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The commercial property sector has been through some turbulent times over the past few years. We therefore thought we would catch up with Fiona Rowley manager of the £1.7bn M&G Property Portfolio Fund to get her views on the state of the market, her thoughts for the future and of course the fund itself.
Q1. The commercial property has been through a rollercoaster ride over the past few years, how has your performance measured up against your peers?
A. The comparable peer group that we use for performance consists of the seven authorised property unit trusts, including the M&G Property Portfolio, that are members of the Association of Real Estate Funds. The other six funds are Aviva Investors Property Trust, Henderson UK Property Fund, Ignis UK Property Fund, L&G UK Property Fund, Skandia IM Property Fund and SWIP Property Trust.
| From | 30.10.2009 | 31.10.2008 | 31.10.2007 | 31.10.2006 | 31.10.2005 |
| To | 29.10.2010 | 30.10.2009 | 31.10.2008 | 31.10.2007 | 31.10.2006 |
| M&G Property Portfolio | +11.1% | -8.0% | -24.6% | +4.5% | N/A |
Source of performance: Morningstar, Inc, as at 31 October 2010, bid to bid, Sterling class A units, net income reinvested.
Please remember that the past performance of a fund is not a guide to future performance. The value of an investment in commercial property is not fixed and you may not get back the amount you originally invested. There is no guarantee that the value of property assets will increase and also remember that the fund’s investments can be relatively illiquid compared to bonds and equities and selling property investments can be a long and uncertain process
Commercial property is a specialised sector. You should contact a financial adviser if you have any doubts about investing in this sector.
Q2. The M&G Property Portfolio can invest in both physical property and also other property-related assets, how much of your fund is actually invested in ‘bricks & mortar’ at the current time?
A. As at 31 October 2010, the fund had 16.9% cash, 0.6% in a property derivative fund which in effect tracks the performance of UK ‘bricks and mortar’ without investing directly into the asset class, and 82.5% invested directly in “bricks and mortar”. (Source: M&G, 31 October 2010)
Q3. Do you see this positioning of the fund continuing in the future?
A. Yes. Our preference is for clarity of the investment proposition. It is possible that some specific opportunities, specialist sectors such as healthcare, may be achieved via indirect holdings (other institutional funds investing solely in these) but to a very limited degree. We feel that when our clients buy this fund, they want to invest in property as an asset class itself, so that is what we invest in.
Q4. The properties held by the fund are pretty evenly spread between the different sectors e.g. shops, retail warehouses, industrial, office etc, how important is it for a fund to be diversified in this way?
A. The fund has a “core” investment style, which means the fund will always be well diversified in terms of being exposed to the different sectors of the market.
Q5. How else do you diversify the fund and reduce risk?
The exposure of the fund to each separate tenant is closely monitored and the financial health of the tenants paying rental income for the fund is regularly analysed and assessed. The fund has many distinct tenants across 135 properties. A lease is a contract between a landlord and a tenant that sets out the terms under which the tenant occupies a property. I ensure that the lease expiries, of these tenants are evenly spread over the coming years, avoiding excessive exposure to the rental market from spikes in any one year. In the present challenging economic environment, greater security of income becomes more valuable and the fund has an average lease length of 13.9 years (Source: M&G 31 October 2010), well in excess of the market of 10 years (IPD Monthly Benchmark). (Source: IPD Monthly Benchmark as at 30 September 2010).
Q6. Our investors always like to know a little more about the person managing their money, what is your background?
I grew up in Yorkshire. I attended Southbank University in London, achieving a first class honours degree in Estate Management. I first started work at property agents Knight Frank, specialising in central London offices. I joined PRUPIM in 1994 as an investment manager and moved onto the retail funds team in 2004 as a fund manager. I am married and live with my husband and daughter in West London.
Q7. You head the fund, who are the other key people that you work with?
I have two investment managers that work alongside me, Michael Wood and Natalie Andrews. They assist me in analysing the existing portfolio, sourcing and assessing attractive investment opportunities and devising asset management strategies for the properties held by the fund. I also have four asset managers, Simon Welch, Daniel Sitton, Tim Hayns and Simon Phipps. They execute the initiatives agreed for the properties in the portfolio to optimise the rental income achievable. Two property managers, Mark Jeff-Herbert and Kate Waters, feed back valuable information gleaned from regularly engaging with the various tenants and ensure properties are well maintained, rents are up to date and efficiently collected.
In addition to this core team, I regularly interact with the various sector specialists within the firm, utilising the extensive resources available to me.
Q8. One of the key factors when running a property fund seems to be the success of the manager to actually find tenants, how are your properties faring at the moment?
Perhaps the measure of this may be a fund’s vacancy or unoccupied property rate. At the end of October 2010, the M&G Property Portfolio had a vacancy rate of only 1.4%, excluding developments. Including developments, this rises to 2.8%. This means that of the total potential income from the current portfolio of properties, only 1.4% is not being achieved because there is no tenant currently. The additional 1.4% isn’t achievable because of an office being redeveloped in the West End. The comparable figure for the market, represented by IPD, would be 8.4%. (Source: M&G 31 October 2010, IPD 30 September 2010).
Having positioned the portfolio to consist almost exclusively of prime or near prime property assets – a prime property is likely to be finished to a high standard, situated in a commercially attractive location and let to a financially sound tenant – means that in a challenging occupier market it is relatively easier to attract tenants to those properties.
Q9. What factors do you take into account when you are looking for a tenant?
The most important factor is their ability to pay the rent. The profile of the tenant can also be a factor: for example, gaining a high profile retailer as an anchor or headline tenant for a retail warehouse park or a shopping centre.
Q10. 2010 has seen the fund produce positive returns, how do you see 2011 for your fund? Do you expect a year of positive returns?
The market rally driven by the significant rise in capital values since June 2009 is at an end. Yield levels which look at the rental income in proportion to the value of the property have stabilised at what we believe to be sustainable levels. The rental market remains fragile, with little or no growth in rental income expected over the coming year. Flat yields and no/low rental growth means that there is little scope for capital growth in the short term. So while we believe we should see positive returns in 2011, they may be below trend, based predominantly on the rental income received.
Where there is scope for capital growth is through careful asset management of specific properties we own. This is where we can engineer further rental growth and hence generate uplifts in the value of the asset. Examples of such asset management initiatives include tenant engineering on multi-let properties, refurbishment, and acquiring assets with a measured level of leasing risk with a view to improving their income profile.
This is now a key focus for the fund management team as we move through the bottom of the rental cycle. Please remember that past performance is not a guide to future performance and that prices may fluctuate and you may not get back your original investment. Also note that the fund’s investments can be relatively illiquid compared to bonds and equities and selling property investments can be a long and uncertain process.
The views expressed in this document should not be taken as a recommendation, advice or forecast.
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 registered office is Laurence Pountney Hill, London, EC4R 0HH. Registered in England No. 90776. CC7353
