The M&G Secured Lease Income Fund (SLIF) invests in ‘income strips’ which are amortising leases. Typically, the fund acquires a long-term interest in a real estate asset and benefits from inflation-linked rental cashflows over the contracted lease term (usually 25 years plus). At lease expiry, ownership of the real estate asset transfers back to the tenant, assuming all contractual rent has been paid, therefore removing uncertainty around the long-term capital value of the real estate asset. The resulting cashflows offer a close fit with the matching objectives of many institutional investors: bond-like, RPI-linked cashflows that can match long-term liabilities, secured by real assets. The fund has a current mid to long-term anticipated net return of 1.5-2% above UK inflation. SLIF was launched in 2014 and is currently the only dedicated income strip fund in the UK. The fund has a NAV of over £230m*.
We follow a relative value strategy that combines analysis of tenant credit quality with our real estate expertise, supported by our large pool of fixed income and real estate resources. This provides investors with long-term, liability-matching cashflows, whilst benefitting from the security of owning real estate assets without the capital value uncertainty at lease expiry.
- Anticipated medium to long-term total net return of 1.5-2% above UK inflation
- Inflation-linked income
- Long-term investments
- Security from predominantly investment grade tenants
- Security from ownership of key operating assets without the residual value uncertainty
- Relatively low volatility of returns versus traditional real estate
- Quarterly cash distributions (option to reinvest)
A typical transaction
A typical transaction of the M&G Secured Lease Income Fund consists of the following:
- A sale and leaseback with a UK corporate/government/university entity (the tenant)
- The tenant has a contractual obligation to meet rental payments over a fixed lease term
- A lease term of 25 years or more with annual reviews in line with UK inflation
- Transfer of the asset back to the tenant at lease expiry for a nominal sum
- Continual analysis of the tenant by our in-house credit resources
- On-going assessment of the properties by our experienced real estate team
Who should invest?
- Investors with long-dated, inflation-linked liabilities requiring index-linked cashflows
- Investors seeking regular, positive and growing income to pay pension liabilities
- Fixed income investors prepared to exchange some liquidity for higher potential returns and enhanced security over typical corporate bond investments
- Real estate investors looking for a lower risk, lower volatility alternative to traditional balanced property funds and avoiding uncertainty around long-term capital values
- Investors able to invest outside of the constraints of Solvency II to access enhanced relative value
- Investors seeking alternative matching assets which fit within actuarial constraints
* As at 31 March 2016.