M&G Real Estate, the real estate investment management business of UK insurer Prudential, has restructured one of its oldest property funds to enable investment from international institutional investors for the first time.
The firm has set a target of growing its core real estate-focused, M&G Pooled Pensions UK Property Fund to £1 billion (€1.18 billion; $1.53 billion) in assets from £580 million today “over the next few years” after converting the open-ended fund into a Luxembourg FCP structure on 31 May.
Since the fund’s launch in 1971 it could only accept capital commitments from UK exempt pension schemes but given its new jurisdiction the firm can now attract equity from investors from all around the world. To reflect the transition the firm has renamed the fund M&G UK Property Fund.
M&G Real Estate expects in the first instance to attract institutional investors from continental Europe and from Asia but Matthew Peake, deputy fund manager at the firm, who is working on the fund, said that US institutions too would be able to invest in the vehicle.
“We know there is interest from continental Europe for such a fund. We also know that one or two Asian funds have been looking to target the UK. But such is the structure of the fund we can now attract capital from all over the world,” he said.
M&G said international investors increasingly are interested in investing in UK real estate for reasons including the relative depreciation of the sterling against since 2007 – against the dollar and euro, the sterling has weakened by 20 percent. The firm said that offered international investors “a double discount” when also considering how UK property values are 30 percent “below their peak” still.
Peake said while the fund was flexible in terms of which sorts of institutions could invest, the nature of the vehicle meant it would be better suited for those investors taking a long-term perspective on their investment. For instance, he said the fund’s redemption policy might not suit those looking for liquidity. Investors can only withdraw 10 percent of their funds in the first six months, followed by 10 percent a month for the following nine months meaning it would take 15 months before an investor can redeem its capital.
The fund’s resources will be focused primarily, although not exclusively, on the south east of England, where property has performed generally the best in the UK. Currently the fund’s portfolio is 46 percent located in the south east. Peake said: “Of course we would be comfortable being more exposed to the south east but, clearly, if we saw an opportunity in the north or the south west, we would look.”
In terms of asset classes, the fund is predominantly focused on offices, industrial and residential properties. For the fund, M&G is willing to take on a level of leasing risk but only when the asset is well located and is of good quality. “We might take a bit of risk over the length of lease, possibly over the strength of the covenant,” said Peake.
The firm cited IPD numbers denoting how returns from properties within its target range can be approximately 7 percent a year.
The M&G UK Property Fund has delivered returns of 60 basis points “relative to the benchmark” Peake said. In the last 12 months, the fund has returned 0.6 percent versus a benchmark return of 0.3 percent.