At 30 September 2012
For professional investors only. Not suitable for retail clients.
Schroders
Schroder UK Property Fund (SPF)
Quarter 3 2012 Report
Executive summary
SPF continued to outperform its benchmark over one, two and
three year periods. The fund offers a good quality portfolio
structured to optimise returns through a balance of income and
capital growth.
Following investors and the Financial Services Authority (FSA)
approval to convert Schroder Exempt Property Unit Trust
(SEPUT) to a Property Authorised Investment Fund (PAIF), the
fund converted on 31 July 2012 and was renamed Schroder UK
Property Fund (SPF).
Global capital flows continue to support pricing in London, where
an estimated 70% of transactions in 2012 originated from foreign
investors (source: Real Capital Analytics). Demand from domestic
capital also remains resilient for good quality assets.
In a low growth environment, an initial yield of over 6.3% (source:
IPD Monthly Index) remains significantly above that of UK
government bonds and is perhaps one reason why Schroders is
seeing renewed interest in property despite flat total returns in
2012.
Performance
As at 30 September 2012, SPF continued to outperform its
benchmark over one, two and three year periods. Its three year
relative outperformance compared to the benchmark was 1.1%
pa, ahead of its 0.5% performance objective. Key drivers of
performance include:
Asset allocation. In the last year, the overweight
position to central London offices at the expense of
other sectors has been an important driver. The
investment in West End of London Property Unit Trust
(WELPUT) and other central London offices has
produced above benchmark returns.
Databank
Fund Objective
To outperform its
benchmark3 by 0.5% per
annum, net of fees, over
rolling three year periods.
Fund net asset value
£1,231.7 million
Fund gross asset value
£1,305.1 million
Property value
£1,177.5 million
Cash
£70.5 million
Distribution yield
4.1%1
Void rate (look through
analysis)
6.5%
Debt (% NAV)
6.0%
Number of investments
65
Number of tenants
(look through analysis)
753
Net initial yield
5.4%
Equivalent yield
6.6%
Reversionary yield
6.9%
Performance2
Q3
12m
2 yr
(% pa)
3 yr
(% pa)
5 yr
(% pa)
SPF
0.5
3.5
5.9
10.6
-5.6
Benchmark3
0.4
2.8
5.1
9.5
-3.6
Former b’mark4
0.3
2.3
4.6
9.4
-2.9
Alternative investments. The investments in leisure and student accommodation have provided above benchmark
returns. Despite the weak economic environment, leisure operators at Mermaid Quay, Cardiff and West India Quay,
London E14, have performed well over the past 12 months. This has resulted in strong tenant demand for these locations
and driven rental growth.
Active asset management strategies. Year-to-date, IPD reports that all property capital values have decreased by 3.1%.
While SPF has also been impacted by capital value declines, active asset management strategies such as those at Dean
Street, Soho W1 and Kensington Village, London W14 (see page 4), have added both value and income, helping to
underpin the capital values in the portfolio.
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 wider market.
1
Distributions payable in the 12 months to 30 September 2012 as a percentage of NAV per share. Distributions are paid monthly.
Source: AREF/IPD UK Pooled Property Fund Indices (UK PPFI), Schroders. 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 share.
3
AREF/IPD UK Pooled Property Fund Indices – All Balanced Funds Weighted Average.
4
AREF/IPD UK Pooled Property Fund Indices – All Balanced Funds Median. The Fund’s benchmark has changed over time. A
composite for 10 years is available upon request
2
At 30 September 2012
For professional investors only. Not suitable for retail clients.
UK property market commentary
Economy
Equity markets rallied in the third quarter of 2012 in response to further quantitative easing, the German constitutional court
approving the European bailout fund and Mario Draghi’s announcement that he will ‘do whatever it takes’ to save the
eurozone. But whilst the financial markets have reacted positively to further central bank intervention, the underlying
economy remains fragile.
GDP fell for the third successive quarter in the three months to end June, meaning the UK economy remains in a technical
recession. The one anomaly has been employment growth, which seems oblivious to the weakness in most parts of the
economy. The majority of this growth has been in part-time jobs and self employment, however, which tend to be less
productive. Schroders’ central forecast assumes that the UK economy will contract in 2012 and that output growth will
remain below trend in 2013.
Occupational market
The summer months were dominated by London’s hosting of the Olympic and Paralympic games. As with most host cities,
the long-term benefits are harder to quantify. The improvements to road and rail networks will create a more lasting legacy,
as will the transformation of Stratford in east London.
In central London, occupier demand has remained resilient. The TMT sector continues to drive robust levels of take-up in
the West End and fringe central London office markets, whilst in the City the growth of the insurance industry is largely
offsetting the decline in investment banking. The largest deal of the quarter was the 290,000 sq ft letting to the insurance
brokers Jardine Lloyd Thompson, whilst we have seen a number of smaller lettings in the area around Lloyd’s of London.
We are also seeing pockets of growth outside of London and the South East. The UK car manufacturing industry, for
example, is enjoying a renaissance and now exports more cars than it imports for the time since 1976. Jaguar Land Rover
has moved to 24 hour production at Halewood, creating another 1,000 jobs, a move that came hot on the heels of major
new investments by Nissan at Sunderland, Honda at Swindon and McLaren at Woking. This is prompting a host of
matching initiatives in the supply chain, some of which is creating demand for industrial units in the regions.
Investment market
Global capital flows continue to support pricing in London, where an estimated 70% of transactions in 2012 originated from
foreign investors (source: Real Capital Analytics). Whilst London continues to be the focus of the majority of this foreign
capital, increasingly we are seeing some foreign investors target the regions. The US investor BioMed Realty Trust
purchased a science park in Cambridge for £127 million, whilst we have also seen global funds active in the student
housing sector. Domestic demand for good quality property has remained resilient. This is predominately due to property
returns being attractive relative to other asset classes.
A combination of wider bank deleveraging, over-exposure to commercial property and tougher regulatory requirements all
suggest that lending to real estate is set to remain subdued. The positive in the debt story is the re-emergence of insurers
and fund managers as property lenders. However, the bulk of this lending will be focused on well-let, good quality
properties, and as a result is unlikely to directly replace bank debt secured on more secondary stock. Capital for this riskier
undertaking is likely to be confined to private equity.
Outlook
We continue to forecast flat total returns in 2012, as capital value declines largely offset the property income return.
Property yields look fairly priced when compared to most other financial assets however, and we expect capital values to
stabilise thereafter. Over the next five years we expect the bulk of total returns to be derived from an income return of 6-7%,
while we anticipate some rental growth from 2014 as the outlook for the wider economy improves.
2
At 30 September 2012
For professional investors only. Not suitable for retail clients.
Strategy
Whether the UK economy grew or not in the third quarter 2012, our expectation is that growth will remain lacklustre for
some time. On the face of it this is not positive for commercial property since occupier demand is closely linked with
economic activity. However, we live in a world where investors are hungry for yield and where expected asset class
returns have generally declined. In a low growth environment, an initial yield of over 6.3% (source: IPD Monthly Index)
remains significantly above that of UK government bonds and is perhaps one reason why Schroders is seeing renewed
interest in property.
Current yields versus long term ranges*
*Longest time period selected for each data series, based on availability of data, so ‘long term’ covers varying time periods. Shortest
time period relates to secondary UK real estate (13 years). Other data covers 15 year periods or longer. Source: Schroders,
Datastream, July 2012
Of course, the market is not equally attractive. Regionally, we prefer the South East over the rest of the UK because of
the relative dynamism of the London’s (globally-driven) economy relative to the rest of the UK. Central London offices
and retail property remain attractive to both domestic and overseas investors, and valuations have generally held
steady. The same is not generally the case elsewhere. South East industrial property is similarly relatively attractive
for its yield, occupational demand and alternative land use value. Elsewhere we remain underweight to standard high
street shops where retailers are suffering from consumers’ falling real disposable income and their search for better
value from online retailers, supermarkets and larger retail destinations.
Two other important themes run through the fund. The first is income. 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 under-researched sectors which provide high and growing income streams which are
somewhat independent to the performance of the wider economy. In the past two years this has led us to research
and invest in non-traditional areas such as car showrooms and convenience retail where rents are often indexed to
inflation.
The second is good quality secondary property. The 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.
3
At 30 September 2012
For professional investors only. Not suitable for retail clients.
Key activities
Over the 12 months to 30 September 2012 we have engaged in a number of active management strategies to reduce
the vacancy rate. Over the quarter we have had a number of successes which has resulted in the fund’s vacancy rate
reducing from 7.5% at Q2 2012 to 6.5%. Some of the keys activities are detailed below:
82 Dean Street, Soho, London, W1. A high specification refurbishment was
completed following lease expiry. The improved office space was marketed from
October 2011. Despite a weak letting market, five of the seven floors are now let, one
is under offer and we are negotiating with two parties for the remaining floor. We
estimate the building will be let at approximately 16.5% above the initial business plan
rental levels, resulting in a significant uplift in valuation.
Kensington Village, London W14. A rolling refurbishment took place on each of the
floors following a series of lease expiries. Successful letting activity has resulted in
rental value growing from £27.50 to the most recent letting at £33 per square foot
over the past 18 months. It is now fully let with the main tenant being Universal Music
Operations Limited.
Woking Business Park, Surrey. One significant letting was completed in Woking
Industrial Park for 51,000 sq ft let on a 5 year term. We expect to finalise a second
letting during Q4 2012 for a 32,000 sq ft unit. We are also working with the local
council who have just approved the building of a new access road adjacent to the
park. This will improve the road communication to the park, broadening its appeal
beyond the existing tenant base.
82 Dean Street, Soho, London
At the end of September 2011, approximately 16% of the contracted rent in the direct portfolio had either a lease break
or expiry in 2012. Plans were put into place to either re-gear leases, refurbish and re-let space or sell the property. This
programme was carried out successfully and as at September 2012, we have increased the rental income derived from
the direct portfolio compared to 12 months ago.
Beyond the lettings activity described above, some of the other initiatives included:
Hackbridge Industrial Estate. In Q2 2011 we received outline planning consent for a
mixed use residential led scheme. The site had a number of lease expiries let to
industrial tenants. We marketed the scheme to potential purchasers for either
development of the first phase or an outright purchase of the whole scheme and
received interest in both strategies. We are in the process of selecting a party and
hope to conclude this shortly.
Parker Tower, London WC1. Sold in Q2 2012 for £31 million (£596 capital value per
sq ft). The property comprised 55,000 sq ft office space which was located in Holborn
in the mid town area of central London. It was let to British Telecommunications Plc
but only until September 2012 and they had already vacated the building. The
property accounted for 2.2% SPF’s net asset value and therefore would have created
a significant void. We considered a number of asset management initiatives, such as
refurbishing the office space or converting the property to residential accommodation.
However, in the current market environment we did not believe the risks associated
with these initiatives were justified or profitable compared to the sale price achieved
from a residential developer.
4
Artist’s image, Hackbridge
supermarket with residential
above
At 30 September 2012
For professional investors only. Not suitable for retail clients.
Portfolio analysis
Bracknell
QVC Building, Chiswick, London
Acorn Industrial Estate, Crayford
Matrix, Park Royal, London NW10
Monks Cross Shopping Park, York
Mermaid Quay, Cardiff
Davidson House, Forbury Square, Reading
Kensington Village, London W14
Fujitsu Office Complex, Central Park, Manchester
West End of London Property Unit Trust (WELPUT)
Retail and Office
Offices
Industrial
Industrial
Retail Warehouse
Other
Offices
Offices
Offices
Offices
5.2%
4.8%
3.9%
3.8%
3.8%
3.7%
3.6%
3.2%
3.1%
3.0%
Absolute Segment Positions
% GAV
Relative Segment Positions*
Underweight Overweight
-1.6%
-5.2%
-4.3%
-0.2%
2.2%
7.8%
1.3%
8.4%
-5.4%
-1.7%
-1.5%
-7%
-5%
-3%
-1%
1%
3%
5%
7%
9%
SPF
Benchmark*
Standard Retail - South East
6.5
8.1
Standard Retail - Rest of UK
3.7
8.9
Shopping Centres
1.8
6.1
Retail Warehouses
18.6
18.8
Offices - Central London
15.0
12.8
Offices - South East
16.6
8.8
Offices - Rest of UK
5.5
4.2
Industrial - South East
16.9
8.5
Industrial - Rest of UK
1.2
6.6
Other
8.6
10.3
Cash
5.4
6.9
11%
Source: Schroders, 30 September 2012, figures may vary marginally from those reported by IPD.
*Positions relative to AREF/IPD UK Pooled Property Fund Indices – All Balanced Funds Weighted Average. Data
subject to rounding
Lot size bands, by GPV
Tenant profile, % contracted rent
Fujitsu Services Limited 3.6%
0-2.5m 0.6%
Lloyds TSB Bank Plc 3.5%
2.5-5m 2.1%
QVC Ltd 3.3%
5-10m 9.0%
Universal Music Operations
Limited 2.6%
Regus (UK) Limited 2.5%
10-25m 21.4%
25-50m 48.7%
Pendragon PLC 1.9%
B&Q Plc 1.9%
50-100m 18.2%
100-150m 0.0%
Sungard Availability Services
(UK) Ltd 1.7%
Sportsdirect.com Retail Ltd
1.6%
Homebase Ltd 1.6%
743 other tenants 75.6%
Source: Schroders, subject to rounding
GPV: gross property value
5
At 30 September 2012
For professional investors only. Not suitable for retail clients.
Shareholder information
Minimum investment
Annual management charge (AMC)
Total expense ratio (TER)
1
£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%
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
Bid-offer spread
Number of new shares issued – Q3 2012
Number of shares redeemed – Q3 2012
Number of shares matched – Q3 2012
Value of shares matched – Q3 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
38,185,694
£32.26
£33.79
£31.67
6.25%
Nil
Nil
749,644
£23,975,225
Fund codes
ISIN
Sedol
Feeder fund ISIN
Feeder fund Sedol
GB00B8215Z66
B8215Z6
GB00B8206385
B820638
1
6
Calculated in accordance with AREF guidelines
At 30 September 2012
For professional investors only. Not suitable for retail clients.
Further information
Alice Wilcox
Product Manager
For general enquiries and placing trades
Phone +44 (0) 207 658 3552
alice.wilcox@schroders.com
Northern Trust
Registrar
For all fund servicing queries
Phone +44 (0)870 870 8059
schrodersenquiries@ntrs.com
Important information
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 or
reliance on any of the information which may be attributed to it.
For the purposes of the Data Protection Act 1998, the data controller in respect of any personal data you supply is Schroder Unit
Trusts Limited (“SUTL”). Personal information you supply may be processed for the purposes of investment administration by
any company within the Schroder Group and by third parties who provide services and such processing and which may include
the transfer of data outside of the European Economic Area. SUTL may also use such information to advise you of other
services or products offered by the Schroder Group unless you notify it otherwise in writing.
This document is intended for the use of the addressee or recipient only and may not be reproduced, passed on or published, in
whole or in part, for any purpose, without the prior written consent of Schroder Unit Trusts Limited.
Issued in October 2012 by Schroder Investments Limited, 31 Gresham Street, London EC2V 7QA. Registration No, 2015527
England. Authorised and regulated by the Financial Services Authority.
7