Legal & General UK Property Trust Annual Manager s Short Report for the year ended 28 November 2010 Distribution Number 19
Investment Objective and Policy The investment objective is to achieve revenue and capital growth through investing generally in commercial property. The investment policy is to invest predominantly in commercial property in the UK. The Scheme will aim to diversify risk by seeking exposure principally in three main sectors:- Retail (for example, shopping centres, retail warehouses, standard shops, supermarkets and department stores); Offices (for example, standard offices and business parks); and Industrial (for example, standard industrial estates and distribution warehousing). In addition, the Scheme may also gain exposure to other commercial property sectors, including the smaller Leisure sector (for example, leisure parks, restaurants, pubs and hotels). The Scheme may from time to time seek diversification to the Isle of Man and the Channel Islands but properties will be predominantly situated in the United Kingdom. The Scheme may also invest in other property related assets (including property related UK transferable securities and mainly UK property related Collective Investment Schemes), in money market instruments, deposits, money market related Collective Investment Schemes and government and public securities. The intention of the Manager is to invest at least 80% of its assets directly or indirectly in UK commercial property but it may reduce this level (to no lower than 70%) from time to time if it believes it is in the interests of maintaining scheme liquidity. All immovables included in the property of the Scheme are separately insured for their reinstatement value. Currently the Scheme has an All-Risks policy with a reputable insurer which covers loss of rent and loss or damage to immovable property, where caused, for example, by fire, flood, subsidence, property owner s liability and terrorism. The detailed coverage under this policy may vary from time to time dependent on the availability of suitable cover in the market. Risk Profile Liquidity Risk The intention of the Manager is to invest at least 80% of its assets directly or indirectly in UK commercial property but it may reduce this level (to no lower than 70%) from time to time if it believes it is in the interests of maintaining scheme liquidity. 1
Market Risk Market liquidity risk All property investments are relatively illiquid compared to bonds and equities. Liquidity is a function both of the time to effect a sale and the extent to which it is possible to trade at the market price. Property is slow to transact in normal market conditions and hence is illiquid. In poor market conditions it will take even longer to find a buyer to pay an acceptable price. Market Valuation Risk The value of a property, except where it is bought or sold, is generally a matter of a valuer s opinion rather than fact and may go down as well as up. The simplest yardstick of property valuation is initial yield, which is current annual rent divided by the value of the property, including purchase costs. Property yields will fluctuate through time and may reflect the general economic cycle. At any time, the market value of a property will, broadly, reflect market expectations for rental growth. If an investment is made in the expectation that a certain level of rental growth will be achieved and that growth fails to materialise, then the returns from holding that property are likely to be lower than anticipated. Rental growth is affected by many things: general economic conditions, local trading conditions, relative scarcity of alternative space and so on. Interest Rate Risk Interest rate risk is the risk of movements in the value of financial instruments as a result of fluctuations in interest rates. The Trust s only interest bearing financial instruments were its bank balances and overdraft facilities. Cash is deposited, and overdraft facilities utilised, on normal commercial terms and earn or bear interest based on London Interbank Offered Rate (LIBOR). 2
Trust Facts Period End Dates for Distributions: 28 Feb, May, Aug and Nov Distribution Dates: 28 Apr, Jul, Oct and Jan Total Expense Ratios: 28 Nov 10 28 Nov 09 Trust Expense Ratios* Trust Expense Ratios* R-Class 1.43% R-Class 1.32% I-Class 0.66% I-Class 0.64% L-Class 0.06% L-Class 0.05% Property Expense Ratios** Property Expense Ratios** R-Class 0.31% R-Class 0.26% I-Class 0.32% I-Class 0.23% L-Class 0.26% L-Class 0.27% * The Trust Expense Ratio shows the ratio of operating costs (excluding overdraft interest, bad and doubtful debts and transaction charges) that relate to the management of the Trust to the average net assets of the Trust. ** The Property Expense Ratio shows the ratio of operating costs that relate to the management of the property assets to the net average net assets of the Trust. 3
Trust Performance Net Asset Net Asset Number Of Accounting Value Of Value Per Units Date Trust Unit In Issue 28 Nov 08 R-Class Distribution Units 13,920,681 39.48p 35,262,370 Accumulation Units 114,641,698 43.09p 266,065,091 I-Class Distribution Units 4,131,473 41.45p 9,966,942 Accumulation Units 1,942,054 45.90p 4,230,847 L-Class Distribution Units 54,753,862 41.44p 132,116,629 28 Nov 09 R-Class Distribution Units 33,912,027 38.44p 88,225,545 Accumulation Units 152,502,465 43.61p 349,691,785 I-Class Distribution Units 19,222,539 40.36p 47,627,644 Accumulation Units 8,823,341 46.71p 18,888,554 L-Class Distribution Units 42,527,687 40.35p 105,392,756 28 Nov 10 R-Class Distribution Units 53,818,300 41.07p 131,026,756 Accumulation Units 269,999,870 48.11p 561,237,872 I-Class Distribution Units 56,724,766 43.13p 131,526,581 Accumulation Units 47,620,003 51.85p 91,833,747 L-Class Distribution Units 17,093,204 43.12p 39,644,076 Past performance is not a guide to future performance. The price of units and income from them may go down as well as up. Distribution Information R-Class The distribution payable on 28 January 2011 is 0.3620p net per unit for distribution units and 0.4206p net per unit for accumulation units. I-Class The distribution payable on 28 January 2011 is 0.4528p net per unit for distribution units and 0.5383p net per unit for accumulation units. L-Class The distribution payable on 28 January 2011 is 0.5090p net per unit for distribution units. 4
Portfolio Information The top 10 holdings and their associated sectors for the current and preceding year are: Top 10 Holdings at 28 November 2010 Holding Sector 1-7 Upper Street, Islington Office Cambridge Science park, Cambridge Retail BMI Woodlands Hospital, Darlington Other Commercial Building C, Solent Business Park, Fareham Office Royal Buildings, 2 Moseley Street, Manchester Retail Walter House, London Office Tower Fields Leisure Park, Huntingdon Leisure 118 Princes Street, Edinburgh Retail 31-33 Bedford Street, London Office 66-67 Newman Street, London Office Top 10 Holdings at 28 November 2009 Holding Sector Royal Buildings, 2 Moseley Street, Manchester Retail 118 Princes Street, Edinburgh Retail Audi Showroom, 4 Bankhead Drive, Edinburgh Other Commercial Homebase Unit, Romford Retail Warehouse 66-67 Newman Street, London Office Libra Industrial Estate, Milton Keynes Industrial Station Retail Park, Carlisle Retail Warehouse Plot 5, Sherwood Park, Annesley Industrial Aquila House, Redhill Office 991 Doddington Road, Lincoln Office 5
Trust Holdings as at 28 November 2010 30% 25% 26% 20% 20% 18% 15% 14% 10% 7% 6% 5% 4% 3% 2% 0% Offices Retail Net Other Assets Industrial Retail Warehouses Other Commercial Liquidity Instrument Leisure Real Estate Equity Investments Trust Holdings as at 28 November 2009 25% 20% 22% 21% 17% 15% 11% 11% 10% 8% 6% 5% 3% 1% 0% Net Other Assets Retail Offices Industrial Retail Warehouses Liquidity Instrument Real Estate Equity Investments Other Commercial Derivatives 6
Unit Price Range and Net Revenue R-Class Units Highest Lowest Net Year Offer Bid Revenue Distribution Units 2006 (1) 57.54p 47.61p 0.7023p 2007 58.98p 48.52p 1.5132p 2008 54.12p 38.29p 1.6258p 2009 42.88p 35.28p 1.4631p 2010 (2) 45.31p 39.51p 1.3024p 2011 (3) 0.3620p Accumulation Units 2006 (1) 58.86p 47.61p 0.7098p 2007 61.23p 51.06p 1.5491p 2008 56.95p 41.82p 1.7182p 2009 48.65p 39.23p 1.6029p 2010 (2) 52.61p 45.18p 1.4792p 2011 (3) 0.4206p I-Class Units Highest Lowest Net Year Offer Bid Revenue Distribution Units 2006 (1) 57.58p 50.00p 0.8649p 2007 59.07p 51.28p 1.8683p 2008 54.16p 42.20p 1.9771p 2009 42.90p 37.06p 1.7498p 2010 (2) 45.38p 41.35p 1.6230p 2011 (3) 0.4528p Accumulation Units 2006 (1) 59.12p 50.00p 0.8703p 2007 61.74p 54.45p 1.9338p 2008 57.51p 46.77p 2.1086p 2009 49.66p 41.92p 1.9456p 2010 (2) 54.00p 48.31p 1.8851p 2011 (3) 0.5383p L-Class Units Highest Lowest Net Year Offer Bid Revenue Distribution Units 2006 (1) 57.60p 50.00p 0.9882p 2007 59.15p 51.00p 2.1476p 2008 54.20p 42.21p 2.2261p 2009 42.91p 36.92p 1.9469p 2010 (2) 45.43p 41.22p 1.8256p 2011 (3) 0.5090p (1) From 27 February 2006. (2) The above tables show highest offer and lowest bid prices to 28 November 2010. (3) Net revenue per unit to 28 January 2011. Past performance is not a guide to future performance. The price of units and income from them may go down as well as up. 7
Manager s Investment Report During the year under review, the bid price of the Trust s R-Class accumulation units rose by 10.22%. Past performance is not a guide to future performance. The value of investments and income from them may go down as well as up. Market/Economic Review The UK commercial property market experienced a rapid recovery in values during the latter months of 2009. In December, the IPD Monthly Index recorded a total return of 3.6% for the month which set a new record within IPD for the highest monthly return as well as the highest level of return over a 3 month period (10%). The first quarter of 2010 showed continued capital value growth driven primarily by UK institutional investors continuing to compete for limited available investment stock. Total returns for the quarter were recorded at 6.0% (IPD Quarterly Index) with capital growth forming 4.3% and income return the remainder. Since then, the total return from commercial property has remained positive but on a reducing trend with 3.4% in quarter two and 2.3% in quarter three. Latterly returns have been almost exclusively provided by income with negligible capital growth. UK Institutional investor demand for the sector has eased, however due to UK currency weakness the sector has become increasingly attractive to overseas investors. The Office sector has provided the highest returns over each quarter of 2010 so far, leading the Retail sector, with the Industrial sector providing the lowest returns of the three. Performance in the Office sector has been led by Central London locations where an emerging shortage of new space is beginning to place upwards pressure on rental values, particularly for high quality accommodation. During quarter one, rents showed growth in the Office sector for the first time in two years and this trend has been maintained in the months since. In other sectors whilst the trend of falling rental values throughout 2009 has started to fade, positive rental recovery is yet to occur. Rental growth was recorded as -0.2% in both the Retail and Industrial sectors for quarter three (IPD Quarterly Digest). 8
Manager s Investment Report continued Trust Review Due to the popularity of the Trust with investors, the Trust has experienced a rapid growth in size. The Trust has increased in size from 257 million at the end of November 2009 to 445 million by the end of November 2010. As such the Trust has been actively purchasing new properties in order to combat any drag on performance caused by excessive cash reserves. In the Retail sector, the Trust has acquired assets in strong locations but with asset management potential including Royal Arcade in Norwich, a retail block on Upper Street in Islington North London and Castle Place Shopping Centre in Trowbridge. Office acquisitions include the European HQ for Amgen on Cambridge Science Park, a call centre let to NatWest on Aztec West Business Park in Bristol and two buildings based in London s Covent Garden with good rental recovery prospects. Other purchases include Tower Fields Leisure Park in Huntingdon, a newly built Audi car showroom close to Edinburgh airport let for 25 years and Woodlands BMI Hospital in Darlington let for a further 23 years. The Trust has also completed several successful asset management initiatives during the year including a lease regear and subsequent sale of a Lloyds Bank building on Terminus Road in Eastbourne and the letting of 5,700 square feet of office space to MCSE at Royal Buildings on Market Street in Manchester. Other activities that have contributed significantly to the portfolios performance this year include the sale of 46 Bedford Square in London, which achieved 5.6 million a full 2 million above market expectations. 9
Manager s Investment Report continued Outlook As was forecast in the Manager s Report from May 2010, momentum has eased over recent months. Looking forward, we anticipate continuing concern over debt levels both within the UK economy and within the economies of other European markets. This is likely to have a more negative impact on the Retail Property sector, with the prospect of reduced Government subsidy and an increase in VAT likely to result in a reduction in consumer spending. We believe the income return profile for commercial property remains strong relative to UK bond and equity markets, but that returns driven by rental value recovery are likely to be restricted to Central London office markets for the short term. The UK Property Trust has continued to perform well, though performance has been tempered by the rapid growth of the Trust. Legal & General Investment Management Limited (Investment Adviser) 16 December 2010 10
Manager s Report and Accounts Copies of the most recent Interim and Annual Long Form Manager s Reports are available free of charge by telephoning 0370 050 0955 or by writing to the Manager. Call charges will vary. We may record and monitor calls. Other Information The information in this report is designed to enable unitholders to understand how the Trust has performed during the year under review and how it is invested at the year end. Further information on the activities and performance of the Trust can be obtained by telephoning 0370 050 0955 or by writing to the Manager. Management Structure of the Legal & General Property Unit Trust Mike Barrie is the Fund Manager for the UK Property Trust and also a Director of Legal & General Property Division. He joined LGIM Property in November 2005. The last 14 years of his career were spent in property fund management with Sun Alliance, Royal Sun Alliance, ISIS following the merger with Friends Provident and latterly with F&C PAM since the acquisition of ISIS by F&C in 2004. Mike is a member of the Royal Institution of Chartered Surveyors and has a post-graduate Diploma in Property Investment from Reading University following an initial degree in Urban Land Economics from Sheffield Hallam University. Significant Changes Calculation of Unit Prices From 7 June 2010, the way we price units in this Trust has changed. Each day, two unit prices are calculated: The Creation Price based on the price of buying all the Trust s assets plus any costs involved, and; The Cancellation Price based on the price of selling all the Trust s assets less any costs involved. The difference between these two prices is known as the spread. Prior to 7 June 2010 we based our daily dealing price on either the creation or cancellation price, depending on the volume of overall transactions in the Trust for that valuation point. Generally, we would use the creation price if we were selling more units to clients than we were buying back and the cancellation price if we were buying back more units from clients than we were selling. This price would then become the published bid price we would then add any applicable initial charge to arrive at the published offer price. 11
Calculation of Unit Prices continued From 7 June 2010, we have based the price of selling units to clients on the creation price and refer to this as the offer price (creation price plus any initial charge). The price at which we buy back clients units is based on the cancellation price and is referred to as the bid price. This means that there is a difference between the selling (offer) and buying (bid) prices for units, being the spread plus any initial charge. Both the bid and offer prices are published on our website www.legalandgeneral.com/utprices. Manager: Legal & General (Unit Trust Managers) Limited, Registered in England No. 01009418 Registered office: One Coleman Street London EC2R 5AA Telephone: 0370 050 3350 Authorised and regulated by the Financial Services Authority Trustee: The Royal Bank of Scotland Plc, Trustee and Depositary Services, Gogarburn, P.O. Box 1000 Edinburgh EH12 1HQ Authorised and regulated by the Financial Services Authority Independent Auditors: PricewaterhouseCoopers LLP, Hay s Galleria, 1 Hay s Lane London SE1 2RD Investment Adviser Legal & General Investment Management Limited One Coleman Street London EC2R 5AA Authorised and regulated by the Financial Services Authority Independent Valuer Knight Frank LLP 20 Hanover Square London W1S 1HZ. 12
Authorised and regulated by the Financial Services Authority Legal & General (Unit Trust Managers) Limited Registered in England No. 01009418 Registered office: One Coleman Street, London EC2R 5AA www.legalandgeneral.com Q0030485