ADVERTORIAL M&G INVESTMENTS
Time to return to property?
For financial advisers only. Not for onward
distribution. No other persons should
rely on the information contained in this
article. Source of statistics; M&G statistics
Inc and IPD, as at 31 March, 2010, unless
otherwise stated. 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 No. 90776.
Jan 09/28143
“
The manager of
the M&G Property
Portfolio, Fiona
Rowley, runs a ‘core’,
relatively low-risk
fund, pragmatically
balancing stability
of income with
long-term capital
growth
”
The low correlation of
property with the other
major asset classes means
that introducing property
into a portfolio brings an
increase in the level of
diversification. So, although
it has a similar level of risk
to bonds, and offers a similar
long-term return, it has
a very low correlation with
bonds and shares. As such,
it makes it possible to both
reduce the overall level
of risk in a portfolio and
enhance the return.
l The good news
There are other reasons to
consider holding property.
It can provide a high and
stable income. This stability
of income arises because
the rental income from a
property is determined by
the structure of the lease.
The standard lease in the
UK typically has upwardonly
rent reviews which
offer protection from the
down-cycles in the rental
market, as was the case
recently. Income is the
key element of the longterm
return from property
investment; over 70% of
the total return from UK
commercial property has
come from income over
the long term.
Furthermore, property is
a real, physical asset. As
well as the cash flows from
rental income, the buildings
themselves have a value.
But it is the land owned
under and around the property
where the real intrinsic
value lies and underpins
every asset owned.
Pricing looks attractive
currently. Even after the
recent rise, the IPD Monthly
Index net initial yield stands
at around 6.8%, above the
long-term average.
So what should you
look for in a property fund
management group?
When considering which
fund management group
for your property needs,
it is important to choose
a group with plenty of
experience, resource and
expertise. A portfolio of
properties needs to be
worked to optimise investment
returns. It is not
about just collecting the
rent. Managing the assets
and tenants efficiently
enhances returns. Hence,
property is a resourcehungry
asset class.
As a core element of its
fund management range,
M&G has a 270-strong
Property mkt return components ’72 – ’09
30
20
10
% 0
-10
-20
-30
’72 ’75 ’78 ’81 ’84 ’87 ’90 ’93 ’96 ’99 ’02 ’05
31 Dec ’72 – 31 Dec ’09. Source: IPD Annual Index
division dedicated to real
estate. They have accrued
over 140 years of investment
experience and are
one of Europe’s leading
investors in real estate,
looking after over £15bn of
property assets globally.
Their investment knowledge,
insight and market
access are essential for finding
the best opportunities.
They can draw on their
extensive network of property
contacts to participate
in off-market transactions
– particularly useful in the
current conditions where
it is difficult to source
deals and access stock. All
of which is backed up
by their industry-leading
research capability with
sophisticated proprietary
cash flow and modelling
tools, providing unrivalled
depth of analysis in the
various segments and geographical
regions of the
property market.
The fund managers
capitalise on the resources
available to them, working
closely with their asset
management teams to
apply robust strategies to
the properties they hold,
which can enhance income
and hence capital returns
for their investors.
48 PORTFOLIO ADVISER [www.portfolio-adviser.com] MAY 2010
Income
Capital
l Choosing a fund
’08
Just like equities and bonds,
not all property funds are
the same. The manager of
the M&G Property Portfolio,
Fiona Rowley, runs a ‘core’,
relatively low-risk fund,
pragmatically balancing
stability of income with
long-term capital growth.
She currently focuses on
high quality properties and
aims to maintain a strong,
defensive income profile,
appropriate for the present
economic environment.
With over 85 properties,
the portfolio is well spread
by region and market
sector, and with over 240
unique tenants, rental
income is highly diversified
by tenant type.
The fund’s quality is
shown by a vacancy rate
of 4.4%, which is well
below the index (currently
at 11.5%), an average lease
length of 14 years that is
well above the market as
a whole (estimated around
ten years) and having over
90% of the portfolio invested
in prime and good secondary
property.
l Final thoughts
The soft economic environment
means that tenant
demand has been and
remains weak short-term.
But with a medium-term
view, it is also worth
remembering that the
ongoing lack of credit to
fund construction activity
means that the supply of
properties has been curtailed
for some years to
come. With the balance
of building supply and
tenant demand determining
the direction and pace
of rental growth, this lack
of future supply could
provide material support
to rental growth as tenant
demand returns.
Over the long term,
there are several key
advantages that property
as an asset class possesses
which include diversification
due to its low
correlation with the other
main asset classes; a lower
volatility of returns that
lead to strong risk-adjusted
returns; a high and stable
income. Therefore, property
has all the attributes
to remain a core element
of any well-balanced
portfolio, alongside bonds
and equities.
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