M&G has around £447m invested in this market through two avenues. The first is direct let, where it takes leasing risk through building and managing a property. It also funds student accommodation where the university is the client, paying M&G back over 25 to 30 years in inflation-linked deals. There is no leasing risk here, all M&G has to do is assess whether or not the university can repay the loan.
“For us it is an income strip,” Brown says. “It’s income guaranteed by the university, so we do not take leasing risk. It is like a debt where we loan them the money for a set period.”
Brown adds that these deals are popular with pension funds because they can liability match through seeing the income they will receive over a fixed period. “For them it is a good matching tool for liabilities,” he says.
HEALTHY RETURNS
If student housing serves a younger demographic then parts of the healthcare property market target older citizens. An ageing population and growing diagnosis of chronic illnesses, such as diabetes, are putting pressure on healthcare services. Private finance helps by building and operating care homes for the elderly as well as providing modern surgeries.
The government has a strategy to ease pressure on hospitals by developing the primary care sector through building GP centres. The idea is to replace the mainly converted houses that doctors use as their surgeries into centres where minor operations and procedures can be carried out.
Quirijns, who invests in listed GP surgery builders Primary Health Properties and Assura, says that alternatives could be the core assets of tomorrow. “You could argue are they still alternatives or are they moving to a much broader investment audience,” he adds.
In healthcare Quirijns is seeing yields of around 5.25%, which along with 3% inflation growth, points to a potential 8% return. This compares to 4.25% for an office, a sector where he questions growth, saying he has heard estimates that rents in London could dive 10% to 25%. “The office market’s cycle is peaking,” he adds.
In healthcare Legal & General Investment Management (LGIM) focuses on long-term care, such as care homes. It invests with operators that management judge to be best in-class.
“You have to be quite selective in healthcare over the quality of the accommodation, the need in the local area and how the operator performs,” LGIM Real Assets’ head of fund management, Michael Barrie, says. “You have to be aware that there are areas like government funding and the minimum wage. So the operational model is quite important.”
