M&G Investments has launched the first fund to invest in European long lease property with £265 million of initial commitments from five pension funds.
The M&G European Secured Property Income Fund (Euro SPIF) offers its institutional investors liability-matching, long-term income growing in line with inflation, and operating companies the opportunity to raise cash through structured sale and leasebacks.
The new euro-denominated fund is modeled on the investment manager’s eight-year-old UK SPIF fund which is now £3.2 billion in size and is managed by the same team led by Ben Jones with Peter Riley as deputy fund manager.
As with UK SPIF, Jones said the new continental fund was an alternative way for companies to raise capital against their property assets while retaining long-term occupancy, at a time when banks had largely retreated from long-dated financing.
It was also an alternative to raising finance in the bond markets for some operators. “A lot of private equity owners wishing to release capital from real estate which are not necessarily natural bond market issuers will do structured sale and leaseback deals, where the rent is set at a conservative level of gearing versus EBITDA”, Jones said.
Simon Pilcher, M&G Investments’ fixed income chief executive, said: “A new European financing landscape is emerging following the financial crisis, where pension funds and institutional investors, the natural owners of long term capital, are providing long term finance where banks previously dominated the market.
“European companies are beginning to seek alternative ways to raise finance, with sale and leaseback being an increasingly popular option”.
Both funds are jointly managed by M&G’s fixed income and real estate teams. Alex Jeffrey, chief executive of M&G Real Estate, said long lease property was not as established in continental Europe as in the UK and Euro SPIF was “an innovative fund” which would give investors “access to an evolving opportunity at a time when the European economy is improving.”
The European fund will seek 3-4 percent real annual returns over inflation and is likely to have a basket of different inflation measures depending on the assets its acquires.
M&G has deployed about half of the initial £265 million raised. Its first investments, totaling €100 million, are in Belgium and Portugal and it has two smaller deals, with a combined value of about €30 million, under offer in Germany and Ireland.
The Belgian deal is the acquisition of a David Lloyd health and racquets club in Brussels for about €50 million, on a 30-year lease linked to Belgian CPI.
In Portugal, M&G bought a portfolio of 12 supermarkets sold and leased back on 20-year leases to Sonae. Euro SPIF has invested in five of the assets, valued at about €50 million, while the remaining seven have been acquired by M&G Real Estate’s European Property Fund.