Spin-Free Guide to Property

Contents What is commercial property? 3 The benefits of investing in commercial property 4 Property compared with other types of investments 5 Understanding how commercial property can rise or fall in value 6 How to invest in commercial property 7 Types of property fund 8 A few questions to ask before you invest in a property fund 9 Glossary 10 Spin-free guides 11 Please refer to the glossary found on page 10 for an explanation of the words highlighted in bold throughout this guide. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to a financial adviser. The views expressed in this document should not be taken as a recommendation, advice or forecast.

What is commercial Commercial property refers to buildings used by businesses. property? The three main types of commercial property are retail, office and industrial. You can also invest in several other areas, from hotels and health centres to cinemas. Commercial property in brief Who uses commercial property? Commercial property is part of our everyday lives, as Commercial property covers many different types of this asset class includes the places where we work, shop buildings, but there is arguably even more diversity and relax. in the types of occupiers. Virtually all industries and businesses use commercial property, varying from small There are three main types of commercial property: locally based companies to multinationals and even retail, office and industrial. governments. Retail property: This is the largest section of the commercial property market and consists of shops, shopping centres and retail parks, which contain a mix of retail outlets. Office property: This includes business parks as well as office buildings. Industrial property: This covers factories, distribution warehouses and industrial estates. 3

The benefits of Commercial property offers the prospect of a reliable income. investing in Over the long term, this is likely to make up most of the total return you may achieve. commercial You may also get some capital growth, as properties can rise in value. However, they may property also fall in value. The potential for income The potential for capital growth The main source of return from commercial property Commercial property also has the potential for capital investment is normally the rent paid by the tenants – growth, meaning that if the property were to be sold, over the long term, this is likely to make up most of the the investor may receive more than the purchase price. total returns you may achieve. Of course, the investor may receive less if the price were to fall. Rental payments are made on a regular basis as set out in the lease agreement, just as they are when people rent A feature of commercial property is that its value tends residential properties. However, commercial property to be largely based on the reliability of the regular has two big advantages over residential property. The rental income rather than the emotional decisions that leases tend to last much longer and there is usually a can sometimes affect stockmarkets. This is one of the better chance of the rent being paid, as businesses are reasons that the performance of commercial property generally more reliable tenants, with access to larger is normally less volatile than some other types of sums of money. investment. Leases on commercial property can be for five or ten years – sometimes even longer – which means a commercial property investment offers the scope for a predictable, regular income that lasts the life of the lease. What’s more, rental rates are normally reviewed every five years and, in many cases, the rent can only be revised upwards. 4

Property compared Cash savings are perceived to be the safest way to invest, but returns are not high. with other types of Property has the potential for greater total returns than bonds over the long term. However, it investments tends to have less growth potential than equities. Bonds offer the potential for a regular income and tend to be lower risk than equities but have less chance for strong growth. Equities (also known as shares) are higher risk than bonds, property and cash, but they also offer the most potential for strong growth. Costs associated with buying and selling properties are generally higher than those for equities and bonds. Should you choose property over Equities have the potential for strong growth, but also bonds or equities? come with the possibility for greater losses as their value When it comes to choosing where to invest, the option fluctuates more and there is no obligation to pay the you go for is likely to depend on how you feel about risk shareholder back the original amount they invested. and what you need from your investment. Property can also be an appealing way to increase the Bonds are generally lower risk than equities as there is level of diversification in a portfolio focused on equities an obligation to pay the bond holder back the original and bonds. This is because it tends to perform very amount they invested. Bonds provide a regular income differently when market or economic conditions change. with more growth potential than cash. Diversification is a useful way to reduce risk in a portfolio. Up to £75,000 of your money is secure in a bank or building society through the Financial Services Compensation Scheme, unlike stocks and shares or fixed interest investments which are less secure. Property offers the combination of a stable, long-term income and potential for some growth. 5

Understanding how Commercial property is affected by supply and demand. commercial property Location and quality are also important. can rise or fall A tenant that defaults (in other words, doesn’t pay their rent) can significantly affect in value your returns. There are four key factors that affect the performance Location and quality of a commercial property investment. The highest-quality buildings in the best locations (which Supply and demand are known as prime property) attract the highest rents. When the economy is doing well, businesses prosper and However, a property’s status can change. For example, a look to expand, which means they need more space. prime retail shop might be downgraded if it is not looked This extra demand means that tenants will be prepared after by its owner or if a new shopping centre up the to pay higher rent, which generally feeds through to road takes away some of its customers. higher property values. In contrast, a downturn means Of course, there can be positive changes as well, such as an businesses are likely to cut back on expansion plans or industrial property being turned into a retail warehouse, even reduce the number of people they employ. This can which normally means it can charge higher rents. depress rents and property values. The difficulty in buying and These effects are exaggerated by the time it takes to selling property build commercial property, as the construction of new Unlike many other types of investment, property is quite buildings often lags behind rising demand. Equally, when difficult to buy or sell. The process takes time and there demand falls away, the buildings are still there, so there is no guarantee either that buildings will be available may be more available than are needed. to buyers or that sellers will be able to find a buyer. (To The financial strength of the use the technical term, property is less ‘liquid’.) This can tenants mean that, if a property needs to be sold quickly, its If a tenant is financially strong, they are less likely to value can suffer. Also, buying property requires a large default, so rental income can be more secure. A longer initial investment. lease also means greater security for the owner. This is important because default is one of the key risks in property investing. After all, if a tenant goes bust, the rent stops being paid and the owner’s costs rise. 6

How to invest in You can buy commercial property yourself. commercial You can buy shares in companies in the property sector. property You can put your money into a fund that invests in property. Different ways you can invest Property funds: A fund manager invests your money in in commercial property commercial property on your behalf. This gives you the Direct: You can buy and manage commercial benefit of the fund manager’s experience and expertise, properties yourself, though it’s likely you will as well as the resources of the investment company need a significant sum to get started – and you they work for. Some property funds buy buildings and may be relying on the performance of just one or manage them (these are known as ‘bricks and mortar’ two buildings. funds), while others focus on property company shares. Property company shares: You can buy the shares If you are interested in commercial property for its of companies that own, manage or develop property. income potential or lower level of risk, you may need If they do well, their shares should rise in value. The to take care when choosing where to invest. Although companies may also pay a dividend to shareholders, property company shares are in a position to benefit which would provide you with an income. However, over from the income generated by the properties they hold, time, the returns from property company shares tend to in the shorter term, their returns are usually more like be more variable, or volatile, than a direct investment the performance of shares – which means they involve a in property. higher level of risk. If you’re not sure about the suitability of an investment, you should speak to a financial adviser. 7

Types of property There are several different legal structures that property funds can use, which affect how they are set up and how they are taxed. fund These include unit trusts, Real Estate Investment Trusts (REITs) and Property Authorised Investment Funds (PAIFs). Choosing the structure of Property Authorised Investment Funds your fund (PAIFs) This section of our guide explains some of the legal These are similar to unit trusts, but have a legal structure structures of property investment funds. This information that makes them more tax-efficient for certain investors. is important as there can be significant benefits in How PAIFs can give you more choosing a fund with the right structure for your needs, particularly if you plan to hold it in an Individual Savings for your money Account (ISA). Please note, ISA tax advantages depend ‘Bricks and mortar’ unit trusts have to pay 20% tax on on your individual circumstances and ISA tax rules may the income they receive from rent, which reduces the change in the future. amount they can pay to their investors. However, PAIFs Three types of fund leave tax payments to the investor. Property unit trusts This means that when a PAIF is held in an ISA (where you A property unit trust is simply a fund that invests in don’t have to pay tax on investment income), the income property, where the investors own a specified number from a ‘bricks and mortar’ PAIF can be considerably of units depending on how much money they have more than the income from a comparable unit trust. invested. The value of the units depends on the value of the properties in which the fund is invested. Real Estate Investment Trusts (also known as REITs) These are investment companies that own and manage property. This means they have a share price that can be different to the value of the properties they hold (as the price is affected by supply and demand). They must pay out at least 90% of the taxable income they receive to investors in the form of dividends. 8

A few questions to Is there a range of property types in the fund? ask before you invest Does the fund have some cash reserves? in a property How does the fund manager plan to increase the value of their holdings? fund Does the fund manager’s company have the necessary resources? Does the fund meet your needs? Is it making the most of its properties? There are many property funds out there and their If most of a fund’s properties are occupied (in other names aren’t always that informative. However, you can words, it has a low vacancy rate) and its tenants are get an idea of the growth potential and risks by looking on longer leases, this means the fund is less likely to at the investments a fund makes and the company that experience a sudden drop in rental income. runs it. Equally, it’s good to check that the fund manager Where does the fund invest? is doing everything they can to maximise returns. A good place to start is to check how varied a fund’s For example, they could refurbish properties, change holdings are. This doesn’t just mean the number of planning use or improve their leases. properties it holds, it’s where they are located, what size Is the fund sensibly run? they are, how many tenants they have and what sectors they serve. When you put your savings in a property fund, you might expect all the money to be spent on buying properties – A broad spread of properties means a fund can cope after all, that is the point of the investment. However, a much better with a downturn in any one area – and well-run fund should hold some cash in reserve, so it is having lots of tenants means you aren’t relying on the ready to take advantage of new opportunities and can fortunes of just a few businesses. easily meet any withdrawals. What about the fund’s size and resources? At the most basic level, a larger fund is able to buy bigger properties – so it has more options to choose from. However, a well-resourced and highly experienced team also has more market knowledge and better access to opportunities. 9

Glossary Investment terms The following are explanations of some of the terms you would have come across in this guide. Asset Diversification Prime property Anything having commercial or exchange value that The practice of investing in a variety of assets. This A prime property is likely to be finished to a high Ais owned by a business, institution or individual. is a risk management technique where, in a well- standard, have a commercially attractive location Asset class diversified portfolio, any loss from an individual and be let to a financially sound tenant. Category of assets, such as cash, equities (or holding should be offset by gains in other holdings, Risk company shares), fixed income securities and their thereby lessening the impact on the overall portfolio. The chance that an investment’s return will be sub-categories, as well as tangible assets such as Dividend different to what is expected. Risk includes the real estate. Dividends represent a share in the profits of a possibility of losing some or all of the original Bond company and are paid out to the company’s investment. A loan in the form of a security, usually issued by shareholders at set times of the year. Total return a government or company, which normally pays a Equities The term for the gain or loss derived from an fixed rate of interest over a given time period, at the Shares of ownership in a company. investment over a particular period. Total return end of which the initial amount borrowed is repaid. Lease includes income (in the form of interest or dividend Capital growth A contract between a landlord and a tenant. It sets payments) and capital gains. Occurs when the current value of an investment is out the terms for the tenant to occupy the property. Volatile greater than the initial amount invested. Liquid When the value of a particular share, market or Commercial property A company is considered highly liquid if it has plenty sector swings up and down fairly frequently and/or Any property that is used for business purposes. The of cash at its disposal. A company’s shares are significantly, it is considered volatile. three main sectors are retail, industrial and offices. considered highly liquid if they can be easily bought Default or sold since large amounts are regularly traded. Z When a borrower does not maintain interest payments or repay the amount borrowed when due. 10

This brochure is part of our Spin-free guides aim to give you the basics range of Spin-free guides: about investing, to help you make informed decisions about your financial goals and how Investing to reach them. Equities The value of investments, and the income from them, will fluctuate which will cause the fund price to fall as well as rise and you may not get back the original amount you invested. We are unable to give financial advice. Risk Income If you are unsure about the suitability of your investment, speak to a financial adviser. The views expressed in this document should not be taken as a recommendation, advice or forecast. Bonds Property 11

Contact us If you would like to get in touch with us you can contact us in the following ways: Call us* Write to us: Customer Relations M&G Customer Relations 0800 390 390 PO Box 9039 If you have a query regarding your M&G investment. Chelmsford CM99 2XG Investment Helpline 0800 389 8600 If you would like to make an investment, request Learning Zone further information on a new or additional investment, Educational guides to help you on your investment or want to read more about our products and services. journey. Our Customer Relations team and Investment Helpline www.mandg.co.uk/learningzone can be contacted from 8.00am to 6.00pm, Monday to Friday, and from 9.00am to 1.00pm on Saturday. Minicom telephone 0800 917 2295 * For security purposes and to improve the quality of our service, we may record and If you have hearing difficulties, you can contact us on monitor telephone calls. If you would like to request a copy of the Important Information for Investors minicom from 9.00am to 5.00pm, Monday to Friday. document, a Key Investor Information Document or the Prospectus, free of charge and in English, please call Customer Relations free on 0800 390 390. This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776. APR 16 / W124608