M&G bets on prime real estate as inflation rises

M&G Investments is set to focus its real estate strategy on best-in-class properties, including prime offices, hotels and build-to-rent, as economic challenges bite. Speaking at the firm’s global outlook webinar, head of investment strategy José Pellicer (pictured) pointed out that prime real estate should be in a much better position over the next 18 months than secondary. “Not all real estate is equal,” Pellicer said. He added: “Inflationary interest rate pressures will have a deeper impact on secondary assets in weaker locations, with shorter lease lengths, voids and capital expenditure required to bring them up to date, in comparison with prime assets.” In the current market, M&G favours properties such as prime city centre offices with long leases, which ensure a sufficiently high liquidity premium for the investor and partially protect against inflation. Another sector favoured by M&G is build-to-rent. “With rising interest rates, there should in theory be, without any further government subsidies, less demand for owner-occupied housing,” Pellicer said. “The ability to buy a house is far more limited at current prices, with interest rates being higher. What is the option? Continue renting. So resi for rent should be in a relatively good position, notwithstanding the lower cap rates.” Hotels have also been put on M&G Real Estate’s investment list. According to the firm’s report, demand for leisure and tourism has remained strong in the past quarter and should be sustained throughout 2022 and 2023. “In the current environment, despite the risks to the general economy and low interest rates, people still want to go on holidays. People still want to travel. It’s been too long that we’ve been locked down in our rooms,” Pellicer said. Elsewhere, M&G acknowledged continued demand for logistics space globally, which is likely to support strong rental growth in low-supply markets. “Anecdotally, this market appears to be far more cautious in terms of bidding. While around six months ago for every logistics deal there were about five or 10 bidders, now the number of bidders has gone down substantially. Some deals even had just one bidder. Some are not reaching their target price,” Pellicer said. In retail, M&G said food stores with defensive lease structures continued to perform well. Summarising the current situation, Pellicer said: “Performance on a par with 2021 will be difficult to achieve across all real estate sectors, so it is crucial that low-risk investors remove risk and create portfolios which offer long-term inflation protection. For higher-risk investors who remain active, opportunities will present themselves in time as liquidity falls and pricing changes.” To send feedback, e-mail evelina.grecenko@eg.co.uk or tweet @Gre_Eve or @EGPropertyNews Photo courtesy of Redwood Consulting