As January draws to a close, Christmas indulgence has been all but forgotten in favour of sweaty sessions on the treadmill, salads, smoothies and early nights. For my own part, “dry January” is helping to neutralise the mince pies, with only one slip-up so far. It’s the season of renewal, and that theme applies as firmly to our investment portfolios as it does to our own health.
In real estate, we see opportunities for renewal through development, place-making, diversification and rotation through asset sales. Indeed – displaying hopefully greater staying power than your typical January gym-joiner – we pursued those themes with some success for much of 2015 and plan to carry on with the regime throughout this year.
We carried out £4.1bn of transactions globally in 2015 – £1.5bn of disposals and £2.6bn of acquisitions. Some might question why on earth we are actively selling and buying in the same market. The fact is you can never sell everything at the top of the market and buy everything at the bottom. Therefore, as we move through the property cycle, we believe it is prudent to gradually shift the balance so that you are selling more as your valuations start exceeding what is potentially fair value in your eyes. That is exactly what we have done – the share of disposals in our total transactions grew to 37% last year from 15% in 2014.
The key is to identify assets that have reached the end of their natural course of valuation maximisation under our ownership, but could have the potential to add more value to others, and to reinvest that capital into a range of different themes. So, for example, we sold a portfolio of Oxford Street retail assets for £170m at an exit yield of 2.2%. The deal generated an attractive annualised total return of 15% over the lifetime of the investment, and passed on the opportunity to redevelop the site (with related planning risks) to the new owner.
In terms of reinvesting the money, we currently see some of the best opportunities in development and place-making, particularly outside London where supply of modern space in a range of sectors has been extremely low for at least seven years.
M&G Real Estate is currently working on more than 70 developments and forward-funding projects across the UK, with a total planned lettable area of 10m sq ft. We are seeing strong demand from occupiers for new, top-of-the-range space in desirable in-town locations. Indeed, a growing number of companies are willing to lease space ahead of completion, as seen with SSE at 1 Forbury Place in Reading, and Ashurst at the Fruit & Wool Exchange, E1.
Now is also the time to look for opportunities in alternative sectors (such as through selective sale-and-leaseback deals with leisure or healthcare operators) and in residential, as well as to consider investing more abroad. Other countries are at different points in the cycle and notably certain cities in Europe, such as Copenhagen, lead globally on investment prospects. With capital market turmoil and Brexit risks swirling, a bit more diversification has undoubted appeal. And some alternative sectors offer naturally greater resilience.
So, while the time of exuberance – and double-digit returns – may be over for the UK property market, we believe the current stage of the cycle presents a great opportunity to rejuvenate the portfolio and take a disciplined approach to identifying fresh, new sources of income.
Alex Jeffrey is chief executive, M&G Real Estate
