M&G Property Portfolio: intra-month valuation update
On 8 November, Knight Frank (the Valuer), the Standing Independent Valuer for the M&G Property Portfolio (the Fund) carried out an intra-month valuation, which has resulted in a 3.6% decrease in the Fund’s Net Asset Value (NAV). This adjustment stems primarily from investments in the Retail sector, whose values fell on aggregate by (-7.7%), reducing the value of Retail sector assets in the Fund by £75.6 million*.
Why are we doing this?
Knight Frank usually values the Fund’s property assets once a month, but if a material change in value is noted intra-month, these assets will be valued more frequently to provide the Fund with the best possible independent view of property asset values.
In this case, the Valuer has taken this decision due to the growing number of available data points and transactional evidence pointing to a marked deterioration in the Retail sector since the summer. By making this adjustment, the Valuer is acting on the most recent market information, ensuring the Fund is fully marked to the current market and that investors are transacting at the most up to date price.
Rental value declines facing all Retail landlords
The latest data coming through is providing retail landlords with substantive insight into the levels of rent which retailers can now afford to pay to remain within their stores and units. As the willingness and capacity for retailers to pay their rents diminishes, Estimated Rental Values (ERV) are being revised downwards to more sustainable levels.
It is has been well documented that the bricks and mortar retail sector is suffering substantial headwinds. The rise of e-commerce coupled with recent retailer failures is increasing uncertainty across the sector. Retailers are reluctant to pay high rents and investors are decreasing their appetite for retail assets. (Transaction volumes have decreased by 24% compared to the same period in 2018). Even in highly sought after locations such as Bath and Manchester, rents have declined over the last 12 months.
The future of retail
Market views on the sectors vary, but most point towards further deterioration both in rents and values. Yet, depending on location, the type of retail and the nature of individual tenants, some properties are expected to be more resilient than others, such as supermarkets, central London shops and out of town shopping centres with more destination appeal.
*M&G Investments as of 08/11/19
**Property Data, as of 30/09/19