INVESTMENT BULLETIN. A fascinating stage of the property cycle... WINTER 2010

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1 PROPERTY WEALTH MANAGERS INVESTMENT BULLETIN WINTER 2010 Asset Management is a property wealth manager. We source, secure, structure and actively manage direct investments in commercial and residential property. We combine property, fund management and banking skills to enable investors with significant private wealth to make prudent and interesting investments. We bring the professional approach of an institutional investor combined with the entrepreneurialism of a successful property company. A fascinating stage of the property cycle... Inside London versus the rest Global versus local demand Predictions and investment prospects for 2011 Featured Article Contact Details Welcome to s first Investment Bulletin. We have tried to write the sort of bulletin that we would like to read if we were thinking of investing in a market in which we were knowledgeable but not expert. We hope it is useful, interesting and informative. Everyone has a view about property and too many people think they understand it. The reality is unlike most investments, there is no single property market. There is no market place like the London Stock Exchange to conduct a trade. There is no source for real time pricing. Up to date and therefore the most useful information is nearly always passed on verbally rather than read in a report. Reports are always backwards looking. You need to be in the market to properly understand it. At, we study the available research but relate it to what we see, hear and feel from actually being involved in property day in and day out. Our Bulletins are our way of sharing our feel for the property market and how to invest in it.

2 London versus the rest What is happening in the market - London versus the rest By the end of June 2009 UK commercial property had fallen in value by over 44% from the peak in the middle of 2007, and residential property had fallen by 20%. Since mid 2009 average commercial property values have increased but remain about 30% below their peak, whilst residential prices are about 12% below their peak. However, there is no such thing as an average property and the total market figure masks enormous differences between different types of property. Rebound since the bottom of the market Offices Prime Central London 100% bonds - long leases to undoubted tenants - outside London many properties are still close to their mid 2009 price levels. This is because there are currently no clear reasons to believe that demand from tenants outside London is likely to grow over the next few years. Rents are therefore likely to remain subdued and empty property will be difficult to re-let. Banks are reluctant to lend and there are very few buyers. In a time of low interest rates, low bond yields and volatile equities property looks very attractive. This situation is a major opportunity for confident and knowledgeable investors. It is possible to build portfolios of well let attractive properties which will generate a significant and secure income stream. Secondary London Prime Regional Secondary Regional Industrial Prime Secondary 10% 0% 0% 40% 75% The best properties in London are now trading at values similar to the peak values of mid 2007 Residential Prime Central London Rest of UK 10% Source: CBRE Savills and Asset Management 100% Offices in the City and West End of London have, not surprisingly, been the strongest performing properties. This is because global investors still believe in London and in times of uncertainty a transparent and liquid market will attract capital. The relative weakness of sterling adds to this attraction. The best properties in London are now trading at values similar to the peak values of mid At the other end of the spectrum, with a few exceptions such as properties that look more like In many ways the residential property market mirrors the commercial property market, although the falls in value were not so extreme. The overall housing market fell by around 20% from its peak in mid 2007 to its floor at the beginning of There is strong global demand for high quality property in the best areas of London. Prices for the best properties are at or close to their peak values. However, a two tier market is developing - property that appeals to the global market or the wealthiest elements of the local market is in short supply and achieves high prices. Apart from these properties the market has stagnated. Rents are rising as fewer people are buying property and for the knowledgeable investor there are also opportunities in residential property.

3 Global versus local demand What is happening in Prime Central London? Global versus local demand What price a view? Two new residential developments have set record prices for their locations. Apartments in The Candy s scheme 1 Hyde Park on the south side of Hyde Park have sold for as much as 6,0000 psf. Apartments in Northacre s scheme on the north side of Hyde Park have sold for as much as 3,000 psf. Both still have many flats left to sell. It will be interesting to see how much the flats without a view sell for, and whether these blocks raise property prices in their immediate vicinity or whether they are both special cases. Prime Central London is unique. Besides its obvious significance as a capital city and a global financial centre, there are other factors that drive the London property market. These are factors that do not drive the rest of the UK - this is true for both commercial and residential property. An important factor is that there is a structural imbalance between the supply of the best property and the demand for it. Significant numbers of the world s wealthiest people own property in London as it is seen as a safe haven. London property is a diversification from exposure to investments and assets held in one s own country. London property provides a literal safe haven and also a financial safe haven for global wealth. The London property market is amongst the most liquid and transparent in the world. London is a relatively short flight away from most centres of wealth. It is much harder to freeze hard assets such as property than it is to freeze bank accounts. The prices people pay for property must be seen in this context - which is not something that easily fits an analysts model. London is seen as a tolerant, secure, cultured and multi cultural city where English is the common language and the weather isn t too bad. No other city in the world can compete with London and as the number of Ultra High Net Worth individuals and families increases so will the demand for the best London property. Fortune favours the brave This rapid recovery in prime London has highlighted the foresight of those who saw that the earlier price falls were an over correction with the fundamentals of supply and demand continuing to favour this sector. Those who were brave in the darkest days of 2009 are now reaping the benefit. In April 2009, private investors EPIC, acquired Broadwick Street, Soho for 21mn at a time when no-one else was willing to commit funds. Following the recovery in the market, EPIC sold the property in April for 31.7mn. An increase in value of more than 50% in 12 months represents a very nice return for an investor brave enough to buy counter cyclically to the market.

4 Predictions and investment prospects for 2011 What will 2011 bring? Short term forecasts are notoriously inaccurate and when there is so much economic uncertainty it is impossible to be precise. We therefore feel it is more realistic to paint a picture than to produce numbers. There is currently a sense of gloom in the commercial property market. Transactional volumes are low and there is insufficient activity to keep surveyors, brokers, valuers, lawyers and analysts busy. As the devil finds work for idle hands, the sense of gloom from those at the heart of the property industry will inevitably have an impact on sentiment. We therefore feel the current negative view of the market will continue into next year. However, as property fundamentals are actually positive and the market is at the right stage of the cycle to invest we feel as 2011 progresses the market will recover more quickly than most people currently expect....any property that is undistinguished or is flawed will suffer disproportionately Sentiment towards residential property generally is also negative. We believe the trend towards a two tier market will become more pronounced. This is not London versus the rest but quality versus the rest. There will continue to be strong demand and strong pricing for desirable property but any property that is undistinguished or is flawed will suffer disproportionately. Location alone will not be enough to get a premium price - even some property in Knightsbridge could suffer. When prices fall, the residential market dries up as people chose not to sell. Expect 2011 to be another year of low transactional volumes. Investment Prospects What would we invest in next year? To some extent it depends what the investment objectives are. If the intention is to buy and hold for a generation the timing of the purchase is not that significant. Buying a great building in a great location in 2011 will prove to be a good long term investment. Investment attractiveness Prime London Retail Secondary London Retail Prime Central London Offices Secondary London Offices Prime Regional Offices Secondary Regional Offices Prime Industrial Secondary Industrial Prime Cent London Residential Rest of UK Residential Performance in 2010 Performance in 2011 Investment attractiveness Strong Medium Weak For those investors looking for particular opportunities in the current market environment, the opportunity for property to produce very strong cash on cash returns stands out. Interest rates are low and the right investment strategy can lead to cash on cash returns with low risk of 7% or more. It is also likely that buying into the market at these yields will result in healthy capital returns as the market recovers and yields fall. In Prime Central London there remains a very interesting opportunity to work with developers starved of equity. Before the credit crunch, developers needed little equity to produce a development. Now they need at least 35% to 40% and therefore have to rely on investors to provide this. There is consequently a real shortage of new development activity which means returns on the right investment can be very attractive.

5 Featured Article Featured article Five key differences between private and institutional investors When you own the money, you have a different view The performance of property over the last decade has caused institutions to take it more seriously as an asset class. As demonstrated by the graph below the sector has matched or outperformed equities over the last 10 years and not withstanding the dramatic falls in value in 2008 and 2009, there remains an implicit confidence in property because of the relatively high level of income and the stability of returns based on real assets. Academic research has shown that holding property in a balanced portfolio lowers risk without reducing returns. Relative performance of equity bonds and commercial property FT Gilts FT All Share IPD UK Private investors are less likely to be driven by asset allocation strategies or rigorous analysis of historical data. They are more likely to be influenced by whether a property appears to be good value and factors such as the appearance of the property, its location and their familiarity with the tenant if it is a commercial property. This does not mean they are less professional, it means that the investment process is different. Private investors do not have to justify their decisions to other people as it is their own money whereas institutions are custodians of other people s money. This is a profound difference. When you manage money you value predictability For the institutional investor commercial property lies outside the main asset classes of equity and bonds and is defined as an alternative investment. Institutional investors see commercial property in a similar light to other asset classes and are looking for consistent predictable returns over the medium term. While short term gains are always welcomed they are not the focus of most institutional investment strategies. Conversely, the private investor loves residential property which has consistently out performed the returns of all other mainstream asset classes. The private investor tends to see commercial property in a number of different ways. It can be a very long term hold to protect capital for a generation or more, a source of cash on cash income or potentially a higher risk one off windfall gain created by investing in a good deal rather than part of an overall balanced portfolio.

6 Featured Article One man s risk is another man s reward The institutional approach of seeking consistency has driven institutional investors further and further towards a perceived norm with assets selected for their ability to perform in line with expectations rather than for the out and out win. The result has been an increasing drive towards the middle of the road core investment which is subject to lower volatility and therefore lower risk. Institutional investors have recently favoured safe as houses properties such as well let offices, supermarkets and warehouses, let on long leases. Paradoxically there has been very little investment by the institutions in residential property - they would rather forego the potential for super profits and stay in their traditional comfort zone. Private investors are much more prepared to back their own judgment or the judgment of their advisors and take a view. Few if any are interested in performing in line with the market. The starting point for most private investors is to understand whether they may lose money. Once the downside risk is understood most private investors will take a view on the potential upside and decide whether they feel comfortable with the risk and the potential reward. strategy. There are times to increase exposure and times to decrease exposure. Therefore the time to buy and sell property is influenced as much by the likely future performance of the market as the current performance of the market. As property is an illiquid asset it takes time to adjust weightings and this can mean that institutions can miss the best times to buy and to sell. Private investors tend to see a specific property as a long term hold or a short term deal. They are often driven to sell by the profit they have made. If they own an asset that is not part of a longer term strategy - such as creating cross generational wealth - they will be prepared to sell it for a price they feel to be attractive. If they do not receive that price they will continue to own it. Many subscribe to Warren Buffet s view that you should not buy an asset unless you are happy to own it for at least ten years. Private investors would generally rather buy a property where there is some potential to add value... Private investors would generally rather buy a property where there is some potential to add value than simply rely on the performance of the market. An over reliance on models can lead to counter intuitive results For institutions the exposure of the portfolio to property is part of an overall asset allocation

7 Featured Article Benchmarks - Good news, we have out performed. Bad news we have lost 15% Most institutions measure their investment performance relative to a benchmark. In the case of property this may be IPD total market return. Some institutions will look for an absolute return over an extended period. If a benchmark return falls by 5% but the value of a fund s assets fall by 3% this is seen as a good performance - regardless of whether the investment has actually generated a profit. Even though some new funds have been set up for absolute returns the lure of super profits has not perceptibly changed that fund s behaviour. There are major but explicable differences between the way institutions approach property investment and the way significant private investors approach property investment. Capital preservation is a very different goal from out performing a benchmark. These differences are often not recognised which is why so many private investors find the property industry so frustrating to deal with. For sophisticated and wealthy private investors capital preservation is a major objective. It is hard to make money and so once that objective has been achieved, hanging on to it is pretty important. Their time frame for investment is different from that of institutions. They may hold an asset or they may trade it if the price right. Whatever happens, whilst they measure the value of their assets, they would not consider they had made a profit or necessarily a loss until they had realised it. So who s right and who s wrong? The difference in the approaches of institutions and private investors illustrates one of the great beauties of property - it can be many different things to many different people. It can be high risk or low risk. It can generate income, capital growth or a mixture of the two. It can be long term or short term. It can be part of a balanced portfolio or it can be a deal. All of these differences are entirely understandable. Property can be many different things to many different people. It can be high risk or low risk. It can generate income, capital growth or a mixture of the two

8 Contact Details Asset Management Three things we would like you to remember about We have an extremely experienced team, with great access to and knowledge of the property market. We are relationship not transaction driven - we have long term relationships with a small number of investors. We understand the importance of capital preservation. Our aim is to generate profits for our clients from astute investment in commercial and residential property without taking undue risk. Contact details For more information, please look at our website Graham Gould grahamgould@cobaassetmanagement.com Ben Keating bkeating@cobaassetmanagement.com Mickola Wilson mwilson@cobaassetmanagement.com Tim Barker tbarker@cobaassetmanagement.com David Richards drichards@cobaassetmanagement.com William Davies wdavies@cobaassetmanagement.com Ross Frowen rfrowen@cobaassetmanagement.com Asset Management 43 Pall Mall, London SWIY 5JG Tel