The M&G Secured Property Income Fund Annual Investment Report and Consolidated Financial Statements (audited) for the year ended 30 June 2020 Contents

The M&G Secured Property Income Fund Manager’s report Page 1 Financial highlights Page 12 Consolidated Financial Statements and notes Page 13 Trustee’s responsibilities and report Page 30 Independent Auditor’s report Page 32 Other regulatory disclosures Page 37 The M&G Secured Property Income Fund Manager’s report

The Manager of The M&G Secured Property Income Real Estate Asset Manager Fund (the ‘Fund’) presents the Annual Investment M&G Real Estate Limited Report and Consolidated Financial Statements (audited) 10 Fenchurch Avenue, London EC3M 5AG for the Fund for the year ended 30 June 2020. Legal Adviser to the Fund as to Guernsey law Administration Carey Olsen (Guernsey) LLP Carey House, Les Banques, St Peter Port, Manager Guernsey GY1 4BZ

M&G (Guernsey) Limited Ground Floor, Dorey Court, Admiral Park, St Peter Port, Neither the Manager nor the Trustee are authorised under the United Guernsey GY1 2HT Kingdom Financial Services and Markets Act 2000. The investor protection provided by the United Kingdom regulatory system does Licensed by the Guernsey Financial Services Commission under not apply to the Fund. The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended). Both the Manager and the Trustee are licensed by the Guernsey Financial Services Commission under The Protection of Investors Board of Directors of the Manager (Bailiwick of Guernsey) Law, 1987 (as amended). Statements made in this report are, where appropriate, based on James Gilligan (Chairman) advice received by the Manager regarding present law and Peter Baxter administrative practice. Every care has been taken in preparing the Timothy Cumming statements contained herein which are believed to be correct at the Karen Donald time of going to press, but the Manager does not take any Steffan Francis responsibility for the accuracy of such statements or for the effect on Peter Mills them of any future changes in the law or in administrative practice. John Cable (resigned 1 November 2019) Investors who are in any doubt of what action to take are Administrator, Registrar and Listing Sponsor recommended to consult their professional advisers. JTC Fund Solutions (Guernsey) Limited Ground Floor, Dorey Court, Admiral Park, St Peter Port, The Fund Guernsey GY1 2HT The Fund (with its subsidiaries, together the ‘Group’) is an open ended unit trust constituted in Guernsey with unlimited duration by a Investment Advisor Trust Instrument dated 2 May 2007 and amended and restated on 2 September 2020 (as further amended, restated, novated or M&G Investment Management Limited supplemented from time to time), made between the Trustee and the 10 Fenchurch Avenue, London EC3M 5AG Manager and governed by Guernsey law. The Fund is listed on The International Stock Exchange (‘TISE’). The Fund has been authorised Trustee - until 15 August 2019 by the Guernsey Financial Services Commission (‘GFSC’) as an authorised Class B open-ended collective investment scheme under Kleinwort Benson (Guernsey) Limited the Authorised Collective Investment Schemes (Class B) Rules 2013 Hambro House, St. Julian’s Avenue, St Peter Port, (the ‘Rules’). Guernsey GY1 3AE The GFSC has exercised the discretion permitted under the Rules to Licensed by the Guernsey Financial Services Commission under modify the requirement of the Rules for the disclosure of the value of The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as individual properties held in the portfolio. The requirement is modified amended). to show a portfolio statement specifying properties held in value bands at the end of the accounting period. This modification is Trustee - from 15 August 2019 consistent with industry practice. Northern Trust (Guernsey) Limited PO Box 71, Trafalgar Court, Les Banques, St Peter Port, Information Memorandum Guernsey GY1 3DA The current Information Memorandum ('IM') of the Fund is dated 2 Licensed by the Guernsey Financial Services Commission under September 2020. There are no disclosures required to be made by The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as the Manager to Unitholders in relation to any changes to the IM since amended). 2 September 2020. The principal change to the IM on 2 September was to introduce the Independent Valuer concept of a Market-Wide Non-Payment Event, which provides for CBRE Limited the allocation of deferred or delayed rental income, when eventually St Martin's Court, 10 Paternoster Row, London, EC4M 7HP received, to those Unitholders who would have received same had it been received from tenants in the normal timeframe.

Independent Auditor On 6 October 2020 the Manager and the Trustee declared a Market- Wide Non-Payment Event thereby allowing for the allocation of Ernst & Young LLP deferred or delayed income from prior periods (i.e. rental income not Royal Chambers, St. Julian’s Avenue, St Peter Port, received in the quarter to which it relates) to the relevant Unitholders, Guernsey GY1 4AF ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 1 The M&G Secured Property Income Fund Manager’s report

Information Memorandum (continued) Rules made under The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended) and the Principal Documents. until Normalisation is declared. The Market-Wide Non-Payment Event has been declared in light of lower collections of rental income as a The Manager is also responsible for taking reasonable steps for the result of Covid-19, for example in the leisure and hospitality sectors, prevention and detection of fraud and other irregularities. for periods since Q2 2020. When received, such income will be allocated to those Unitholders so entitled to it. So far as the Manager is aware, there is no relevant audit information of which the Fund’s auditor is unaware, and the Manager has taken The Market-Wide Non-Payment Event will be kept under continual all the steps to ensure it is aware of any relevant audit information and review by the Manager and Trustee, and Unitholders will be kept to establish that the Fund’s auditor is aware of that information. updated until a declaration of Normalisation is agreed.

Important information Statement of the Directors The World Health Organisation declared the COVID-19 outbreak a pandemic on 11 March 2020. Global financial markets have been of the Manager reacting to the outbreak. All markets have incurred increased volatility and uncertainty since the onset of the pandemic. This report is signed in accordance with the requirements of The Authorised Collective Investment Schemes (Class B) Rules, 2013. The Manager has noted the operational risks that are posed to the Fund and its service providers due to global and local movement restrictions that have been enacted by various governments. James Gilligan The COVID-19 pandemic is an unprecedented event and the eventual Directors of the Manager Timothy Cumming } impact on the global economy and markets will largely depend on the scale and duration of the outbreak. The Manager continues to monitor 23 October 2020 this situation. Investment objective Manager’s responsibilities The Fund invests primarily in UK real estate, with the objective to Statement of the Manager’s responsibilities in respect deliver a secure long-term income stream with inflation-linked or of the Consolidated Financial Statements of the Fund fixed uplifts. Investment returns are optimised by combining systematic analysis of both tenant credit quality and real estate The Manager is responsible for preparing Consolidated Financial fundamentals. Statements for each financial year which give a true and fair view of As a consequence, this provides investors access to long-term the state of affairs of the Group and of the total return and cash flows liability matching cash flows through exposure to a diversified pool of the Group for that period and are in accordance with the provisions of inflation mitigated corporate revenue streams, backed by UK of its Principal Documents and The Rules made under The Protection real estate assets. of Investors (Bailiwick of Guernsey) Law, 1987 (as amended). In preparing those Consolidated Financial Statements the Manager is required to: • select suitable accounting policies and then apply them Investment policy consistently; The Fund aims to provide growing and secure income by investing • make judgements and estimates that are reasonable and prudent; in a diversified portfolio of UK real estate assets. The Fund seeks to • state whether applicable United Kingdom accounting standards add value through: have been followed subject to any material departures disclosed • strategic asset selection across the main sectors of the UK real and explained in the Consolidated Financial Statements; and estate market; • prepare the Consolidated Financial Statements on the going • analysis of each property’s fundamentals and potential; and concern basis unless it is inappropriate to presume that the Fund and the Group will continue in operation. • analysis of the credit quality of each tenant.

The Manager confirms that it has complied with the above Security of investment returns will be achieved through maintaining requirements in preparing the Consolidated Financial Statements. an appropriate balance between tenant credit quality and the underlying real estate fundamentals (including vacant possession The Manager is responsible for keeping proper accounting records value), whilst income growth will be achieved by investing in assets which disclose with reasonable accuracy at any time the financial with leases that incorporate regular rent reviews providing inflation position of the Fund and the Group and to enable it to ensure that the linked or fixed uplifts. Consolidated Financial Statements comply with the provisions of The

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The Fund’s non-GAAP NAV per Unit decreased by 2.64% over the Investment Advisor’s report year to 30 June 2020. This is due to yield widening across certain assets as a direct consequence of the COVID-19 pandemic. In For the year ended 30 June 2020 particular, the Fund’s operational assets were largely subject to government-mandated closures, resulting in the underlying tenants Investment highlights being unable to generate revenue for a number of months. The Fund • The Fund delivered a total return of 1.11% for the 12-month has therefore been working collaboratively with impacted tenants to period up to 30 June 2020 net of all costs and charges; support them through this period, whilst also maximising long term value for investors. The relatively small NAV per Unit decline has been • The average annualised net distribution yield of the Fund (net offset by the income return, resulting in a total return of 1.11% for the income on an accrued basis as a percentage of the average NAV Fund (net of all costs and charges) over the year to 30 June 2020. per Unit) was 3.77%; This compares favourably to the broader property market (-2.56% total return as measured by the MSCI UK All Balanced Property Fund • The non-GAAP Net Asset Value of the Fund was £4,427 million Index), demonstrating the defensive and high quality nature of the by the income return (an increase of £134 million over the year); Fund’s assets. • The weighted average lease expiry (WALE) of the portfolio by Whilst COVID-19 has impacted transaction volumes, long lease income remains healthy at 29.5 years (30.4 years as at 30 June assets continue to be in high demand from investors – primarily due 2019). If ground leases are capped at 50 years, the portfolio to their long term contracted rental growth, defensive nature and WALE stands at 23.3 years (23.7 years as at 30 June 2019); strong relative value proposition – as demonstrated by the weight of • COVID-19 impacted a number of hotel and leisure tenants from capital in the UK long lease market. Accordingly, the market remains March onwards, resulting in reduced rent collection rate for Q2 highly competitive, particularly for investment grade cash flows, and (payable in March) and Q3 (payable in June) of 81% and 89% therefore the Fund has remained selective with regard to new respectively. Fund distributions were reduced accordingly and acquisitions. agreements are now in place for the repayment of the majority of The annual net distribution yield of the Fund (total net distributions on deferred income; an accrued basis divided by the average NAV per Unit) for the year • As a result of COVID-19 the Fund’s Valuer introduced material ended 30 June 2020 was 3.77%, 17bps lower than the previous year. uncertainty clauses in March which remained in place for 65% of This decrease has been in part due to the forward funding of the the portfolio as at year-end. They were subsequently removed Anglo American HQ, which only became income producing in June entirely on 9 September; 2020, and in part due to prudent bad debt provisions on uncollected rent as a result of COVID-19. Given that only collected rents were • The Fund completed on three acquisitions during the 12-month distributed, there has been a temporary reduction in the distribution period up to 30 June 2020, bringing the total number of yield to 3.1% for the period from April to June (from 3.8% for the properties to 240; period January to March). The average monthly distribution per Unit • Two Buzz Bingo clubs were sold ahead of valuation: for the year was £0.37, versus £0.382 in the previous financial year. Wolverhampton (sale price of £2.1 million) and Bridlington (sale The Fund’s valuations remain well supported due to the weight of price of £805k); investor capital seeking long term inflation-linked cash flows from high • The Fund’s developments continued to progress, albeit the quality real estate, combined with the scarcity value of the Fund’s completion dates are slightly delayed. Rent commenced on the assets which cannot be replicated in the current market. Further, the Anglo American HQ in June due to a contractual fixed lease start Fund continues to offer a significant ‘illiquidity premium’ above date; similarly rated ‘BBB’ corporate credit, of 3.78% as at 30 June 2020, 69bps higher than the prior year. This is calculated by forecasting the New investor capital commitments of £32 million were received • Fund’s cash flows using the market breakeven inflation rate and over the 12-month period up to 30 June 2020; assumes no tenant defaults, no sales or purchases and no capital • The Fund’s undrawn investor capital queue stood at £402 million value growth from current valuations. This illiquidity premium offers a as at 30 June 2020, comprising undrawn commitments from the degree of valuation protection should gilt rates and credit spreads Q3 and Q4 2017 vintages, the Q3 and Q4 2018 vintages and the widen meaningfully. Q1, Q2 and Q3 2019 vintages. We believe that over the medium to long term the Fund should continue to deliver attractive risk-adjusted performance, due to the Fund performance disciplined investment strategy focusing on high quality assets with Over the year to 30 June 2020, the Fund provided a total return of long term, growing and secure income streams. Since inception, the 1.11% (net of all costs and charges). This is lower than prior years Fund has delivered significantly stronger returns than the wider due to the COVID-19 pandemic, which has resulted in rent collection property market with a total annualised return of 5.36% (net of all disruption and capital value decline in certain sectors, principally the costs and charges) versus 2.77% (as measured by the MSCI UK All hotel and leisure sectors. Since March month-end, when COVID-19 Balanced Property Fund Index). This reflects a total return pick up of first impacted the Fund’s property valuations, the Fund’s capital value 2.59% per annum for a lower risk proposition (the Fund benefits from has fallen by c. 4%, with values stabilising in recent months. Overall, a higher average tenant credit rating, longer leases, contractual rental the Fund continues to benefit from good rental income generation and growth and higher quality real estate). rental growth, albeit UK inflation (RPI) – the principal rent review index for the Fund’s leases – was lower at 1.07% over the year to 30 June 2020 (30 June 2019: 2.88%). The Fund’s medium to long term anticipated return of RPI + 3% remains unchanged.

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outlook therefore remains unclear. In the face of so much uncertainty, Investment Advisor’s report the strength of any recovery remains dependent on the country’s ability to contain the virus, ease social distancing measures and the COVID-19 update ability of companies and households to stay afloat as the economy The COVID-19 pandemic and associated government lockdown reopens. measures have caused major disruption to the real estate market. While inflation (CPI) is expected to remain muted this year at 0.8% While the majority of the Fund’s rent has been collected as normal p.a., economic recovery is expected to encourage an acceleration in (with a 100% collection rate for supermarkets, offices, residential, price growth to 1.7% p.a. in 2021 (HM Treasury consensus forecast, student accommodation, car auctions and healthcare), some of the June 2020). However, limited inflationary pressures combined with Fund’s hotel and leisure tenants have been impacted as their revenue the potential for a ‘no deal’ Brexit are likely to ensure that the BoE generating abilities have been severely disrupted. As a result, a small maintains interest rates at low levels, underpinning the view that rates number of tenants have experienced short term cash flow and will continue to be ‘lower for longer’ for some time to come. liquidity constraints, which has impacted their ability to service their various financial obligations, including rent. We remain in regular Market overview dialogue with all impacted tenants and, where appropriate, have UK property market total returns have been decelerating on an annual agreed rent deferral and repayment terms to protect the long term basis, owing to a combination of a weaker retail market and, more value of their businesses and the Fund’s assets. recently, the impact of COVID-19. While it is still too early to gauge the Two of the Fund’s tenants (Travelodge and Buzz Bingo) have full effects of the pandemic on either the economy or the property undertaken Company Voluntary Arrangements (‘CVAs’) as a markets, on-going uncertainty around the path of the pandemic mean response to COVID-19. A CVA is a formal procedure and is a legally that we are likely to see activity in both the occupational and binding agreement between the business and its creditors. It sets out investment markets remain subdued in the short term. For property how repayments of company debt should be made to creditors landlords, the immediate concerns have been rent collection and the (including landlords) and can deliver a better outcome than an negotiation of rent holidays and deferrals during the crisis. administration or liquidation. The two CVAs have resulted in reduced However, while traditional balanced property funds have been seeing income for the Fund in respect to the Travelodge and Buzz Bingo a sharper deceleration in performance, with total returns falling into holdings, as well as three vacant Buzz Bingo sites, for which exit negative territory at the end of Q2 2020, the long lease index has options are currently being considered. recorded positive annual total returns, demonstrating relative The Fund’s rent collection rate has therefore been lower than the defensiveness during periods of uncertainty and economic historic 100% collection rate (81% and 89% in Q2 and Q3 2020 weakness. (Source: MSCI/AREF UK Quarterly Property Fund Index). respectively). We expect to recover the majority of deferred rent by Whilst the impact of the pandemic has been felt across the whole of the end of 2021. the economy, property market sectors have been affected to differing The Fund’s Independent Valuer (CBRE) – in line with all of the main extents: valuation houses – added a Material Uncertainty Clause (‘MUC’) into Discretionary retail, leisure and hospitality operators have been all UK property valuations in March. CBRE is of the view that its • most impacted, resulting in major short-term liquidity pressures monthly valuations remain reliable and accordingly the Manager has on already stressed sectors. Many retail tenants have struggled continued to price the Fund as normal, with the calculation of a to pay rents, while the leisure and hospitality industry only started monthly NAV. As at 30 June 2020, MUCs remained in place for 65% to reopen in Q3 2020 and remains subject to restrictions on of the Fund’s portfolio by value. Post Fund year-end on 9 September, trading. In contrast “essential” retail businesses that have been MUCs were lifted across all UK real estate, with the exception of allowed to continue trading, such as food operators or some assets valued purely with reference to trading potential (e.g. pharmacies, have performed well. Amongst them, the major hotels with management contracts) to which the Fund has no winners are traditional grocers who benefit from more mature exposure. omnichannel infrastructure. Economic overview • The industrial sector has been relatively resilient, reflected in COVID-19 has been a global economic shock like no other, with an higher rent collection versus other sectors. It benefited from a unprecedented 20.4% decline in UK GDP in the three months to June surge in demand from grocery stores, third-party logistics and 2020 (Office for National Statistics), and uncertainty as to the duration government bodies as they sought short-term warehouse space and severity of the future economic impact. Post Fund year-end, the to cater for the rise in online orders and infrastructure economy is showing early signs of recovery with the easing of requirements. That said, the sector has not been unscathed, with lockdown measures resulting in a pick-up in consumer and housing some warehouse space let to stressed retailers released back market activity over the summer. However, the recent rise in infections onto the market. The long-term outlook for the sector remains and the targeted measures to contain the spread of the virus are good, underpinned by the continued growth in e-commerce. expected to take a toll on growth in coming months. The government’s For many organisations, the transition to working from home has extended rescue package (the Winter Economic Plan) which includes largely been seamless, triggering conversations around the future of wage top-ups, cash flow support for companies and an extended VAT offices. We expect well-specified and well-located offices to remain at cut for the hardest hit sectors should support the UK economy to the heart of companies’ workplace strategies, driven by the need for some extent. In addition, the Bank of England (‘BoE’) maintained the more and enhanced collaboration spaces. Given the uncertainty Bank Rate at the historic low of 0.1% and has continued to expand its surrounding office re-occupation, some businesses are likely to adopt QE programme. Further, the Brexit discussions have resumed but a wait-and-see approach before signing new leases, and there is there is still uncertainty over the nature of the UK’s future trading potential for existing space to be released back to the market. Whilst relationship with the Eurozone. The medium to long term economic this is expected to put pressure on short-term rental forecasts, we

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Investment Advisor’s report Liquidity The Fund continues to be fully invested in UK property and aims to minimise its cash balance via the use of its investor capital queue Market overview (continued) system and short term debt facility (£100 million facility with RBSi, expect delays to planned future developments to further restrict undrawn as at 30 June 2020). This limits any cash drag on already-constrained supply and support vacancy rates for high quality performance and provides a liquidity mechanism for investors. Whilst stock. the Fund does not have a specific target cash balance, over the year to 30 June 2020 the cash balance in the Fund has not exceeded 3% Despite the economic turmoil from COVID-19, the private rented of NAV. Whilst the Fund has the ability to invest in property derivatives sector has already shown its resilience versus other sectors through it does not currently hold any and has not since inception. much higher and sustained levels of rent collection. Wider uncertainty has led to some house price and rent falls, but both have shown signs As at 30 June 2020, the Fund’s investor capital queue was £402 of emerging recovery and improving sentiment, albeit possibly a million (or circa £220 million less the outstanding balance of the result of pent up demand and a temporary reduction in SDLT. The contracted development fundings). Post year-end, the Fund issued outlook for unemployment remains a key concern, however the long- drawdown notices totalling £68 million and at the time of writing the standing supply/demand imbalance is expected to continue to investor capital queue stands at £304 million. underpin the market over the long term. The Fund has continued to attract new investor commitments over the While traditionally demand for student housing has been de-linked year, despite having an already significant investor capital queue, with from the economic cycle, the sector has been significantly affected by total investor commitments of £32 million in the 12 months to 30 June lockdown measures, with most operators agreeing to reimburse 2020 (versus £215 million in the prior year). Over the same period, students for their final term. The healthy application figures for the £203 million was deployed from the investor capital queue (versus 2020/21 academic year are encouraging but we remain cautious on £351 million in the prior year). the short-term outlook, despite the Fund having received 100% of Whilst aiming to deploy investor capital into assets that are accretive rent in this sector thus far. to the portfolio, running an investor capital queue provides investors Investment activity slowed considerably in the six months to 30 June with liquidity and enables meaningful conversations with potential 2020, as the lockdown hindered the ability to carry out physical counterparties. inspections and valuations. That said, post Fund year-end there has Prior to the COVID-19 pandemic, we were guiding drawdown timings been some evidence of investment activity increasing. of up to 24 months, however, we have temporarily removed our drawdown timing guidance due to the prevailing market uncertainty. Portfolio structure The Fund continues to invest in UK property with long term Transaction activity contracted income streams. As at 30 June 2020, the Fund’s NAV The Fund completed on three acquisitions over the year to 30 June was £4,427 million (an increase of £134 million over the year) and 2020, comprising: comprised 240 individual assets across 49 holdings and 25 tenants. The Fund has a high security of income with all investments backed • A David Lloyd Health and Racquets club located in Colchester. by long term leases with inflation-linked or fixed rental increases, as The asset is let to David Lloyd Leisure Ltd, the main UK operating well as ownership of the underlying real estate. Further, as at year entity, on a new 30 year full repairing and insuring lease, subject end the Fund had an investment grade weighted average credit to five-yearly, RPI-linked rent reviews (0-4% p.a. collar). rating of ‘BBB-’. As at 30 June 2020, the weighted average lease 50% of a portfolio of 40 branded hotels (39 Holiday Inn Express term by income of the portfolio was 29.5 years (23.3 years assuming • assets and one Hampton by Hilton), structured on a ground rent ground leases are capped at 50 years), with the nearest lease expiry basis, subject to a 125 year full repairing and insuring leases with being 11.3 years (the non-extended portion of the British Car annual, RPI-linked rent reviews (0-5% p.a. collar) and a tenant £1 Auctions portfolio). The Fund has 91.3% of rental income linked to buyback option in year 65. inflation, with the remaining 8.7% of income providing fixed percentage rental increases (average of 2.8% per annum). • The sale and leaseback of Syngenta’s International Research and Development centre in Berkshire, on a new 40 year full As at 30 June 2020, the Fund was invested as follows (by income repairing and insuring lease, with break options in years 20 and before provisions): 28.8% in Supermarket Retail, 19.7% in Office, 30, subject to annual, RPI-linked rent reviews (0-5% p.a. collar). 16.2% in Leisure, 11.3% in Hotels, 6.9% in Healthcare, 5.9% in Quasi-Industrial, 4.9% in Student Accommodation, 4.2% in The Fund sold three assets over the year to 30 June 2020, totalling Residential and 2.0% in Research and Development. In terms of £17 million, comprising: geographical allocation, the Fund’s exposure stands at (by income Buzz Bingo club, Wolverhampton for a total of £2.1 million (sold before provisions): 39.1% located in London, 11.5% in the South • ahead of valuation and the original purchase price). East and 49.4% in the rest of the UK. Buzz Bingo club, Bridlington for a total of £805k (sold ahead of The Fund will continue to grow with the completion of its • valuation and the original purchase price). development assets: the Anglo American HQ redevelopment in Farringdon, London is expected to reach practical completion in Q1 • Priory, BUPA Nursing & Residential Home, Solihull for a total of 2021 (although full rent commenced in June 2020 due to the fixed £13.97 million. lease start date) and the North Wharf Gardens, Paddington hotel and aparthotel development is due to complete in Q3 2021 (upon completion it will be let to Premier Inn and Staycity).

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Investment Advisor’s report

Fund governance

The Fund continues to operate within all its investment guidelines; none of which have been breached since the Fund’s inception. This is reinforced by the strong governance framework within which the Fund operates, namely the level and range of experience on the Investment Advisor’s Investment Committee (comprising senior staff members across M&G’s Fixed Income and Real Estate businesses) and the Board of Directors of the Manager. Please see the below table for a summary of the Fund’s position versus each of its investment restrictions as at 30 June 2020:

Investment restriction Fund’s position as at 30 June 2020 Borrowing maximum 30% (or if greater than 30% it must not last more than 3 months) 0.00% of GAV Any single counterparty (OTC Derivative), maximum 20% GAV 0.00% of GAV Any single body (Transferable Secs, Money Market), maximum 20% GAV 0.00% of GAV Any single body (Deposits), maximum 20% GAV 2.74% GAV Leisure sector assets (excluding hotels), maximum 30% GAV 13.95% GAV Under development or held vacant pending development, maximum 20% GAV 4.71% GAV* Any single group of tenants (excl. UK Govt), maximum 35% Gross Income 13.01% of Gross Income Any single Real Estate Asset, maximum 30% GAV 6.29% of GAV Minimum Credit Rating (Deposits, excl. Trustee), minimum A-/A3 (Split Low) Confirmed Speculative Abortive Costs, maximum £100,000, without Board approval Not exceeded in year to 30 June 2020

* It should be noted that the Fund’s forward funding of the Anglo American HQ falls outside of the Fund’s Investment Memorandum’s definition of a development, given it is subject to a fixed lease start date guaranteed by an investment grade counterparty. Only North Wharf Gardens, Paddington is included and the maximum commitment is reflected.

Each and every transaction (sale or purchase), as well as other asset management initiatives, are reviewed by the Investment Committee (IC) of the Investment Advisor and presented to the Board of the Manager, which retains ultimate control of the Fund.

Ben Jones (Head of Real Estate Income and Co-Fund Manager of the Fund) left M&G during the financial year ended 30 June 2020. Holly Johnstone, a longstanding member of the team and previously Deputy Fund Manager, is now Co-Fund Manager, alongside Lee McDowell, whose role remains unchanged.

M&G’s Real Estate lncome team has strength in depth and breadth and draws on the combined resources of M&G's industry-leading Fixed lncome and Real Estate divisions. The investment process, strategy and Investment Committee is unchanged (other than the retirement of Trevor Hankin and the addition of Jose Pellicer) and we expect the Fund to continue to perform in line with expectations.

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Environmental, Social and Governance (‘ESG’)

M&G Real Estate’s Responsible Property Investment strategy The Fund’s Real Estate Asset Manager, M&G Real Estate has a responsible property investment strategy which seeks to create and manage exceptional places that enrich the lives of people and communities to deliver long-term value for our investors, society and the environment. M&G Real Estate has redefined its approach to Responsible Property Investment, having simplified its strategy to home in on the following as core pillars of focus: environmental excellence; health, wellbeing and occupier experience and contributing to communities and society.

For funds under asset management globally, M&G Real Estate has set implementation objectives against these impact area.

Responsible Property Investment objectives for the M&G Secured Property Income Fund

M&G Real Estate has developed its responsible property investment strategy for the Fund in line with its new focus areas. New long term objectives have been set, as well as short term targets to ensure delivery in each of the three focus areas as detailed in the table below. This is to ensure that the Fund maintains a sector leading approach to responsible investment and continues to meet the needs of its Unitholders.

Long term objective Short term target (by end 2021 unless specified) Environmental Achieve net zero greenhouse gas • Develop net zero carbon pathway for the Fund (by end of 2020) Excellence emissions by 2050 Ensure portfolio climate resilience • Undertake work to assess risk and identify mitigation measures for material climate risk across our portfolio Proactively drive and evidence • Seek green building certification on new development funding; implement environmental improvements at assets BREEAM In-Use Certification at ten of the Fund’s assets • Proactively engage our occupiers on their environmental impacts, and endeavor to support their environmental programmes and initiatives; implement smart energy data capture on key assets Health, wellbeing Promote and support wellbeing and • Seek opportunities to encourage adoption of health and wellbeing strategies by experience inclusivity across the portfolio our occupiers Ensure an exceptional standard of • Implement our H&S processes to ensure an exceptional standard of safety and Health & Safety security in all the working environments we control Ensure highest levels of occupier • Ensure ongoing improvements in our occupier engagement strategy (including experience and satisfaction an occupier satisfaction survey) Contributing to Actively engage communities • Seek opportunities to encourage adoption of community engagement communities and programmes by our occupiers and during development activities that we fund society

ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 7 The M&G Secured Property Income Fund Manager’s report

GRESB (Global Real Estate Sustainability Benchmark)

Since 2013, the Fund has participated in the GRESB Real Estate Assessment on an annual basis – this is the Fund’s eighth year of reporting. In 2019, the Fund achieved a 2-star ‘Green Star’ status, and continues to show year on year improvements in performance. The Fund scored above the GRESB global average and peer average for the ‘Management & Policy’ aspect. The Fund has completed its submission to the 2020 Real Estate Assessment; results will be published by GRESB in November 2020, later than in previous years due to COVID-19. The Fund’s short term responsible property investment targets (described above) are aligned to GRESB requirements and have been implemented to support continued improvement in the GRESB score.

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Environmental Excellence

1. Achieve net zero greenhouse gas emissions by 2050

We believe that climate change is the most important environmental issue facing the World today. The risks posed by climate change are multi- faceted and far reaching, and the implications on our environment and society are profound. It is likely that the world will warm by more than two degrees Celsius, and continued relative inaction will exacerbate the impact.

M&G Real Estate has committed to net zero carbon by 2050 across its global real estate portfolio. This covers operational carbon, critically covering whole building performance including our tenants’ activities, as well as embodied carbon of development, refurbishment and fit-out works.

M&G Real Estate, in conjunction with the Investment Advisor, is in the process of developing net zero carbon pathways for the Fund. This will include interim targets and metrics to measure progress and communicate to investors in line with industry standards, including the Task Force on Climate Related Financial Disclosure recommendations. It is also working with the Investment Advisor on integrating net zero considerations into investment processes and investment strategy.

2. Green building certification

Currently, 20% of the Fund by value (as at 30 June 2020) has a green building certificate under a recognised scheme (e.g. BREEAM New Construction). We are continuing to seek opportunities to expand the number of green building certified assets held in the Fund. We seek to include green building certification requirements in forward funded developments, and the Fund’s two developments currently under construction are targeting BREEAM New Construction ‘Excellent’ ratings at practical completion. M&G Real Estate is also committed to certify ten assets under the BREEAM In-Use certification scheme before the end of 2021, this work was previously planned for 2020 but has been delayed due to COVID-19. BREEAM In-Use provides an opportunity to measure the operational sustainability performance of assets and provide useful feedback to occupiers to support the development of their own management strategies.

3 . Proactively drive and evidence environmental improvements at assets

The environmental and wider sustainability performance of all assets in the Fund is ultimately controlled and driven by our occupiers given that all leases are on a full repairing and insuring basis. We are committed to working with occupiers to improve performance wherever possible. During the past year we have extensively engaged with our largest occupiers to build a greater understanding of their corporate sustainability strategies and to find opportunities to align with the Fund’s own approach. We have also undertaken extensive data collection to measure the actual environmental (energy, greenhouse gas, water and waste) performance of assets. Further, we have received ‘actual’ energy performance data for 72% of the Fund’s lettable floor area, a significant uplift on the previous year, and have incorporated this information into the GRESB Real Estate Assessment disclosure. For the remaining assets where data capture has not been possible we have estimated energy and carbon performance using established industry benchmarks to achieve full data coverage (this data is available upon request).

Access to occupier environmental data not only supports the Fund in its disclosure to GRESB but it also supports the development of a net zero pathway model which sets out what is required to move the portfolio to achieving net zero greenhouse gas emissions by 2050. Early insights from this work are already driving conversations with some of our occupiers to explore opportunities to collaborate on improving asset environmental performance.

4 Energy Performance Certificates (‘EPC’)

M&G Real Estate monitors the EPC ratings of all assets in the portfolio. This not only provides a measure of the energy performance of the portfolio, it also enables us to manage any risk posed by the introduction of Minimum Energy Efficiency Standards (‘MEES’) legislation in the UK. MEES made the granting of a new lease or lease renewal of any building with an EPC rating below ‘E’ illegal with effect from April 2018. The chart below shows a breakdown of the Fund’s EPC ratings for assets that will be covered by the MEES legislation from 2023 (England & Wales only, where lease length is less than 99 years). Through our asset planning process we are proactively seeking to manage any risk associated with these holdings well in advance of the 2023 backstop date. We are speaking with our occupiers to ensure that ratings below the minimum standard are addressed as a priority, we are also focused on ensuring that improvements made provide resilience against any future changes to EPC legislation. For existing EPC ratings, 90% of these as a proportion of estimated rental value (ERV) are EPC rating ‘E’ or above. We continue to monitor the EPC ratings of existing and new assets as they are acquired or developed.

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2020 9 The M&G Secured Property Income Fund Manager’s report

Outlook for the Fund

The Fund’s long term focus remains unchanged: generating long- term, above inflation performance for our clients whilst pursuing new opportunities at good relative value and maintaining the quality of the portfolio.

Lee McDowell and Holly Johnstone M&G Investment Management Limited

14 October 2020 Lee McDowell and Holly Johnstone are employees of M&G FA Limited which is an associate of M&G (Guernsey) Limited.

10 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2020 The M&G Secured Property Income Fund Manager’s report

Portfolio statement (continued) Investments Property by Market Sector and Value Band as at 30 June 2020 2019 Portfolio of investments Location % % Properties with value over £20 million up to £50 million 6.26 6.55 Portfolio statement Priory Group, Stump Lane Chelmsford Property by Market Sector and Value Band as at 30 June Priory Group, The Bourne North London 2020 2019 Portfolio of investments Location % % Lyme Regis House Bournemouth RETAIL 23.09 23.68 Dunaskin Street Glasgow Properties with value over £90 million up to £150 million 2.34 2.37 Bridewell Street Bristol Sainsbury’s, 45 & 33 Garratt Lane London Unite House, Frogmore Street Bristol Properties with value over £50 million up to £90 million 15.64 16.09 Priory Group, Heath House Lane Bristol Morrisons Supermarket, Coventry Road Sheldon Priory Group, Rappax Road Altrincham Sainsbury’s, Treyew Road Truro Properties with value up to £20 million [f] 0.84 1.22 Tesco Supermarket, Hythe Road Ashford Priory Group, Chobham Road Woking Sainsbury’s, Southgate Huddersfield Okeford House Bournemouth Sainsbury’s, Otford Road Sevenoaks Chesil House Bournemouth Tesco Supermarket, Culverhouse Cross Cardiff OTHER INVESTMENTS 11.30 9.15 Tesco Supermarket, Riverview Drive Bedford 99.95% holding in The Swansea Unit Trust (unconsolidated) Tesco Supermarket, Parc Trostre Llanelli 40% holding in The Tesco Jade Unit Trust (unconsolidated) Tesco Supermarket, Old Road Royston Sainsbury’s, Dog Kennel Hill Dulwich 40% holding in The Jade (GP) Limited (unconsolidated) Sainsbury’s, William Hunter Way Brentwood 50% holding in The Car Auctions Unit Trust (unconsolidated) 50% holding in The Hotel 42 Unit Trust (unconsolidated) Properties with value over £20 million up to £50 million 5.11 5.22 Tesco Supermarket, Springlands Way Sudbury Total portfolio valuation 98.46 98.43 Sainsbury’s, Worthington Way Wigan Derivatives 0.00 (0.53) Morrisons Supermarket, Edgeley Road Stockport Net other assets 1.54 2.10 Morrisons Supermarket, Plumpton Park Harrogate Net assets attributable to Unitholders Morrisons Supermarket, West Bailey Killingworth and non-controlling interests (“NCI”) 100.00 100.00 Morrisons Supermarket, Limebrook Way Maldon [a] 250 Bishopsgate,London moved bands. OFFICE 19.98 19.40 Properties with value over £260 million 5.97 5.99 [b] 17 Charterhouse Street, Farringdon, London moved bands. 250 Bishopsgate[a] London [c] 45 (2019: 45) properties located in the United Kingdom ranging in value from Properties with value over £150 up to £260 million 3.91 0.00 £3,575,000 to £30,020,000. 17 Charterhouse Street, Farringdon [b] London [d] 40 (2019: 42) properties located in the United Kingdom ranging in value from Properties with value over £90 million up to £150 million 8.28 11.51 £610,000 to £5,330,000. St Vincent Street Glasgow [e] 39 (2019: 39) properties located in the United Kingdom ranging in value from Rose Court London £1,060,000 to £7,810,000. Southwark Bridge Road London [f] The Priory, BUPA Nursing & Residential Home, Solihull was disposed of during the Properties with value over £50 million up to £90 million 1.82 1.90 Dorland House, Westbourne Terrace London year. LEISURE (INCLUDING HOTELS) 28.33 31.24 Properties with value over £90 million up to £150 million 4.73 5.16 Portfolio transactions Premier Inn, Arrivals Road Gatwick Premier Inn, Tothill Street London Acquisitions, development and refurbishment costs Properties with value over £50 million up to £90 million 2.23 1.86 Property Name Location £’000 North Wharf Gardens, Paddington London

Properties with value over £20 million up to £50 million 5.62 6.76 Acquisitions Tennis Clubs Portfolio [c] Various David Lloyd, United Way Colchester Travelodge Hotel, Povey Cross Road Gatwick Syngenta's International R&D Centre, Jealotts's Hill Berkshire Premier Inn, 29-37 Red Lion Street London The Hotel 42 Unit Trust Various Travelodge Hotel, 3 Harewood Row London Hilton Hotel, Terminal 5 Heathrow Total cost of acquisitions for the year 221,861 Clayton Hotel, St. Mary’s Street Cardiff Total cost of acquisitions for the year as a percentage of NAV 4.96% David Lloyd Royal Berkshire Bracknell David Lloyd, United Way Colchester Development and refurbishment Properties with value up to £20 million 15.75 17.46 17 Charterhouse Street, Farringdon London Tennis Clubs Portfolio [c] Various North Wharf Gardens, Paddington London Bingo Halls Portfolio [d] Various Total development and refurbishment costs for the year 65,788 [e] Health Clubs Portfolio Various Total development and refurbishment 14-18 Noel Street London costs for the year as a percentage of NAV 1.47% Travelodge Hotel, 3 Waterloo Place Edinburgh 104-108 Bolsover Street London Disposals OTHER 15.76 14.96 Property Name Location £’000 Properties with value over £150 million up to £260 million 3.74 3.76 Stratford, Halo London The Priory BUPA Nursing & Residential Home Solihull Gala Bingo Hall, Bridlington Bridlington Properties with value over £50 million up to £90 million 4.92 3.43 Aberfeldy New Village London Gala Bingo Hall, Wolverhampton Wolverhampton Syngenta's International R&D Centre, Jealotts's Hill Berkshire Total for the year 16,023 Priory Group, Priory Lane Roehampton

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2020 11 The M&G Secured Property Income Fund Financial highlights

The preceding table includes transaction costs incurred by Fund performance subsidiaries and associates, as a percentage of the total purchase cost.

The impact of transaction costs related to the selling of property- Long-term performance related assets will be reduced by the dilution levy charged to Year ended 30.06.20 3 years (p.a.) Since inception (p.a.) redeeming investors where applicable. Total Total Total Capital Return Capital Return Capital [a] Return [a] % % % % % % Institutional Specific Unit class performance ‘A’ Units (2.64) 1.11 1.39 5.43 1.04 5.36

[a] Since launch on 1 August 2007. The following table shows the performance of the Institutional ‘A’ Unit class based on the reported NAV. Operating charges and transaction costs Institutional ‘A’ Unit performance The Unit class was launched on 1 August 2007. We explain below the payments made to meet the ongoing costs of investing and managing the Fund, comprised of operating charges Year ended 30 June 2020 2019 2018 Change in NAV per Unit £ £ £ and portfolio transaction costs. Opening NAV per Unit 117.41 114.44 109.69 Return before operating charges and after Operating charges direct transaction costs (2.21) 3.70 5.49 Operating charges include payments made to the Manager, its Operating charges (0.89) (0.73) (0.74) associates and independent service providers as follows: Return after all charges and costs (3.10) 2.97 4.75 • Manager’s fee: Fee paid to M&G (Guernsey) Limited in its Closing NAV per Unit 114.31 117.41 114.44 capacity as Manager of the Fund. Direct transaction costs £ £ £ • Investment Advisory fee: Fee paid to M&G Investment Direct transaction costs per Unit 0.36 0.58 0.04 Management Limited for investment advisory services. Performance and charges % % % Administration fee: Fee paid to JTC Fund Solutions (Guernsey) • Direct transaction costs 0.30 0.50 0.04 Limited in its capacity as Administrator of the Fund. Operating charges 0.76 0.63 0.66 • Trustee fee: Fee paid to Northern Trust (Guernsey) Limited (15 Return after all charges and costs (2.64) 2.60 4.33 August 2019 to 30 June 2020) and Kleinwort Benson Distribution yield [a] 3.61 3.78 3.88 (Guernsey) Limited (1 July 2019 to 14 August 2019) in their capacity as Trustee of the Fund. [a] In relation to Dealing NAV (NAV after taking into account any dilution adjustments). • Real Estate Asset Management fee: Fee paid to M&G Real Estate Limited in its capacity as Real Estate Asset Manager of the Fund. Other information Closing reported NAV of the Fund (£’000) 4,427,384 4,293,270 3,834,238 • Other property expenses: Other costs associated with the Number of Units in issue 38,730,086 36,567,175 33,505,584 management and operation of the property portfolio itself. Highest dealing price per Unit (£) 123.918 122.398 119.116 Transaction costs Lowest dealing price per Unit (£) 119.218 119.256 114.477 Portfolio transaction costs include the costs of acquiring or disposing, Dealing Price as the case may be, of all of the assets forming the Scheme Property, being agents’ commissions, legal, fiscal and financial advisory fees On 1 July 2020 and 2019, the Dealing Day immediately following the accounting reference date, the Dealing Price was as follows: and additionally in the case of acquisitions, surveyors’ fees and taxes, Dealing Price Dealing Price including Stamp Duty Land Tax (‘SDLT’). £ £ 2020 2019 To protect existing investors, portfolio transaction costs incurred as a Institutional ‘A’ Units 119.218 122.398 result of investors buying and selling Units in the Fund are recovered from those investors through a ‘dilution adjustment’ to the price they pay or receive. The following table shows direct portfolio transaction Dealing Price history costs paid by the Fund before and after that part of the dilution High Low adjustment relating to direct portfolio transaction costs. Calendar year £ £ Institutional ‘A’ Units 2017 116.928 111.602 Direct transaction costs 2018 121.141 117.466

2020 2019 2018 2019 123.368 121.263 % % % 2020 [a] 123.918 119.218 SDLT 4.36 4.57 3.29 Legal & survey fees 0.28 0.51 0.28 [a] To 30 June 2020. Agent fees 0.03 0.49 - Investment Advisor acquisition fee 0.28 0.45 - Other 0.22 0.10 0.15 Direct transaction costs before dilution adjustment 5.17 6.12 3.72 Dilution adjustment in respect of direct transaction costs (4.29) (4.25) (4.09) Direct transaction costs 0.88 1.87 (0.37)

12 ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

Consolidated Financial Statements Consolidated balance sheet as at 30 June 2020 2019 Note £’000 £’000 Assets Consolidated statement of total return Fixed assets Investment property under for the year ended 30 June 2020 2019 construction 12 274,597 212,078 Note £’000 £’000 £’000 £’000 Investment property 12 3,616,383 3,655,482 Income Other investments 13 505,572 397,169 Net capital (losses)/gains Net investment in finance leases 14 8,106 8,314 on investments 5 (132,577) 76,851 Revenue 6 204,195 191,707 Lease inducement asset 5,908 6,176 Expenses 7 (32,668) (23,675) 4,410,566 4,279,219 Finance costs: Interest 9 (968) (1,474) ______Current assets Net revenue 170,559 166,558 Lease inducement asset 268 268 Total return before distributions 37,982 243,409 Debtors 16 27,249 11,924 Finance costs: Distributions 9 (172,767) (166,780) Cash and cash equivalents 126,128 166,428 Change in net assets attributable 153,645 178,620 to Unitholders and Total assets 4,564,211 4,457,839 non-controlling interests from investment activities (134,785) 76,629 Liabilities Non-controlling interests 13 9,191 Derivative liability 18 - 23,175 Change in net assets Creditors 19 49,200 50,625 attributable to Unitholders from investment activities (134,798) 67,438 Distributions payable 9 41,497 42,188 Total liabilities 90,697 115,988 All items in the Consolidated statement of total return derive from Net assets attributable to Unitholders 4,307,794 4,176,116 continuing operations. Non-controlling interests 165,720 165,735 Net assets attributable to Unitholders Consolidated statement of change in net assets and non-controlling interests 4,473,514 4,341,851 attributable to Unitholders Reconciliation to Fund Balance Sheet for the year ended 30 June 2020 2019 Net assets attributable to Unitholders £’000 £’000 £’000 £’000 excluding non-controlling interests Opening net assets attributable as per Fund Balance Sheet 4,427,384 4,293,270 to Unitholders 4,176,116 3,739,959 Adjustment for estimated Amounts received on issue of Units 265,019 354,150 SDLT savings 1(d), 1(e) (119,598) (117,154) Amounts paid on cancellation Adjustment for capital expenses 8 - of Units (9,936) (456) ______Net assets attributable to Unitholders 255,083 353,694 excluding non-controlling interests Dilution adjustment 11,393 15,025 in accordance with FRS 102 4,307,794 4,176,116 Change in net assets attributable The Financial Statements on pages 13 to 29 were signed on behalf of to Unitholders from investment activities (see above) (134,798) 67,438 the Board of Directors of M&G (Guernsey) Limited on 23 October 2020 by: Closing net assets attributable to Unitholders 4,307,794 4,176,116 James Gilligan Directors of the Manager Timothy Cumming }

ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 13 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

Consolidated Financial Statements Consolidated cash flow statement for the year ended 30 June 2020 2019 Note £’000 £’000 Net cash inflow from operating activities 10 130,573 145,730 Fund balance sheet Investing activities as at 30 June 2020 2019 Distributions received 19,959 19,171 Note £’000 £’000 Interest received 4,266 1,787 Assets Finance lease receipts 454 454 Fixed assets Lease inducement paid - (3,968) Investments in subsidiaries 20 3,725,987 3,712,176 Purchase of investment property and Other investments 13 505,572 397,169 investment property under construction (161,481) (378,422) Investment property 12 164,280 117,470 Investments in associates (105) (9) 4,395,839 4,226,815 Investment in joint ventures (126,168) - Disposal of investment property 16,804 39,697 Current assets Disposal of unconsolidated subsidiaries 840 820 Debtors 16 45,838 44,675 Cash and cash equivalents 34,879 70,056 Net cash outflow from investing activities (245,431) (320,470) 80,717 114,731 Financing activities Total assets 4,476,556 4,341,546 Amounts received on issue of Units 276,412 369,175 Amounts received on Units issued to NCI 20 70 Amounts paid on cancellation of Units (9,936) (456) Liabilities Amounts paid on cancellation of Units to NCI (2) (26) Creditors 19 9,043 7,427 Amounts received from banking facility 100,000 210,000 Distributions payable 40,129 40,849 Amounts repaid on banking facility (100,000) (210,000) Total liabilities 49,172 48,276 Distributions paid (168,032) (159,264) Net assets attributable to Unitholders 4,427,384 4,293,270 Distributions paid to NCI (5,426) (5,322) Finance costs: Interest (968) (1,474) Reconciliation to reported NAV Amounts paid to settle swap contract (17,510) - Net assets attributable to Unitholders based Net cashflow from financing activities 74,558 202,703 on reported NAV 4,427,392 4,293,270 Net (decrease) / increase in cash (40,300) 27,963 Adjustment for capital expenses (8) - Opening cash 166,428 136,465 Net assets attributable to Unitholders 4,427,384 4,293,270 Closing cash at bank and on deposit 126,128 166,428

The Financial Statements on pages 13 to 29 were signed on behalf of the Board of Directors of M&G (Guernsey) Limited on 23 October 2020 by:

James Gilligan Directors of the Manager Timothy Cumming }

14 ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

As a result the Manager has concluded that the use of the going Notes to the Financial Statements concern basis is appropriate in preparing these Financial Statements.

b) Functional and presentational currency 1 Accounting policies The Consolidated Financial Statements are presented in Pounds a) Basis of accounting and going concern Sterling (£), which is the Fund’s functional and presentational These Consolidated Financial Statements have been prepared in currency. accordance with FRS 102, the Financial Reporting Standard c) Basis of consolidation applicable in the United Kingdom and the Republic of Ireland, The Consolidated Financial Statements of the Group incorporate including all subsequent amendments and in accordance with the the financial statements of the Fund and its consolidated Statement of Recommended Practice ‘Financial Statements of subsidiaries drawn up to 30 June 2020. Under FRS 102, Section Authorised Funds’, issued by the Investment Association, in May, 9 Consolidated and Separate Financial Statements, control is 2014 (the ‘IA SORP’) and amended in June 2017. presumed when a parent owns more than half of the voting These Consolidated Financial Statements have been prepared power of an entity. under the historical cost convention, as modified for the Where subsidiaries hold investment property the IA SORP states revaluation of investment property, investment property under that the Fund is required to consolidate such entities. Where a construction, other investments and derivatives. subsidiary holds investments that do not meet the definition of The Manager has made an assessment of the Fund’s ability to investment property, the entity is not consolidated and is held at continue as a going concern as at the date of issue of these fair value as it is held as a part of an investment portfolio. Financial Statements. This assessment considers the Fund’s The results of investment property holding subsidiaries acquired significant areas of possible financial risk including liquidity, the are consolidated from the date on which control passes. non-collection of rent as a result of the Covid-19 pandemic, Acquisitions are accounted for under the acquisition method. declines in global capital markets, investor intentions including known and estimated redemptions, on-going operating The results of investment property holding subsidiaries sold expenses, funding commitments and key service providers’ during the year are deconsolidated from the date on which control operational resilience. In arriving at its conclusion the Manager passes. has specifically considered the following: Non-controlling interests in the net assets of the consolidated As at 30 September 2020 the Fund had sufficient liquid assets to subsidiaries are distinguished from the Group’s net assets meet its current obligations, with current liabilities of £112.2 attributable to Unitholders therein and are classified as liabilities. million and current assets of £129.6 million. Ongoing operating Non-controlling interests consist of the amounts of those expenses represent only 12.7% of annual contracted income. interests at the date of the original acquisition and the non- controlling interest’s share of changes in net assets since the The Manager and Investment Advisor are closely monitoring the date of acquisition. impact of Covid on the Fund’s rental collection and the credit worthiness and operational earnings of all tenants. Where there All intra-Group transactions, balances, income and expenses are are concerns around recovery these are considered for bad debt eliminated on consolidation. provisioning. d) Investments in unconsolidated subsidiaries As disclosed in note 23, the Fund has contractual development Investments in unconsolidated subsidiaries are initially funding obligations totalling £178.7 million, the majority of which recognised at cost and include all costs related to the acquisition is due at completion in 2021. These will be funded via the capital of the subsidiary. queue. Investments in unconsolidated subsidiaries are held as part of an At the date of issue of these Financial Statements the Fund has investment portfolio and are subsequently measured at fair value, access to an undrawn revolving credit facility of £100 million which is based on the net asset value of the relevant which expires in October 2022 and provides an efficient and unconsolidated subsidiary as at the period end date. As flexible source of funding due to the margin of 1.6% and its ability unconsolidated subsidiaries are SDLT exempt entities, the to be drawn and repaid as often as required. The bank loan has valuation of the investment may include an uplift element which relatively few covenants due to the low gearing nature of the reflects the SDLT saving that would be achieved by disposing of facility; there is an LTV restriction of 30% but no interest cover the subsidiary rather than the property. These are included within covenants. ‘other investments’. As at 30 September 2020 the undrawn investor queue was £303.9 million. Since the outbreak of the pandemic, the Fund has received redemption requests representing 1.6% of the Fund’s value, all of which have been paid. Whilst it is not possible to determine future investor redemption requests with a high degree of certainty, based on the investor profiles there is no expectation of significant redemptions over the next 12 months and certainly not of the quantum of the net capital queue after development funding. As described in note 3 (a) the Fund has the ability to defer redemption requests if necessary.

ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 15 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

received in future years which are not known at lease inception, Notes to the Financial Statements such as those arising from inflation-linked rent reviews, are treated as additional income in the period which it relates to.

1 Accounting policies (continued) The finance leases are reviewed for impairment at the end of each reporting period. e) Investments in associates and joint ventures i) Lease incentives Investments in associates and joint ventures are held as part of The Fund may agree to pay incentive fees to the lessee in an investment portfolio and are measured at fair value through connection with the lease contracts for the properties held by the the profit or loss. This is on the basis that their value to the Fund Fund. These fees are capitalised within the carrying amount of is through their marketable value, rather than as a medium the related investment property and amortised over the lease through which the Fund carries out its business. The investments term. Lease incentives are recognised as a reduction of rental are carried at their net asset value and distributions are income on a straight-line basis over the lease term. recognised on an accruals basis in the period to which they relate. Where the associate is a SDLT exempt entity, the valuation j) Derivatives of the investment may include an uplift element which reflects a SDLT saving that would be achieved by disposing of the Fund’s Where derivative contracts are used to manage risk exposure, interest in the associate or joint venture rather than the property. the derivative financial instruments are initially measured at fair These are included within ‘other investments’. value on the date on which a derivative contract is entered into.

f) Investment properties and investment properties under Subsequently derivative contracts are measured at fair value construction through the Consolidated statement of total return and carried as assets when the fair value is positive or as liabilities when the fair Property assets consist of investment property and, in the case of value is negative. sites in the course of development, investment property under construction. Initially property assets are recognised at cost, k) Cash and cash equivalents including SDLT and other transaction costs, and reduced for Cash and cash equivalents comprise cash at bank and demand amounts received from the vendor, associated with the purchase deposits with an original maturity of three months or less and of the property asset. Acquisitions and disposals are accounted other short term, highly liquid investments that are readily for on exchange of contracts or thereafter when all conditions convertible to a known amount of cash and are subject to an have been met. insignificant risk of changes in value.

Property assets are subsequently measured at fair value and are l) Bank loans and interest valued by an independent valuer at fair value as defined in the Appraisal and Valuation Standards manual issued by the Royal Bank loans are recognised initially at fair value, net of transaction Institution of Chartered Surveyors of the United Kingdom. costs incurred and subsequently stated at amortised cost. Any difference between the proceeds (net of transaction costs) and g) Development loans and interest income the redemption value is recognised in the Consolidated The Fund has entered into development loan agreements with statement of total return over the period of the loan using the third party developers in respect of certain properties under effective interest method. Interest expense is recognised within development. The development loans receivable are shown in ‘Finance costs: Interest’ in the Consolidated statement of total the Consolidated balance sheet at amortised cost within ‘other return using the effective interest rate method. investments’. These loans are repayable at the option of the m) Unitholders’ funds developer at any time. The loans are repayable by the developers in the event that the building work is not completed in accordance In accordance with Section 22 of FRS 102 and the IA SORP with the purchase contract. Interest is charged under the terms 2014 paragraph 2.80, Fund Units are classified as equity detailed in the respective development loan agreements and instruments only when they meet all three of the following taken to the Consolidated statement of total return in the period in conditions: 1) The Fund is a stand-alone fund or is the sub-fund of which it accrues. an umbrella; 2) the Fund has only a single class of Units; and 3) the Fund is not obliged to distribute by way of cash (where, for h) Investment in finance leases example, only accumulation Units are in issue) any part of the Where leases transfer the significant risks and rewards of owning total return to Unitholders. Since the third condition is not met, the the asset to the tenant, the lease is accounted for as a finance Fund Units are classified as financial liabilities. Distributions on lease in accordance with Section 20 of FRS 102. At lease these Units are recognised in the Consolidated statement of total inception the fair value of the asset is de-recognised from asset return as ‘Finance costs: Distributions’. under construction and a finance lease receivable recognised, at n) Net capital gains and losses the fair value of the asset. Realised and unrealised gains or losses on disposal and Finance lease income is recognised over the period of the lease revaluations of property assets and other investments are treated at a constant rate of return, using known amounts to be received as movements on capital and classified as ‘Net capital gains or at lease inception. The difference between the gross receivable losses on investments’ in the Consolidated statement of total and the present value of the receivable is recognised as finance return. income within Income over the lease term. Additional amounts

16 ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

Income attributable to Unitholders, becomes available for distribution Notes to the Financial Statements on the accounting reference date being the last day of each calendar quarter, and is allocated to those Investors who held units at any time during that calendar quarter. This entitlement to a share of the net 1 Accounting policies (continued) income of the Fund is calculated by reference to the Investor’s holding of Units and its tenure in the Fund for the period, and is paid within 30 o) Recognition of income business days following the end of the relevant calendar quarter. All income is accounted for on an accruals basis net of VAT. The amount available for distribution is calculated in accordance with Rental income and contingent rents, being those that are not fixed the policy as set out above. at the inception of the lease, are recorded as income in the period Any net proceeds received as a result of returns of capital, such as in which earned. Changes arising from rent reviews are reflected through disposals of investment property or finance lease receipts, as income, based on estimates, when it is reasonable to assume can be distributed at the discretion of the Manager. Capital they will be received. distributions become available for distribution when declared and are Interest receivable is accounted for on an effective interest rate basis. allocated to Investors who hold Units at that time. The total amount paid for capital distributions in a period shows as a movement through Interest receivable on development loans is described in note 1g. the Statement of total return.

Distributions receivable from investments are recognised on an The Manager is not obliged to make distributions if it would render the accruals basis and accounted for in the Statement of total return. Fund insolvent, or if the distribution may leave the Fund unable to If it is expected that revenue receivable at the balance sheet date meet any future obligations and liabilities. will not be received, a provision is recognised for the amount that Subsequent to the year-end and under the terms of the Information is considered irrecoverable. Memorandum as updated on 2 September 2020, upon the In doing so, each tenant is assessed individually with the aim of occurrence of a Market Wide Non-Payment Event (defined as an forming a conclusion on their financial profile and ability to meet event agreed by the Manager and the Trustee as having given rise to market conditions which cause a significant proportion of the Income obligations. This is done by considering the most recent available accruing in respect of the Scheme Property to not be received in a information such as verbal conversations, media reports and any timely manner, due to extraordinary circumstances affecting the other readily available financial data. markets in which the Fund invests) and until the subsequent p) Expenses Normalisation Date (the date at which the Manager and the Trustee agree that the Market-Wide Non-Payment Event has ceased to have For accounting purposes, all expenses (other than those relating a material impact on the timely receipt of Income), any Income to the purchase and sale of investments and SDLT) are charged received in a Distribution Period, which accrued in an earlier against income for the period on an accruals basis. Distribution Period, but was not received in such earlier period due to Transaction costs associated with failed investment property the Market-Wide Non-Payment Event, shall on its receipt by the acquisitions and disposals are charged as expenses to the Trustee be distributed to the Unitholders appearing in the Register at Consolidated statement of total return in the period the the time that it was accrued. The Manager and the Trustee declared transaction is aborted. a Market-Wide Non-Payment Event on 6 October 2020 due to the impact of Covid-19 on rental income receipts. q) Loan facility fees

The direct issue costs of raising finance are amortised over the 3 Risk management policies life of the loan facility. The Fund’s overall investment objective is to deliver a secure long- r) Finance costs: Distributions term income stream with inflation-linked or fixed uplifts through investment primarily in UK real estate. The Group's activities expose Distributions treated as finance costs are calculated in it to various types of risk, particularly those associated with the accordance with note 2 and recognised gross of any applicable property market. In addition, the Group holds cash and liquid withholding tax within the period to which they relate. resources as well as having debtors and creditors that arise directly from its operations. 2 Distribution policy The main risks arising from the Group’s portfolio of investments and Income (which is defined as the income and other receipts and investment property are liquidity risk, market price risk, credit risk, accruals of the Fund of an income nature) attributable to Unitholders interest rate risk and development risk. belongs beneficially to the Unitholders and does not form part of the Scheme Property, in accordance with the Fund’s status as a Baker The Manager and Investment Advisor monitor and seek to manage Trust. Any Income distributed to Unitholders shall be after the these risks by using appropriate reporting mechanisms which identify deduction of Revenue Expenses (defined as permitted expenses risk activities and allow the Group to control or avoid risks identified. pursuant to the accounting policies of the Fund) and any withholdings The Manager operates a risk management framework containing five to be made by the Manager, Trustee, or any of their agents. It is the key steps: Fund’s policy therefore to distribute all net income. 1. Risk Identification: new risks are identified and escalated to the Income is not included in the calculation of the creation or Risk Director and included in the quarterly reporting cycle to the subscription prices of Units. Board of Directors of the Manager. Significant new risks may be escalated immediately by the Manager’s Risk Director to the Board in exceptional circumstances.

ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 17 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

b) Market price risk Notes to the Financial Statements Market price risk is primarily the risk that the Fund is exposed to adverse real estate valuation movements. Real estate values of 3 Risk management policies (continued) the Fund can be affected by a number of factors that are beyond the control of the Manager. These include, but are not limited to, 2. Risk Assessment: risks are assessed against a Group-wide risk changes to global or local economic conditions, local market assessment scale and ratings are reviewed on a quarterly basis. conditions, the financial conditions of tenants, changes in interest Themed stress testing is carried out and the results are reported rates, real estate tax rates and other operational expenses, by the Manager’s Risk Director to the Board of Directors of the environmental laws and regulations, planning laws and other Manager. governmental legislation, energy prices and the relative 3. Risk Mitigation: a risk mitigation strategy for a new risk or a new attractiveness of real estate types or locations. In addition, real mitigation for an existing risk is approved by the Board of estate is subject to long-term cyclical trends that give rise to Directors of the Manager following a recommendation from the significant volatility in values. Manager’s Risk Director. Such mitigation strategy could be the The risk is mitigated through strategic asset allocation, stock addition of a new control, the amendment of an existing control, selection and asset management. the avoidance of the risk by the cessation of the activity or the transfer of the risk by insuring or outsourcing the activity. The value of investment properties and investment properties under construction is determined by the Independent Valuer, 4. Risk Monitoring: all risks are reviewed by the Manager’s Risk CBRE, and is therefore subjective. The Independent Valuer has Director on a quarterly or more frequent basis, as required. acquired significant experience in the real estate sectors targeted 5. Risk Reporting: all risks are formally reviewed by the Board of by the Fund. Directors of the Manager on a quarterly basis. No assurance can be given that any given real estate asset could a) Liquidity risk and capital management be sold at a price equal to the fair value ascribed to it. Valuation methodologies applied are outlined in note 4. Liquidity risk is the risk that the Fund may encounter in attempting to realise assets or otherwise raise funds to meet financial c) Credit risk commitments as and when they fall due. Credit risk is the risk that an issuer or counterparty in respect of The Fund’s liquidity can be affected by unexpected or high levels rental income receivable, finance lease receivables, distributions of Unit redemptions. In addition to investor commitments, the receivable, development loans receivable and cash balances, will Manager reserves the right to defer accepted redemption requests be unable or unwilling to meet a commitment that it has entered into for a period of up to six successive Dealing Days as defined in the with the Group. During the development phase, the credit risk Information Memorandum. At the end of this period, a minimum of exposure comes from the developer but on completion will shift to 10% of the Units comprising each accepted redemption request the tenant. In respect of the property portfolio, in the event of will be redeemed on each successive Dealing Day until settlement default by an occupational tenant, the Group will suffer an income has been made in full. shortfall and incur additional cost including legal expenses, maintaining, insuring and re-letting the property. This risk is reduced The Manager may borrow for the account of the Fund including for by investing in a diversified portfolio of properties. Additionally, the the purpose of meeting redemption requests and to meet timing income from any one tenant or tenants within the same group must differences in connection with the acquisition and disposal of not exceed 35% of the aggregate income in relation to the property investments. Cash is held to meet the Fund’s short term liabilities. investments in any accounting period unless that tenant is the UK The Fund has a revolving credit facility with Royal Bank of Government or guaranteed by the UK Government. Scotland International Ltd, as described in note 17. The Fund has policies in place to ensure that contracts are The Group has long-term commitments to the developers under entered into only with lessees and developers with an appropriate agreements and in relation to the Fund’s investment in credit history and that an appropriate balance exists between subsidiaries, as detailed in note 23. Meeting these requirements tenant credit quality and the underlying real estate fundamentals are managed in accordance with the capital structure. where appropriate, whilst achieving income growth by investing in assets with leases or other contracts that incorporate regular rent The Manager considers that the Fund’s capital consists of its net reviews providing inflation-linked or fixed uplifts. assets attributable to Unitholders together with the Fund’s borrowing facilities and its capital queue. The Manager manages The COVID-19 pandemic and associated government lockdown the Fund’s capital to enable the Fund to continue as a going measures have caused major disruption to the real estate market. concern and meet its liabilities as they fall due and to minimise the While the majority of the Fund’s rent has been collected as cost of borrowing within the constraint of meeting liabilities as they normal (with a 100% collection rate for supermarkets, offices, fall due. When funding new developments or acquiring new assets residential, student accommodation, car auctions and the Manager assesses whether it is in the best interests of healthcare), some of the Fund’s hotel and leisure tenants have Unitholders as a whole to utilise existing borrowing facilities, been impacted as their revenue generating abilities have been negotiate new facilities or draw down from the capital queue. The severely disrupted. As a result, a small number of tenants have Manager also considers whether it is in the best interests of experienced short term cash flow and liquidity constraints, which Unitholders to use existing liquid assets or different sources of has impacted their ability to service their various financial capital to meet redemption requests or to defer such redemptions. obligations, including rent. Regular dialogue continues with all impacted tenants and, where appropriate, rent deferral and The Fund is not subject to any regulatory capital requirements. repayment terms are being discussed to protect the long term value of their businesses and the Fund’s assets. 18 ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

In the process of applying the Fund’s accounting policies, Notes to the Financial Statements management has made various judgements. These judgements are considered to be in line with standard market practice and where 3 Risk management policies (continued) relevant have been disclosed in the associated accounting policies (refer to notes 1(a), 1(d), 1(e) and 1(f)) and the appropriate c) Credit risk (continued) disclosures have been made. The key estimates concerning the future and other key sources of estimation uncertainty at the end of Credit risk arises from cash and cash equivalents held at banks. the reporting period that have a significant risk of causing a material The Manager structures the levels of credit risk acceptable to the adjustment to the carrying amounts of assets and liabilities within the Fund by placing limits on exposure to a single counterparty, or next financial year are discussed below. groups of counterparties, and to geographical and industry segments. Such risks are subject to frequent reviews. Cash is Trade receivables and payables placed on deposit with reputable financial institutions. The Trade receivables and trade payables are recognised at fair value and Manager has policies that limit the amount of credit exposure to subsequently held at amortised cost, less any provision for any financial institution. The Group holds cash and cash impairment in respect of trade receivables. equivalents for operational use with HSBC UK Bank plc and RBS International, each with Moody’s ratings of Aa3 and Baa2 Rents and service charges are often billed quarterly in advance, respectively (2019: Aa3 and Baa2 respectively). which results, initially, in deferred income being recognised in the balance sheet. Given the current unprecedented circumstances Limits on the level of credit risk by category and territory are caused by pandemic restrictions, significant uncertainty persists over approved by the Manager. The utilisation of credit limits is collectability of trade receivables. While this is the case, the Manager regularly monitored. considers that it is more appropriate to only recognise deferred d) Interest rate risk income to the extent it estimates that it is likely to materialise. This also applies to the corresponding trade receivables. The Fund is subject to interest rate risk in respect of cash deposits, as well as interest paid on overdrafts and bank loans At the end of each reporting period, the Manager assesses whether held. Interest is earned and accrued based on bank base rates. there is objective evidence following a loss event that revenue Since the objective of the Fund is to deliver returns over the long receivable at the financial reporting date will not be received. If term, transactions with the sole objective of realising short term objective evidence is present then a provision is made for the relevant returns are generally not undertaken. Finance leases, earning a amount in the statement of total return. fixed rate of interest, expose the Fund to market risk from adverse Objective evidence includes observable data that has come to the movements in rates. attention of the Manager about the following loss event: e) Development risks a) significant financial difficulty of the issuer or tenant; The development or redevelopment of properties carries a b) a breach of contract, such as a default or delinquency in interest number of risks. During the development phase the risk partly lies or principal payments; with the developer not being able to deliver the property as agreed. Other risks associated with development or c) the Manager, for economic or legal reasons relating to the redevelopment include the risk that delays in the construction debtor’s financial difficulty, granting to the debtor a concession timetable result in real estate not reaching a stage where it is that the Fund would not otherwise consider; reasonably fit for occupancy and the risk of bad craftsmanship by d) it has become probable that the debtor will enter bankruptcy or contractors. Furthermore, should the project costs exceed other financial reorganisation; and budgeted costs, the Fund would incur additional monitoring and progress costs. Similarly, there may be planning risks arising from e) observable data indicating that there has been a measurable difficulties in obtaining planning consents and licences which decrease in the estimated future cash flows from a group of delay the construction timetable. Development risks are financial assets since the initial recognition of those assets, even substantially mitigated by provisions including lease pre- though the decrease cannot yet be identified with the individual commitments, fixed price development contracts, guarantees financial assets in the group, such as adverse national or local from appropriate capitalised parties and contracted sunset dates. economic conditions or adverse changes in industry conditions

These risk management policies have been consistently applied Other factors to be considered include significant changes with an since the beginning of the financial year. adverse effect that have taken place in the technological, market, economic or legal environment in which the tenant operates. 4 Critical accounting estimates and judgements For rent deferrals and non-payment, each tenant has been assessed The preparation of Consolidated Financial Statements in conformity individually with the aim of forming a conclusion on their financial with FRS 102 requires management to make judgements, estimates profile and ability to meet obligations. This is done by considering the and assumptions that affect the application of policies and the most recent available information such as verbal conversations, reported amounts of assets and liabilities, revenues and expenses. media reports and any other readily available financial data. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying It must be noted that an exercise of this nature is highly judgemental amount of the assets or the liabilities reflected in future periods. and a level of prudence will be applied in arriving at a decision on whether or not to provide for receivables. A bad debt provision totalling £4.238 million was charged to the Consolidated statement of total return for the year ended 30 June 2020.

ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 19 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

a) Sales / Direct Comparison Approach Notes to the Financial Statements The comparative approach considers the sales of similar or substitute properties and related market data, and establishes a value estimate by processes involving comparison. In general, a 4 Critical accounting estimates and judgements property being valued (a subject property) is compared with sales (continued) of similar properties that have been transacted in the market. Listings and offerings may also be considered. Fair value of investment properties, investment properties under construction and finance leases This approach establishes limits on the fair value for real property by examining the prices commonly paid for properties that Investment properties and investment properties under construction compete with the subject property for buyers. Sales are (note 12) are stated at fair value. Finance leases held in investigated to ensure that the parties to the transaction were unconsolidated subsidiaries are stated at fair value (note 13). For typically motivated. directly held finance leases (note 14), at lease inception a finance lease receivable is recognised at the fair value of the asset. Finance b) Income Capitalisation Approach leases (note 17) are stated at amortised cost and the fair value of the The income capitalisation approach considers income and Real Estate asset is used as key input into the Funds impairment expense data relating to the property being valued and estimates assessment. value through a capitalisation process. Capitalisation relates All fair values have been determined based on valuations performed income (usually a net income figure) and a defined value type by by CBRE in their capacity as accredited independent valuers, as at 30 converting an income amount into a value estimate. This process June 2020. CBRE has acquired significant expertise in valuing these may consider direct relationships (known as capitalisation rates), types of investment properties, investment properties under yield or discount rates (reflecting measures of return on construction and finance leases. The Valuer derives the fair value by investment), or both. applying the methodology and valuation guidelines as set out in the The income capitalisation approach is particularly important for practice statements of the current Royal Institution of Chartered properties that are purchased and sold on the basis of their Surveyors’ ‘Appraisal and Valuation Manual’ and the requirements of earnings capabilities and characteristics and in situations where ‘FRS 102’. The assets were valued in their entirety by the there is market evidence to support the various elements Independent Valuer as at 30 June 2020. incorporated into the analysis. The income capitalisation Much focus has been towards the accuracy of the fair value for approach is based on the same principles that apply to other investment real estate assets properties as a result of material valuation approaches. In particular, it perceives value as created uncertainty clauses applied by the Independent Valuer (see note 12). by the expectation of future benefits (income streams). Income Careful regard has been had to the level of market activity, and the capitalisation employs processes that consider the present value degree of reliability of valuations. For avoidance of doubt, the of anticipated future income benefits. inclusion of “material uncertainty clauses” does not mean that the c) Discounted Cash Flow (DCF) Analysis valuation cannot be relied upon. Rather, the phrase is used in order to be clear and transparent with all parties, in a professional manner that DCF is a financial modelling technique based on explicit in the current extraordinary circumstances less certainty can be assumptions regarding the prospective cash flow to a property or attached to the valuation than would otherwise be the case. The business. As an accepted methodology within the income material uncertainty clause is a disclosure, and not a disclaimer. It approach to valuation, DCF analysis involves the projection of a draws attention to the fact that the outbreak of COVID-19 is a series of periodic cash flows either to an operating property, a unprecedented set of circumstances from which significant judgment development property, or a business. To this projected cash flow has to be applied. series, an appropriate, market-derived discount rate is applied to establish an indication of the present value of the income stream The Manager believes there are still enough data points to value the associated with the property or business. In the case of operating assets as at 30 June 2020 and has engaged through its advisors with real properties, periodic cash flow is typically estimated as gross professional forums presented by industry bodies such as the Royal income less vacancy and collection losses and less operating Institution of Chartered Surveyors to come to this decision. expenses / outgoings. Fair value is estimated through application of valuation methods and The series of periodic net operating incomes, along with an procedures that reflect the nature of the property and the estimate of the reversion / terminal value, anticipated at the end circumstances under which the given property would most likely trade of the projection period, is then discounted. The most widely used in the market. The most common method used to estimate fair value applications of DCF analysis are the Internal Rate of Return of investment properties and finance leases is the sales comparison (IRR) and Net Present Value (NPV). approach. The income capitalisation approach, including discounted cash flow (DCF) analysis, is then used to support and confirm the As with all other components of DCF analysis, the discount rate conclusions drawn from the sales comparison approach. The Valuer should also reflect market data, i.e., other market derived discount has regard for not only the vacant possession value of the sites but rates. Discount rates should be selected from comparable also the trading performance of the operational assets. The most properties or businesses in the market. In order for these common method used to estimate the fair value of investment properties to be comparable, the revenue, expenses, risk, properties under construction is the residual value method. For inflation, real rates of return, and income projections for the finance leases, as there is no residual value a greater reliance is properties must be similar to those of the subject property. placed on the cash flows. Present value calculations of cash flows are most often calculated using appropriate discount rates for each class of The determined fair value of the investment properties and cash flows. A reversion / terminal value is capitalised at a terminal investment properties under construction is most sensitive to the capitalisation rate, or reversion yield, and discounted to present estimated yield as well as the long term vacancy rate. value at an appropriate discount rate. In many instances, a single discount rate is used for all cash flows.

20 ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

7 Expenses Notes to the Financial Statements 2020 2019 £’000 £’000 Payable to the Manager or Associates of the Manager 4 Critical accounting estimates and judgements Manager’s fee 529 504 Investment Advisory fee 22,128 20,477

(continued) Real Estate Asset Management fee 356 311 d) Residual value method 23,013 21,292 For the investment properties under construction, fair value has Payable to the Trustee or Associates of the Trustee been determined using the residual value method. As part of this Trustee fee 249 244 process the valuation specialist initially assesses the gross Other expenses development value of the respective property based on the Administration fee 872 829 Estimated Rental Value (‘ERV’) that they assume for each asset Auditor’s fee 272 244 upon completion and an equivalent yield that would be Bad debts provision 4,238 - appropriate for the subject property. Various costs such as the Independent Valuer fee 555 539 estimates of capital outlay, construction costs and developer’s Legal and professional fees 2,144 66 profit then have to be deducted in order to arrive at the value of Listing fees 84 62 the property which is accurately reflecting its current construction Loan facility set up costs 114 222 status. In determining such costs the contractual commitments Service charges and other expenses 1,080 130 are taken into account. Taxation charges 47 47 9,406 2,139 The valuations of investment properties, investment properties under construction and finance leases are based upon estimates Total expenses 32,668 23,675 and subjective judgements that may vary from the actual values and sales prices that may be realised by the Group upon a) Manager’s fee: The Manager receives a fee of £125,000 per disposal. annum, which accrues daily and is payable quarterly in arrears, and a fee of 0.01% of the Net Asset Value of the underlying Fair value of investments in unconsolidated subsidiaries and subsidiaries. associates b) Investment Advisory fee: The Investment Advisor receives a Fair value is the amount for which an asset could be exchanged, or a fee of 0.5% of Net Asset Value (NAV) per annum accrued liability settled, between knowledgeable, willing parties in an arm’s monthly and payable quarterly. NAV is defined as the aggregate length transaction. The fair value of investments that are actively traded in organised financial markets is determined by reference to value of the assets of the Fund, excluding any and all net income quoted market prices at the close of the business on the reporting date. whether accrued or received, but including any liabilities, calculated in accordance with the trust instrument. For investments in unconsolidated subsidiaries and associates where there is no active market, fair value is determined based on the latest The Investment Advisor also receives an acquisition fee of 0.25% available net asset value of the unquoted investment as reported by of the acquisition price of the real estate asset payable from the the Administrator or Manager of the relevant investment. capital of the Fund, provided that the aggregate of the acquisition fee and any sourcing fees payable to agents does not exceed 1% As subsidiaries are SDLT exempt entities, the valuation of the investment may include an uplift element which reflects the SDLT of the acquisition price of the asset. This acquisition fee saving that would be achieved by disposing of the subsidiary rather amounted to £733,500 (2019: £1,485,500). than the property. The uplift applied follows the Manager's policy on c) Real Estate Asset Management fee: The Real Estate Asset SDLT adjustments. Manager receives an annual fee of £1,500 per material tenancy, calculated and paid quarterly in arrears. The fee is subject to 5 Net capital gains on investments 2020 2019 indexation. £’000 £’000 Realised gains on sale of investment property 835 3,129 d) Trustee fee: The Trustee receives a fee, calculated and paid Realised gain on derivatives 5,665 - quarterly in arrears, at the following rates (subject to a minimum Unrealised (loss) / gains on investment properties (118,769) 73,673 fee of £10,000 per annum) and £5,000 per sub-trust: Unrealised loss on investment property under construction (3,269) (10,913) Unrealised (loss) / gain on investments in associates (11,767) 5,837 Band Fee Unrealised gains on unconsolidated subsidiaries 1,079 8,426 On the first £250 million of the NAV 0.015% p.a. Unrealised loss on investments in joint ventures (6,351) - On the NAV of between £250 million and £500 million 0.0125% p.a. Unrealised loss on derivatives - (3,301) On the NAV of between £500 million and £1 billion 0.01% p.a. Net capital (losses) / gains (132,577) 76,851 On the NAV over £1 billion 0.0075% p.a.

This variable fee is not applicable to the Fund’s assets where the 6 Revenue Trustee already acts as trustee to the underlying asset. Included 2020 2019 £’000 £’000 in the acquisition costs of the properties is an amount of £4,000 Distributions from associates and unconsolidated subsidiaries 20,820 19,291 (2019: £15,000) paid to the Trustee. Interest on finance lease 247 253 Interest income 4,266 1,787 The Trustee is also entitled to a setup fee of £1,500 for each new Other income 667 455 sub-trust and a fixed fee of £2,500 per transaction. Rental income 178,463 170,104 Amortisation of Lease inducement asset (268) (183) Total revenue 204,195 191,707

ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 21 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

8 Taxation Notes to the Financial Statements The Fund principally invests in subsidairy unit trusts established under the laws of Guernsey (‘sub-trusts’). The Fund and its sub-trusts are exempt from Guernsey taxation under The Income Tax (Exempt 7 Expenses (continued) Bodies) (Guernsey) Ordinance, 1989. The Fund and its sub-trusts e) Administration fee: The Administrator receives a fee, calculated have applied for exempt status for the periods covered by these and paid quarterly in arrears, at the following rates (subject to a Financial Statements and will each be liable for a fixed fee of £1,200 minimum fee of £150,000 per annum): (2019: £1,200) per annum.

Band Fee The Fund invests in a unit trust established under the laws of Jersey. On the first £250 million of the NAV 0.0325% p.a. The income of this trust is exempt from Jersey Income Tax. The On the NAV of between £250 million and £500 million 0.025% p.a. income of the trust is not subject to overseas taxation. On the NAV of between £500 million and £750 million 0.015% p.a. On the NAV of between £750 million and £1 billion 0.013% p.a. Following the introduction of taxation on gains derived from UK On the NAV of between £1 billion and £2 billion 0.011% p.a. commercial property by non-UK residents (“NRCGT”) as from 6 April On the NAV of between £2 billion and £3 billion 0.0075% p.a. 2019, the Manager has made an ‘exemption election’ for the Fund On the NAV over £3 billion 0.007% p.a. under the NRCGT legislation. This means that, provided certain conditions are continuously met, the Fund shall not be subject to UK This variable fee is not applicable to the Group’s assets where tax on gains derived from sales of property (or other such chargeable the Administrator already acts as the administrator to the events). Tax is instead levied on Unitholders in the Fund depending on underlying assets. their own tax status and linked to liquidity events at the Unitholder level. The Administrator also receives a setup fee of £5,000 for each new sub-trust, and an additional administration fee of £8,000 p.a. 9 Finance costs: Distributions and other finance costs per sub-trust. The following distributions were made or became payable during the f) Legal and professional fees: £1,802,316 of these fees relate to year: 2020 2019 the change in trustee in the current year. £’000 £’000 g) Bad debts* Quarterly distributions Quarter ended 30 September 42,916 41,460 Bad Debt Bad Debt Quarter ended 31 December 44,446 41,200 Tenant Unit Trust Provision % Provision Amount Quarter ended 31 March 43,908 41,932 Buzz Bingo [a] Bingo Unit Trust 85% 3,438,868 Quarter ended 30 June 41,497 [a] 42,188 CLV Bournemouth [b] Bournemouth Unit Trust 50% 22,202 Total quarterly distributions 172,767 166,780 Travelodge - Gatwick [c] Gatwick 2 Unit Trust 70% 493,292 Finance costs: Distributions 172,767 166,780 Shiva [d] Heathrow Unit Trust 50% 143,397 Interest on secured borrowing 389 672 Travelodge - Edinburgh [e] N/A 70% 52,003 Non-utilisation fee 579 802 Finance costs: Interest 968 1,474 * The above table is for Covid-19 related bad debts, and the remaining bad debts Total finance costs 173,735 168,254 balance are the bad debts incurred in the normal course of business. Net revenue per statement of total return 170,559 166,189 [a] The tenant appointed restructuring advisors and successfully concluded a Capital expenses excluded from net income for Company Voluntary Arrangement ("CVA") in exchange for an equity injection. A income distribution purposes 2,208 591 bad debt provision of 85% of the missed payment has been provisioned which is Finance costs: Distributions 172,767 166,780 in line with the fixed minimum rent payable under the CVA. Comprising: [b] The tenant was required to refund a significant amount of money to students unable Distributions to Unitholders 167,336 161,460 to occupy and subsequently has cash flow issues. As at year-end, discussions were Distributions to non-controlling interests 5,431 5,320 continuing in relation to a deferral. Given the uncertainty over cashflow, 50% of the unpaid rent was provisioned. [a] Distribution paid on 3 August 2020 net of cash withheld of £5,977,149. [c] Travelodge launched and successfully concluded a CVA. Gatwick was in category B and therefore will have a reduced rent for 2020 and 2021 before returning to the passing rent, in addition to a new landlord break option, valid for 6 months. As at year-end, a 70% bad debt provision has been recognised which is the agreed rent under the CVA for Q2-Q4 2020. Reducing to 25% in 2021 per the CVA. [d] The hotel remains closed and is not expected to re-open until Q4 at the earliest. While the rent is set at a conservative level, given the hotel’s reliance on airport footfall and events we expect profitability to be impacted over the medium term, and have therefore provisioned to reflect the current level of uncertainty. [e] Travelodge launched and successfully concluded a CVA. Edinburgh was in category B and therefore will have a reduced rent for 2020 and 2021 before returning to the passing rent, in addition to a new landlord break option, valid for 6 months. As at year-end, a 70% bad debt provision has been recognised which is the agreed rent under the CVA for Q2-Q4 2020. Reducing to 25% in 2021 per the CVA.

22 ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

The Group’s investment property assets were valued by the Notes to the Financial Statements Independent Valuer, being a member of the Royal Institution of Chartered Surveyors, on 30 June 2020, at £3,452,103,000 (2019: £3,538,012,000). This excludes the directly held properties 10 Cash flow disclosed below. The valuations have been prepared in accordance 2020 2019 with the RICS Valuation – Global Standards 2017 and the UK national £’000 £’000 supplement 2018 (‘the Red Book’). Reconciliation of total return before distributions to net cash flow from operating activities Included in investment property are properties held directly by the Total return before distributions 37,982 243,409 Fund with a Fair Value as at 30 June 2020, of £164,280,000 (2019: Distributions received (20,820) (19,291) £117,470,000). These properties were valued by the Independent Interest income (4,266) (1,787) Valuer, as of 30 June 2020. Interest on finance lease (247) (253) Net losses / (gains) on investments 132,577 (76,851) Investment property also includes the values of the properties held by Amortisation of Lease inducement asset 268 183 each sub-trust, as detailed in note 20. Finance costs: Interest 968 1,474 The Group’s investment property under construction assets were Movement in debtors (14,464) (4,743) Movement in creditors (1,425) 3,589 valued by the Independent Valuer, as of 30 June 2020, at £274,597,000 (2019: £212,078,000). Net cash inflow from operating activities 130,573 145,730 Given the nature of the Fund, there are various leases in place that Reconciliation of net debt At Cash Other non At have a variety of contractual terms, including those that permit 1 July 2019 flows cash changes 30 June 2020 £’000 £’000 £’000 £’000 contingent rent, renewal/purchase options and escalation clauses and the option of sub-letting. Net debt (4,217,611) (133,290) (37,982) (4,388,883) The valuation has been primarily derived using comparable recent Net debt comprises of cash, distributions payable and net assets market transactions on arm’s length terms. The valuation was also attributable to Unitholders. determined using cash flow projections based on estimates of current and future cash flows, supported by the terms of any existing lease 11 Units in issue and other contracts and by external evidence such as current market rents for similar properties in the same location and condition, and The following table shows the movement in Units in issue during using capitalisation rates that reflect current market conditions. the year.

Opening Movement Closing The future rental rates were estimated depending on the actual Unit class: 01.07.19 Issued Cancelled 30.06.20 location, type and quality of the property, and by taking into account Institutional ‘A’ Units 36,567,175 2,244,406 (81,494) 38,730,086 market data and projections at the valuation date. In addition to the condition and repair of buildings and sites, certain assumptions were 12 Investment property and investment property also made as to the tenure, letting, and local town planning in order to under construction derive the valuation. Investment property The following material valuation uncertainty has been included by Investment under property construction Total CBRE in the valuation reports of 65% of the investment property £’000 £’000 £’000 portfolio as well as the investments in joint ventures in note 13: Valuation as at 30 June 2019 3,655,482 212,078 3,867,560 Purchases of investment property “The outbreak of the Novel Coronavirus (COVID-19), declared by and cost adjustments 95,857 - 95,857 the World Health Organisation as a “Global Pandemic” on the 11 Development costs - 65,788 65,788 Disposal of investment property (16,023) - (16,023) March 2020, has impacted global financial markets. Travel Adjustment to cost (164) - (164) restrictions have been implemented by many countries. Movement in unrealised loss Observable market activity – that provides the empirical data for on revaluation during the period (118,769) (3,269) (122,038) us to have an adequate level of certainty in the valuation – is Valuation at 30 June 2020 3,616,383 274,597 3,890,980 being impacted in the case of a few properties, as set out in the Fair value as at 30 June 2020 3,616,383 274,597 3,890,980 attached schedule. Investment property In the case of these properties, as at the valuation date, we Investment under property construction Total consider that we can attach less weight to previous market £’000 £’000 £’000 evidence for comparison purposes, to inform opinions of value. Valuation as at 30 June 2018 3,462,945 - 3,462,945 Indeed, the current response to COVID-19 means that we are Purchases of investment property 155,431 - 155,431 Development costs - 222,991 222,991 faced with an unprecedented set of circumstances on which to Disposal of investment property (36,567) - (36,567) base a judgement. Movement in unrealised gain on revaluation during the period 73,673 (10,913) 62,760 Our valuations of these properties are therefore reported as Valuation at 30 June 2019 3,655,482 212,078 3,867,560 being subject to ‘material valuation uncertainty’ as set out in VPS Fair value as at 30 June 2019 3,655,482 212,078 3,867,560 3 and VPGA 10 of the RICS Valuation – Global Standards. Consequently, less certainty – and a higher degree of caution – should be attached to our valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the

ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 23 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

13 Other investments Notes to the Financial Statements Investments in Investments in Investments in unconsolidated associates joint ventures subsidiaries Total £’000 £’000 £’000 £’000

12 Investment property and investment property Valuation at 30 June 2019 311,064 - 86,105 397,169 under construction (continued) Purchases of investments 105 126,168 - 126,273 Disposal of investments - - (831) (831) valuation of the whole portfolio under frequent review. For the Movement in unrealised gain avoidance of doubt, the inclusion of the ‘material valuation on revaluation during the period (11,767) (6,351) 1,079 (17,039) uncertainty’ declaration above does not mean that the valuation Valuation at 30 June 2020 299,402 119,817 86,353 505,572 cannot be relied upon. Rather, the declaration has been included Fair value as at 30 June 2020 299,402 119,817 86,353 505,572 to ensure transparency of the fact that – in the current Investments in extraordinary circumstances – less certainty can be attached to Investments in unconsolidated the valuation than would otherwise be the case. The material associates subsidiaries Total £’000 £’000 £’000 uncertainty clause is to serve as a precaution and does not

invalidate the valuation. Valuation at 30 June 2018 305,218 78,494 383,712 Purchases of investments 9 - 9 In the case of development valuations, we would draw your Disposal of investments - (815) (815) attention to the fact that, even in normal market conditions, the Movement in unrealised gain residual method of valuation is very sensitive to changes in key on revaluation during the period 5,837 8,426 14,263 inputs, with small changes in variables (such as the timing of the Valuation at 30 June 2019 311,064 86,105 397,169 development, finance/construction costs and sales rates) having Fair value as at 30 June 2019 311,064 86,105 397,169 a disproportionate effect on land value. Consequently, in the The cost and unrealised gain / (loss) on revaluation split of the other current extraordinary market conditions – with construction costs investments, excluding development loans, is as follows: increasing, supply and timing issues, fluctuating finance rates, Unrealised uncertain marketing periods and a lack of recent comparables – 2020 gains/(losses) 2020 Cost on revaluation Total it is inevitable that there is even greater uncertainty, with site £’000 £’000 £’000 values being susceptible to much more variance than normal.” The Car Auctions Unit Trust 137,461 56,242 193,703 Effective 9 September 2020, CBRE has removed all material The Hotel 42 Unit Trust 126,168 (6,351) 119,817 The Swansea Unit Trust 30,619 55,735 86,354 valuation uncertainty clauses from its valuation reports. The Tesco Jade Unit Trust 96,538 9,105 105,643 The below sensitivities illustrate the impact of changes in a key The Jade (GP) Limited 32 23 55 unobservable input (in isolation) on the fair value of the Group’s 390,819 114,754 505,572 property investments, analysed by sector in accordance with the Unrealised Portfolio Statement: 2019 gains 2019 Cost on revaluation Total Impact on valuation of 25% change in yield £’000 £’000 £’000 Increase Decrease The Car Auctions Unit Trust 137,461 67,947 205,408 2020 2020 £’000 £’000 The Swansea Unit Trust 31,450 54,655 86,105 The Tesco Jade Unit Trust 96,433 9,167 105,600 Retail (49,160) 54,390 The Jade (GP) Limited 32 24 56 Office (62,185) 70,635 265,376 131,793 397,169 Leisure (including hotels) (83,597) 89,153 Other (34,558) 39,092 As at 30 June 2020 material valuation uncertainty clauses were

included in the valuation reports of the real estate assets held by Impact on valuation of 25% change in yield Increase Decrease other investments. Further information relating to material uncertainty 2019 2019 clauses is disclosed in notes 4 and 12. The investments in associates £’000 £’000 relate to a 40% holding in The Tesco Jade Unit Trust and Tesco Jade Retail (50,460) 56,020 (GP) Limited, and a 50% holding in The Car Auctions Unit Trust. Office (58,991) 67,069 Leisure (including hotels) (89,562) 102,948 The investment in joint ventures relates to a 50% holding in Other (60,592) 68,408 The Hotel 42 Unit Trust.

Future minimum rentals receivable under non-cancellable operating Investments in unconsolidated subsidiaries relate to holdings in The Swansea Unit Trust. This subsidiary holds finance lease assets which leases within investment property are as follows: do not meet the criteria of investment property and so are not 2020 2019 consolidated. £’000 £’000 Not later than one year 193,042 173,563 Later than one year and not later than five years 773,684 694,250 Later than five years 5,549,326 5,455,023 Total 6,516,052 6,322,836

24 ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

16 Debtors Notes to the Financial Statements Group 2020 2019 As at 30 June £’000 £’000 Distributions receivable 4,429 3,568 14 Net investment in finance leases VAT receivable 345 - Other debtors and prepayments 22,475 8,356 As at 30 June 2020 2019 Total 27,249 11,924 £’000 £’000 Amounts receivable under finance leases: Fund 2020 2019 Within one year 454 454 As at 30 June £’000 £’000 In the second to fifth year inclusive 1,816 1,815 Distributions receivable 43,246 43,865 After five years 9,288 9,743 Other debtors and prepayments 2,592 810 11,558 12,012 Total 45,838 44,675 Less: unearned finance: Income (3,513) (3,761) Present value of minimum lease payments receivable 8,045 8,251 17 Bank loans Interest received in advance 61 63 During the financial year the Fund had a £100,000,000 (2019: Net investment in finance lease 8,106 8,314 £100,000,000) revolving credit facility with The Royal Bank of The Aberfeldy Unit Trust entered into a lease in the 2016 financial year Scotland International Limited, as per the amended and restated for the completed property with a third party tenant. The term of the agreement dated 18 October 2018. As at 30 June 2020, £nil (2019: finance lease is from 11 March 2016 (with the rent commencement £nil) of the facility was drawn down. For the portion that is used during date on 31 March 2016), and expires on 31 December 2045. The initial the year, interest is charged on the daily balance at LIBOR, plus annual rent was £453,932. The principal rent is paid quarterly in 1.60% (2019: 1.60%), per annum. On the remaining unused portion advance and is increased from each rent review date in accordance of the facility, interest is charged at 0.65% (2019: 0.65%) per annum. with the lease agreement (using a formula for an RPI adjustment). The This loan is repayable on expiry of the facility, being 18 October 2022. 1st rent review date was on 1 September 2016 with each rent review being on each anniversary of that date thereafter. 18 Derivative liability

The fair value of the finance lease receivable at 31 March 2016, being The 250 Bishopsgate Unit Trust, a subsidiary, entered into a rental inception of the lease, was £9,000,000. price swap agreement with Credit Suisse International on 5 June The term of finance lease entered into is 30 years. 2007. The purpose of the swap was to hedge rental income deriving from a lease agreement against RPI. The agreement with Credit Unguaranteed residual values of assets held under finance leases at Suisse International had a maturity date of 29 June 2035 and a the balance sheet date are estimated at £nil (2019: £nil) due to the £1 floating rate based on RPI was paid to Credit Suisse International in buy back option given to the tenant as per the head lease agreement. order to receive a fixed amount per annum.

The interest rate inherent in the leases is fixed at the contract date for On 16 December 2019 the swap was closed out at a cost of all of the lease term. The implied interest rate contracted £17,510,000. approximates 3.01% (2019: 3.01%) per annum. Contingent rents are recognised within income. At 30 June 2020 the fair value of this rental price swap was a liability of £nil (2019: £23,174,986). The movement in fair value during the 15 Portfolio transaction costs prior year was a loss of £3,300,754, resulting in an unrealised loss 2020 2019 through the Consolidated statement of total return, in the prior year £’000 £’000 (see note 5). a ) Acquisitions and Capital Additions Acquisitions excluding transaction costs 154,823 358,556 19 Creditors Agents’ fees 75 1,332

Investment Advisory acquisition fee 734 1,485 Group 2020 2019 Legal fees 234 1,174 As at 30 June £’000 £’000 Other costs 149 405 Deferred rental income 39,813 36,547 Stamp Duty Land Tax 5,366 15,054 Investment Advisor fees 5,668 5,411 Survey fees 96 376 VAT payable - 3,082 Trustee’s fees 4 40 Other creditors and accruals 3,719 5,585 Total transaction costs 6,658 19,866 Total 49,200 50,625 Total acquisitions including transaction costs 161,481 378,422 Fund 2020 2019 b ) Disposals As at 30 June £’000 £’000 Disposals excluding transaction costs 26,851 36,994 Investment Advisor fees 5,581 5,323 Agents’ fees - 298 Other creditors and accruals 3,462 2,104 Legal fees - 126 Total 9,043 7,427 Other costs 1 3 Total transaction costs 1 427 Total disposals net of transaction costs 26,850 36,567

ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 25 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

The cost and unrealised gain / (loss) on revaluation of the Notes to the Financial Statements investments in subsidiaries is as follows:

Unrealised 2020 gains/(losses) 2020 20 Investments in consolidated subsidiaries Cost on revaluation Total £’000 £’000 £’000 The Fund held the following investments in subsidiaries: The 250 Bishopsgate Unit Trust 248,530 30,062 278,592 2020 2019 The 4M Supermarket Unit Trust 149,732 (2,141) 147,591 Total Total £’000 £’000 The Aberfeldy Unit Trust 44,463 34,086 78,549 The 250 Bishopsgate Unit Trust 278,592 248,174 The Ashford Unit Trust 44,839 12,634 57,473 The 4M Supermarket Unit Trust 147,591 145,640 The Bedford Unit Trust 62,407 5,686 68,093 The Aberfeldy Unit Trust 78,549 78,854 The Bingo Unit Trust 165,158 (59,790) 105,368 The Ashford Unit Trust 57,473 57,022 The Bournemouth Unit Trust 40,500 1,425 41,925 The Avalon Unit Trust - 14,180 The Brentwood Unit Trust 81,415 (1,615) 79,800 The Bedford Unit Trust 68,093 67,157 The Bridewell Unit Trust 33,680 6,190 39,870 The Bingo Unit Trust 105,368 193,090 The Cardiff Unit Trust 69,112 (1,764) 67,348 The Bournemouth Unit Trust 41,925 45,728 The Charterhouse Unit Trust 187,874 2,861 190,735 The Brentwood Unit Trust 79,800 79,808 The Crown Unit Trust 126,483 4,238 130,721 The Bridewell Unit Trust 39,869 40,989 The Dorland House Unit Trust 58,869 25,893 84,762 The Cardiff Unit Trust 67,348 67,356 The Dulwich Unit Trust 71,389 3,028 74,417 The Charterhouse Unit Trust 190,736 142,905 The Dunaskin Unit Trust 32,811 6,689 39,500 The Crown Unit Trust 130,720 126,277 The Gatwick Unit Trust 82,647 33,907 116,554 The Dorland House Unit Trust 84,762 85,720 The Gatwick 2 Unit Trust 36,626 (242) 36,384 The Dulwich Unit Trust 74,416 74,425 The Glasgow Unit Trust 104,615 51,911 156,526 The Dunaskin Unit Trust 39,500 40,637 The Health Clubs Unit Trust 97,650 30,787 128,437 The Gatwick Unit Trust 116,554 124,953 The Heathrow Unit Trust 22,263 2,337 24,600 The Gatwick 2 Unit Trust 36,384 47,194 The Huddersfield Unit Trust 54,204 2,077 56,281 The Glasgow Unit Trust 156,526 159,200 The Jealott's Hill Unit Trust 92,559 (1,237) 91,332 The Health Clubs Unit Trust 128,437 131,587 The Llanelli Unit Trust 49,148 8,516 57,664 The Heathrow Unit Trust 24,600 29,865 The North Wharf Gardens Unit Trust 108,164 (3,324) 104,840 The Huddersfield Unit Trust 56,281 56,289 The P6 Unit Trust 233,018 11,937 244,955 The Jealott's Hill Unit Trust 91,321 - The Rose Unit Trust 101,949 10,326 112,275 The Llanelli Unit Trust 57,665 58,862 The North Wharf Gardens Unit Trust 104,840 85,246 The Royston Unit Trust 58,784 5,811 64,595 The P6 Unit Trust 244,955 246,133 The Sevenoaks Unit Trust 76,403 11,243 87,646 The Red Lion Street Jersey Property Unit Trust - 42,717 The Sheldon Unit Trust 52,400 3,670 56,070 The Rose Unit Trust 112,275 113,328 The Stratford Unit Trust 114,207 61,613 175,820 The Royston Unit Trust 64,594 63,753 The Student Accommodation Unit Trust 22,462 9,703 32,165 The Sevenoaks Unit Trust 87,646 87,654 The Sudbury Unit Trust 32,299 8,563 40,862 The Sheldon Unit Trust 56,070 56,070 The Tennis Unit Trust 265,516 77,841 343,357 The Stratford Unit Trust 175,820 171,267 The Truro Unit Trust 51,790 (717) 51,073 The Student Accommodation Unit Trust 32,166 32,291 The Wandsworth Unit Trust 82,778 27,664 110,442 The Sudbury Unit Trust 40,862 40,871 The Westminster Unit Trust 108,521 248 108,769 The Tennis Unit Trust 343,357 343,323 The Wigan Unit Trust 41,029 (423) 40,606 The Truro Unit Trust 51,073 51,081 Total 3,306,294 419,693 3,725,987 The Wandsworth Unit Trust 110,443 108,193 The Westminster Unit Trust 108,770 113,725 The Wigan Unit Trust 40,606 40,612 Total 3,725,987 3,712,176

26 ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

21 Financial instruments Notes to the Financial Statements The policies applied in the management of financial instruments are set out in note 3.

20 Investments in consolidated subsidiaries (continued) Currency exposure The financial statements of the Group consolidate the results, assets There was no significant currency exposure within the Group at the and liabilities of the subsidiary undertakings listed below: balance sheet date (2019: same). Country Class % of of of Class Principal Liquidity establishment shares held activity The 250 Bishopsgate Unit Trust Guernsey Units 99.99% Property investment The Fund’s liquidity position is monitored by the Manager and the The 4M Supermarket Unit Trust Guernsey Units 99.99% Property investment Investment Advisor. The Aberfeldy Unit Trust Guernsey Units 99.96% Property investment The Ashford Unit Trust Guernsey Units 99.93% Property investment A summary table with maturity of financial assets and liabilities The Bedford Unit Trust Guernsey Units 99.95% Property investment presented below is used by the Manager to manage liquidity risks and The Bingo Unit Trust Guernsey Units 99.99% Property investment is derived from managerial reports at individual Trust level. The The Bournemouth Unit Trust Guernsey Units 99.95% Property investment amounts disclosed in the below tables are the contractual The Brentwood Unit Trust Guernsey Units 99.98% Property investment undiscounted cash flows. Undiscounted cash flows in respect of The Bridewell Unit Trust Guernsey Units 99.94% Property investment The Cardiff Unit Trust Guernsey Units 99.96% Property investment balances due within 12 months generally equal their carrying The Charterhouse Unit Trust Guernsey Units 99.98% Property investment amounts in the Consolidated balance sheet as the impact of The Crown Unit Trust Guernsey Units 99.98% Property investment discounting is not significant. The Dorland House Unit Trust Guernsey Units 99.91% Property investment The Dulwich House Unit Trust Guernsey Units 99.97% Property investment Refer to note 23 for investor and capital commitments. The Dunaskin Unit Trust Guernsey Units 99.94% Property investment The maturity analysis of financial assets / liabilities at 30 June 2020 is as follows: The Gatwick Unit Trust Guernsey Units 99.96% Property investment

The Gatwick 2 Unit Trust Guernsey Units 99.92% Property investment Demand and From 1 to Later than The Glasgow Unit Trust Guernsey Units 99.97% Property investment less than 1 year 5 years 5 years Total The Health Clubs Unit Trust Guernsey Units 99.98% Property investment £’000 £’000 £’000 £’000 The Heathrow Unit Trust Guernsey Units 99.87% Property investment Assets The Huddersfield Unit Trust Guernsey Units 99.94% Property investment Cash and cash equivalents 126,128 - - 126,128 The Jealott's Hill Unit Trust Guernsey Units 99.98% Property investment Other debtors 22,820 - - 22,820 The Llanelli Unit Trust Guernsey Units 99.94% Property investment Distributions receivable 4,429 - - 4,429 The North Wharf Gardens Unit Trust Guernsey Units 99.98% Property investment Liabilities The P6 Unit Trust Guernsey Units 99.99% Property investment Other creditors 9,387 - - 9,387 The Rose Unit Trust Guernsey Units 99.98% Property investment Distributions payable 41,497 - - 41,497 The Royston Unit Trust Guernsey Units 99.95% Property investment Net assets attributable to Unitholders* 4,427,384 - - 4,427,384 The Sevenoaks Unit Trust Guernsey Units 99.96% Property investment

The Sheldon Unit Trust Guernsey Units 99.94% Property investment The Stratford Accommodation The maturity analysis of financial assets / liabilities at 30 June 2019 is as follows: Unit Trust Guernsey Units 99.98% Property investment

The Student Accommodation Demand and From 1 to Later than Unit Trust Guernsey Units 99.87% Property investment less than 1 year 5 years 5 years Total The Sudbury Unit Trust Guernsey Units 99.91% Property investment £’000 £’000 £’000 £’000 The Tennis Unit Trust Guernsey Units 66.67% Property investment Assets The Truro Unit Trust Guernsey Units 99.94% Property investment Cash and cash equivalents 166,428 - - 166,428 The Wandsworth Unit Trust Guernsey Units 99.96% Property investment Other debtors 7,987 - - 7,987 The Westminster Unit Trust Guernsey Units 99.98% Property investment Distributions receivable 3,568 - - 3,568 The Wigan Unit Trust Guernsey Units 99.93% Property investment Liabilities Other creditors 10,996 - - 10,996 Distributions payable 42,188 - - 42,188 Derivative liability 3,387 16,558 74,317 94,262 Net assets attributable to Unitholders* 4,293,270 - - 4,293,270

* Based on reported NAV.

Interest rate profile

The significant interest-bearing financial instruments of the Group are bank loans (nil balance but available facility as per note 17), on which interest is calculated at a variable rate. The majority of the Group’s assets comprise properties which neither pay interest nor have a maturity date.

ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 27 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

The following table provides fair value analysed by the level of the Notes to the Financial Statements defined fair value hierarchy for investment property and investment property under construction as at 30 June 2020:

Level 1 Level 2 Level 3 Total 21 Financial instruments (continued) £’000 £’000 £’000 £’000 Investment property - - 3,616,383 3,616,383 The interest rate profile of the Group and Fund’s assets and liabilities Investment property under construction - - 274,597 274,597 at 30 June 2020 was: Fair value analysed by level at 30 June 2019: Weighted average interest rate Level 1 Level 2 Level 3 Total Group £’000 % Maturity £’000 £’000 £’000 £’000 Bank loans - Libor + 1.60% 18.10.22 Investment property - - 3,655,482 3,655,482 Investment property under construction - - 212,078 212,078 Weighted average interest rate Fund £’000 % Maturity The following table provides fair value analysed by the level of the Bank loans - Libor + 1.60% 18.10.22 defined fair value hierarchy for financial instruments carried at fair value at 30 June 2020: Level 1 Level 2 Level 3 Total The interest rate profile of the Group and Fund’s, assets and liabilities £’000 £’000 £’000 £’000 at 30 June 2019 was: Investments in associates and joint venture - - 419,219 419,219

Weighted average Investments in interest rate unconsolidated subsidiaries - - 86,353 86,353 Group £’000 % Maturity Derivative liability - - - - Bank loans - Libor + 1.60% 18.10.22 Net assets attributable to Unitholders - (4,307,794) - (4,307,794)

Weighted average Fair value analysed by level at 30 June 2019: interest rate Level 1 Level 2 Level 3 Total Fund £’000 % Maturity £’000 £’000 £’000 £’000 Bank loans - Libor + 1.60% 18.10.22 Investments in associates - - 311,064 311,064 Investments in Fair values unconsolidated subsidiaries - - 86,105 86,105 Derivative liability - (23,175) - (23,175) Financial instruments and investment properties carried at fair value Net assets attributable to Unitholders - (4,175,747) - (4,175,747) are classified using the following hierarchy that reflects the significance of the inputs used in measuring their fair value: There is no material difference between the carrying values and fair values of the financial instruments disclosed in the balance sheet Level 1: Fair value based on a quoted price for an identical instrument (2019: same) and no transfers were made within the fair value in an active market and will generally include equities, some highly hierarchy during the year. liquid bonds and exchange traded derivatives. Credit risk Level 2: Fair value based on a valuation technique using observable The Group’s maximum exposure to credit risk by class of financial market data and will generally include evaluated pricing techniques asset is as follows: using inputs such as quoted prices for similar instruments, interest 2020 2019 rates, yield curves or credit spreads. £’000 £’000 Trade receivables, net of provision for impairment Level 3: Fair value based on a valuation technique that relies where applicable Other debtors 22,820 8,356 significantly on non-observable market data and will include values Distributions receivable 4,429 3,568 not primarily derived from observable market data. Total debtors, net of impairment 27,249 11,924 Cash and cash equivalents 126,128 166,428 The determination of what constitutes ‘observable’ requires significant judgement by the Group. The Group considers observable 22 Related parties data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and The Manager, a company incorporated in Guernsey, was a wholly- provided by independent sources that are actively involved in the owned subsidiary of Prudential plc, a company registered in England. relevant market. On 21 October 2019, M&G plc demerged from Prudential plc, with the result that M&G plc is now the ultimate parent company of the The level in the fair value hierarchy within which the fair value Manager. Kleinwort Benson (Guernsey) Limited (the ‘Trustee’), a measurement is categorised in its entirety is determined on the basis company incorporated in Guernsey, is a wholly-owned subsidiary of of the lowest level input that is significant to the fair value in its entirety. Société Générale S.A. With effect from 15 August 2019, Northern If a fair value measurement uses observable inputs that require Trust (Guernsey) Limited replaced Kleinwort Benson (Guernsey) significant adjustment based on unobservable inputs, that Limited as Trustee of the Fund. Northern Trust (Guernsey) Limited, a measurement is a Level 3 measurement. Assessing the significance company incorporated in Guernsey, is a wholly-owned subsidiary of of a particular input to the fair value measurement in its entirety Northern Trust Corporation, headquartered in Chicago, Illinois. The requires judgement, considering factors specific to the asset or Fund has no ultimate controlling party. Refer to note 7 for further liability. information on related party transactions in the year, note 19 for amounts payable at year end and note 13 for investments in associates and unconsolidated subsidiaries. As at the date of this report, no Director of the Manager held Units in the Fund, except for Mr Francis who held 4,654.220 Units at 30 June 2020 (2019: 4,654.220).

28 ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

24 Events occurring after the balance sheet date Notes to the Financial Statements The Fund has issued Units to the value of £82,571,455 and redeemed Units to the value of £65,982,384 since the year end. 22 Related parties (continued) The Fund has subscribed for / (redeemed) additional units to the values listed below in the following sub-trusts. Distributions to related parties are as follows: Prudential Assurance Unit trust Value of units issued/(redeemed) Company Limited The North Wharf Gardens UT £22,477,450 £’000 The Jealott's Hill UT (£14,248,118) Distributions paid for 2020 period 3 Distribution payable at 30 June 2020 1 On 17 July Buzz Group limited announced a Company Voluntary Distributions paid for 2019 period 6 Arrangement (CVA) over all properties it occupies. Buzz Bingo is the Distribution payable at 30 June 2019 1 principal tenant in the Bingo Unit Trust. As part of the CVA process there would be a period of reduced rental whilst the business 23 Capital commitments recovers from COVID-19 and some properties would be vacated by The Fund has entered into a number of subscription agreements with the tenant. On 3 August the Buzz Group CVA was approved by its subsidiaries to fund future capital commitments incurred through creditors and on 4 September the legal challenge period ended and development funding or forward commitment agreements as detailed the CVA terms came into effect. below, which are authorised and contracted for, but for which no Under the terms of the Information Memorandum dated 2 September provision has been made in the Fund’s Consolidated Financial 2020, The Manager and the Trustee declared a Market Wide Non- Statements. Payment Event on 6 October 2020. Outstanding Original As at 30 June 2020 commitments commitments The North Wharf Gardens UT £105,736,580 £126,824,206 25 Distribution table Accounting Payment Distribution paid/payable [a] The Charterhouse UT £73,044,110 £175,000,000 reference date dates 2020 The Crown UT* £81,419,263 £81,419,263 £ Total £260,199,953 £383,243,469 Institutional ‘A’ Units 30 September 01.11.19 1.169 * Subject to planning approval. 31 December 03.02.20 1.181 The Fund’s holding of cash together with commitments from investors 31 March 01.05.20 1.137 is sufficient to cover the full cost of all amounts contracted for and 30 June 03.08.20 1.072 falling due within twelve months of 30 June 2020 amounting to c.£134m (2019: c.£65m). Accounting Payment Distribution paid/payable [a] reference date dates 2019 The maturity analysis of the capital commitments at 30 June 2020 is £ as follows: Institutional ‘A’ Units Outstanding commitments, falling due: 30 September 01.11.18 1.182 Demand and less than From 1 to More than 31 December 01.02.19 1.148 As at 30 June 2020 1 year 5 years 5 years Total 31 March 01.05.19 1.125 The North Wharf Gardens UT £61,204,707 £44,531,874 - £105,736,580 30 June 01.08.19 1.122

The Charterhouse UT £73,044,110 - - £73,044,110 [a] As the Fund is a Baker Trust, there is no income tax, tax credit or equalisation The Crown UT* - £81,419,263 - £81,419,263 applicable to the distributions. Refer to Distribution Policy note 2 and note 8 on Total £134,248,817 £125,951,137 - £260,199,953 Taxation.

* Subject to planning approval.

ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 29 The M&G Secured Property Income Fund Trustee’s responsibilities and report

Trustee’s responsibilities

Statement of the Trustee’s responsibilities in respect of the Consolidated Financial Statements of the Fund

It is the duty of the Trustee to enquire into the conduct of the Manager in the management of the Fund in each accounting period and report thereon to the Unitholders.

The Trustee is also responsible for safeguarding the assets of the Fund.

Trustee’s report

Report of the Trustee to the Unitholders of The M&G Secured Property Income Fund for the financial for the period 15 August 2019 to 30 June 2020

We hereby state that in our opinion the Manager has managed the Fund for the period 15 August 2019 to 30 June 2020 in accordance with the provisions of (i) the Scheme’s Principal Documents (ii) Scheme Particulars and (iii) The Authorised Collective Investment Schemes (Class B) Rules 2013, made under The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended).

Northern Trust (Guernsey) Limited

23 October 2020

30 ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 The M&G Secured Property Income Fund Trustee’s responsibilities and report

Trustee’s responsibilities

Statement of the Trustee’s responsibilities in respect of the Consolidated Financial Statements of the Fund

The Trustee is responsible for safeguarding the assets of the Fund and hence for taking reasonable steps for the prevention and detection of fraud, error and non-compliance with law and regulations.

Trustee’s report

Report of the Trustee to the Unitholders of The M&G Secured Property Income Fund for the financial period 1 July 2019 to 14 August 2019

We hereby state that in our opinion the Manager has managed the Fund during the period 1 July 2019 to 14 August 2019 in accordance with the provisions of (i) the Scheme’s Principal Documents (ii) Scheme Particulars and (iii) The Authorised Collective Investment Schemes (Class B) Rules 2013, made under The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended).

Kleinwort Benson (Guernsey) Limited

23 October 2020

ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 31 The M&G Secured Property Income Fund Independent Auditor’s report

Independent Auditor’s report to the Overview of our audit approach Key audit matters • Fair value of investment property Unitholders of The M&G Secured • Valuation of other investments Property Income Fund • Revenue recognition and recoverability of related receivables (rental income and Opinion distribution income) In our opinion: • Impact of COVID-19 on Going Concern • The Consolidated Financial Statements of The M&G Secured Audit scope • The audits of all the consolidated entities were Property Income Fund (the “Fund”), together with its subsidiaries performed by the audit team. (“the Group”) (the “Consolidated Financial Statements”) give a Materiality • Overall materiality of £43m which represents true and fair view of the state of the Group’s affairs as at 30 June 1% of the Net assets attributable to Unitholders 2020 and of the Group’s total return for the year then ended; and (“NAV”) as at 30 June 2020. • the Consolidated Financial Statements have been properly prepared in accordance with UK Accounting Standards including Key audit matters FRS102 ‘The Financial Reporting Standard applicable in the UK Key audit matters are those matters that, in our professional and the Republic of Ireland. judgment, were of most significance in our audit of the What we have audited Consolidated Financial Statements of the current period and We have audited the Consolidated Financial Statements which include the most significant assessed risks of material comprise: misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the • Consolidated statement of total return; overall audit strategy, the allocation of resources in the audit; and • Consolidated statement of change in net assets attributable to directing the efforts of the engagement team. These matters were Unitholders; addressed in the context of our audit of the Consolidated Financial • Consolidated balance sheet as at 30 June 2020; Statements as a whole, and in our opinion thereon, and we do not • Fund balance sheet as at 30 June 2020; provide a separate opinion on these matters. • Consolidated cash flow statement; and Risk • Related notes 1 to 25 to the Financial Statements. Consolidated fair value of investment property and investment The financial reporting framework that has been applied in the property under construction (£3.9bn, 2019: £3.9bn) preparation of the Consolidated Financial Statements is applicable law and UK Accounting Standards, including FRS102 ‘The Financial Refer to accounting policies, Note 4 and Note 12 of the Consolidated Reporting Standard applicable in the UK and the Republic of Ireland’. Financial Statements

Basis for opinion The valuations of investment properties (including those under construction) are based on judgements, estimates and assumptions We conducted our audit in accordance with International Standards and may be materially misstated. on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the The uncertainties over the current economic environment caused by Auditor’s responsibilities for the audit of the Consolidated Financial COVID-19 had an impact on the valuation of the Group’s properties. Statements section of our report below. We are independent of the As disclosed in note 12, CBRE (the ‘independent valuer’) highlighted Fund in accordance with the ethical requirements that are relevant in their assessment of the fair value of the property portfolio that to our audit of the Consolidated Financial Statements in the UK, there is limited transactional evidence and less certainty with regard including the FRC’s Ethical Standard as applied to listed entities, to valuations and that market values can change rapidly in the context and we have fulfilled our other ethical responsibilities in accordance of current market conditions. Accordingly, CBRE have stated that it with these requirements. has been necessary to make more judgements than usually required and the Group has reported the valuation of the property portfolio at We believe that the audit evidence we have obtained is sufficient 30 June 2020 on the basis of a ‘material valuation uncertainty’. and appropriate to provide a basis for our opinion. For the avoidance of doubt CBRE state, the inclusion of the ‘material Conclusions relating to going concern valuation uncertainty’ declaration above does not mean that the We have nothing to report in respect of the following matters in valuation cannot be relied upon and the clause is to serve as a relation to which the ISAs (UK) require us to report to you where: precaution and does not invalidate the valuation. • the Manager’s use of the going concern basis of accounting in the preparation of the Consolidated Financial Statements is not appropriate; or • the Manager has not disclosed in the Consolidated Financial Statements any identified material uncertainties that may cast significant doubt about the Group’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the Consolidated Financial Statements are authorised for issue.

32 ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 The M&G Secured Property Income Fund Independent Auditor’s report

Independent Auditor’s report to the Risk Unitholders of The M&G Secured Valuation of other investments (£506m, 2019: £397m) Refer to accounting policies, Note 4 and Note 13 of the Consolidated Property Income Fund Financial Statements

Our response to the risk Other investments comprise investments in unconsolidated We performed the following procedures: subsidiaries, associates and joint ventures. The valuation of other investments is based on their net asset values which depend primarily • We developed an understanding of the valuation process, by on the fair values of the underlying properties. The fair values are performing walkthroughs of the processes and controls in place; based on judgements, estimates and assumptions that may be • We assessed the qualifications, experience, independence and materially misstated. scope of work performed by management’s Independent Valuer; The uncertainties over the current economic environment caused by • We engaged EY real estate valuation specialists to assess the COVID-19 had an impact on the valuation of other investments. As methodology applied by management’s Independent Valuer in noted above CBRE (the ‘independent valuer’) have indicated that the determining the property values; valuation of certain properties held by the other investments in the • We performed analytic procedures over the valuation of portfolio at 30 June 2020 is prepared on the basis of a ‘material investment properties across the portfolio, focusing on valuation uncertainty’ correlations with movements in market data for similar assets and investigated any significant deviations; Our response to the risk • With respect to key objective inputs to the valuation, comprising With respect to the fair values of the underlying properties held by the rental income and lease expiry dates, we agreed the inputs to other investments, we performed the following procedures: lease agreements or rent review schedules on a sample basis; • We developed an understanding of the valuation of other • We assessed the assumptions applied by the external valuers as investments estimates process, by performing walkthroughs of a result of COVID-19 in respect of any tenant voids and rent the processes and controls in place; concessions and investigated any contrary evidence to the In relation to the valuation of the underlying properties held by the assumptions adopted; • unconsolidated subsidiaries, associates and joint ventures we • We selected a representative sample of investment properties performed the same procedures as described above in and engaged EY real estate valuation specialists to assess the “Consolidated fair value of investment property and subjective assumptions and whether the reported value fell within investment property under construction”; a range of reasonable outcomes; • We determined the appropriateness of net asset value as a proxy • We checked that the fair values derived by management’s of fair value of the investment in unconsolidated subsidiaries, Independent Valuer for the entire portfolio were correctly included associates and joint ventures after we had considered any other in the Consolidated Financial Statements; adjustments such as the SDLT uplift; and • Our EY real estate valuation specialists challenged the • We reviewed the ‘Update on NAV adjustments’ prepared by assumptions made by management’s Independent Valuer based management. We challenged the assumptions and judgments on recent transactions noted for comparable asset disposals, applied by management with particular attention to the uplift where applicable; and element which reflects the SDLT saving that could be achieved by • We assessed the adequacy of the additional COVID-19 related disposing of an SDLT exempt entity. Our procedures included disclosures of estimates and valuation assumptions disclosed in evaluating the tax status of the underlying entity, understanding the notes in accordance with UK Accounting Standards. the basis of the likely exit mechanisms available to management and obtaining corroborating evidence the assumptions are Key observations communicated to the Audit supported by recent transactions for comparable disposals. Committee: Key observations communicated to the Audit Based on our procedures performed over the risk of misstatement in Committee: the fair value of investment property portfolios, we concluded that the Based on our procedures performed over the risk of misstatement in methodology applied was appropriate and that the external the fair value of other investments, we concluded that the valuations were a reasonable assessment of the fair value of the held methodology applied was appropriate and that the external investment properties at 30 June 2020. valuations were a reasonable assessment of the fair value of other We concluded that the disclosures in the consolidated financial investments at 30 June 2020 statements relating to the material valuation uncertainty paragraph We concluded that the disclosures in the consolidated financial included by the independent valuers in their valuation report are statements relating to the material valuation uncertainty paragraph appropriate and fundamental to users understanding of this matter. included by the independent valuers in their valuation report are We also conclude that the balances and disclosures in the financial appropriate and fundamental to users understanding of this matter. statements appropriately reflect the risks factors identified. We also conclude that the balances and disclosures in the financial statements appropriately reflect the risk factors identified.

ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 33 The M&G Secured Property Income Fund Independent Auditor’s report

Independent Auditor’s report to the Risk Unitholders of The M&G Secured Impact of COVID-19 on Going Concern The global COVID19 pandemic continues to affect all businesses Property Income Fund across the world in different ways. The governments of the countries Risk affected have designed measures to mitigate the resulting adverse economic impact of this pandemic. Revenue recognition and recoverability of related receivables (rental and distribution income) There is a risk that the COVID-19 pandemic may impact Fund liquidity, investment returns, and covenant compliance which could (Rental income £178m, 2019: £170m), Distribution income £21m, impact the Going Concern of the Fund. 2019: £19m), Receivables £22m, 2019: £8m There is also a risk that management has not appropriately disclosed Refer to accounting policies, Note 6 and Note 16 of the Consolidated the impact of COVID-19 in the annual report. Financial Statements

Rental and distribution income are significant and management may Our response to the risk seek to overstate income to increase performance and distributions to We performed the following procedures: Unitholders. • We obtained an understanding of the process management There is a risk that the COVID-19 pandemic may impact the ability of followed to make the going concern assessment as a result of the the Fund to collect all outstanding receivables and therefore the impact of COVID-19; amount may be materially misstated due to incorrect or inappropriate • We obtained and assessed the completeness of managements estimates, judgements and assumptions in relation to the forecasts which include operational cash projections and known recoverability of the amounts. development costs to ensure there are no material unidentified or undisclosed events that could have an impact on going concern; Our response to the risk • We challenged the Manager on the appropriateness of the key With respect to revenue recognition and recoverability of the related assumptions including the forecast rental income, expenditure receivable, we performed the following procedures: and Fund development commitments and considered their • We developed an understanding of the rental and distribution reasonableness in the context of other supporting evidence income and recoverability processes, by performing walkthroughs gained from our audit work; of the processes and controls in place; • We evaluated the appropriateness of management’s stress test • We performed analytical procedures by setting expectations on scenarios, and their impact on the liquidity position. We performed rental income and comparing quarterly rents to those our own stress test and reverse stress tests using a number of expectations. alternative assumptions to assess the reasonableness of management’s assessment; • We obtained explanations and supporting evidence for variances above our testing thresholds; • We obtained updated Fund queue subscription information to assess how the Fund will cover ongoing development • For a sample of leases, we obtained the lease agreements, along commitments. We agreed a sample of outstanding subscription with any subsequent rent reviews and we agreed rental amounts agreements included in the schedule; to the lease accounting records; • We obtained confirmation of the bank loan facility and considered • On a sample basis, we have agreed the distribution income the covenant compliance implications which would arise upon received by the Fund to the distributions paid by the underlying utilisation to ensure these were appropriately disclosed in the unit trusts; financial statements; • We have reviewed management’s assessment of the • We reviewed minutes of the Manager with a view to identifying recoverability of any overdue rent receivables and challenged the any matters which may impact the going concern assessment; judgements involved; and • We have agreed subsequent cash receipts of receivable balances • We reviewed the disclosures in the annual report in relation to at year end for known collections; and COVID-19 and ensured these adequately disclose the risk, impact • We assessed the adequacy of the additional COVID-19 related on the Fund and mitigation actions adopted. disclosures of estimates and recoverability assumptions disclosed in the notes in accordance with UK Accounting Key observations communicated to the Audit Standards. Committee:

Key observations communicated to the Audit Based on the procedures performed, we are satisfied that the Committee: Manager has appropriately considered the impact of COVID-19 and that adequate disclosures have been presented in the consolidated Based on our procedures performed on the risk of the overstatement financial statements. or inaccurate rental and distribution income recognition and related year-end receivables, we concluded that revenue and related year- end receivables are fairly stated.

We concluded that the disclosures in the consolidated financial statements relating to revenue and associated recoverability estimates are appropriate.

34 ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 The M&G Secured Property Income Fund Independent Auditor’s report

We evaluate any uncorrected misstatements against both the Independent Auditor’s report to the quantitative measures of materiality discussed above and in light of Unitholders of The M&G Secured other relevant qualitative considerations in forming our opinion.

Property Income Fund Other information An overview of the scope of our audit The other information comprises the information included in the annual investment report other than the Consolidated Financial Statements and our auditor’s report thereon. The Manager is Tailoring the scope responsible for the other information.

Our assessment of audit risk, our evaluation of materiality and our Our opinion on the Consolidated Financial Statements does not cover allocation of performance materiality determine our audit scope for the other information and, except to the extent otherwise explicitly the Group. This enables us to form an opinion on the Consolidated stated in this report, we do not express any form of assurance Financial Statements. We take into account size, risk profile, the conclusion thereon. organisation of the Group and effectiveness of controls, including In connection with our audit of the Consolidated Financial controls and changes in the business environment when assessing Statements, our responsibility is to read the other information and, in the level of work to be performed. doing so, consider whether the other information is materially The Group consists of the consolidated entities as explained in note inconsistent with the Consolidated Financial Statements or our 20 of the Consolidated Financial Statements. knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent Our application of materiality material misstatements, we are required to determine whether there is a material misstatement in the Consolidated Financial Statements We apply the concept of materiality in planning and performing the or a material misstatement of the other information. If, based on the audit, in evaluating the effect of identified misstatements on the audit work we have performed, we conclude that there is a material and in forming our audit opinion. misstatement of the other information, we are required to report that fact. Materiality We have nothing to report in this regard. The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the Consolidated Financial Statements. Materiality provides a basis for determining the nature and extent of our audit procedures.

We determined materiality for the Group to be £43m (2019: £42m), which is 1% (2019: 1%) of NAV. We believe that the NAV provides us with an appropriate basis for audit materiality as the NAV is a key performance measure and is a key metric used by management in assessing and reporting on the overall performance of the Group.

Performance materiality

The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.

On the basis of our risk assessments, together with our assessment of the Fund’s overall control environment, our judgement was that performance materiality was 50% (2019: 50%) of our planning materiality, namely £21.5m (2019: £21m). We have set performance materiality at this percentage so that it is equivalent to the pricing error guidance in Guernsey regulations.

Reporting threshold

An amount below which identified misstatements are considered as being clearly trivial.

We agreed with the Audit Committee of the Manager that we would report to them all uncorrected audit differences in excess of £2.2m (2019: £2.1m), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.

ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 35 The M&G Secured Property Income Fund Independent Auditor’s report

Responsibilities of the Manager Use of this report

As explained more fully in the Manager’s responsibilities statement This report is made solely to the Fund’s Unitholders, as a body, in set out on page 2, the Manager is responsible for the preparation of accordance Paragraph 4.02(3) of the Authorised Collective the Consolidated Financial Statements and for being satisfied that Investment Schemes (Class B) Rules, 2013. Our audit work has they give a true and fair view, and for such internal control as the been undertaken so that we might state to the Fund’s Unitholders Manager determines is necessary to enable the preparation of those matters we are required to state to them in an auditor’s report Consolidated Financial Statements that are free from material and for no other purpose. To the fullest extent permitted by law, we do misstatement, whether due to fraud or error. not accept or assume responsibility to anyone other than the Fund and the Fund’s Unitholders as a body, for our audit work, for this In preparing the Consolidated Financial Statements, the Manager is report, or for the opinions we have formed. responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Manager Ernst & Young LLP either intends to liquidate the Fund or to cease operations, or has no Guernsey realistic alternative but to do so. 23 October 2020

Auditor’s responsibilities for the Notes: 1. The maintenance and integrity of The M&G Secured Property Income Fund web audit of the consolidated financial site is the responsibility of the Manager; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditor accept no statements responsibility for any changes that may have occurred to the Consolidated Financial Statements since they were initially presented on the web site. Our objectives are to obtain reasonable assurance about whether the 2. Legislation in the Guernsey governing the preparation and dissemination of Consolidated Financial Statements as a whole are free from material financial statements may differ from legislation in other jurisdictions. misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Consolidated Financial Statements.

A further description of our responsibilities for the audit of the Consolidated Financial Statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

36 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2020 The M&G Secured Property Income Fund Other regulatory disclosures

Alternative Investment Fund Remuneration Manager’s Directive (AIFMD) In line with the requirements of the Alternative Investment Fund Managers Directive (“AIFMD”), M&G (Guernsey) Limited (the “AIFM”) The Directive, which was implemented by EU Member States in 2013, is subject to a remuneration policy which is consistent with the covers the management, administration and marketing of alternative principles outlined in the European Securities and Markets Authority investment funds (‘AIFs’). Its focus is on regulating alternative guidelines on sound remuneration policies under the AIFMD. investment fund managers (‘AIFMs’) established in the EU and The remuneration policy is designed to ensure that any relevant prohibits such managers from managing any AIFs or marketing conflicts of interest can be managed appropriately at all times and shares in such funds to investors in the EU unless an AIFMD that the remuneration of staff is in line with the risk policies and authorisation is granted to the AIFM. The Fund is a non-EU AIF and objectives of the alternative investment funds managed by the AIFM. the Manager is a non-EU AIFM for the purpose of the Alternative Further details of the remuneration policy applicable at an M&G Investment Fund Managers Directive 2011/61/EU (‘AIFMD’). Limited level can be found here: https://www.mandg.com/about- As a non-EU AIFM, the Manager distributes the Units of the Fund us/policies-andbusiness-principles. M&G’s remuneration policy and within the EEA under the AIFMD National Private Placement Regime its implementation is reviewed on an annual basis, or more frequently and will not be required to seek authorisation under the AIFMD. To where required, and is approved by the M&G Remuneration comply with the private placement regime in an EU state it is generally Committee. necessary to register the non-EU AIF with, or obtain marketing The AIFM is required under the AIFMD to make quantitative authorisation for, the non-EU AIF from the regulator in that country. disclosures of remuneration. These disclosures are made in line with The Manager has retained responsibility for the collective portfolio M&G’s interpretation of currently available guidance on quantitative management and risk management in relation to the Fund. remuneration disclosures. As market or regulatory guidance evolves, In accordance with the AIFMD we are required to report to investors M&G may consider it appropriate to make changes to the way in on the ‘leverage’ of the fund and any ‘special arrangements’ that exist which quantitative disclosures are calculated. Members of staff and in relation to the Fund’s assets. senior management typically provide both AIFMD and non-AIFMD related services and have a number of areas of responsibility. Leverage and borrowing Therefore, only the portion of remuneration for those individuals’ services which may be attributable to the AIFM is included in the Under AIFMD, leverage is defined as any method by which the Fund remuneration figures disclosed. Accordingly the figures are not increases its exposure through borrowing or the use of derivatives. representative of any individual’s actual remuneration. This exposure must be calculated in two ways, the ‘gross method’ and the ‘commitment method’. The Fund must not exceed maximum M&G (Guernsey) Limited does not directly employ any staff exposures under both methods. members. However, the total remuneration paid in respect of 7 Directors and members of the senior management team, whose ‘Gross method’ is calculated as the sum of all positions of the Fund actions had a material impact on the risk profile of the Fund, for the (both positive and negative), that is, all eligible assets, liabilities and financial year ended 31 December 2019 amounted to £271,010 derivatives, including derivatives held for risk reduction purposes. (£269,966 in respect of fixed remuneration and £1,044 in respect of ‘Commitment method’ exposure is also calculated as the sum of all variable remuneration), of which £67,372 was paid in respect of positions of the Fund (both positive and negative), but after netting off senior management. derivative and security positions.

The total amount of leverage calculated as at 30 June 2020 is as follows: Gross method: 99.29% Commitment method: 99.29%

ANNUAL INVESTMENT REPORT AND CONSOLIDATED FINANCIAL STATEMENTS (AUDITED) • June 2020 37 56557_LR_311019