Threadneedle UK Property Fund II - Threadneedle Investments

Threadneedle UK Property Fund II Interim Report and Accounts 2012
Manager’s Report
Investment Objective
The investment objective of the Company is to achieve longterm
capital growth and income primarily through direct
investment in, or exposure to, UK commercial property.
Investment Policy
The investment policy of the Company is to invest in UK
commercial properties (including shops, offices, retail
warehouses, leisure and industrial units), as favourable
investment opportunities arise.
The Company may also invest in property related securities,
regulated and unregulated collective investment schemes, debt
instruments and other transferable securities to gain exposure
to the UK and other property markets. In addition, the
Company may invest in money market instruments, deposits
and cash and near cash.
Review
This report covers the period from 1st January 2012 to
30th June 2012.
Market Commentary
2011 saw no let-up in the tough economic back drop for
business right across the UK, with significantly sub trend
economic growth during the year of just 0.7%. Fluctuating
degrees of uncertainty around the Eurozone have been and
continue to be, a significant drag on the UK economy. The
prospect of a breakup of the Eurozone is holding back business
investment by cash rich corporates making credit difficult to
obtain, limiting the export market for UK manufactured goods
and negatively effecting overall sentiment. Unemployment has
risen to 8.3%, its highest level since the early 1990’s. The UK
economy recorded negative GDP growth in the final quarter of
2011, and the first quarter of 2012, meaning technically the UK
has entered recession again. This economic environment,
coupled with the UK Government’s on-going policies aimed at
tackling public sector debt have inevitably continued to temper
both business expansion and consumer expenditure and
therefore occupational demand. Whilst masking some regional
and sector variances, occupation markets over the past year
have generally been alive and functioning but not buoyant.
Market wide rental value growth for the twelve months to the
end of June 2012 has been 0.0%. Overall vacancy rates have
also been broadly stable (the source of all market statistics in
this section being the IPD UK Monthly Index). The one material
exception to this general synopsis of occupational markets is
the Central London office market. Modest supply, particularly
in the West End, and a greater willingness amongst businesses
to commit to new accommodation, has generated positive
rental value growth in the central London office market of
around 5%. A particularly positive feature of the commercial
property sector over the past three years has been the
generally robust nature of portfolio wide rental income flows. It
has been estimated that from its peak in September 2008 to
January 2012 the aggregate rental income generated by the
portfolio that makes up the IPD UK monthly index fell by just
2.2% (source: CBRE). This highlights one of the key positive
characteristics of UK Real Estate as an asset class.
When compared to alternative asset class pricing, such as UK
equities and Gilts, UK commercial property remains an
attractive proposition and is considered to present fair value.
Continued concerns over the Eurozone debt crisis, the impact
of spending cuts in parts of the public sector and a lack of
available debt, have combined to have a negative impact on
the market and 2012 is set to continue in a similar vein to 2011.
From an investor’s perspective, the twelve months to the end of
June 2012 was a presentable period for the real estate sector,
particularly when compared against the volatility across other
investment sectors. Total returns over the period for the UK
commercial property market were 4.8%, ahead of the negative
3.1% total return from UK equities, but behind the 16.1% total
return achieved by the prolonged bull run in gilt markets. This
property sector out-turn was entirely down to the sectors rental
income return of 6.7%, with capital growth being negative at
–1.9%. During the last eight months of this period, property
investment yields have displayed a slight softening following a
twenty-seven month period of month-on-month positive yield
impacts. This is consistent with the unfavourable trend in the
balance between active buyers and sellers in the UK property
investment market, reflecting a back drop of less equity
flowing into the market and an on-going desire amongst banks
to decrease their real estate exposure.
Although UK property fund inflows are currently at negligible
levels, it is reported that, after record inflows in the period
3Q09-4Q10, institutional investors still hold significant
un-invested cash balances, but remain wedded to a cautious
investment approach. Institutional investors seeking to exploit
the property sector’s income yield advantage, relative to
competing investment media, remain focussed upon the
acquisition of core/core+ property assets, long-let to
undoubted tenant covenants. Institutional investors currently
have little appetite for entrepreneurial property risk.
It is widely considered that, whilst values remain subdued
outside of Central London, those investors with significant
cash weightings continue to be in a privileged position to take
advantage of comparatively low pricing on assets with robust
underlying fundamentals.
UK Property Market Performance –
12 Months to 30th June 2012
All Retail Office Industrial Property
Total Return 3.0% 6.4% 5.9% 4.8%
Income Return 6.5% 6.6% 7.7% 6.7%
Capital Growth -3.3% -0.2% -1.7% -1.9%
Rental Value Growth -1.1% 1.6% -0.8% -0.1%
Yield Impact -2.1% -0.5% -0.9% -1.3%
Source: IPD UK Monthly Index June 2012
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