12 Months to 31 March 2012

Transcription

1 For professional investors only. Not suitable for retail clients. Schroder Exempt Property Unit Trust UK Property Market Review The past year has proven challenging for the high street, and this became evident in late 2011 and early 2012 with established retailers like Game and Peacocks going into administration. Their failures are symptomatic of some of the difficulties facing the high street. The former lost market share to the internet while the latter was undermined by high debt financing costs. These issues were highlighted in the Portas review issued in December Profitable retailers, too, are reviewing their property strategy and many, such as Arcadia Group and Mothercare, are seeking to reduce their high street presence as they move to a multi-channel (i.e. shops and internet) approach. Elsewhere, the City office market continued to cool from mid-2011 onwards, with large occupiers choosing to wait and see rather than commit to space. Most provincial office markets remain subdued although there have been some pockets of growth that have defied the wider malaise. These includes media and technology clusters such as Cambridge, Soho and Old Street in East London, all of which have benefited from the growth of the IT and creative sectors. The investment market is dominated by two overriding themes. The first is the continued importance of foreign capital which is particularly evident in the Central London office market where cross border flows accounted for 62 of all transactions in London in 2011 (source: Real Capital Analytics). Another persistent feature of the investment market is the widening of the yield gap between prime and secondary property as the majority of investors focus on prime properties with long income streams. Whilst the number of banks actively lending to commercial property has not completely dried up, terms remain prohibitive on all but the best stock and in the short term this may exacerbate the prime/secondary divide. More encouragingly we are seeing the emergence of some insurance companies as providers of debt as an alternative to banks. Performance The table below shows the performance of The Schroder Exempt Property Unit Trust (SEPUT) for a range of time periods. Portfolio Benchmark Difference Source: Investment Property Databank (IPD) UK Pooled Property Fund Indices, 31 March 2012 Performance is calculated on a net asset value (NAV) to NAV price basis plus income distributed, compounded monthly, net of fees and based on an unrounded NAV per unit. 1 Benchmark shown is the IPD UK Pooled Property Fund Indices All Balanced Funds Index Median. The Trust benchmark has changed over time and a composite for 10 years is available upon request Over the one and two year periods to 31 March 2012, the Trust outperformed its benchmark. While it is behind over the three year period, its recent outperformance is encouraging. Recent outperformance over the 12 month period to 31 March 2012 can be attributed to: Acquisitions that have benefited from uplifts in valuation. This includes the purchase and development of the pre-let Building 8 in Chiswick Park. The Issued in March 2012 by Schroder Investment Management Limited. 31 Gresham Street, London EC2V 7QA. Registered No England. Authorised and regulated by the Financial Services Authority.

2 development was completed on schedule and the tenant, QVC Ltd, is now in occupation. It is let on a 21 year lease with fixed uplifts and has performed well in excess of expectations. Rents in Chiswick Park have continued to grow since we acquired the property, which may enhance future performance. Active asset management strategies that have helped improve rents and in turn valuations. An example of this strategy in action is the floor by floor refurbishment of the multi let office building in Kensington Village, West London. Estimated rental values have grown from around to per square foot over the 12 month period under review. Profitable sales of non core assets. In Q4 2012, Moorgate and Mark Lane office development sites in the City of London were sold at a premium to their prior valuation. This benefited performance, as well as reducing risk in the portfolio. Asset allocation. The overweight position to central London offices at the expense of other sectors has been an important driver. This includes the indirect investment in West End of London Property Unit Trust (WELPUT 1 ), which has produced above benchmark returns. Detractors from relative performance include: Low yielding and non income producing assets. Not surprisingly, land and potential regeneration sites such as Bracknell town centre and Croydon have underperformed the market. However, the recent opening of Waitrose in Bracknell and other similar plans with retailers are expected to improve total returns into the market recovery. Exposure to low distributing indirectly held retail warehouse funds. Despite significantly reducing exposure to indirect retail warehouses in the past two years, the high level of gearing and low distribution yields which have been a feature of these funds, has detracted from relative performance. SEPUT will seek to further reduce its exposure to these holdings, but only when opportune to do so. Investment Strategy & Activity The following considerations have been taken into account when forming our short to medium term strategy: The polarisation in values of prime, secondary and tertiary property continues to be a feature of the market. With a number of investors focusing on the very narrow prime end of the market, we believe opportunities may exist in some good secondary properties. These properties typically offer good property fundamental in a good location, where growth can still be achieved by improving the quality of the income stream or the asset itself. Prime yields may actually present more risk and may be more vulnerable to any increase in long dated gilt yields. Given the weak growth prospects, we continue to take a defensive stance and favour those parts of the market where rents are affordable and which offer a higher income return. Long let properties to supermarkets are available at typical yields of 4.5, but niche properties such as select car showrooms, healthcare and leisure, where rents are often also indexed to inflation, may offer better value. To continue to deliver performance, some key objectives over the next 12 months include: 1 Schroders in house fund 2

3 Income ensure SEPUT has a diversified, secure and good quality income stream. With income expected to be the main driver of property returns over the coming years, this will be important for providing consistent returns from year to year. Stock selection we will continue to target acquisitions where we believe the property offers a good location, where growth can still be achieved by improving the quality of the income stream or the asset itself can be improved. Active asset management strategies in a weak market environment it is essential to keep void rates low and execute initiatives to protect and enhance cashflows. The major transactions undertaken during the period included: Sales of non core assets took place during the year to reduce risk in the portfolio or crystallise profits. Cardiff Bay Retail Park, which the Trust has owned since 1998 in a joint venture with Equitable Life, was sold for 54.5m. SEPUT s 50 interest represented 27.5m on a 6.25 initial yield. The purchase price reflected a premium to its valuation. Moorgate and Mark Lane, two speculative office sites in the City of London, were both sold above valuation for 28.6 and 19.5 million respectively. The disposals reduce SEPUT s exposure to non income producing landsites from 7.4 to 3.5 of net asset value. The 9.5 million investment in Hercules Unit Trust (HUT 1 ) Convertible Bond was redeemed rather than exercising the option to convert the holding to HUT units. The proceeds will be re-invested into directly owned property. This further reduces SEPUT s indirect investments to around 9 of net asset value. The Trust also swapped approximately 11.8 million of units in Hercules Unit Trust 1 for units in the Henderson UK Retail Warehouse Fund. The swap reduces stock specific risk and both of the retail warehouse holdings are now similar sizes.(2.4 and 2.6 of NAV, respectively) A 50 share in the Motor Retail Investment Limited Partnership was acquired in April The Partnership comprises 12 car showrooms across the UK. The portfolio has a net initial yield of over 7 and benefits from 19 years unexpired lease term let to Pendragon. The majority of leases are linked to capped annual RPI uplifts. Davidson House, a modern office building in Reading was purchased in August 2011 for 42.9m. It benefits from a diversified tenant base with weighted average term, including breaks, of six years. A further two office buildings were acquired in February 2012 in Shepherdess Walk, London at a price of 18.5m. The property offers an attractive income return and is located in an emerging technology hub near Old Street in London colloquially known as Silicon Roundabout. Turner Rise Retail Park in Colchester, a modern, well configured retail park, was acquired in December from a distressed fund for 16.5m. This compares favourably to its most recent valuation of 18.5 million. It comprises eight fully let units with an average unexpired lease term of 12 years. Summary & Outlook We are unlikely to see any meaningful rental growth in 2012 or 2013 as occupiers hesitate before committing to new space. In addition, capital values are likely to come under pressure from a further increase in yields on secondary and tertiary property. As a result, we anticipate that capital values will fall on average by 5-7 in 2012, leaving all property total returns close to zero entirely driven by income returns. Looking further ahead, we expect rental values and capital values to stabilise in 2013 and all property total returns to average 6-7 per year between end-2012 and end-2015, equal to the rate of income return. 1 Schroders in house fund 3

4 Asset Allocation One of our key targets over the next 12 months is to ensure that the Trust has a diversified, secure and good quality income stream. With income expected to be the main driver of property returns over the coming years, this will be important for provide consistent returns from year to year. Market sectors Fund Fund Benchmark* Standard retail Shopping centres Retail warehouses Central London offices South East offices Rest of UK offices Industrial Other Cash Total *IPD UK Pooled Property Fund Indices All Balanced Funds Weighted Average. The weighted average has been used as this level of information is not available in the median. Data subject to rounding 4

5 Important Information Schroder Exempt Property Unit Trust (the Trust) is a collective investment scheme within the meaning of Section 235 of the Financial Services and Markets Act 2000 ( FSMA ). The Trust is not an authorised unit trust scheme, OEIC or recognised scheme within the meaning of the FSMA and therefore constitutes an unregulated collective investment scheme. As an unregulated collective investment scheme, the distribution and promotion of units are restricted, for the purposes of Sections 21 and 238 of the FSMA, to persons who are themselves authorised under the FSMA or who otherwise fall within the categories or exceptions made under Sections 21 and 238. Accordingly, this material is directed at market counterparties and authorised persons; intermediate customers; existing investors in this or a substantially similar fund; and existing clients and newly accepted clients of the Schroder Group where reasonable steps have been taken to ensure that investment in the Trust is suitable. This material should not be relied upon by persons of any other description. Investment in the Trust is only available to Exempt Funds. In general terms an Exempt Fund is a person wholly exempt from capital gains tax or corporation tax on capital gains. Investment will only be accepted following the completion of a Form of Authority for the Trust which contains certain warranties and indemnities provided by the potential investor, particularly regarding the exempt status of the investor and confirmation from HM Revenue & Customs that the potential investor is an Exempt Fund. Investors and potential investors should be aware that past performance is not a guide to future returns. No warranty is given, in whole or in part, regarding the performance of the Trust and there is no guarantee that the investment objectives of the Trust will be achieved. The price of units and the income from them may fluctuate upwards or downwards and cannot be guaranteed. Property-based pooled vehicles, such as the Trust, invest in real property, the value of which is generally a matter of a valuer's opinion. It may be difficult to deal in the units of the Trust or to sell them at a reasonable price because the underlying property may not be readily saleable, thus creating liquidity risk. There is no recognised market for units in the Trust and, as a result, reliable information about the value of units in the Trust or the extent of the risks to which they are exposed may not be readily available. Neither this document/presentation nor any other statement (oral or otherwise) made at any time in connection herewith constitutes an offer to sell or exchange units in the Trust or any other fund or product and is not soliciting an offer to buy or exchange and does not constitute an invitation to subscribe for, buy or exchange any units in the Trust or any other fund or product in any jurisdiction where the offer, sale or exchange is not permitted. Potential investors are advised to obtain and review independent professional advice and draw their own conclusions regarding the economic benefits and risks of investment in the Trust as well as the legal, regulatory, tax and accounting aspects in relation to their particular circumstances. Any investment in the Trust must be based solely on the prospectus, or any other document issued from time to time by the Manager of the Trust in accordance with applicable laws. The opinions, beliefs expectations or intentions, unless otherwise stated, are those of Schroder Property Investment Management Limited (SPrIM). All information and opinions contained in this document/presentation have been obtained from sources we consider to be reliable. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in this document/presentation when taking individual investment and/or strategic decisions. A potential conflict with the Manager s duty to the unitholder may arise where a transaction is effected for the Trust in the units of another fund(s) managed by the same Manager or an Associate of the Manager. However, the Manager will ensure that such transactions are effected on terms which are not materially less favourable than if the potential conflict had not existed. The forecasts included in this document/presentation should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors. Use of IPD data and indices: and database right Investment Property Databank Limited and its Licensors All rights reserved. IPD has no liability to any person for any losses, damages, costs or expenses suffered as a result of any use of or reliance on any of the information which may be attributed to it. This document/presentation 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 SPrIM. For the purposes of the Data Protection Act 1998, the data controller in respect of any personal data you supply is SPrIM. 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. SPrIM may also use such information for marketing activities unless you notify it otherwise in writing. Schroder Property Investment Management Limited 31 Gresham Street London EC2V 7QA Registered No England. Schroder Property Investment Management Limited is authorised and regulated by the Financial Services Authority. 5