A core part of our philosophy is to identify well-managed companies which own assets that are considered ‘prime today’ or are developing assets that will become ‘prime tomorrow’.
‘Prime today’ focuses on quality real estate in the most desirable locations with strong management teams in place. These holdings tend to be more defensive with lower volatility. ‘Prime tomorrow’ targets companies whose assets will develop into the prime real estate of the future. These businesses may be based in emerging markets, or restructuring stories located in more established markets, for example. Generally, these holdings tend to exhibit higher beta than prime today and are often more volatile, which helps the fund when markets rally. By structuring the fund in this way, it should be able to generate attractive performance in different economic environments.
Capital & Counties Properties (CapCo) is an excellent example of a company that operates at both ends of the spectrum. Their £1.7bn portfolio focuses on two distinct areas of London: Covent Garden, a ‘prime today’ investment, and the Earls Court and Olympia development, which falls into the ‘prime tomorrow’ classification.
Since acquiring the Covent Garden estate in 2006, CapCo has introduced more than 50 new retailers and occupiers onto the site, transforming the area into one of London’s most reputable and vibrant retail districts.
As a result of CapCo’s focused asset management strategy, it is able to attract some of the most exciting and innovative brands to the area. Their strength on this front is illustrated by the leasing success they achieved in 2012, opening 14 new retail outlets and restaurants during the year. Among these were ‘cult’ restaurant Meatliquor, luxury brand Chanel’s only beauty boutique and a new concept from men’s retailer Hackett, which includes an in-house tailor and barber.
While Covent Garden sits firmly in the fund’s prime today basket, we continue to have confidence in CapCo’s ability to generate growing returns going forward from this part of its portfolio.
The company has already signed eight new leases in the first quarter of 2013, some 10.3 per cent ahead of valuers’ estimated rental values as at December 2012. CapCo also seeks to expand the Covent Garden Estate through tactical acquisitions.
At the other end of the spectrum is CapCo’s investment in the Earls Court and Olympia development, which we believe will create CapCo’s prime properties of tomorrow. The ‘Earls Court Masterplan’ intends to create 7,500 new homes as well as new education, cultural, health and community facilities.
CapCo continues to be a core holding, accounting for 2.5 per cent of the fund as at the end of April 2013. CapCo’s long-term investment philosophy is aligned with our approach as a supportive shareholder who will give companies the time they need to realise their vision. CapCo’s positioning between prime today and prime tomorrow should enable it to continue to provide long-term value for shareholders in the future.
Gillian Tiltman is manager of the M&G Global Real Estate Securities fund
