The Leatherhead-based Merchant Navy Pensions Administration (MNPA) company, responsible for the investment of the approximately £3bn (e4.8bn) Merchant Navy Officers Pension Fund (MNOPF) and the £400m Merchant Navy Ratings Pension Fund (MNRPF), is extending its property management arm to offer third party real estate investment to smaller UK funds on the back of its own in-house division.
Steve Corless, property fund manager at MNPA, which is 100% owned by the officers pension fund, explains that the MNOPF has around £235m in property holdings representing 8% of overall assets.
“The portfolio consists of around 95 properties, 250 tenancies and a rent roll of £17.5m. It was built very specifically to meet the needs of the MNOPF, which being a very mature fund has an income requirement – so it’s income rather than capital driven.” Despite its income bias, Corless notes that the portfolio last year outperformed its benchmark.
The MNPA property division consists of a small in-house team of four surveyors.
Corless adds: “We are unusual in that each member of the team does everything. We split the portfolio and each surveyor covers a geographical area and deals with buying, managing, rent review and sales – the reason being that, because we are only a small department, to try and sectionalise it would affect the sort of overall service we could provide to the fund.”
Consequently, each surveyor becomes an expert in a particular area, aware of the performing towns and cities and the sectors that are returning well, says Corless.
MNPA also uses a network of small surveying contacts to uncover investment opportunities. “These are predominantly one or two-man bands who dig out very good quality product for us – largely before it comes to the market and certainly before we hear from the big players. We see a lot of this product very early and very complete. We have a good relationship here. If we don’t want to take an investment we tell them and if we do we press on – so the surveyors know exactly what they are dealing with.”
The portfolio split comes out at 32% in industrials, 36% in offices and 32% in retail spaces. “We are actually looking to invest more in industrials, but they’ve been difficult to get hold of recently,” notes Corless.
He adds that the fund’s investment strategy presently leans towards industrials and business park offices – albeit those with alternative means of transport to reach them. “There are good returns available on business park units and in some locations you can get better yields on an office – say 8%, than on an industrial just down the road at 7.75%.
And he notes that the fund looks closely for any value-added opportunities: “Because we are yield-driven we are looking for the sector where we feel we can get the best return, but we are always conscious that we are not just looking for a flat return. If there’s a prospect of something in there such as prospects for rental growth or added value such as buy-in leases or extension or redevelopment of properties, we will go for that.”
Geographically the fund’s income- driven approach means it looks country-wide for prospects. “The big growth generators tend to be in the south-east or London-based, but we’re looking for high levels of return as much as anything, so we’re picking up industrials in the north with nearly 10% returns. But we’re also buying in the south-east, where we have industrials returning 7.5–8% on industrials, although we’re just about to do two at 9% rates.”
He says the trustees position is that the MNPA invests in mainland UK direct property, but Corless notes that they keep an eye on what is happening with indirect property as well.
The MNPA manages the MNRPF on a third-party basis. “It is a totally unconnected portfolio of approximately £30m in 25 properties, which is 7.5%of the total portfolio. It performs its socks off, though, and did over 20% last year.”
This, he says, is the market segment where the MNPA is looking to manage third-party assets, adding that they are only seeking a small number of funds around the £50m mark to work with. “We are looking for people who want to invest in direct property but think they are too small to do so. What we are saying for funds of this size is that if you look for the right things you can get very good value. We are just beginning to pitch for business and talking to contacts. The basis for going out into the market is that we feel we won’t have the conflict of interest that may exist with some of the bigger providers because we are running two very mature funds.
“It’s highly unlikely that any new funds taken on will be mature so they are likely to have different strategies in terms of looking for capital growth rather than income return in the first instance.”
Pricing, Corless points out, depends on the client. “If it’s a fund driven by income then we should be looking for income-based return, and similarly with capital-based return. There will also be the possibility of lump sum payment, which is the other way people are moving.”
Corless adds: “Third-party management is the next challenge for us and I don’t know of any other small UK funds that are doing this.”
And Corless is bullish about the current state of the property market, noting that real estate returns are regularly eclipsing gilt and corporate bond yields. “If you’ve got a good property portfolio you can be returning 7.5–8% – plus you have an underlying asset.
“Provided the property industry keeps its act together with the quality and accuracy of performance figures from the likes of the IPD Investment Property_Databank, which are certainly 100% better than what we were getting five years ago and provided that the information is open and in the format that other professionals can understand, then I think things look quite buoyant.”
Corless says the MNPA is not presently looking to up property allocations, but notes that with minimum funding requirement changes and the shift to corporate bonds, then property will be increasingly viewed as a good alternative.