Schroder Real Estate Fund of Funds Continental European Fund II (CEF II)

Transcription

1 31 March 2015 Schroder Real Estate Fund of Funds Continental European Fund II (CEF II) Quarter Target return Fund NAV To provide Unitholders with an IRR of 8-10% per annum over the life of the Sub-fund, net of fees, expenses and taxes. 91.9m NAV per unit I units C units Distribution yield 1 I units 15.7% C units 15.4% Number of holdings 13 Void rate Gearing Investment parameters Source (all report data unless otherwise specified) Performance: % IRR Q1 12 months 3 years I Units 10.2% NAV 40.3% look through GAV In compliance as at 31 December years C Units Schroders, 31 March Since inception Executive Summary After a pause in the middle of last year, the eurozone economy is gathering strength. All the major economies except Italy grew in the fourth quarter of The total value of investment transactions in continental Europe rose by 10% in 2014 to 145 billion (source: RCA) as liquidity rippled out from the core markets of France and Germany to Benelux, Italy, Portugal and Spain. During the quarter the entire holding in CG Malls Europe was sold at a substantial premium to prior valuation. In addition, the residual holding in ANF Immobilier, a French REIT, was also sold. Three funds returned capital. This activity enabled the Management Company to declare a further distribution which will be paid in the second quarter This amounts to per I and C unit. This is in line with our stated strategy of returning capital to investors at the earliest opportunity, subject to maximising total returns, market circumstances and fund liquidity requirements. The fund s quoted quarter end NAV is calculated ex-dividend. This means that the NAV per unit has been affected by the size of the distribution as well as the change in valuation of portfolio holdings. Performance Several funds saw large increases in valuation and these contributed to a strongly positive return for CEF II in the quarter (note: all performance is expressed in euro). However, the attainment of the fund s target return is not realistic given market conditions since launch. For sterlingbased investors, the euro fell by 6.8% over both the quarter and by 12.5% over the past 12 months, according to Datastream. Performance 2 Q1 12 months 3 year 5 year I Units (%) C Units (%) Distributions declared in the previous twelve months divided into the current NAV per unit. This includes both capital and income returns. 2 Source: Schroders, 31 March Performance is calculated net of fees and stated in euros. The performance for periods of less than twelve months has been calculated on a de-annualised IRR basis. Performance since inception and for periods of one year or more have been calculated on an IRR basis. SI = Since inception. Inception date: 19 October SI Four investments contributed to the bulk of positive returns. CG Malls Europe was sold for a significant premium to prior valuation, having previously been written down in value in the third quarter of 2014; IGD, the Italian listed REIT, saw a strong rally in its share price as the impact of QE fed through to European share prices; an agreed sale of NREP Logistics saw the valuation increase by around 20%. On completion in the coming months, a further uplift may be expected; and AXA European Real Estate Opportunity Fund II also saw a big uplift following a valuation increase of its London City office. As CEF II approaches the end of its life investments will be sold in line with fund objectives. During the quarter, two investments were sold. This will inevitably lead to a higher concentration risk as fewer assets are held and may lead to more volatile performance. This is to be expected for a fund of this type at this stage of its life.

2 Economic and real estate market commentary Economic outlook After a pause in the middle of last year, the eurozone economy is gathering strength. All the major economies except Italy grew in the fourth quarter of 2014 and the recent rally in business confidence suggests that companies are coming to terms with the Ukraine crisis and the risk of Greece leaving the euro. Schroders expects the strongest levels of growth from Spain and Germany at 2% per annum through Conversely, growth in France and Italy is expected to be weaker, at 1% and 0.6% per annum, respectively. The collapse in oil prices and low inflation has boosted households real incomes and most eurozone governments have now completed or eased their austerity programmes. In addition, the start of Quantitative Easing (QE) has cut borrowing costs in southern Europe and triggered a sharp depreciation in the euro versus the US dollar and sterling, which will benefit exporters. Occupational market Office markets in continental Europe fall into two main camps. In the big German cities and Stockholm, employment in finance, business services and new media & IT has been growing steadily since 2011, vacancy rates have fallen below equilibrium levels and office rents are rising in most locations. Conversely in Brussels, Copenhagen, Madrid and Paris a lot of recent lettings have involved occupiers rationalising their space in order to cut costs, resulting in vacancy rates above their long-term averages. However, even in these cities there are attractive submarkets with low vacancy (e.g. southern Paris, Centre and Leopold districts of Brussels, Madrid CBD) and we expect them to lead the upswing in rents as demand recovers later this year. On a positive note, there are no signs that deflation is leading consumers to defer purchases. Eurozone retail sales grew by a healthy 3.7% in volume terms over the 12 months to January. However, demand for retail space remains tepid, because many retailers are focusing on their online offering and improved logistics. Online accounted for 10% of German retail sales in 2014, up from 4% in 2010 and this trend is echoed in many other eurozone countries. The strongest parts of retail real estate are big dominant shopping centres, major tourist destinations, small shopping centres with a strong food offer and big boxes in towns with good population growth and active housing markets. After a prolonged period of oversupply the logistics market has got back to equilibrium. Take up in Western Europe rose by 10% in 2014, as retailers and logistics operators reconfigured their supply chains and prime rents rose slightly in Dusseldorf, Frankfurt and Rotterdam. Looking ahead, our real concern is that speculative development will bounce back quickly, given short lead times. We therefore favour mid-sized warehouses close to big cities, where supply is restricted. Investment market The total value of investment transactions in continental Europe rose by 10% in 2014 to 145 billion (source: RCA) as liquidity rippled out from the core markets of France and Germany to Benelux, Italy, Portugal and Spain. The majority of capital invested was equity, but the last year has seen a definite increase in real estate lending given finance costs have fallen further to 1-2% and new entrants into the market such as insurers and debt funds. The weight of capital means that prime office and shopping centre yields have fallen to 4-5% in most major cities in Western Europe and prime logistics yields to 6%. While this might look rational in the context of 10 year government bond yields at %, investors are concerned that pricing of prime assets has become indiscriminate. We see better value in CBD offices which have short leases, or which can be repositioned, offices in mixed-use areas with a good range of amenities, convenience retail, mid-sized warehouses around big cities and certain alternative types (e.g. hotels). Yields on these assets are typically % above those on prime assets and we expect them to outperform over the mediumterm, assuming the eurozone economy continues to grow. Outlook We forecast total returns on average investment grade European real estate will be 7-9% per year between end-2014 and end Total returns and capital growth are likely to be front loaded, benefitting from yield compression in and rental growth from 2016 onwards. The main upside risk is that the low financing costs and the weight of money targeting real estate triggers an even bigger fall in yields through , boosting total returns in the short-term. The main downside risks are increased uncertainty surrounding the stability of the eurozone following a potential Greek exit of the euro and elections in Spain, or deflation becomes entrenched. CEF II s total return is likely to be lower than our European forecast suggests. However, the return of liquidity to non-core markets may enable underlying investments to be realised earlier than anticipated and, in certain markets, at favourable valuations. 2

3 Strategy and portfolio activities Strategy Our strategy is to return capital to unitholders at the earliest opportunity, subject to maximising total returns, market circumstances and fund liquidity requirements. A further distribution amounting to per unit (both I and C units) was declared at 31 March 2015 and will be paid on 24 April This represents over 5% NAV. The chart below shows the possible timing and quantum of distributions over the remaining life of the fund. This assumes that all funds wind up by their documented termination date and equity returned is at today's valuation. In practice, early repayments, fund extensions and valuation changes may alter this analysis. Unitholders should also note that open ended funds and listed investments are assumed to be realised at the end of the life for the fund in 2019, but in practice the realisation may take place earlier. Subject to the timing of receipt of capital from several underlying funds, distributions totalling around 15% NAV can be expected to be declared during This information should be treated as an indicative guide only as to when capital distributions may be made. Source: Schroders, Fund Managers, 31 March Portfolio activity Sales 4.3million was received following the sale of CG Malls Europe via a secondary market transfer. This will be returned to unitholders via a distribution in the second quarter. Having written the valuation of this fund down substantially during the third quarter of 2014 because of its short remaining life, the illiquidity of Portuguese real estate and a breach of all banking covenants, the sale price represented a small premium to to the Manager s net asset value. The uplift is equivalent to around 5.3% CEF II s net asset value and is a good outcome for what has proven a disappointing investment. The return of liquidity to the Portuguese real estate market has been remarkably quick, though not entirely unexpected as more opportunistic investors entered the market. The alternative to this sale was to retain the fund and receive an uncertain return as assets are sold, debt repaid and taxes settled over the next two years. Capital returns Further proceeds of sale were received from FREO Germany II Partners, Corestate German Residential Fund and Sveafastigheter Fund III. Commentary on selected portfolio holdings The Manager of NREP Logistics AB has now agreed the sale of all assets, although this is subject to documentation. The deal is expected to complete during the coming quarter, with the majority of proceeds to be received shortly thereafter. The fund saw an uplift in its valuation which partially reflects the agreed sale price. Separately, the small residual holding in ANF Immobilier was disposed of early in the quarter. 3

4 Performance of underlying holdings Holding Year of initial investment % of NAV 3 month performance (%) 12 month performance (%) NREP Logistics AB M&G European Property Fund Valad V+ Nordic Property Fund Pradera Central & Eastern Europe API Property Fund Denmark Sveafastigheter Fund III Sierra Portugal Fund Henderson Herald AXA European Real Estate Opportunity Fund II Standard Life EPGF IGD SiiQ FREO Germany II Partners Corestate German Residential Limited All performance is quoted in euros. Performance is calculated on a total return basis using the net asset values applied to relevant CEF II valuations plus distributions received during the period. Source: Schroders, 31 March

5 Portfolio analysis Fund style Holding Target holding market Current value as % NAV Void rate (%) Gearing (%) Gross asset value ( m) No. of properties Core M&G European Property Fund Europe, all sectors Henderson Herald Europe, retail Sierra Portugal Fund Portugal, retail Value add Standard Life EPGF Europe, all sectors Pradera Central & Eastern Europe Corestate German Residential Ltd Central Europe, retail German, residential NREP Logistics AB Nordic, logistics Valad V+ Nordic Fund 2 Nordic, all sectors API Property Fund Denmark Denmark, all sectors Opportunity Sveafastigheter Fund III Nordics, all sectors FREO Germany II Partners Germany, all sectors AXA European Real Estate Opportunity Fund II Europe, all sectors Listed IGD Siiq Europe, retail , Net cash and other assets 8.6 Total ( m)/weighted Average (%) ** 7, * *Total number excludes Corestate and IGD due to their large exposure to residential properties; **Calculated on a look through basis to underlying real estate funds divided by CEF II net asset value excluding listed securities. Source: Schroders, 31 March Data may be subject to rounding. 4

6 Geographic allocation 17.5% 5.6% 5.6% 6.9% 7.5% 7.8% 8.9% 27.8% 12.3% Sweden Denmark France Germany Portugal Poland Italy Finland Other Sector weighting (% of net asset value) 9.7% 1.2% 27.4% Office 19.8% Retail Industrial Residential Other 41.9% Source: Schroders, 31 March Data may be subject to rounding. Further information Tom Dorey Head of Real Estate Product Schroder Real Estate Investment Management Ltd Phone +44 (0) ISIN Codes Class C units Class I units LU LU

7 Important Information: No offer: This document is being communicated solely for the purposes of ascertaining levels of interest for CEF II. Accordingly, this document is not, and should not be construed as an offer to accept investment in CEF II or any of the sub-funds of the Funds (the Sub-funds ) or as an offering of securities for sale in any jurisdiction. Any offer will be made only by means of the Confidential Private Placement Memorandum as supplemented from time to time (the Memorandum ). The Memorandum contains detailed information about the Funds and the sub-funds and the merits and risks of the offering of interest in the sub-funds. Accordingly, this document, in whole or in part, will not form the basis of and should not be relied upon in connection with any subsequent investment in the sub-funds (when established and offered). To the extent that any statements are made in this document, they are qualified in their entirety by the terms of the Memorandum, the management regulations governing the Funds and other constitutive documents of the Funds. A copy of the Memorandum and management regulations governing the Funds and, where relevant, the other constitutive documents of the Funds must be reviewed prior to making a decision to invest in any of the sub-funds. Any indication of interest from prospective investors in response to this document involves no obligation, application or commitment of any kind. Please refer to the Memorandum for a summary of risk factors relating to the Funds and the relevant disclaimers. Accordingly, if there is an inconsistency between this document and the Memorandum, the Memorandum will prevail. Eligible Investors: Only selected institutional investors ( Eligible Investors ) may invest in any of the sub-funds, as relevant. Amongst other things this requires investors to be aware of, to accept and to be able to bear the risks attaching to an investment in any of the sub-funds and to acknowledge that any recourse they may have is limited, in substance, to the assets of the relevant sub-fund. No reliance: No reliance may be placed for any purpose whatsoever on the information contained in this document or on its completeness. The information set out herein may be subject to updating, completion, revision, verification and amendment and such information may change materially. No person has been authorised by Schroder Real Estate Investment Management Limited to give any information or to make any statement or representation concerning the Funds or any of the sub-funds other than as set forth in this document. This document should not be considered as a recommendation by Schroder Real Estate Investment Management Limited or any of its affiliates that any of the sub-funds are a suitable investment for any recipient of this document. Forward-looking statements: The statements contained in this document that are not historical facts are forward-looking statements. These forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which the Fund will operate, and Schroders beliefs and assumptions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and returns may differ materially from what is expressed or forecasted in such forward-looking statements. Own investigation: Investors should make their own investigations and evaluation of the Funds and the relevant sub-fund. Prior to the acceptance of an investor s application to invest in any of the sub-funds, investors will be given the opportunity to ask questions and receive answers and additional information concerning the terms and conditions of the Funds, the relevant sub-fund and other relevant matters. Investors should inform themselves as to the legal requirements applicable to them in respect of interests in any of the sub-funds, and as to the income and other tax consequences to them of holding interests. UK recipients: The interests in CEF II described in this document will be interests in a collective investment scheme which will not be authorised or regulated by the Financial Conduct Authority. Accordingly, this document is not being distributed to, and must not be passed on to, the general public in the United Kingdom. Rather, the communication of this document as a financial promotion is only being made to market professional and institutional investor customers having professional experience of investing in unregulated schemes (and not to private customers) or any person to whom it may otherwise lawfully be made to. Investment in CEF II as a result of this document will only be available to such persons and this financial promotion must not be relied or acted upon by other persons (for example, individual investors). Expressions of interest resulting from this document will only be responded to if received from such persons. Netherlands Units may not be and will not be offered, sold or delivered in The Netherlands as part of their initial distribution or at any time thereafter except to individuals or entities who qualify as qualified investors (gekwalificeerde belegger) within the meaning of section 1:1 of the Dutch Financial Supervision Act (Wet op het financieel toezicht (Wft))." Past performance realised in the property funds is not a guide to future performance and may not be repeated. Investors may not get back the full amount invested, as prices of shares and the income from them may fall as well as rise. Forecasts: Forecasts are the result of statistical modelling, based on a number of assumptions, and should be seen as objectives only. There is no assurance or guarantee that these results will be achieved and they should not be considered as predictions of actual results which may be realised in the future. For the purposes of the Data Protection Act 1998, the data controller in respect of any personal data you supply is Schroder Real Estate Investment Management Limited (Schroder REIM). Personal information you supply may be processed for the purposes of investment administration by any company within the Schroder Group and by third parties who provide services and such processing and which may include the transfer of data outside of the European Economic Area. Schroder REIM may also use such information to advise you of other services or products offered by the Schroder Group unless you notify it otherwise in writing. This document is intended for the use of the addressee or recipient only and may not be reproduced, redistributed, passed on or published, in whole or in part, for any purpose, without the prior written consent of Schroder Real Estate Investment Management Limited. Issued by Schroder Real Estate Investment Management Limited, 31 Gresham St, London EC2V 7QA. Registration No England. Authorised and regulated by the Financial Conduct Authority. 6