M&G to step up investments in residential, divest commercial assets in the UK

M&G Real Estate has been actively looking for office, retail and logistics assets in Asia as part of an overall strategy to diversify out of the UK. Its target is to have half of its global assets under management outside its home market. Currently, only 25% of its AUM is outside the UK, according to CEO Alex Jeffrey. “We see a lot of investors who want to invest with us outside the UK,” he says.
The company is the property investment arm of British insurance giant Prudential. It was known as PRUPIM until April 2013, when it was renamed M&G Real Estate. As CEO of PRUPIM before that, Jeffrey naturally assumed the top position in the newly named company.
Following the Brexit referendum, M&G Real Estate announced in early July that it was temporarily suspending trading in the shares of the M&G Property Portfolio, a £4.4 billion ($7.8 billion) open-ended fund invested in UK commercial real estate in response to a spike in redemptions by investors who were spooked by the unexpected Brexit vote in June. Likewise, insurance company Aviva suspended trading in its property fund just after the Bank of England announced that it was monitoring investors in open-ended commercial property funds, citing them as a risk to the UK’s financial stability. Trading was also suspended in Standard Life Investment’s UK real estate fund after increased outflows dried up the fund’s cash reserves in early July.
M&G Real Estate had explained that the sharp rise in the number of investor redemptions, owing to the uncertainty sparked by the Brexit vote in June, had led to its decision to temporarily suspend the fund as the best move “to protect the interests of the funds’ shareholders”. The company had also announced that it would review the suspension decision every 28 days.
“We decided it would be sensible to suspend those requests [for redemption] because the underlying property market is still relatively healthy. So it didn’t make sense for us to fire-sell these assets when there are actually buyers out there looking for a good buy, especially when the sterling has fallen 12% and bank interest rates were also down,” explains Jeffrey.
Jeffrey admits, however, that M&G Property Portfolio has sold “a few hundred million pounds’ worth of assets”. Some were sold at prices of about 5% discount to pre-Brexit days while others were sold at prices above pre-Brexit days. This was done to rebuild liquidity within the fund, he explains.
“We have just announced the sale of an office building in Edinburgh, which [contributed] £61 million net to our fund compared with the original investment cost of £48 million,” he says. “We have held most of these assets for a very long time and we have also been collecting rent during that period.”
The M&G Property Portfolio is the only M&G fund available to retail investors. Its other funds, such as M&G UK Residential Property Fund, M&G European Property Fund and M&G Asia Property Fund, were not suspended and cater to institutional investors, says Jeffrey. M&G will reopen the M&G Property Portfolio fund for subscriptions and redemptions soon, he adds, declining to elaborate further. “The timing will depend on a range of different factors,” he says.
In the meantime, M&G Real Estate is optimistic about Northern UK. It announced on Sept 22 that M&G UK Residential Property Fund will invest £27.6 million in the development of 135 new private rental homes in the Northern Quarter of Manchester by Manchester-based developer Mulbury. This marks M&G Real Estate’s first entry into private residential sector in the north of England. “We see a global trend in which young people aged 25 to 34 are more willing to rent rather than own a property,” says Jeffrey.
He reckons residential is more “strongly placed” in the UK, although he thinks prime Central London property may be suffering from a supply and demand imbalance. “While the residential sector is very compelling for investors, there’s still lingering uncertainty over the longer term over the UK government’s deal with the European Union, or when exactly Brexit will actually take place,” he says.