M&G’s October announcement that it is looking for a partner to invest approximately £1 billion in a two million sq ft portfolio of four assets across the UK, on behalf of the Prudential With-Profits Fund, has highlighted an interesting capital markets trend that’s been fairly common in the US market for a long time, but is becoming increasingly more prevalent in the UK; that of owners looking to raise capital by finding an investor to take a passive share in an asset or portfolio.

With so many high-profile sales following this model this year, what’s driving this trend and what are the advantages for the parties involved?

Back in August, before M&G’s announcement, Singapore’s GIC took an approximately £800 million, 75 per cent, stake in British Land’s Paddington Central campus, as British Land looked to raise capital to fund its development pipeline and release equity to deploy under new investment strategies. This followed the REIT also entering into a similar agreement with Allianz earlier this year for the latter to take a similar 75 per cent majority stake in 10 Portman Square, Marble Arch House and York House, all in London, for c.£500 million. In both instances British Land remain the manager of the assets, despite being the minority shareholder.

For the owner of the properties. selling a share provides an efficient way to raise capital, without having to exit (completely) holdings across their portfolio. Selling a stake instead gives the owner an opportunity to unlock capital to re-invest in future deals and / or existing projects, while also retaining substantial assets under management (AUM) and generating management fees as an additional income stream alongside a share of rental income and capital value growth.

For a potential partner the benefits are also manifold: in return for their investment, in the case of portfolios, almost overnight they can obtain a substantial (and often diversified) presence in a market. It also limits the time and effort it would take to assemble one’s own portfolio of the scale and quality. The incoming investor is also not required to dedicate large resource to the asset management, which can be a significant attraction for new investors to a market, in particular those based overseas; but they still receive annual income and the potential of capital appreciation. Looking ahead, forming a joint venture together may also open up future long-term opportunities to co-invest. The choice of partner becomes key here, as those groups who are well embedded in a market should, in theory, have greater market access than groups who are trying to establish themselves with first acquisitions.

Given continued uncertainty in the wider equity and debt markets, it is likely we could see more owners of established real estate portfolios, adopting a similar approach. With the amount of money being allocated to real estate ever increasing from both new and well established global investors, if structured correctly, then any stakes offered on this basis are likely to generate very strong interest.

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Contact Rasheed Hassan

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