Interim Short Report 15 November 2017 Fund Managers Report Don Jordison Gerry Frewin Review This report covers the period from 16 May 2017 to 15 November 2017. Property Market Commentary The UK property market, as represented by the IPD UK Monthly Index, generated a direct property total return of 5.4% for the six months to 31 October. Income return at 2.7% almost matched a significant capital value growth of 2.6%. Despite continued uncertainties generated by the prospect of a soft or hard Brexit, the underlying fundamentals of UK commercial property remain sound, with sustained tenant demand and restricted levels of supply across the majority of occupational markets (with the exception of parts of the structurally troubled high street). From a pricing perspective, despite prevailing macro level headwinds, 2017 has seen significant capital value growth of 3.5% for the first ten months of the year (to 31 October). The investment market has become increasingly polarised, with strongest investor demand and capital value growth for assets exhibiting the risk off characteristics of lease length, prescribed rental value increases and prime industrial assets (with a strong leasing dynamic supportive of potentially significant medium-term rental value growth). Positive capital growth can be attributed to a number of factors. These include significant investor reengagement from sources such as: overseas investors attraction to the UK s safe haven status and sterling weakness, leveraged investors taking advantage of the significant positive arbitrage between income yield and cost of debt, and the demand from institutional investors. The industrial sector generated the strongest total returns over the past six months, adding 10.0%, compared to 4.1% for the office sector and 3.7% for the retail sector. The industrial sector s robust returns have centred on strong underlying fundamentals generating rental value growth, combined with the resultant enthusiasm among investors to acquire industrial assets. Growing demand for warehousing and logistical accommodation right across the unit-size spectrum is a logical product of the dramatic growth in online retailing. Another contributing factor has been rising construction costs in the industrial sector, which have created headroom between prevailing rental values and the economic rent at which fresh developments can be supported. Property Market Outlook The period under review was one in which the UK commercialproperty sector delivered attractive investment returns to investors. With exposure to strong occupier markets outside of central London, the fund is well placed to generate significant gains through proactive asset management. Market returns are set to be increasingly dominated by income and rental value growth, with far less scope for further downward movement of yields. The fund has a defensive structure, with no exposure to property-company shares, no exposure to speculative property development and no debt at the property or fund level. The Portfolio The Threadneedle UK Property Authorised Investment Fund benefits from a well-balanced portfolio offering a high income return. The portfolio is extremely well diversified and is free from the elevated risks associated with wholesale, speculative development activities. The acquisition strategy over the period continued to focus upon properties exhibiting strong underlying investment credentials and those considered to provide a significant risk premium. At the end of October 2017, the fund s property portfolio generated an extremely attractive net income return of 6.5%, representing an income-yield advantage of 150 basis points above the comparable (IPD Monthly Index) market yield. This, combined with the appreciation in capital value the fund has enjoyed across the portfolio, should enable the fund to maintain a competitive advantage. The net asset value (NAV) of the fund (as at 31 October 2017) now stands at 1.35 billion following a significant period of NAV growth since the fund reopened in September 2016. As the fund continues to grow, lower proportionate cash holdings will have a diluted impact on returns. Since the onset of the financial crisis in late 2007, prudent liquidity management has remained one of the hallmarks of the fund s long-term strategy. Index measures are provided for information, to demonstrate performance relative to peer groups. However, please be reminded that the fund is not managed with reference to any benchmark. Performance With reference to the Morningstar UK IMA OEIC benchmark for real estate funds, the Threadneedle UK Property Authorised Investment Fund is ranked in the first quartile (4th out of 49 funds) over the 12 months to 31 October 2017, and in the third quartile (24th out of 37 funds) over the five-year period. This information is provided to demonstrate performance relative to the peer group. However, please be reminded that the fund is not managed with reference to any benchmark. Strategy The fund continues to focus on the direct acquisition of undermanaged, high-quality, commercial real-estate assets with high, sustainable income yields, situated in key growth sub-markets, at pricing discounted to long-run pricing trends. The fund has completed the purchase of 25 properties over the period, amounting to c. 240m together with three disposals amounting to 18.5m. Additionally, there is an acquisition pipeline of approximately 65m in solicitor s hands; this is due to be completed before the end of November. Prudent liquidity management remains one of the hallmarks of the fund s long-term strategy.
Fund Facts Fund Accounting and Distribution Dates Accounting Dates Payment Dates 15 May 15 July 15 August 15 October 15 November 15 January 15 February 15 April Ongoing Charges Figure The Operating charges are represented by the Ongoing Charges Figure (OCF) which is the European standard method of disclosing the charges of a share class of a fund based on the financial year s expenses and may vary from year to year. It includes charges such as the fund s annual management charge, registration fee, custody fees and distribution cost but ordinarily excludes the costs of buying or selling assets for the trust (unless these assets are shares of another fund). The non-ucits retail scheme Key Investor Information (NURS-KII) contains the current OCF. For a more detailed breakdown please visit columbiathreadneedle.com/fees. Share class 15 November 2017 15 May 2017 Class 1 Net income shares 1.63% 1.62% Class 1 Net accumulation shares 1.63% 1.62% Class 1 Gross income shares 1.63% 1.62% Class 1 Gross accumulation shares 1.63% 1.62% Class 2 Net income shares 0.81% 0.80% Class 2 Net accumulation shares 0.81% 0.80% Class 2 Gross income shares 0.81% 0.80% Class 2 Gross accumulation shares 0.81% 0.80% Class F Gross accumulation units 0.02% 0.01% Property Expense Ratio A property expense ratio is shown which takes into account expenses that are associated with the day to day maintenance of the property assets and excludes costs associated with operating the Fund. Share class 15 November 2017 15 May 2017 Class 1 Net income shares 0.66% 0.72% Class 1 Net accumulation shares 0.66% 0.72% Class 1 Gross income shares 0.66% 0.72% Class 1 Gross accumulation shares 0.66% 0.72% Class 2 Net income shares 0.66% 0.72% Class 2 Net accumulation shares 0.66% 0.72% Class 2 Gross income shares 0.66% 0.72% Class 2 Gross accumulation shares 0.66% 0.72% Class F Gross accumulation units 0.66% 0.72% Summary of Fund Performance Share class 2017 1 2016 2015 2014 2013 2012 Class 1 Net income shares +9.66-5.24 +8.43 +13.44 +3.14-1.53 Class 1 Net accumulation shares +9.88-5.21 +8.64 +13.71 +4.21-1.58 Class 1 Gross income shares 2 +10.21-6.21 Class 1 Gross accumulation shares 2 +10.39-6.10 Class 2 Net income shares +10.29-4.62 +9.17 +15.60 +4.12-0.85 Class 2 Net accumulation shares +10.37-4.62 +9.49 +15.85 +5.01-0.96 Class 2 Gross income shares 2 +11.00-5.73 Class 2 Gross accumulation shares 2 +11.16-5.74 1 To 31 October 2017. 2 Shares commenced 13 May 2016. Source: Morningstar and Threadneedle. Bid to bid prices are quoted (i.e. not including any initial charge) with net income reinvested for a UK basic rate tax payer. Performance data is quoted in sterling. The performance data prior to 14 May 2016 (the launch date of the Fund) relates to the Threadneedle UK Property Trust whose assets transferred to the Threadneedle UK Property Authorised Investment Fund on 14 May 2016.
Net Asset Value (NAV) Threadneedle UK Property Authorised Investment Fund NAV pence per unit Number of units in issue As at Unit class NAV ( ) 15 November 2017 Class 1 Net income shares 1,797,287 71.59 2,510,602 15 May 2017 Class 1 Net income shares 2,021,572 71.83 2,814,442 15 November 2017 Class 1 Net accumulation shares 22,696,514 112.93 20,098,301 15 May 2017 Class 1 Net accumulation shares 27,568,698 110.93 24,852,586 15 November 2017 Class 1 Gross income shares 418,008 71.58 583,933 15 May 2017 Class 1 Gross income shares 504,355 71.83 702,192 15 November 2017 Class 1 Gross accumulation shares 41,392,060 114.04 36,295,074 15 May 2017 Class 1 Gross accumulation shares 37,708,805 111.67 33,767,651 15 November 2017 Class 2 Net income shares 72,109,018 80.99 89,031,975 15 May 2017 Class 2 Net income shares 50,116,204 80.96 61,905,717 15 November 2017 Class 2 Net accumulation shares 25,359,105 124.58 20,355,979 15 May 2017 Class 2 Net accumulation shares 20,713,151 121.96 16,983,209 15 November 2017 Class 2 Gross income shares 46,985,998 80.98 58,019,517 15 May 2017 Class 2 Gross income shares 45,516,203 80.95 56,229,274 15 November 2017 Class 2 Gross accumulation shares 47,164,446 126.14 37,390,547 15 May 2017 Class 2 Gross accumulation shares 39,961,817 123.00 32,488,117 15 November 2017 Class F Gross accumulation units 1,102,225,437 531.57 207,351,635 15 May 2017 Class F Gross accumulation units 1,012,478,842 516.31 196,100,329 Distribution History/Share Price Range Pence per unit Highest offer price (pence) Lowest bid price (pence) As at Unit class 15 November 2017 Class 1 Net income shares 1.5312 72.43 71.59 15 May 2017 Class 1 Net income shares 3.2743 74.86 71.10 15 November 2017 Class 1 Net accumulation shares 2.3773 112.93 110.85 15 May 2017 Class 1 Net accumulation shares 4.9150 110.91 106.54 15 November 2017 Class 1 Gross income shares 1.7561 72.53 71.58 15 May 2017 Class 1 Gross income shares 3.7640 74.93 71.10 15 November 2017 Class 1 Gross accumulation shares 2.7473 114.04 111.61 15 May 2017 Class 1 Gross accumulation shares 5.6663 111.66 106.76 15 November 2017 Class 2 Net income shares 1.6920 81.84 80.84 15 May 2017 Class 2 Net income shares 3.6020 83.81 79.83 15 November 2017 Class 2 Net accumulation shares 2.5623 124.58 121.88 15 May 2017 Class 2 Net accumulation shares 5.2779 121.95 116.58 15 November 2017 Class 2 Gross income shares 2.0140 82.00 80.83 15 May 2017 Class 2 Gross income shares 4.2868 83.89 79.83 15 November 2017 Class 2 Gross accumulation shares 3.0795 126.13 122.95 15 May 2017 Class 2 Gross accumulation shares 6.3026 123.00 116.88 15 November 2017 Class F Gross accumulation units 13.0443 531.55 516.09 15 May 2017 Class F Gross accumulation units 26.5277 516.28 487.82 Past performance is not a guide to future performance.
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Threadneedle UK Property Authorised Investment Fund Classification of Investments 15 November 2017 vs 15 May 2017 90% 80% 15 November 2017 15 May 2017 70% 60% 50% 40% 30% 20% 10% 0% Direct properties Net other assets Portfolio Information Top Five Holdings as at 15 November 2017 % of Fund Fareham, Fusion Building 1-3 2.34 Reading Retail Park 2.34 Larkfied Mill 1.96 Cardiff, City Link 1.94 Reading, Broad Street & Friar Street 1.53 Top Five Holdings as at 15 May 2017 % of Fund Fareham, Fusion Building 1-3 2.58 Reading Retail Park 2.54 Larkfied Mill 1.87 Brentwood, Baytree Shopping Centre 1.56 Chelmsford, One Legg Street 1.48
Investment Objective and Policy The objective of the Threadneedle UK Property Authorised Investment Fund (the Company) is to obtain a total return based on income and capital appreciation predominantly through investment in certain kinds of real estate, property related securities, government and public securities and units in collective investment schemes. The Company will invest primarily in UK commercial real estate. It may also invest in US or continental European real estate, property-related securities, property investment companies, collective investment schemes (including other collective investment schemes managed, advised or operated by the ACD or its associates), cash and near cash, warrants, deposits and money market instruments. Derivatives may be used for investment purposes on the giving of 60 days notice to Shareholders. At the date of this report derivatives are used for efficient portfolio management purposes only. It is intended that the Company be a PAIF at all times and so its investment objective is to carry on Property Investment Business and to manage cash raised from investors for investment in the Property Investment Business as further described below. HM Revenue & Customs has confirmed to the ACD that the Company meets the requirements to qualify as a PAIF under regulation 69O of the PAIF Tax Regulations. The Company will be managed so as to be eligible as an ISA investment for the purposes of the Individual Savings Account Regulations 1998 (as amended from time to time). Non-UCITS Retail Scheme Key Investor Information Documentation (NURS KII) Subscription requirements The NURS-KII is a pre-contractual document and investors have to confirm that they have read the latest NURS-KII before making a subscription. Threadneedle has the right to reject a subscription if the investor does not confirm that they have read the latest NURS-KII at the time of application. Investors can obtain the latest NURS-KII from columbiathreadneedle.com. Changes to the prospectus of the Company There were no changes to the Prospectus of the Fund during the period from 16 May 2017 to 15 November 2017 Changes to the management of the ACD The following changes have been made to the management of the ACD Appointment of Michelle Scrimgeour on 14 August 2017 Changes to the Instrument of Incorporation There were no changes to the Instrument of Incorporation during the period from 16 May 2017 to 15 November 2017. Key Risks Investment Risk: The value of investments can fall as well as rise and investors might not get back the sum originally invested. Property Liquidity Risk: It may be difficult or impossible to realise an investment in the Trust because the underlying property concerned may not be readily saleable. Property Valuation Risk: The value of a property is a matter of a valuer s opinion and the true value may not be recognised until the property is sold. Property Market Risk: The performance of the Fund would be adversely affected by a downturn in the Property market in terms of capital value or a weakening of rental yields. Volatility Risk: The trust may exhibit significant price volatility. Uninvested Cash Risk: Due to the illiquid nature of property and the time it can take to buy or sell assets, under normal circumstances up to 20% of the Fund s assets may be held as cash deposits. In exceptional circumstances, the level of cash held by the Fund may be significantly higher. Holding high levels of cash will have an impact on the performance of the Fund and its distributable income until the excess cash is invested in property assets. Effect of Dual Pricing Risk: The Fund is dual priced, and there is a price to buy shares and a different price to sell them. Because of the cost of transacting in property, the difference between the two prices is likely to be wider than for other Funds. The price at which you deal may change depending on whether the Fund is experiencing inflows or outflows of cash, and any change will mean an increase or decrease in the price at which you deal.
General Information The information in this report is designed to enable shareholders to make an informed judgement on the activities of the Fund during the period it covers and the results of those activities at the end of the period. For further information, please contact Threadneedle Investment Services Limited. The Long Form Report and Financial Statements is available free of charge on request from the ACD and on our website. For more information about the activities and performance of the Company during the period, please contact the Manager at the administration address noted below, or visit our website at columbiathreadneedle.com. Contacts: Manager and Administration The Company and Head Office Threadneedle UK Property Authorised Investment Fund Cannon Place 78 Cannon Street London EC4N 6AG Authorised Corporate Director (ACD) and Alternative Investment Fund Manager (AIFM) Threadneedle Investment Servies Limited Registered office and head office: Cannon Place 78 Cannon Street London EC4N 6AG Registrar Threadneedle Investment Services Limited Delegated to: DST Financial Services Europe Limited** Authorised and regulated by the Financial Conduct Authority (FCA) St Nicholas Lane Basildon Essex SS15 5FS ACD Client Services Department Threadneedle Investment Services Limited PO Box 10033 Chelmsford Essex CM99 2AL Telephone (dealing & customer enquiries): 0800 953 0134* Fax (dealing): 0845 113 0274 Email (enquiries): questions@service.columbiathreadneedle.co.uk Investment Managers Threadneedle Asset Management Limited Cannon Place 78 Cannon Street London EC4N 6AG Depositary Citibank Europe plc, UK Branch (Authorised by the Prudential Regulatory Authority (PRA) and regulated by the FCA and PRA) Citigroup Centre Canada Square Canary Wharf London E14 5LB Legal Advisers Eversheds Sutherland (International) LLP One Wood Street London EC4V 7WS Independent Auditor PricewaterhouseCoopers LLP Atria One 144 Morrison Street Edinburgh EH3 8EX Standing Independent Valuer: CBRE Limited Kingsley House Wimpole Street W1G 0RE Colliers International Propert Consultansts Ltd 1st Floor 50 George Street London W1U 7GA Transfer Agent DST Financial Services Europe Limited** IFDS House St Nicholas Lane Basildon Essex SS15 5FS *Please note that calls may be recorded. **International Financial Data Services (UK) Limited changed its name to DST Financial Services Europe Limited on 15 August 2017. To find out more visit columbiathreadneedle.com Threadneedle Investment Services Limited, ISA Manager, Authorised Corporate Director and Unit Trust Manager. Registered No. 3701768. Registered in England and Wales. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com 211335