Investment Update Global Real Estate Fund Quarterly Update Q2 2017

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1 The Global Real Estate Fund quarterly update provides an overview of the market; fund performance, positioning and portfolio changes; and the fund manager s outlook for the months ahead. Economic Overview The recovery in the global manufacturing cycle that started in the fourth quarter of 2016 continues. Most of the improvement has been led by stronger trade activity in Asia and emerging Europe, as these regions benefit from proximity to fast growing China and the EU, respectively. A key factor is whether activity broadens, both within countries such as the US where it is concentrated in the energy sector or China where it is concentrated in the housing sector, but also among countries. The US has seen a cyclical lift in corporate earnings and though the Fed s policy rate is creeping up, long-end government bond yields are lower than they were at the beginning of the year. The growth in manufacturing and business investment are key drivers of the economy, and will broaden out more from inventory rebuilding and the energy sector. Wage growth and core inflation remain very sluggish compared with historical norms and there are few signs in the data that the trend is turning. In the UK, activity is now wavering, as rising inflation puts pressure on households. Growth slowed materially in the first quarter with weaker consumption partly to blame. Data have been mixed, with retail sales posting a weather supported rebound, while other items of consumer spending, such as car sales, and have been soft. Meanwhile, industrial production, construction and trade data have all been weak. In the Eurozone, both the hard and soft data through the first six months of 2017 reflect a continuing strengthening of the economic recovery against the backdrop of the global cyclical upswing. Industrial production had risen, the unemployment rate is at an eight-year low and the IMF upgraded its growth forecast citing greater-thanexpected domestic demand in the first part of the year. Expectations of consumers, manufacturers, and business expectations among retailers, construction companies and services firms show no signs of deflating. Four years into the Abenomics project, much has been achieved in Japan. Inflation has replaced the deflation of the previous decade, the primary deficit has been halved, and governance and taxation policies have been reformed. The economy is following a path of moderate recovery as consumer spending and capital investment improve. The external sector is strong and confidence amongst big manufacturers reached its highest level in more than three years. The Australian economy displayed signs of improvement towards the end of Q2. Unemployment dipped sharply and retail sales turnover advanced, underpinned by a rise in revenue from household goods. The economy continues to adjust to lower levels of mining investment. Chart 1: Global economic recovery driven by exports Real Estate Market The continued real estate performance is underpinned by the broadbased acceleration in global activity and healthy real estate market fundamentals. Yield compression has stalled in a number of markets and segments, but rental growth is sustained, albeit muted. The attractive fundamentals are reflected in sustained investor demand around the world as the search for yield continues, but volumes are declining due to keen pricing and shortage of investment stock. Caution exercised in this cycle in the lending space and in conservative new development is paying off, and there is still a fair amount of steam in the real estate markets around the world. UK commercial property continues to record solid returns in Q2 on the back of both capital and rental growth. The industrial sector remains the strongest performing sector, driven by strong fundamentals and on-going supply chain reconfiguration by retailers. The sector remains in demand and investors are paying higher prices for industrials assets to benefit from the strong expected growth. European real estate returns were once again healthy in Q2, led by Germany, Spain, Netherlands, Ireland and France. The very healthy performance is expected to continue through H and much of Prime yield compression is slowing across a number of markets and segments, but rental growth has improved. There are signs that increased supply could cool rental growth from the end of The construction component of Eurozone industrial output climbed in May to the highest rate in three years and the second highest increase since The US market is still tight across all property types, and broadly, supply is not a major concern. US lenders have reported tightening standards for commercial real estate loans of all types despite historically low vacancies across property types keeping a lid on both supply and pricing. Rents are past peak but are supported by strong fundamentals. The core office markets of Japan and Australia are slowing, Hong Kong remains resilient and Singapore is recovering. Both Hong Kong and Singapore benefit from the recent pick-up in global trade and robust financial sectors. The Hong Kong office market in particular is underpinned by sustained demand from mainland China financial firms as the capital markets in China continue to deepen. After two years of decline, Singapore s office market may bottom earlier than expected on the back of healthy take-up in the new office towers at Marina One. The dearth of new office supply in Singapore from 2019 is balanced by elevated new supply in Australia and Japan. Chart 2: Investment volumes (excluding development sites) % change USD billion Jan-15 Jul-15 Jan-16 Jul-16 Jan Q1 07Q3 08Q1 08Q3 09Q1 09Q3 10Q1 10Q3 11Q1 11Q3 12Q1 12Q3 13Q1 13Q3 14Q1 14Q3 15Q1 15Q3 16Q1 16Q3 17Q1 UK US Germany China Source: Thomson Reuters Datastream as at 2 August 2017 EMEA Asia Pac Americas Source: Real Capital Analytics, 2Q 2017

2 Fund Positioning Top 10 direct assets Fund % Top 10 tenants (Direct only) % Contracted Rent 3 & 5 Custom House Plaza, Dublin 8.4 Ogier 14.2 WTC Almeda House, Barcelona 8.4 Revlon Esplanade, Jersey 8.2 Dutch Heart Foundation 5.4 Galeria Gniezno, Poland 7.7 Citco St Kilda Rd, Melbourne 6.8 Maxol Ltd St Georges Terrace,Perth 6.1 Mobelix 2.4 Fleming Court, Dublin 4.7 Castorama 2.4 Retail Park Hana, Kafkova 4.4 Carrefour St Georges Terrace, Perth 4.1 Electro World 2.2 ExtraVerde, The Hague 3.5 Biomet 2.0 Fund Facts Fund size Average lot size (direct) Average lease length Number of direct properties m 20.8m Number of tenancies years* Distribution yield 2.74%** Standing void 17.0% *Assumes tenant breaks are exercised only if over-rented **Yields are historic based on the preceding 12 months distributions as a percentage of the mid market unit/share price at date shown. Yields will vary, do not include any preliminary charges, and investors may be subject to tax on distributions. Based on institutional income shareclass. Top 5 listed holdings Fund % Simon Property Group 1.7 Prologis 1.5 Duke Realty 1.3 Hilton Worldwide 1.3 Unibail Rodamco 1.3 Performance % growth 3mths 6mths 1 yr 3 yrs* 5 yrs* Global Real Estate Fund Fund performance is quoted net of institutional fees (GBP). *Returns are annualised Sector allocation (Direct Only) Geographical breakdown Retail Offices % Source:, direct assets only. Australia Ireland United States Poland Spain United Kingdom Czech Republic Netherlands Japan India Sweden France Germany Singapore Hong Kong %

3 Portfolio activity Acquisitions and asset management In April the Fund sold the Pavlova building in Prague to Estonian investment company ELL. There is an expectation that the recent uptick in vacancy and increased development pipeline will lead to a period of weakness for the Prague office market which could translate into muted performance at this asset. From a leasing perspective Q2 has been a very busy and productive quarter across the Fund. At 55 St George s Terrace, Perth, Australia we completed the second letting of 2017 to seismic data provider Spectrum Geo and have a third leasing deal under offer which is expected to complete during the early part of Q3. In Melbourne, the prevailing strength of the occupational market meant that we were able to quickly re-lease the top two floors vacated by mining company Answar at 432 St Kilda Road to Brüel & Kjær thus minimising the void period and any loss income suffered by the Fund. Additionally we are in the process of extending a number of our existing tenant s leases which will ensure that the building remains at close to full occupancy in the medium term. In Dublin, a market which also continues to benefit from strong tenant demand, we completed a letting to Verisk at Customs House Plaza and the letting of the remaining vacant office suite is anticipated to complete during the early part of Q3. Also in Dublin we have submitted proposals to lease all of the vacant suites at Fleming Court and anticipate completing an agreement for lease on 2 of the vacant 5 suites during Q3. In aggregate the lettings under offer and those completed year to date will add around 900k to the Fund s annual rent roll. We substantially restructured the listed portfolio during the quarter. We sold retail-focused holdings Brixmor and Regency Centres, and partially sold Federal Realty, as we expect the malaise in this sector to continue. In addition, we sold out of office holdings Douglas Emmett, Boston Properties and Vornado, recycling proceeds into SL Green, Paramount, Hudson Pacific and Kilroy, which are the listed real estate team s favoured US office sector picks at this point in the cycle. We also added to the Fund s holdings in Duke and ProLogis which are focused on our preferred industrial sector. Properties in Focus Asset management Customs House Plaza, Dublin New 10yr lease agreed with Verisk Asset fully occupied with the next lease expiry not until October % ERV growth this year alone Rent growth and yield compression driving just under 20% capital value growth this year Performance overview The Fund returned 0.5% during the quarter. In the early weeks of the quarter the strengthening of sterling (which was given a short-term boost following the UK Conservative Government s decision to hold a General Election) detracted from the positive performance being generated by the Fund s direct holdings. In recent weeks, the unit price volatility has been dampened after the Fund hedged out the currency exposure associated with its direct property holdings towards the end of April. Currently, 76% of Fund value is denominated in or hedged back to sterling. During the quarter the Fund s pricing basis moved from bid to mid during the quarter due to client inflows. During the quarter Customs House Plaza, Dublin, St Kilda Rd, Melbourne, and Ogier House, Jersey, all experienced material valuation uplifts whilst 182 St George s Terrace, Perth was the weakest performer.

4 Forecasts On a global weighted view, we anticipate the global real estate market delivering low single digit returns on an annualised basis over the next three years with returns being driven mainly by the elevated income component. There were no significant changes to the UK forecasts. The decline that is factored into year two of the forecasts is predicated on the economic weakness that continues to be expected by the in-house strategy team. As some of the anticipated yield movement has now passed, we expect slightly lower returns than was expected last quarter. The three year annualised return therefore reduces from 3.8% p.a. to 3.4% p.a. There were no changes to the sectors in terms of ranking position. The European forecasts were largely unchanged, with a small upgrade to year 1. Positive lead indicators support our rental growth forecasts. In addition, Paris has received a slight boost from the Macron impact the market is now anticipating. Optimism towards improving occupier fundamentals supports the notion that net effective rents will improve further and vacancies fall. However, it is also likely to spur further office development too and there could be greater supply risk further down the line. The Eurozone is moving through the cycle and the yield compression story is slowly coming to an end. We have shaved some yield compression off the front end of the forecasts across the board as we approach the latter stages of the capital market cycle. Overall, forecast total returns are expected to reach around 6.2% per annum over the next three years. The forecast returns for the Americas remained relatively stable, dipping slightly to a 5.1% annual return over three years from 5.2%. Core logistics markets remain at the top of the house view, but oversupply in the luxury apartment sector is forcing the apartment sector further down the houseview. The Washington DC Office market has been downgraded as a result of consistently weak demand with little hope for expansion on the back of the new administration. Despite high household debt, significant rental growth and yield compression, the office cycle in Australia has some distance to go to the bottom in 2019/20. We have downgraded regional shopping centres on the back of limited rental growth and the imminent entry of Amazon. The development cycle is in full swing in mainland China and parts of Tokyo, but the Australian markets are lagging. As a result there were minor changes in the house view rank. The three year average total return was unchanged at 4.0%. Outlook The outlook for real estate remains favourable as real estate continues to provide an elevated yield compared to other assets. The steady secure income component generated by real estate is likely to remain the key driver of returns in the near term. Our expectation for the 2017 calendar year is that UK returns improve to close to 7% by year end. This is underpinned by current index momentum and also the expectation of cash in funds being deployed in the early part of the year. Returns are then expected to deteriorate as we move into 2018 and the current economic momentum moderates. South East Industrial is currently at the top of our house view and Grade B City Offices at the bottom of the rank. We continue to expect the next few months to be a relatively buoyant period for UK real estate. In Europe, the strongest performance is expected in the next 12 months. The supply side remains constrained, with office and industrial vacancy rates falling, although higher levels of construction activity are starting to become apparent. Current strong levels of investment demand should drive further yield compression in the near term. For the core markets, Amsterdam CBD Offices are at the top of the house view and Helsinki Offices at the bottom of the rank. For noncore markets, Budapest Offices are at the top and Poland Dominant Malls at the bottom of the house view. In North America, historically low vacancies and very little supply will continue to support rent growth in most property types and markets. The overall positive momentum should continue as long as there aren t any major missteps by the administration or serious geopolitical events. Inland Empire (Southern California) Industrials are at the top of the house view rank and Sao Paulo Offices at the bottom. In Asia Pacific, real estate margins remain healthy, but yield compression is now limited to Australia and stable elsewhere. We expect continued strong performance from Sydney, Melbourne and Tokyo offices in the next 12 months, but the pace is slowing. Investment volumes continue to decline in the absence of suitable investment stock and keen pricing. Income remains the main driver of performance and the subdued development cycle and healthy tenant demand continue to support rents. Sydney Offices are at the top of the House View and Shenzhen Offices at the bottom. Global TR Ranking 3yr return Very Heavy Hungary, Portugal, India, Netherlands, Spain Heavy Australia, Sweden, Germany, France, Denmark Neutral South Korea, Italy, Belgium, Czech Republic, Finland Light Very Light Ireland, United States, Poland, Japan, UK China, Singapore, Hong Kong, Canada, Latin American Offices

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