Investment Update Q3 2018

Transcription

1 The SLI UK 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 and Property Market While the UK economy bounced back in the second quarter, it marked little more than a return to trend growth. The way Brexit plays out will be a key driver in the near term; while no deal is not our base case, the probability of this occurring has increased. The recovery in real income growth has temporarily stalled as higher oil prices have pushed inflation higher. However, wage growth data surprised on the upside and improving household finances should help support spending, offset by the rebuilding of savings from very low levels. As expected, the Bank of England (BoE) increased interest rates by 25 basis points (bp) to 0.75% at the August meeting of the monetary policy committee with the BoE highlighting rising unit labour costs (ULC) as a reason for more monetary tightening; it effectively thinks the speed limit of the economy is much lower than in the past. Industrial remains comfortably the strongest part of the market in terms of occupier sentiment and fundamentals. While monthly MSCI data suggests a slowing in the rate of rental value growth, we see no visible change in rental tension, with vacancy rates exceptionally low. The retail sector continues to face significant long-term structural challenges with modest rates of rental decline in the MSCI indices. There are very few expansionary retailers away from the value end of the market, but there is a continuing stream of closures as store networks are rationalised. London office markets remain broadly static with uncertainty around Brexit regularly cited as a factor for occupiers. Future access to skilled EU labour is an important concern; but fears over an exodus of financial firms appear to have been overblown, with very few jobs moving away from the City so far. Early data on investment volumes for the third quarter suggest the lowest quarterly total in two years and substantially less than during the same quarter in 2017, according to Property Data. Overseas investors continue to be influential and have been the principal net investor in the third quarter. The value of retail deals was just 800 million during the third quarter, representing just 7% of the market. Elsewhere, alternatives and mixed use assets accounted for the highest proportion of transactions on record, albeit skewed by Network Rail s Arches Portfolio, which was acquired by Telereal and Blackstone for 1.46 billion. This sample includes private rented sector residential, which accounted for a large and growing proportion of investment volumes. This included the 600 million Get Living portfolio at the former London Olympic village and a number of development deals. The industrial sector continues to be the favoured sector call amongst UK institutional investors. Total returns on the MSCI Monthly Index have continued to slow, with equivalent yields rising modestly. Chart 1: Weight of capital driving industrials performance margin between industrials and retail at record highs Sector performance relative to All Property (%) - 12m rolling Jun-12 Jun-13 Jun-14 Jun-15 Retail Office Industrial Jun-16 Jun-17 Jun-18 Residential Hotel Other Source: Aberdeen Standard Investments, June 2018

2 Fund Positioning Top 10 holdings Fund % Top 10 tenants % Contracted Rent Leamington Shopping Park, Leamington Spa 4.75 Sainsburys / Argos 3.64 Monument Mall, Newcastle upon Tyne 3.73 B&Q / Screwfix Church Street, Birmingham 3.16 Office Depot International 2.55 Isis Reach, Belvedere 3.05 Tesco 2.02 The Old Dairy, South Ruislip 2.93 Asda 1.96 Io Centre & Tradeway, Sutton 2.85 Weatherford UK Ltd 1.81 The Gateway Retail Park, Beckton 2.74 Allies & Morrison LLP 1.72 Royal Avenue House. London 2.65 UK Insurance Ltd 1.60 Masthead Industrial Estate, Dartford 2.09 T P Bennett LLP 1.43 Saxon Way Trading Estate, Heathrow 1.96 DSG Retail 1.42 Fund Facts Fund size Average lot size Average lease length Number of properties 79 2,450.0m 24.4m Number of tenancies years Historic yield 3.3%* Net current assets 21.3%^ Vacancy rate 5.85% *Yield at 30/09/18. Yields are historic based on the preceding 12 months distributions as a percentage of the midmarket 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. ^ The Net Current Assets figure includes cash or cash equivalents and any short term assets and liabilities within the fund. % Contracted Rent Less than 5 years 48.5 Between 5 and 10 years 26.5 Between 10 and 15 years 13.7 More than 15 years 11.4 Performance % growth 3mths 6mths 1 yr 3 yrs* 5 yrs* SLI UK Real Estate Fund IA Property Sector (UK Direct)# Data to end June, Fund performance net of Platform 1 fees. # Peer Group comprises 10 comparable UK commercial property funds in the IA Property Sector. *Returns are annualised. Sector allocation Geographical breakdown Industrial Se Retail W/house Std Retail SE Offices Rest of UK Industrial Rest of UK Offices Rest of SE Std Retail Rest of UK Offices West End/Mid Town Shopping Centres Offices City Other % SLI UK Property Fund Rest of London 25.1 South East 19.6 West Midlands 11.9 Scotland North West & Merseyside North East London West End Eastern South West East Midlands City of London Wales Yorkshire and Humberside % 1.0

3 Portfolio Update Transaction and Asset Management Activity Ongoing asset management activity surrounding the existing portfolio remains a key focus as we seek to implement initiatives aimed at income and value enhancement. Activity continued in the retail sector with a number of events taking place. At Bligh s Meadow, Sevenoaks, the Fund has completed a lease renewal with Monsoon Accessorize, securing an additional 5 year term at an initial rent of 53,750 per annum. The Fund has also completed rent reviews with Total Orthodontics at a revised rent of 28,622 per annum (an uplift of 10%), and Moshulu at a revised rent of 34,000 per annum (an uplift of 9.6%). At Gateway Retail Park, Harwich, the Fund has completed a new letting to Card Factory, providing a 5 year term at an initial rent of 42,500 per annum. At Tudor Arcade, Dorchester, the Fund has settled a rent review with Carphone Warehouse at a revised rent of 44,250 per annum (an uplift of 4.1%). In the industrial sector, at unit 7, Minto Commercial Park, Aberdeen, the Fund has secured a new 10 year lease to Control Value Solutions at an initial rent of 282,500 per annum ( 6.50 psf). At Southern Cross Industrial Estate, Southampton, the Fund has completed a lease renewal with Smith News, providing an additional 10 year term at an initial rent of 225,500 ( 9.00 psf) per annum. At the io Centre, Sutton, a lease renewal with Kuehne & Nagel has secured an additional 5 year term at an initial rent of 116,500 per annum ( psf). At Brunel Park, Chippenham, a rent review with Rotomat has secured a revised rent of 89,587 per annum (an uplift of 27.6%). At One Eton Street, Richmond, in the office sector, People Against Dirty has taken a 5 year lease over the third floor at an initial rent of 340,968 per annum ( psf). At 55 Princess Street, Manchester, gym operator V-Fit has taken a 10 year lease over the part ground floor at an initial rent of 51,916 per annum ( psf). During the period the Fund disposed of 214 Purley Way, Croydon, a multi-let industrial asset, for 7.85m; Ellenborough House, Cheltenham, a multi-let office, for 17.0m and Hollywood Retail Park, Barrow-in-Furness for 15.3m. The sales of Croydon and Cheltenham continue the strategy of selective disposals and both of these assets realised significantly in excess of the SIV valuation. The disposal of Hollywood Retail Park reduces the Fund s Retail Warehouse exposure in line with strategy. Properties in Focus Asset Disposal 214 Purley Way, Croydon A multi-let industrial asset Continuing activity to selectively reduce exposure to smaller tail-end assets. Sold for 7.85m significantly in excess of SIV valuation. Asset Disposal Hollywood Retail Park, Barrow-in-Furness Sold for 15.3m. Further reduces the Fund s Retail Warehouse exposure in line with strategy. Performance Overview The Fund outperformed the IA UK Direct Property Sector for Q recording a Total Return of 1.58% against the sector average of 1.02%. The IA Property Sector unit price movement has been distorted over the medium term due to various pricing basis changes and market value adjustments applied to a section of the contributors. (*1)Source: Standard Life Investments / Morningstar. Fund returns net of Platform 1 fees. Peer group comprises 8 comparable UK commercial property funds in the IA Property Sector.

4 Forecasts and Outlook Investor behaviour, especially among domestic UK investors, remains heavily skewed towards the industrial and alternative sectors. There are a rising number of funds and investment vehicles committing capital to residential opportunities too. Long, secure income streams are also highly sought after and they are becoming harder to find. With student accommodation increasingly on a direct-let basis and a fall in sale-andleaseback activity among the supermarket operators, the supply of long-income assets is limited. An increase in the number of liability-driven investors is also creating a tight and competitive investment market and so we would highlight the importance of not only understanding covenants and rental affordability, but focusing on the underlying quality and re-lettability of the assets. In the short term, our forecasts are muted and below the current consensus view. From a top-down perspective, we expect existing industrial investments to deliver considerably stronger returns than retail and offices over the next three years, but accessing the yield component of those returns through new purchases is challenging given competitive bidding. We expect sector level retail returns to be negative over the next three years, with rents declining and yields rising, but that dynamic is not uniform across the sector with dominant affordable schemes performing more favourably. UK commercial real estate continued its stable performance over the period with capital values and rental growth at an All Property level remaining broadly supportive. Industrial and long income type sectors continue to generate the strongest returns while sentiment in the retail sector is weakening. We continue to believe that UK property dynamics remain supportive although the returns from the UK commercial real estate market are expected to be moderate. UK real estate continues to provide an elevated yield compared to other assets in a low growth environment. Given the backdrop of continuing heightened macro uncertainty, however, we expect to see more polarised performance between prime and secondary assets and across the sectors. Currently c.50%+ of the Fund s assets by value are categorised within the Neutral to Very Heavy classification in relation to our 3 year House View and we will continue to implement asset management initiatives across the portfolio aimed towards maintaining income and capital preservation alongside appraising select favourable investment opportunities. Alignment to House View: Q Very Heavy Heavy Neutral Sector South East Industrial Distribution Warehouses (London) Distribution Warehouses (South East ex London) Build to Rent (Rest of UK) Rest of UK Industrial Distribution Warehouses (Rest of UK) Grade A Rest of UK Offices Build to Rent (London) Hotels House View Forecasts UK Real Estate Fund APUTs & PAIFs in Quarterly Universe 11.4% 20.1% 12.9% 20.6% 16.7% Rest of South East Offices (ex London) Supermarkets 9.8% 8.1% Forecasts and Outlook The Fund remains well positioned relative to the latest real estate House View, especially when compared to the peer group 51% of the Fund is held within the Neutral, Heavy or Very Heavy sectors where we forecast the strongest market returns Selective exposure retained to more cyclical markets & headwinds in retail sector Light Very Light Leisure Parks Retail Warehouse Fashion Parks Outer London Offices Other Rest of UK Offices Inner London Offices Retail Warehouse Bulky Goods Parks Retail Warehouse Solus Units West End and Midtown Offices Grade A City Offices Business Parks Regional Shopping Centres (> 50,000 sqm) Medium Town Prime Shops Major City Prime Shops District Shopping Centres (25,000 to 50,000 sqm) Secondary / Small Town Shops Secondary Shopping Centres (<25,000 sqm) 2nd Hand City Offices 30.2% 36.1% -3.4% 19.3% 21.0% Other 0% 5.2% Source: Aberdeen Standard Investments, 30 October Figures above reflect forecast % annual total returns over the next 3 years. Projected returns are unleveraged, not risk adjusted and do not reflect the inclusion of transaction costs. We do not expect the structure of all our property funds to exactly match the above as there are stock specific, transaction costs and liquidity issues that may work against each fund achieving the ideal structure. Figures above exclude cash and cash like assets.

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