Fund manager commentary
Property Market Overview
Although the third quarter saw all property total returns improve to 0.7% from 0.4% in the previous quarter, according to the IPD Quarterly Index, sentiment remains subdued. Capital values continued to fall and rental values were flat during the quarter.
Strength in the Central London Office and Retail market persists with investment from overseas investors a major factor supporting performance; elsewhere the market is significantly weaker.
Total returns in the retail sector registered an improvement after a poor second quarter but this may reflect an adjustment by valuers to an overly aggressive markdown three months earlier. The sector remains troubled by restrained consumer spending, cost pressures on retailers, rental pressure on landlords and retailers in administration.
The yield gap has continued to widen with prime property generally holding steady but secondary yields moving out further. In some instances, secondary yields are at, or close to, levels seen at the low point of the 2007-2009 downturn. Projected slow growth within and beyond the UK, and the problems of the Eurozone, are continuing to produce a climate of uncertainty which delays decision-making. Investors are risk averse and focused on prime property and core locations. Assets with a long and secure income stream are highly favoured.
Portfolio Overview
As at 30 September 2012 the Company's portfolio was valued at £901.2 million (£940.2 million as at 30 June 2012). After allowing for disposals and capital expenditure, this represented a 0.6% increase in the valuation during the quarter.
The portfolio recorded a total return of 1.9% over the quarter, compared with the IPD All Quarterly and Monthly Valued Funds total return of 0.7% and over the period the portfolio was ranked on the ninth percentile against 242 funds.
The strongest performing property sub-sectors of the portfolio were South East Retail, West End London Offices, Retail Warehouses and the 'Other' sector. Two sub-sectors recorded negative total returns over the period; Rest of UK Retail and Offices Rest of UK where capitalisation rates moved out and values fell. Even though the Company is invested in prime properties it is not immune to the negative investor sentiment currently prevailing in these sectors.
On 31 July 2012, the Group agreed a forward commitment to purchase four pre-let office blocks in Aberdeen for approximately £94 million. The office blocks are currently being developed and are expected to be completed between October and November 2013. This purchase will provide the Company with exposure to one of the most buoyant office markets in the UK as well as an attractive long term and secure income stream. The overall net initial yield is 6.8%, which is above the average yield of the portfolio. On the same date, the Company entered into a new £30 million committed bank facility which will mature on 30 June 2015. The facility will be drawn down on purchase of the property.
During the period, the Group also completed the sale of its property at 84 Eccleston Square, London SW1 for £49.0 million. The sale price compared with the last external valuation of £45.0 million reflecting a net initial yield of 6.08%. The rationale for the sale was to take advantage of the current strong demand from overseas investors for Central London properties especially with potential to convert to residential uses.
Since the end of the period, the Company has announced the sale of 385/389 Oxford Street, London W1 for £28.1 million. The sale price compares with the last external valuation of £23.9 million and reflects a net initial yield of 3.62 per cent. The sale completed on the 15 November 2012.
Void levels within the portfolio are 6.7 per cent (excluding properties held for development). The leasing of voids remains a primary focus and there remain a number of lettings in legal hands. However, as previously reported, it is taking significant time and effort to contract leases.
As at 30 September 2012
The value of shares and the income from them is not guaranteed and can fall as well as rise due to stock market movements. Past performance is not a guide to future performance. When you sell your shares, you might get back less than you originally invested. If markets fall, gearing can magnify the negative impact on performance. Changes in rates of exchange may have an adverse effect on the value, price or income of investments. Emerging Markets, Unquoted Companies and Smaller companies carry a higher degree of risk and their value can be more sensitive to market movement; their shares may be less liquid and performance may be more volatile. The fund may invest in hedge funds or private equity funds which are not normally available to individual investors, exposing the fund to the performance, liquidity and valuation issues of these funds. Such funds typically have high minimum investment levels and may restrict or suspend redemptions or repayment to investors. The asset value of these shares and its prospects may be more difficult to assess.
