31 December 2012
For professional investors only. Not suitable for retail clients
Schroders
Quarter 4 2012 Report
Executive summary
–
–
–
The global economy picked up in the second half of
2012, boosted by the belief in the reduced risk of a
eurozone break-up, US fiscal cliff and Chinese hard
landing. We now expect the eurozone to muddle
through in 2013 although austerity is expected to
continue to hold back growth in the short term.
To outperform its
1
benchmark by 0.5% per
annum, net of fees, over
rolling three year periods
£1,226.2 million
UK GDP growth is likely to remain sluggish in 2013
although we are starting to see more positive signs in
recent months such as an improvement in consumer
confidence and encouraging employment data. As UK
corporates still have cash on their balance sheets this
improved sentiment could lead to further business
investment in 2013.
£1,289.9 million
£85.2 million
7.0%
5.1%
5.4%
We continue to focus on growth sectors in the property
market, targeting pockets where rental growth is less
correlated to the broader economic cycle and which are
benefiting from long-term structural change.
6.9%
Performance
–
–
As at 31 December 2012, SPF continued to outperform
its benchmark over the one, two and three year periods.
Key drivers of performance include:
2 yr
(%
pa)
3 yr
(%
pa)
5 yr
(%
pa)
0.4
2.1
4.8
7.4
-3.1
-0.4
0.2
3.3
6.1
-2.3
7.1
-0.9
Alternative investments. Investments in leisure,
student accommodation and car showrooms have
0.5
1.9
3.9
generated market beating returns. The combination of
an attractive income return and inflation linked uplifts has outperformed the wider property market.
–
Active asset management strategies. Over 2012 IPD report that capital values have decreased by 4.2% across
the UK commercial property market. While yields have also moved out across the SPF portfolio, active asset
management, such as the refurbishment and re-letting of Dean Street, London W1, have mitigated the impact of
market movements. Overall SPF’s portfolio fell by around 2% over 2012, although this has varied across assets.
–
Asset allocation. SPF’s underweight position to retail and its office and industrial bias to London and the south
east have proven more resilient than the sector / geographical allocations of the Benchmark. SPF’s best
performing sector has been its office investments in central London.
–
Low yielding and non income producing assets. Over 2012, income has been the main driver of returns.
Investments which are not generating income, such as potential developments, have underperformed the market.
1
AREF/IPD UK Quarterly Property Fund Index – All Balanced Property Fund Index Weighted Average.
Look through analysis
3
Performance is calculated on a net asset value (NAV) to NAV price basis plus income distributed, compounded monthly, net of fees,
gross of tax and based on an unrounded NAV per unit
4
AREF/IPD UK Quarterly Property Fund Index – All Balanced Property Fund Index Median. This was the Fund’s benchmark until
conversion to a Property Authorised Investment Fund on 31 July 2012.
2
Issued in January 2013 by Schroder Investment Management Limited.
31 Gresham Street, London EC2V 7QA. Registered No. 1893220 England.
Authorised and regulated by the Financial Services Authority.
31 December 2012
For professional investors only. Not suitable for retail clients
UK property market commentary
–
Sentiment in the economy picked up in the second half of 2012, as the risk of a eurozone break-up, US fiscal cliff
and Chinese hard landing all receded. We now expect the eurozone to muddle through in 2013, although
austerity measures are expected to hold back growth in the short term.
–
UK GDP growth is likely to remain sluggish in 2013. In recent months we have seen more positive news on
employment growth, manufacturing output and inflation, though this is tempered by weak performance from the
important services sector. Strong corporate balance sheets are expected to boost business investment once
confidence returns.
–
The West End and City office markets both benefitted from a pick-up in demand in the second half of 2012, with
the insurance and technology, media and telecoms (TMT) sectors particularly active. However anecdotally we
believe there are pockets of growth outside of London, such as the West Midlands industrial market where the
resurgence in the automotive industry is leading to reduced supply and growth in rents.
–
Performance has also been strong in some of the alternative property sectors, particularly in those areas where
rental growth is less correlated to the broader economic cycle and which are benefiting from long term structural
change. One such area is the healthcare sector, which can offer an attractive income return, fixed uplifts and
where demand is underpinned by compelling demographic trends.
–
After a challenging year on the high street, retailers will be hoping that the inflation squeeze eases in 2013 and that
consumer confidence finally starts to pick up. Whilst it is too early to draw any conclusions about the success of
the Christmas trading period, the results to date have been mixed. The likes of John Lewis and Next both
announced strong growth in like-for-like sales, while Marks & Spencer and Morrisons both struggled. HMV
became the first high profile retail casualty of the new year as internet continued to impact high street sales.
–
The unwinding of property loan books is resulting in selective buying opportunities as stock is released onto the
market at discounted prices. A recent survey by De Montfort University noted that 11% of outstanding loans
secured against UK commercial property do not provide enough income to pay the interest on the loan, which
suggests we may see further loans defaulting in 2013. Although there have been fears that an increasing supply
of stock may slow a recovery in values, much of the property held by banks is poor quality and not attractive to
institutional buyers. Equity only buyers are still active for better than average property, whilst UK REITs have had
little difficulty raising capital through the corporate bond markets at a relatively low cost.
–
The spread between commercial property and government bonds in the UK is currently over 4%, some way
above the long term average of around 2%. With fixed income investments looking increasingly expensive, a
growing number of investors have declared their intention to move up the risk spectrum into higher yielding growth
assets, such as real estate.
–
Returns in 2013 are forecast to follow a similar path to 2012, with capital values for prime assets staying firm and
secondary property values likely to bottom out over the course of the year. Whilst the polarisation between prime
and secondary and London and the rest of the UK has been a persistent theme since 2009, we have some
reservations about whether this trend will continue in the longer term. Whilst we expect London’s strength relative
to the UK to continue, we believe that going forward ‘good secondary’ properties will start to outperform prime.
Whilst traditional, income-secure real estate is starting to look expensive, we prefer good quality assets maybe
with shorter lease structures, where there are asset management opportunities to protect and drive income going
forwards.
2
31 December 2012
For professional investors only. Not suitable for retail clients
Strategy and key activities
Capital market sentiment improved towards the end of 2012 and equity markets ended on a high. The rally
seemed to owe more to relief that investors’ worst fears would be avoided than to any improvement in
underlying fundamentals. Recent data from the ONS confirms that UK consumer spending and business
sentiment remains subdued, meaning that UK commercial property rental values are likely to see little growth
in the year ahead. Sector strategy has always been an important component of our overall policy, while style
characteristics are an increasingly important overlay.
Sales data for the Christmas period confirms our view that the retail sector is undergoing a structural shift
where there will be a significant number of losers. Traditional high streets have been under pressure for some
years as consumers and retailers gravitate to larger schemes, convenience locations and online. Elsewhere,
London’s global influence continues to create demand from a diverse range of corporations, business
services, technology and media companies for central London offices. This demand has rippled out to the rest
of the South East, but little further. SPF’s underweight position to retail and overweight to South East offices is
in line with our research views.
Two other important themes run through the Fund. The first is income. The chart below shows how income
has been a consistent driver of property total returns. We continue to ensure SPF has a diversified, secure
and good quality income stream through our active approach to asset management. This is important for
providing consistent returns from year to year. Given the weak economy, we also continue to take a defensive
stance and favour those parts of the market where rents are affordable and which offer a high income return.
Here, we have been able to take advantage of sectors away from the mainstream which provide high and
growing income streams which are somewhat independent to the performance of the wider economy. In the
past two years we have researched and invested in non-traditional areas such as car showrooms, student
accommodation and healthcare where rents are often indexed to inflation as well as leisure and convenience
retail.
Components of UK property market returns: rolling 12m IPD Monthly return
The second theme is having a portfolio with good quality property fundamentals. Investors’ search for safety
has led to prime property appearing full priced. We think the best value lies in good quality property outside
‘prime’ where active management can add value. Recent investments such as Shepherdess Walk, London
NW1 and Turner Rise Retail Park, Colchester fit this category. These are properties which provide a high
income return and are let off low rental levels with opportunities to improve the quality of the space and/or
tenant mix. The aim is to build a portfolio capable of capturing growth in the next phase of the economic cycle.
3
31 December 2012
For professional investors only. Not suitable for retail clients
Suffolk Care Homes
SPF has agreed to fund five new care homes in Suffolk
for around £28 million. The care homes will be located on
freehold sites in Framlingham, Haverhill, Mildenhall,
Lowestoft and Ipswich. These are affluent areas in the UK
with an ageing population. The care homes will be state
of the art 60 and 80 bed care homes let to Care UK, one
of the leading providers of health and social services in
the UK. They are the outsourced providers of Suffolk
County Council’s elderly care provision. Care UK will
have 30 year leases on the care homes which will be
index-linked.
3D visualisation of Framlingham Care Home
We identified healthcare as an attractive non-mainstream sector where the drivers of demand differ from the
economic and business cycle and are set to benefit from the UK’s changing demographic profile. The sector is
less vulnerable to the fluctuations of the economy or the impact of the internet. It also offers an attractive
income return. It is envisaged the investment will begin in the second half of this year and will yield over 7.0%
on cost from the outset.
Prior to investing in this sector we fully researched the business model of health care operators with a focus on
the affordability and long term sustainability of their cost base including rent. We believe the rental levels
agreed with Care UK are affordable and provide a significant buffer should their operating costs increase or
their occupancy rates be low. This should help to maintain a strong income return from these care homes.
SPF sold units valued at £16.2 million in Henderson UK Retail Warehouse Fund as part of its ongoing strategy
to reduce indirect investments, which now only represent 8.0% net asset value (NAV). It also reduces Fund
level gearing to 5.1% NAV and from a sector perspective, the Fund is no longer overweight to retail
warehouses. Proceeds will be reinvested into good quality directly owned property.
Bracknell
Following the successful opening of the Waitrose supermarket in
Bracknell town centre, Marks & Spencer and Cineworld have also
exchanged conditional contracts to become anchor tenants for
the regeneration scheme. These lettings are a major step forward
in the redevelopment of the scheme and we expect other large
retailers will also confirm plans to take space.
CGI of Marks & Spencer unit in Bracknell
Retail administrations
Over the last 12 months a number of major retailers have gone into administration. While the impact on SPF
has been mitigated by its underweight position to retail, it has still been impacted. The keys administrations to
impact the portfolio in 2012 include:
Clinton Cards
4
0.6%
This was the largest administration to affect SPF during 2012. Clinton
Cards occupied five units in a number of our high street and town centre
investments. In three of the five units Clinton remained but with a new
lease. The other two units were vacated, both have since been let to
31 December 2012
For professional investors only. Not suitable for retail clients
Comet
0.2%
JJB Sports
0.2%
HMV
0.2%
new tenants.
The impact was through SPF’s investment in Hercules Unit Trust and
Henderson UK Retail Warehouse Fund.
The impact was through SPF’s investment in Hercules Unit Trust.
The potential impact on SPF will be limited to around 0.2% of passing
rent through SPF’s holding in Hercules Unit Trust and a retail unit in
Bracknell.
HMV also occupy a unit in Electra Industrial Park, London E14 but they
served a notice to break in 2012 and would have been vacating the
property in June 2013. We have already commenced marketing this
space and the remainder of the industrial park is 100% let. They have
paid rent up until March 2013 so the administration will potentially result
in a loss of two months’ rent.
Game Group
0.1%
The impact would have been larger as HMV used to occupy a unit in
Monks Cross Retail Park. However, in advance of their lease expiry we
permitted them to surrender the lease and were able to re-let it to
Poundland at a higher rental level.
Game occupied two units in Bracknell and York. Following
administration they continued to trade in both properties and we are
negotiating new leases.
Other retail administrations to impact the Fund have been less than 0.1%.
5
31 December 2012
For professional investors only. Not suitable for retail clients
Portfolio analysis
Bracknell
Retail and Office
4.9%
QVC Building, Chiswick, London
Offices
4.9%
Acorn Industrial Estate, Crayford
Industrial
3.9%
Matrix, Park Royal, London NW10
Industrial
3.8%
Monks Cross Shopping Park, York
Retail Warehouse
3.8%
Mermaid Quay, Cardiff
Leisure
3.7%
Davidson House, Forbury Square, Reading
Offices
3.6%
Kensington Village, London W14
Offices
3.2%
West End of London Property Unit Trust (WELPUT)
Offices
3.2%
Fujitsu Office Complex, Central Park, Manchester
Offices
3.1%
Lots size bands, by GPV
Tenant profile, % contracted rent
Fujitsu Services Limited 3.8%
Lloyds TSB Bank Plc 3.7%
0-2.5m 0.6%
QVC Ltd 3.4%
2.5-5m 2.5%
Universal Music Operations Limited 2.8%
5-10m 9.4%
Regus (UK) Limited 2.8%
Pendragon PLC 2.0%
10-25m 21.1%
B&Q Plc 1.9%
25-50m 52.2%
Sungard Availability Services (UK) Ltd 1.8%
50-100m 14.2%
Sportsdirect.com Retail Ltd 1.6%
Homebase Ltd 1.6%
100-150m 0.0%
747* other tenants 74.6%
Source: Schroders, subject to rounding, GPV: gross property value; *look through analysis
Relative Segment Positions, %*
Absolute Segment Positions, %
0.1%
Standard Retail – South East
6.6
6.5
Standard Retail – Rest of UK
3.8
7.4
-4.2%
Shopping Centres
1.7
5.9
-4.2%
Retail Warehouses
16.4
20.6
Offices – Central London
15.4
13.9
Offices – South East
16.9
9.0
Offices – Rest of UK
5.6
4.5
Industrial – South East
16.9
9.5
Industrial – Rest of UK
1.2
6.9
Other
8.8
8.7
Cash
6.6
7.0
-3.6%
1.5%
7.9%
1.1%
7.4%
-5.7%
0.1%
-0.4%
-15.00%
0.00%
15.00%
Source: Schroders, 31 December 2012, figures may vary marginally from those reported by IPD due to rounding.
*Positions relative to benchmark. Data subject to rounding. Benchmark positions have changed from Q3 2012 due to the
long leased properties funds no longer being a constituent of SPF’s Benchmark.
6
31 December 2012
For professional investors only. Not suitable for retail clients
Shareholder information
Minimum investment
Annual management charge (AMC)
1
Total expense ratio (TER)
Frequency of pricing
Valuation point
Distribution frequency
Pricing methodology
2
Distribution yield (% NAV)
£100,000
0.30% per annum of the Fund’s Net Asset Value
0.40% per annum on the Gross Value of direct holdings and
capital cash
0.85%
Monthly
8am on the first business day of each calendar month.
Monthly paid last business day
Dual priced
4.0%
Shareholder dealing
Subscriptions
Redemptions
Dealing cut-off
Secondary market dealing
Number of shares in issue
NAV per share
Offer price per share
Bid price per share
Offer spread
Bid spread
Number of new shares issued – Q4
2012
Number of shares redeemed – Q4
2012
Number of shares matched – Q4 2012
Monthly
Quarterly, subject to 3 months’ notice at quarter end
12 noon on the last Business Day of the calendar month
Please phone Alice Wilcox on +44 (0)20 7658 3552
38,235,409
£32.07
£33.60
£31.49
NAV +4.75%
NAV -1.8%
49,445
Nil
441,446
Fund codes
Schroder UK Property Fund
Schroder UK Property Fund Feeder Trust
ISIN
Sedol
GB00B8215Z66
B8215Z6
GB00B8206385
B820638
1
2
7
Calculated in accordance with AREF guidelines
Calculated gross of tax, net of fees and expenses. Distributions are paid monthly on the last business day of each calendar month
31 December 2012
Product Manager
For general enquiries and placing trades
Phone +44 (0) 207 658 3552
alice.wilcox@schroders.com
For professional investors only. Not suitable for retail clients
Registrar
For all fund servicing queries
Phone +44 (0)870 870 8059
schrodersenquiries@ntrs.com
For professional investors only. The Schroder UK Property Fund (“the Fund”) is authorised by the Financial Services
Authority (the “FSA”) as a Qualified Investor Scheme (“QIS”). Only investors that meet the requirements for eligibility to
invest in a QIS, as specified in COLL 8, Annex 1 of the FSA’s Handbook, may invest in the 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 Fund and there is no guarantee that the investment objectives
of the Fund will be achieved. The price of units shares and the income from them may fluctuate upwards or downwards
and cannot be guaranteed. Property-based pooled vehicles, such as the Fund, 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 shares of the Fund 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 shares in the Fund and, as a result, reliable information about the value of shares in the Fund or the extent of
the risks to which they are exposed may not be readily available
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is
not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations.
Potential investors are advised to independently review and/or obtain independent professional advice and draw their own
conclusions regarding the economic benefit and risks of investment in SPF and legal, regulatory, credit, tax and accounting
aspects in relation to their particular circumstances.
Any investment in the Fund must be based solely on the prospectus, or any other document issued from time to time by
the Manager of the Fund in accordance with applicable laws.
The information and opinions 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 when
taking individual investment and/or strategic decisions. A potential conflict with the Manager's duty to the shareholder may
arise where an Associate of the Manager invests in shares in the Fund. The Manager will, however, ensure that such
transactions are effected on terms which are not materially less favourable to the shareholder than if the potential conflict
had not existed.
Use of IPD data and indices: © and database right Investment Property Databank Limited and its Licensors 2012. 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
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Issued by Schroder Investments Limited, 31 Gresham Street, London EC2V 7QA. Registration No, 2015527 England.
Authorised and regulated by the Financial Services Authority.
8