Bankhall Conference 2009 - M&G


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Property - what next?

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  • Notes Presentation Title Page Date Type name of Presenters
  • Notes Presentation Title Page Date Type name of Presenters
  • Seeking opportunities to optimise rental income Eg by buying a tenant out of a current lease and signing a lease for a higher rate with a new tenant Rewriting leases of vacated properties Eg take opportunity to rewrite lease once a property is vacated to make it easier to re-let, possibly at a higher rent
  • Bankhall Conference 2009 - M&G

    1. 1. Property in the new world – Bankhall Conference November 2009 Graeme Abell, Director of Nationals and Networks
    2. 2. The world as we knew it Source: Morningstar and Datastream, as at 15 June 2007 Rebased to 100 The view looks great! Asset class returns <ul><li>Low inflation </li></ul><ul><li>Reducing interest rates </li></ul><ul><li>Access to credit </li></ul><ul><li>M&A activity </li></ul><ul><li>Globalisation </li></ul>
    3. 3. What went wrong Source: Morningstar and Datastream, as at 30 June 2009 Rebased to 100 The view becomes bleak! Asset class returns <ul><li>The music stopped </li></ul><ul><li>Freddie and Fanny </li></ul><ul><li>Sub-prime crisis </li></ul><ul><li>Excess leverage exposed </li></ul><ul><li>Lehman’s collapse </li></ul><ul><li>Risk aversion </li></ul><ul><li>Global economics shut down </li></ul>
    4. 4. What went wrong In recession At risk Expanding No data Source: 29 July 2009 Much of the world is in recession…
    5. 5. Property looking into the abyss
    6. 6. Property as an asset class Lower volatility, less correlation Historical asset returns Source: Morningstar Inc.; 31 December 1986 to 30 June 2009; FTSE All-Share Index, FTSE 350 Real Estate Index, FTSE All Stocks Index, IPD Monthly Index; sterling, rebased to 100
    7. 7. Investment market overview Market correcting % UK property market momentum – 3m rolling total returns More positive trend now building Market has discounted economic decline Source: IPD Monthly Index, three-month rolling total returns, as at end August 2009 <ul><li>All property yields risen from 4.6% to 7.9% since July 2007 peak </li></ul>Improving sentiment Anticipating recession
    8. 8. Property is investing for income Source: IPD Annual Index, as at end 2008 % Property market return components 1972-2008 70% of total return comes from income over the long term Safeguarding income is key
    9. 9. Rental market overview <ul><li>Weakening tenant demand </li></ul><ul><ul><li>Businesses restricting growth </li></ul></ul><ul><ul><li>Rising unemployment </li></ul></ul><ul><ul><li>Increased risk of insolvencies </li></ul></ul><ul><li>Market level rents falling across all sectors </li></ul><ul><li>Short-term changes in market rents will have a varied effect on rental income </li></ul>Rolling three month market rents % Source :IPD as at end August 2009 Challenging environment Occupier market to remain weak over the short/medium term
    10. 10. How will falling rents affect rental income? <ul><li>Short term rental income determined by lease terms, not the market </li></ul><ul><li>Lease structures mitigate/smooth the cycle, protecting income </li></ul><ul><ul><li>Latent growth from previous years </li></ul></ul><ul><ul><li>Upward-only rent reviews </li></ul></ul><ul><li>Exposure to prevailing rents is at lease expiry </li></ul><ul><ul><li>63% UK commercial property leases < 5yrs to expiry* </li></ul></ul><ul><ul><li>Diversified income exposures key </li></ul></ul><ul><ul><li>Long lease durations defensive </li></ul></ul>Robust income management safeguards rental income * Source: IPD, as at end September 2009
    11. 11. M&G Property Portfolio <ul><li>Long average lease term </li></ul><ul><ul><li>M&G Property Portfolio 13.2 years </li></ul></ul><ul><ul><li>IPD Monthly benchmark 9 years </li></ul></ul><ul><li>Low vacancy rate </li></ul><ul><ul><li>M&G Property Portfolio 7.4% </li></ul></ul><ul><ul><li>IPD Monthly benchmark 13.1% </li></ul></ul><ul><li>Proactively engaging with tenants </li></ul>Defensively positioned income profile Source: IPD and M&G, as at end September 2009 Lease expiries per year Only 2.7% exposed to the worst of the cycle Contracted rent Year of expiry Terms already agreed on 20% of 2011
    12. 12. Securing income… <ul><li>Existing retail units </li></ul><ul><ul><li>Principles, lease expiry 2011 (in administration) </li></ul></ul><ul><ul><li>Dorothy Perkins (Arcadia Group), expiry 2009 </li></ul></ul>… through asset management Key throughout the cycle <ul><li>Existing retail unit </li></ul><ul><ul><li>Barclays, 2011 expiry </li></ul></ul>X Source : PRUPIM as at end 2009 <ul><li>New </li></ul><ul><ul><li>2 five year leases to Arcadia Group </li></ul></ul><ul><ul><li>£400k annual income secured </li></ul></ul><ul><li>New </li></ul><ul><ul><li>15 year lease, rent maintained </li></ul></ul><ul><ul><li>£300k annual income secured </li></ul></ul><ul><ul><li>Valuation uplift achieved </li></ul></ul>
    13. 13. Where is the value to be found? Source: PRUPIM est of market pricing Q2 2008 Last year’s view… Prospective long run real returns Cheap Expensive
    14. 14. Where is the value to be found? Source: PRUPIM est of market pricing Q3 2009 Good value for long-term investors Prospective long run real returns Cheap Expensive
    15. 15. Asset management Improve the lease terms Change the planning use Developments Refurbishment Extend the lease length Seeking opportunities to optimise rental income Protecting returns and extracting further value Upgrade covenant
    16. 16. Yields – sharp rise since mid ‘97 Source: IPD as at end June 2009 Paid to wait! 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 Dec-04 Mar-04 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
    17. 17. Property Income on the other side <ul><li>Yields on prime properties stabilising, particularly those with good quality tenants on long leases </li></ul><ul><li>Prices now below where we would assess fair value; on that basis, UK currently best value core property market globally </li></ul><ul><li>Increasing evidence of interest in UK commercial property from overseas, also, progressively, from UK investors </li></ul>Source: M&G, as at end August 2009
    18. 18. M&G Property Portfolio <ul><li>£20B assets under management </li></ul><ul><li>140 years of history </li></ul><ul><li>Pure bricks and mortar </li></ul><ul><li>Diversification, income & growth? </li></ul>M&G Property Portfolio 1.5% discount available to 30 th April 2010
    19. 19. Performance review Source: IMA August 2009 * The unweighted average of the seven funds listed calculated by M&G M&G Property Portfolio -11.9 -18.0 -5.3 +2.7 Peer group average* -17.2 -15.8 -17.5 -23.3 -13.2 -15.4 -26.0 -14.9 1 yr % -16.1 -12.7 +0.7 Aviva Investors Property Trust -11.5 -5.2 +1.7 Ignis UK Property -7.5 -2.0 +4.9 L&G UK Property Unit Trust -14.8 -6.9 +1.6 New Star UK Property Unit Trust -12.0 -5.9 +2.6 Skandia Property Fund -10.8 -4.6 +1.6 SWIP Property Trust +5.8 -0.1 YTD % 3 yr % pa 3 months % Unit price performance to end August 2009 -13.1 +11.1 IMA Property Sector average -10.7 +5.7 M&G Property Portfolio
    20. 20. FOR INVESTMENT PROFESSIONALS ONLY. 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 number 90776. This document is not intended as an offer to acquire or dispose of any security. Information given in it has been obtained from, or based upon, sources believed by us to be reliable and accurate although M&G does not accept liability for the accuracy of the contents. This information is not intended to constitute a basis for any specific investment decision.