Agenda item

(A presentation by Link Group, Property Fund Managers)

Mrs Kay Akast, the manager responsible for investor relations, and Jon Rowley, Fund Manager, of M&G UK Property Fund gave a presentation, which gave an update on the real estate market and the fund in which the Council had invested with a projected outlook, and then answered a range of questions from Members.

The presentation is available in PDF format and shown in detail on the YouTube recording of the meeting atAudit & Governance Committee - YouTube

Mrs Akast gave details of the highly experienced and well-resourced UK property fund team under Jon Rowley, as Fund Manager. 

Mr Rowley detailed property returns, making the key point that, despite the negative impact of the pandemic, total returns for the three months to September 2020 were positive, at +0.7%.  In terms of yield spread, when compare with bonds, property yields were looking more attractive at the current time.  Rental returns from retail were declining; however, returns from industrial were increasing. 

Describing the size of the property fund, Mrs Akast highlighted the vacancy rate, which at 1.3% was extremely low against the benchmark of 9%, and was actually lower than when the Council entered the fund.  It had been more challenging to meet targets since the start of the pandemic, but they continued to work towards them. 

The key objectives of the investment strategy remained the same.  In terms of performance, Mr Rowley explained that there had been some underperformance, but more recently, the fund was performing well and was above the benchmark.  The Council’s annualised performance since September 2018 was -3.3%, but this was significantly better than others. 

Rent collections had been affected by the pandemic, due to the Government’s moratorium on paying rents, but it was expected that levels would improve significantly as agreements for payment were reached.  The fund had very limited exposure, just 1.2%, to retail Company Voluntary Arrangements (CVAs) and administration.  Mr Rowley gave details of the fund’s income profile; sector allocation; the use of deferrals to manage liquidity; and asset management, reporting a positive impact from rent review, lease renewals and new lettings.

Mr Rowley concluded by outlining the fund’s performance against the Global Real Estate Sustainability Benchmark (GRESB), which had awarded the fund 4 out of 5 ‘green stars’ and rated it in terms of peer comparison as 5^th out of 79. 

In summary, the team would continue to focus on a reduction in retail allocation as the key action in the short term and continue to actively manage the portfolio to maximise distribution yield, add value and mitigate risks.  The fund had high quality, low risk assets, a secure income profile, low vacancy rate, good tenant quality, active management and an experienced investment team. 

In response to a range of questions, Mr Rowley explained that a key strategy of the fund was to reduce its retail exposure and increase its exposure to other sectors.

Members were assured that tenants were contracted to pay their rents and once the Government’s moratorium on rents had ended, appropriate action would be taken to obtain payment, though lack of trade during the lockdown would be taken into account and some rent free weeks allowed. 

It was possible that there would be an adverse impact on the economy, but this had not been factored into projections due to the assistance offered to businesses by the Government and focus would continue to reduce retail allocation within the fund.  

Members were also reassured that it was not generally advisable to sell up in a depression; instead, they should hold firm and see the situation through.  The fund had a very strong industrial portfolio as well as alternative portfolios. 

In response to concern about investment in student accommodation, with more students learning online, it was confirmed that this was a small element of the portfolio and was high quality property. 

The team were very conscious of the trend to turn empty shops into residential properties and alternative uses a property could be put to were taken into consideration.  Risks were always attached to investment, so total assurance could not be given, but they were doing all they could to mitigate them.  It was also advantageous that the majority of the fund’s retail units were in retail parks, which had withstood the lockdown very well.

The Chairman thanked Mr Rowley and Mrs Akast for their presentation and for reassuring Members about the fund, particularly in terms of the balance of the portfolio, the low exposure to retail, and low vacancy rate, and reiterated the view that the Council’s investment was for the long-term.