Threadneedle UK Property Fund II - Threadneedle Investments

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Threadneedle UK Property Fund II Interim Report and Accounts 2012 Manager’s Report (continued) earned through hard won asset management initiatives, rather than demand and supply imbalances in the investment market. Whilst the Company’s current vacancy rate is 15.4% of the portfolio’s total rental value compared to 8.3% for the IPD UK Monthly Index (reflecting the market overall) this will reduce to zero on completion of the Poyle development which has been pre-let in its entirety on a 15 year lease without break. Performance With reference to the Morningstar UK IMA OEIC Benchmark for Real Estate Trusts, since inception mid 2007, Threadneedle UK Property Fund II is ranked fourteenth out of twenty eight to the 30th June 2012. Index measures are provided for information, to demonstrate performance relative to peer groups. However, please be reminded that the Company is not managed with reference to any benchmark. Strategy Threadneedle Investment Services Ltd became the ACD of the Company on 1st December 2011 and subsequently reviewed the investment credentials of the underlying assets. A number of the assets having suffered a significant downward movement in rental value in line with the regional trend were deemed either ‘ex-growth’ or over-rented but with underlying investment fundamentals considered suitable for sale. Eleven properties were extensively marketed with limited investor interest for individual assets with the most attractive cash proposal being received by CBRE Global Investors proposing to acquire a portfolio of seven properties, subsequently named the Orchid Portfolio, on extremely competitive terms. climate has had a particularly detrimental impact on the retail sector exacerbated by weak consumer spending, negative GDP growth and numerous tenant failures on the UK high streets. Property Market Analysis (Spring 2012) forecasted negative IPD All Property Total Returns for 2012 of –0.8% with retail contributing a Total Return of –1.7% including capital value depreciation of –7.2%. The portfolio sale is therefore considered strategic in light of future market conditions. The sale price of £30,400,000 reflected a net initial yield of 6.8% but the portfolio was considered significantly over-rented with a reversionary yield of 5.9%. The remaining assets within the Company generally exhibit strong underlying investment credentials with numerous asset management opportunities and are considered more defensive in respect of anticipated short to medium term market conditions. Since the onset of the financial crisis in late 2007, prudent liquidity management has remained one of the hallmarks of the Manager’s long term strategy. With a market characterised by illiquidity those with immediate cash resources available will be best placed to take advantage of market conditions in 2012. Future purchasing activity will target mispriced risk, essentially higher yielding assets with strong underlying investment fundamentals both complement and enhance the Company’s income return. Transactions No purchases were completed in the period. The following aforementioned sale was completed in the period: June 2012 Orchid Portfolio The portfolio comprised 7 properties; 4 high street retail properties, 1 retail warehouse (2 units), 1 industrial (2 units) and 1 car showroom let to a total of 9 tenants and generated £2,193,002 per annum against a current estimated rental value (31st May 2012 valuation) of £1,894,155. 70% of the portfolio income was derived from retail assets. The weak economic 5
Threadneedle UK Property Fund II Interim Report and Accounts 2012 Property Portfolio Retail Principal Rental Income Next Rent Between £1 million and £2.5 million in Value Tenants per annum Review Glasgow 109-113 Sauchiehall Street Heritable mid terrace building comprising ground floor Everything Everywhere Limited £178,500 N/A retail unit with first and second floor ancillary accommodation. Property comprises 3,586 sq ft. Glasgow 115 Sauchiehall Street Heritable end of terrace building comprising ground floor Redcastle Limited £128,500 N/A retail unit with basement ancillary accommodation. Property comprises 2,505 sq ft. Ilford 123-125 High Road Freehold mid terrace building comprising ground floor Monsoon Accessorize Limited £193,000 N/A and part first floor retail unit with basement, part first and second floor ancillary accommodation. Property comprises 4,249 sq ft. Peterborough 3 Cathederal Square Freehold end terrace building comprising ground floor HSBC Bank Plc £150,000 December 2012 retail unit with basement, first and second floor ancillary accommodation. Property comprises 5,479 sq ft. Worcester 35-36 High Street Freehold mid terrace building comprising ground and River Island Clothing Company £198,000 N/A first floor retail unit with second floor ancillary Limited accommodation. Property comprises 6,425 sq ft. Between £2.5 million and Principal Rental Income Next Rent £5 million in Value Tenants per annum Review Brighton 30-31 Western Road Freehold mid terrace building comprising ground floor Ann Summers Limited £175,000 March 2014 retail unit with basement and first floor ancillary accommodation and 4 self-contained residential units on second and third floors. Property comprises 4,454 sq ft. excluding flats. Nottingham 28-30 Lister Gate Freehold mid terrace building comprising ground and first A Jones & Sons Limited £160,000 September 2016 floor retail unit with second floor ancillary accommodation. Property comprises 4,921 sq ft. Reading 9-10 Broad Street Freehold mid terrace building comprising ground floor East Limited £190,000 October 2013 retail unit with first floor ancillary accommodation. Property comprises 3,050 sq ft. 6
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