Prudential is setting up the UK’s first fixed-income property fund for institutional investors.

Two of the Pru’s fund management arms – its property division, Prupim, and Prudential M&G, which specialises in the corporate bond market – yesterday launched the M&G Secured Property Income Fund, which is predicted to growth to billions of pounds in size.

‘In five years’ time I would be surprised if the fund wasn’t in the billions rather than the hundreds of millions,’ said Prupim managing director Martin Moore. ‘The potential is huge and there is no ceiling on size.’

The fund will buy property with fixed or inflation-linked rental uplifts, and aims to deliver a secured long-term income stream through a well-diversified portfolio of properties and tenant credit.

‘Today there is increasing demand from pension funds for investments that can deliver stable and long-term returns,’ said Moore. ‘More than ever they are looking for alternatives to traditional fixed-income instruments that can offer premium returns of 1.5% above gilts net of cost and a way of reducing equity risk.’

The timing of the fund is good in the wake of last week’s collapse in the bond market. Moore believes the fund will provide the fixed-income benefits of corporate bonds but without the volatility, and that it will therefore prove popular with institutional investors.

Because the fund will be sold to the fixed-income managers at the institutions rather than the property divisions, who manage far fewer assets, the allocation to the fund from each investor should be greater.

Prupim is not the only big investor to target fixed-income properties. British Land has accumulated a £1.6bn portfolio over the last three years. The rationale is that the guaranteed inflation-linked rises ever year – currently 3.2% – are higher than property research company PMA’s 2.7% estimate of UK rental growth.

The Prudential fund, which will be largely ungeared, will be seeded with three assets with a combined value of more than £200m. The first is a 40% stake in 250 Bishopsgate, the ABN Amro office headquarters in the City of London that Prupim bought two weeks ago from Evans Randall.

The price was undisclosed but is understood to have been £230m, giving an initial yield of 3.5%. The other 60% of the building has been placed in Prudential’s annuities fund. Terms have been agreed for Prupim to buy the other two seed assets.

Prupim is no stranger to buying property that is a proxy for corporate bonds. In the last five years Moore and his team have worked with their colleagues on Prudential’s fixed income side and bought £1bn of properties for the Prudential Retirement Income Fund.