M&G Property Portfolio breaks new ground with student deal

The past three years have been good ones for UK commercial property. Ms Rowley says: "We've had a strong last three calendar years and the market has seen returns of 20 per cent from commercial property. South-east and central London offices were driving that, with retail more subdued."

Over three years M&G Property Portfolio has returned 25.8 per cent and in the year to date has already returned 4.63 per cent, almost reaching the 5.8 per cent returned in 2014. However, Ms Rowley is cautious about whether that growth will continue. With interest rate rises on the horizon and a potential slowdown in the office sector she warns that the good times can't keep on coming.

"I think returns for the sector will be double-digit this year, but interest rates could temper returns in 2016, 2017 and 2018," she says.

Despite that caution she says there are interesting opportunities, and less mainstream areas such as leisure, hotels and healthcare properties are on her shopping list.

"'Other' as an asset class is becoming an increased part of commercial property," says Ms Rowley. "Ten years ago it would have been 2 per cent of the IPD UK Property Index (the key UK commercial property index) and now it's 8 per cent." Ms Rowley now has 5.5 per cent of the fund in 'other' assets.

Those include hotels and restaurants with long, sustainable leases and good rent streams. "A lot of healthcare and hotel leases will be linked to RPI [Retail price index inflation] and these are more of a proxy than an equity play," she says. But she is also eyeing higher-risk, higher-turnover assets such as student accommodation.

Student property is an increasingly popular area of investment due to short supply of prime assets, combined with high demand from a soaring number of overseas students. M&G Property Portfolio is currently in the midst of its first student deal. "We didn't have the stock to invest in 25 years ago," says Ms Rowley. "I'm quite a cautious fund manager and I like to make sure there's a track record there [for the asset class] and that you understand the return. This is high risk, so I need a high return."

Healthcare is another formerly niche area that the fund moved into two years ago. The fund is invested via two healthcare funds, Kames Target Healthcare Property Unit Trust and MedicX Fund (MXF). M&G Property Portfolio had invested £14m in the unit trust by March 2015, with provision for another £11m to be drawn down during the rest of the year. "Healthcare assets are quite smalls, and to get the diversification with tenant and geography we like to invest via a fund," she says.

Elsewhere, Ms Rowley has focused on more traditional areas such as offices and retail assets. "In the past 24 months all the buying has been to increase office exposure," she says, which makes up 37.5 per cent of the portfolio. But her tactics have shifted. She has been hunting further down the value chain and eyeing offices with shorter leases, which give her opportunities to crank up rents and generate high income in the coming years. "Buying shorter leases means you can buy more value in the office sector now," says Ms Rowley, who has brought down the average lease length in the fund from over 11 years three years ago to 8.5.

Linked to that is her increased willingness to invest in 'good secondary' properties across the UK. "Overseas buyers have grown comfortable with the property fundamentals in the rest of the UK now, so the proportion of buying in central London compared with the rest of the UK is shifting," she says.

One of the fund's most recent acquisitions, and now the largest asset in the fund, is New Square Bedfont Lakes business park in Heathrow. Ms Rowley says: "It's a mixture of secure income and asset management (the process of letting and re-letting on shorter-term leases using an agent.)"

Meanwhile retail could head back upwards but competition will be fierce. Ms Rowley says: "Retailers also don't need as many stores as they did years ago. You have got towns that will survive and towns that will struggle. When you talk to retailers they are all talking about the towns they want to be in (market towns such as Guildford and Kingston) and those they want to exit."

Ms Rowley has also used the buoyant market to divest some of the fund's secondary assets and taken profits where she can.

Source: Morningstar, *M&G

Calendar year performance (% total return) of fund and sector

Source: Trustnet

Top 10 holdings

Source: M&G

Sector breakdown

Source: M&G