Finding value in crowded markets Alex Jeffrey, Chief Executive, - - PowerPoint PPT Presentation

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For internal use only

Part of the M&G Group

Finding value in crowded markets

Alex Jeffrey, Chief Executive, M&G Real Estate

24 June 2015

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Agenda

1 Introduction to M&G Real Estate 2 Market outlook 3 Investment themes 4 The secrets of success 5 Q&A

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1 Introduction to M&G Real Estate 2 Market outlook 3 Investment themes 4 The secrets of success 5 Q&A

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A strong sponsor

Mike Wells

Group Chief Executive

UK and European Insurance Operations UK and European Insurance Operations Asian Insurance Operations Asian Insurance Operations M&G Investments M&G Investments Jackson National Life Insurance Co. Jackson National Life Insurance Co.

Fixed Income

Group Profile

Equities Retail

• M&G Investments AUM: £270bn
• Prudential Group assets: £496bn
• Market capitalisation: £36bn
• FTSE 100-listed

Real Estate Tony Wilkey

Chief Executive

Jackie Hunt

Chief Executive

Michael McLintock

Chief Executive

Barry Stowe

Chief Executive

Gary Cotton

Chief Executive

William Nott

Chief Executive

Simon Pilcher

Chief Executive

Alex Jeffrey

Chief Executive

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Introducing M&G Real Estate

• £22.1bn assets under management across 23 countries and three continents
• Global team of 235 operating from a network of offices in London, Luxembourg, Paris,

Frankfurt, Singapore, Seoul and Tokyo

• Income focus to deliver long-term sustainable returns with a low risk profile – open ended

funds and separate accounts

• Responsible for managing property investments for over 100 institutional investors; leading

manager of investments for retail clients

• Extensive network for sourcing properties and effective execution through in-house

transaction team: £4bn deals completed in 2014

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• One of the largest UK real estate investment managers with

reputation for discretion and speed

• Responsible for 5% of UK investment volume in 2014

– Acquired £3.3bn in 64 transactions – Disposed of £630m in 79 transactions

787 assets 6m sqm

• f real estate

£7.9bn

• f retail assets

£6.1bn

• f office assets

1,586

deals offered in 2014

65%

• ff-market transactions

in 2014

3 Hardman Square, Spinningfields, Manchester c.£100m in Q3 2014 Bedfont Lakes, near London Heathrow Airport c.£170m in Q2 2015

Our UK investment expertise

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1 Introduction to M&G Real Estate 2 Market outlook 3 Investment themes 4 Summary: strategy for success 5 Q&A

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• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Real GDP Growth (% pa)

2014 2015 2016

Economic growth improving across the advanced world

No longer is the economic outlook ‘Asia good, Europe bad’ – that is too simplistic, there is more variation

Source: Consensus Economics (May ’15); countries ranked by estimate of 2015 GDP growth

Consensus Forecasts (May 2015) of GDP growth

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UK misery index (inflation + unemployment rate)

A crude measure, but one which shows UK households benefiting from the lowest combination of inflation and unemployment for many years

Source: Capital Economics UK Chartbook 4th Mar 2015

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5 10 15 20 25 30 35 40 45 50 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Completions (million sq ft)

Offices Retail Warehousing Town Centre Retail Historic average (1986-2014)

Construction activity starting to pick up…

Completions by Sector (excl. industrials)

Subdued construction has supported prime rents – and constrained new supply likely to continue going forwards

Source: PMA, Dec 2014

… but is still limited compared to historic standards

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• 2

2 4 6 8 10 Yield Spread UK 10-year Government Bond Yield IPD All Property Equivalent Yield

FTSE 100 Index

Attractive property risk premium

IPD UK Equivalent Yields vs. 10-year Government Bond Yield

Source: Bloomberg, IPD, Apr 2015

Despite property yields moving lower, they still offer a healthy spread above bonds

Yield (%)

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Long run value off current pricing – UK sectors

Real Return (% p.a.)

Source: M&G Real Estate PRT, representing 20-yr value as at end-Q1 2015; Lower SR RFR = Real Risk Free Rate gradual increase from 0.5% for Y1 to 1.5% for Y5

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• 3%
• 2%
• 1%

0% 1% 2% 3% 4% 5% 6%

20 Yr Prospective Return 20 Yr Req'd Return Value Q1 2015

Global long run value by country

Fairmark Analysis for Global Property Markets

Source: M&G Real Estate PRT Apr 15, representing value as at end-Q1 2015

Real Return (% pa)

n.b. Colour of bar represents global region

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0% 2% 4% 6% 8% 10% 12% 14% Y1 Y2 Y3 UK Europe Ex UK Asia Pacific North America

Regional total return prospects

Forecasts of Total Return (% pa, post-depreciation)

UK returns expected to be strongest, at least in the short term. US may have harsher correction when yields eventually rise.

Source: M&G Real Estate (Apr 15) n.b. UK returns represent IPD average, other markets represent prime

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Summary

• Economic health building
• Rental fundamentals for real estate improving
• Interest rates and bond yields extremely low

– Supporting real estate fundamentals – Supporting real estate pricing

• Attractive value/returns increasingly difficult to find in other asset classes –

property looks relatively cheap

• Capital targeting real estate globally (and increasingly in Europe)
• Performance prospects for global real estate looking good

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1 Introduction to M&G Real Estate 2 Market outlook 3 Investment themes 4 The secrets of success 5 Q&A

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Investment themes

• Development
• Technology
• Regionalisation
• Urbanisation
• Structural changes to locations
• Residential and other new sectors

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Development : Forbury Place, Reading

• New 370,000 sq ft town centre
• ffice development
• Phase 1 (185,000 sq ft) u/c -

due to complete in July 2015

• Large floor plates (c. 26,000

sq ft) and very good parking

• A ‘business park type’ building

in an in-town location

• Strong local demand for

premium office space

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Technology: Screwfix, Stoke-on-Trent

• Development for leading
• mnichannel supplier
• Project to double the size of

Trentham Lakes distribution facility to 630,000 sq ft fulfilment centre

• Popular logistics location with

strong transport links

• Enlarged building let to

Screwfix on a new 25 year lease with five yearly inflation- linked rent reviews

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Regionalisation: 3 Hardman Square, Manchester

• 100% Prime Core Asset developed in

2006 to provide 178,508 sq ft of grade A

• ffices located in Manchester City Centre
• Multi-let office, arranged over 8 floors

with a vacancy rate of 25%

• Purchase Price of £92m (5.8% NIY)
• Scope for proactive asset management

initiatives

• Manchester is a focal point for economic

growth within the Big Six regional cities

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Regionalisation: 2 Snowhill, Birmingham

• Recently constructed multi-let office

investment extending to 301,867 sq ft of efficient floor space

• £146m (6.25% NIY) off-market

purchase

• 14 storey state-of-the-art

building in the heart of Birmingham

• Has already delivered significant

capital value growth

• We expect Birmingham, along with

Manchester, to show stronger rental growth than City of London over the medium term

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• Culturally sensitive

redevelopment of historic building

• To deliver 320,000 sq ft of

prime space

• Leasehold geared @ 5%
• Site price £55m;

development costs £160m

• Area enjoying strong growth

and increasing interest from

• ffice and retail occupiers

Structural changes to locations: Fruit & Wool, London

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• Purchase price £315m (5.2%

NIY)

• 450,000 sqft office and retail

space across three buildings

• Predominantly let to RBS for 14

years off £42 psf overall

• Well-placed to benefit from on-

going regeneration and repositioning of London’s Southbank area

Structural changes to locations: Bankside, London

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• €75m

prime high street retail investment in central Milan

• Rare and highly sought after sized unit

(3,745 sqm)

• Newly developed with full warranty

package

• Excellent covenant
• Set to open for business later this year

and become

• ne
• f

the most prominent retail units in the city

Urbanisation: Via Torino, Milan, Italy

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Urbanisation: F Parc Tenjin, Fukuoka, Japan

• Purchase price ¥3.4bn
• An 18 storey, 174 unit multifamily residential

building located close to transport links

• 92.4% occupancy
• A stable income stream in regional Japan
• Benefits from positive regional economy -

Fukuoka, unlike most cities in Japan, enjoys positive demographics (+8.1% in the last 14 years) due to consolidation of Kyushu economy in the city and status as a strategic hub for west Japan with strong presence of manufacturing and high-tech service industries

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• Purchase price: £25m
• Located adjacent to the River Avon

and within walking distance to Bath city centre and train station

• 97 private rented residential flats
• Partnership with developer Crest

Nicholson with scope for further

• pportunities across the UK
• Bath benefits from strong,

professional employment market, while supply is limited by world heritage status

Residential: Frederick House, Bath Riverside, Somerset

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Alternatives: The Priory portfolio, UK:

• £223m sale-and-leaseback deal
• Portfolio of six Priory hospitals
• Leased back to The Priory

Group for 30 years on a full repairing and insuring basis, with annual inflation-linked reviews

• Deal structure based on

property experience of M&G Real Estate and credit analysis experience of M&G Investments

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1 Introduction to M&G Real Estate 2 Market outlook 3 Investment themes 4 The secrets of success 5 Q&A

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The secrets of success (in our view!)

• The power of income
• Judicious use of leverage
• Careful portfolio construction
• Being aware of the cycle

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1 Introduction to M&G Real Estate 2 Market outlook 3 Investment themes 4 The secrets of success 5 Q&A