For professional investors only. Not suitable for retail clients.
Schroder Exempt Property Unit Trust
12 Months to 31 March 2012
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 2011. 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
0.9
5.5
9.5
-2.7
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.
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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. 1893220 England.
Authorised and regulated by the Financial Services Authority.
Schroders Investment Review
12 Months to 31 March 2012
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 £27.50 to £33.00
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
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indirect investment in West End of London Property Unit Trust (WELPUT ),
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:
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Schroders in house fund
Schroders Investment Review
12 Months to 31 March 2012
– 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.
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The £9.5 million investment in Hercules Unit Trust (HUT ) 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.
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The Trust also swapped approximately £11.8 million of units in Hercules Unit Trust 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
2011. 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
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Schroders in house fund
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.
Schroders Investment Review
12 Months to 31 March 2012
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.
Asset
Allocation
Fund
31.03.11
%
Fund
31.03.12
%
Benchmark*
31.03.12
%
8.2
10.4
17.3
Market sectors
Standard retail
Shopping centres
1.9
1.9
5.9
Retail warehouses
19.6
19.2
18.6
Central London offices
16.5
16.0
12.6
South East offices
11.0
16.5
8.9
Rest of UK offices
6.0
5.9
4.8
19.3
17.9
14.7
7.7
8.2
10.4
Industrial
Other
Cash
9.6
4.0
6.7
Total
100.0
100.0
100.0
*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
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Schroders Investment Review
12 Months to 31 March 2012
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 2012. All rights reserved.
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information which may be attributed to it.
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information you supply may be processed for the purposes of investment administration by any company within the Schroder Group and
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Schroder Property Investment Management Limited
31 Gresham Street
London
EC2V 7QA
Registered No. 1188240 England.
Schroder Property Investment Management Limited is authorised and regulated by the Financial Services Authority.
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