The asset manager is targeting three principal types of residential property: PRS, senior housing and student accommodation. It has just closed a forward funding of its third acquisition in the sector, a purpose-built student project in Bologna, at a cost of €62.1 mln.

The Bologna investment follows a €47 mln senior housing acquisition in Parisian suburb Levallois and a €44 mln PRS deal in Amsterdam, taking the future value when they are completed to approximately €153 mln.

David Jackson, the M&G European Property Fund (EPF) fund manager, said the vehicle has two more PRS deals in the pipeline, and is principally focusing in Germany, the Netherlands and France for this subsector of the asset class. One of these is also in the Netherlands and is ‘about double’ the size of the Amsterdam investment.

‘If you look at the existing acquisitions plus our pipeline, it is probably over €350 mln in terms of end value’, he said.

M&G EPF’s GAV is currently circa €4.1bn, with a €400 mln capital queue, making it ‘one of the bigger pan European open-ended funds’, Jackson said.

‘Historically these funds have been purely commercial but if you look at the big core “ODCE” funds in the US over the years they have had significant exposure to residential and I see that as a way forward for Europe...We see it as a strong diversification benefit to a balanced European fund.’

He said the intention is also to rebalance the other sector weightings within EPF, to bring offices down from the current 54% to below 50% and retail down further from the current c 25%.

‘Logistics we are looking to increase, to north of 20%, we are accelerating that. Our early “post covid” deals in this fund have been in this sector.’  Last month EPF acquired a third warehouse in Sweden, in Norrköping, at a yield of 4.75%.

The EPF’s annual net total return for 2019 was 6.45%; so far in 2020 the YTD return is 1.8%.

Jackson said office exposure ‘has served us well in recent times and we have seen some strong performance particularly in Germany’. However, the fund will sell some offices selectively, including a circa €40 mln disposal currently under offer in Germany. “And as we continue to increase our exposure to residential and logistics, gradually the office exposure will come down.

‘If we do find good risk-adjusted returns in core CBD locations then we will still buy offices as well as sell. We have bid on a few offices in recent weeks, in Germany and Paris, but have been outbid  because demand is still very strong... Clearly there will be some changes to rental growth with the impact of the pandemic.’

M&G Real Estate has a longer track record in residential in its domestic market, where its UK residential fund launched in 2013 has reached £1 bn. The manager’s approach in mainland Europe is to use the expertise of this team to bring in specialist local managers on individual investments, with oversight and asset managing from local country offices.

The Bologna development, in 'Little Bologna' 20 minutes walk from the university, is being carried out by Stonehill Group and will be ready for occupation in 2022 providing 513 beds, principally self-contained studios. Jackson said Italy is the fourth largest student market in Europe and Bologna has only about one bed for every 11 students in terms of purpose-built student accommodation.

‘We are getting quite a good risk-adjusted return in Bologna because this is a development which completes in two years’ time and it is in southern Europe. We would expect to get a 25-50 basis point yield premium for a development over a standing investment and (here) we’re getting an overall yield premium of circa 200 basis points above a more mature market like Germany.’