfolio – Portfolio of 3 care homes throughout the UK – 33 years remaining lease term; tenant BUPA Care Homes (CFG) PLC – Let to the preeminent healthcare provider in the UK – Annual RPI linked rental uplifts (minimum 2%, maximum 5%) Tesco Superstore Portfolio – Portfolio of 4 retail superstores located throughout the UK – 25 year lease terms; tenant Tesco Stores Ltd – Guaranteed by Tesco PLC rated “A-” by S&P; “A3” by Moody’s – Annual RPI linked rental uplifts (minimum 0%, maximum 5%) – Significant underlying site value 3M HQ at Amen Corner, Bracknell, Berkshire – Prime quality purpose built headquarters property – 16 years remaining lease term; tenant 3M United Kingdom PLC – Guaranteed by 3M Company rated “AA-” by S&P; “Aa2” by Moody’s – RPI linked reviews payable 5 yearly – Future development (expansion) potential due to current low site density Diverse range of quality tenants and lease terms available

9 9 April 2008 Why long lease real estate and why now? Highly secure rising income streams, essential against a backdrop of weakening rental growth, deteriorating economic outlook and rising vacancies Higher returns than government bonds and comparable returns to corporate bonds but with long term capital upside potential Protection from rising defaults through security of owning the real estate Attractive opportunity to invest in assets that meet long term liabilities: – pricing has been sentiment driven and significantly undervalues the security and certainty of the lease income – very attractive long term value at current prices – the wider market has begun to recognise the attractiveness of the income security - expected to drive nearer term returns, particularly as market liquidity improves – extensive access to opportunities due to M&G’s significant investment in this sector (circa £2.5bn since 2000 and circa £1bn in the past 18 months) Significant downside protection with excellent long term upside potential

10 10 April 2008 Who should consider long lease property? Schemes with long-dated inflation linked liabilities Schemes who need to generate outperformance to close funding gaps Schemes with concerns about existing property investments looking for an alternative with strong defensive characteristics Schemes looking to take advantage of the current indiscriminate pricing in the UK commercial property market Schemes looking to diversify their fixed income portfolio due to credit market uncertainty and potential for rising defaults Schemes looking to diversify out of equities

11 11 April 2008 Market commentary “A portfolio of properties with top-quality tenants on long-term leases with upward-only, inflation-linked rent reviews could deliver income over time at least on a par with high quality bonds, while offering better risk/return characteristics relative to pension liabilities” From an article by Ros Altmann, specialist in pensions economics - FTfm, 3 March 2008 “Commercial property should be bought for income. Long term it is income and income growth that matters, everything else just goes up and down” Jeff Jacobson, Global CEO of LaSalle Investment Management - FTfm, 3 March 2008 “There is a resurgence, said Mr Salway, in property let on longer leases to good tenants, offering investors a decent long-term rental income. This sort of return looks attractive to cash rich investors, but the market for properties without these characteristics looks dicier” Financial Times article on Land Securities and CEO Francis Salway, 14 May 2009

12 12 April 2008 Contacts Ben Jones Director of Real Estate Income Fund Manager, M&G Secured Property Income Fund M&G Investments Tel: Mob: Steffan Francis Director of Fund Management Prudential Property Investment Managers (PRUPIM) Tel: Mob:

13 FOR INVESTMENT PROFESSIONALS ONLY. This financial promotion is Issued by M&G Securities Limited which is authorised and regulated by the Financial Services Authority and provides investment products. The company’s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England number This document is not intended as an offer to acquire or dispose of any security. Information given in it has been obtained from, or based upon, sources believed by us to be reliable and accurate although M&G does not accept liability for the accuracy of the contents. This information is not intended to constitute a basis for any specific investment decision. For Addressee only. The distribution of this report does not constitute an offer or solicitation. Past performance is not a guide to future performance. The value of investments can fall as well as rise. You should ensure you understand the risk profile of the products or services you plan to purchase. The services and products provided by M&G Investment Management Limited are available only to investors who come within the category of the Eligible Counterparty or Professional Client as defined in the Financial Services Authority’s Handbook they are not available to individual investors, who should not rely on this communication. Information given in this document has been obtained from, or based upon, sources believed by us to be reliable and accurate although M&G does not accept liability for the accuracy of the contents. M&G does not offer investment advice or make recommendations regarding investments. Secured Property Income Fund is an unregulated collective investment scheme for the purposes of the Financial Services and Markets Act 2000 ("FSMA") of the UK and subordinate legislation made under FSMA and for the purposes of the Conduct of Business rules which form part of the Handbook published by the UK Financial Services Authority ("FSA"). This means that there are strict controls on the promotion of the Fund in the UK by authorised and unauthorised persons alike. The rules and regulations made in the UK for the protection or compensation of investors do not apply. M&G Investments is a trading name of M&G Investment Management Limited registered in England and Wales under numbers , with registered offices at Laurence Pountney Hill, London EC4R 0HH. M&G Investment Management Limited is authorised and regulated by the Financial Services Authority. 0861/FI/0509


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