economic overview and property market · the sli uk real estate fund quarterly update provides an...

Investment UpdateSLI UK Real Estate Fund Quarterly Update

Q1 2019

Past performance is not a guide to the future. This information is for professional clients and investment professionals only and should not be relied upon by retail investors.

The SLI UK Real Estate Fund quarterly update provides an overview of the market; fund performance, positioning and portfolio changes; and the fund manager’s outlook for the months ahead.

Chart 1: UK Real Estate Investment Volumes and Number of Deals

Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18

Retail Office Industrial Residen�al Hotel Other

25,000

20,000

15,000

10,000

5,000

0

1,200

1,000

800

600

400

200

0

Quar

terly

Inve

stm

ent V

olum

es (£

m)

Number of Deals

Quarterly Investment Levels Number of Deals (RHS)

2004

.Q1

2005

.Q1

2006

.Q1

2007

.Q1

2008

.Q1

2009

.Q1

2010

.Q1

2011

.Q1

2012

.Q1

2013

.Q1

2014

.Q1

2015

.Q1

2016

.Q1

2017

.Q1

2018

.Q1

2019

.Q1

Source: Property Data, Aberdeen Standard Investments, April 2019

▸ The UK economy slowed sharply in the fourth quarter of 2018. Growth fell from 0.6% quarter-on-quarter (q/q) in the third quarter, to just 0.2% in the fourth quarter, leaving full-year growth for 2018 at just 1.5%. It is clear that Brexit-related uncertainty is now weighing very heavily on the economy, and that it is responsible for much of the slow down.

▸ Business investment has now contracted for four successive quarters, leaving it down 3.7% over 2018 as a whole. This is despite a relatively tight labour market, accommodative monetary conditions, and relatively high company profitability – all of which would normally be supportive of investment.

▸ However, assuming a ‘no deal’ Brexit is avoided and the uncertainty around the terms of exit is not prolonged for too long, the economy is poised for a recovery in the second half of the year and into 2020. Pent-up investment demand should be unleashed, while the ongoing recovery in real incomes should help support consumption, albeit potentially tempered by a rebuilding of savings from record lows. Fiscal policy is also set to be modestly supportive of growth.

▸ Recent patterns in the occupier market are relatively unchanged, setting aside the short-term turbulence caused by Brexit-related uncertainty, which is making leasing deals more difficult to complete.

▸ The structural drivers of demand in the industrial sector are ensuring that rental value growth continues to come through. Constrained supply in London and the South East – as well as some urban areas in other parts of the UK – is accentuating that growth, while an increase in development activity in some regional logistics markets is tempering it.

▸ At the other end of the spectrum, retail rents are falling, on average. But those averages mask the reality, which is that lease events and tenant distress are prompting major adjustments to rental values.

▸ Core regional office markets have seen a prolonged period of net absorption and falling vacancy rates, supporting steady rental value growth over the last four years. While fundamentals have been stronger in central London, rents have been mostly flat or falling, which may be partially explained by the high proportion of lettings to flexible office providers.

▸ Liquidity in the market remains impaired, with growing evidence that the appetite for risk has diminished in the face of the considerable Brexit-related uncertainty. Pricing and activity are holding up considerably better in the secure income space, including those for good quality, long-let supermarkets, which runs counter to the negative narrative around retail.

▸ According to the MSCI UK Monthly Property Index, All Property total returns for Q1 2019 were 0.5% with the 12 month total return recorded at 5.6%. Industrials remain the strongest performing main sector, followed by offices. Capital decline continues to be recorded in the retail sector due to a combination of rental decline and outward yield movement. Performance with in the retail sector remains polarised with stronger assets in the best locations faring better.

▸ While overall investment activity in the first quarter of 2019 was certainly lower than in recent years, there were some large portfolio deals that boosted the figures. The total number of deals recorded in the first quarter, as at the second week in April, was just over 550, according to Property Data. This compares with a quarterly average of over 750 in 2018.

▸ The listed market continues to build-in large discounts for retail, although a rising wider equity market has narrowed discounts to net asset value (NAV) for generalists and a number of stocks focused on industrial and alternatives continue to trade at a premium.

Economic Overview and Property Market

Investment levels down across all UK commercial real estate segments in Q1’19 – Leisure the only exception as the sector benefitted from a number of large portfolio deals


Q1 2019


Fund Positioning

Top 10 holdings % Direct Property Top 10 tenants % Contracted

RentLeamington Shopping Park, Leamington Spa 4.73 B&Q & Screwfix 3.48Monument Mall, Newcastle upon Tyne 4.00 Office Depot International 2.83The Old Dairy, South Ruislip 3.50 Tesco 2.24Isis Reach, Belvedere 3.45 Asda 2.1745 Church Street, Birmingham 3.37 Sainsburys & Argos 2.03Io Centre & Tradeway, Sutton 3.23 Weatherford UK Limited 2.00The Gateway Retail Park, Beckton 3.04 UK Insurance Limited 1.77Masthead Industrial Estate, Dartford 2.48 T P Bennett LLP 1.58Solar Park, Birmingham 2.25 DSG Retail 1.58Saxon Way Trading Estate 2.21 TBWA UK Group Limited 1.53Source: Aberdeen Standard Investments at 31/03/19 (exc Cash). Source: Aberdeen Standard Investments at 31/03/19 (exc Cash).

Fund Facts

Fund size £2,122.5mAverage lot size £23.8mAverage lease length 8 yearsNumber of properties 73Number of tenancies 550Historic yield 3.4%*Net current assets 18.2%^Vacancy rate 8.2%Source: Aberdeen Standard Investments at 31/03/19. *Yield at 31/03/19. Yields are historic based on the preceding 12 months’ distributions as a percentage of the midmarket unit/share price at date shown. Yields will vary, do not include any preliminary charges, and investors may be subject to tax on distributions. Based on institutional income shareclass.^ The Net Current Assets figure includes cash or cash equivalents and any short term assets and liabilities within the fund.

Sector allocation

Industrial SeRetail W/house

Industrial Rest of UKOces Rest of UK

Std Retail SEStd Retail Rest of UK

Oces Rest of SEOces West End/Mid Town

Shopping CentresOces City

Other

%

14.9

SLI UK Property Fund

0 5 10 15 20 25

21.5

11.410.0

8.58.3

3.82.6

1.8

12.2

5.0

Source: Aberdeen Standard Investments at 31/03/19. Figures ex cash.

Geographical breakdown

Source: Aberdeen Standard Investments at 31/03/19. Figures ex cash.

Lease Expiry Profile % Contracted Rent

Less than 5 years 54.3Between 5 and 10 years 25.7Between 10 and 15 years 9.7More than 15 years 10.3

Performance – % growth3mths 6mths 1 yr 3 yrs* 5 yrs*

SLI UK Real Estate Fund 0.1 0.4 3.1 1.3 4.4

IA UK Direct Property 0.3 -0.1 2.2 2.6 4.9

Source: Aberdeen Standard Investments at 31/03/19. Data to end December, Fund performance net of Platform 1 fees.*Returns are annualised.

%

Rest of LondonSouth East

West MidlandsNorth West & Merseyside

ScotlandNorth East

London West EndSouth West

East MidlandsEastern

City of LondonWales

Yorkshire and Humberside0 5 10 15 20 25 30

24.721.7

12.69.18.9

6.93.8

3.02.62.6

1.81.3

1.0

1.2


Q1 2019


Portfolio Update

Transaction and Asset Management Activity

During the quarter the Fund disposed of a number of assets to replenish its liquidity buffer during the continuing period of political and economic uncertainty. Asset sales were conducted across all main sectors including the sale of Royal Avenue House, London for £41.81m (3.99% NIY) and Sainsbury’s, Sudbury for £34.6m (4.73% NIY) from the Retail sector. Offices at 85/89 Southwark Street, London for £37.5m (4.13% NIY) and Atmosphere, Prospect Park, Aberdeen for £13.325m (8.73% NIY) together with an Industrial asset, 12 Central Way, London for £34.5m (3.23% NIY). The NCA as a % of NAV at 31st March 2019 was recoded at 18.2% and is projected to be 20%+ in the coming months. Ongoing asset management activity surrounding the existing portfolio remains a key focus as we seek to implement initiatives aimed at income and value enhancement.

In the Retail sector, asset management activity continued with a number of transactions taking place. At Monument Mall, Newcastle, the Fund completed a new 25 year lease with Arc Inspiration t/a Banyan at an initial rent of £275,000 per annum. The Fund also completed a rent review with Sainsbury’s, at the same asset, securing a revised rent of £75,352, an uplift of 15.9%. At Calverley Road, Tunbridge Wells, the Fund completed a lease renewal with EE, providing an additional 5 year term at an initial rent of £98,400 per annum, an increase of 19.6%. At the same asset we also completed rent reviews with Clarks at £200,000 per annum, generating an uplift of 6.67%, and Metro Bank at £446,663 per annum, generating an uplift of 3.27%. At Bligh’s Meadow, Sevenoaks, the Fund secured a new 5 year lease to Contromec at an initial rent of £26,000 per annum. The Fund also completed a lease renewal with Crew, securing an additional 10 year term with an initial rent of £58,000 per annum and a rent review with Handelsbanken, securing a revised rent of £41,000 per annum, an uplift of 20%. At Tudor Arcade, Dorchester, a re-gear completed with Cook, securing an additional 10 year term at an initial rent of £35,000.

In the Industrial sector, at Mount House, Chessington, the Fund completed a lease renewal with Bunzl providing an additional 10 year term at an initial rent of £609,334 per annum (£11.00 psf), an increase of 29.6%.

In the Office sector, at Duncan House, Westhill, Aberdeen, the Fund implemented the indexed rent review securing a rent of £1,104,080 per annum (£18.90 psf), an uplift of 10.4%.

Properties in Focus

Refurbishment55 Princess Street, Manchester

▸ Multi-let, Grade A, office located in Manchester City Centre

▸ Sub-division of 3rd floor to create flexible office suites

▸ Strategy to diversify income generated from the asset, attract growth companies and remove a longer term void

Asset Disposal12 Central Way, London

▸ 78,000 sq ft distribution warehouse occupied by Matthew Clark

▸ Investment brought to market following completion of 2018 rent review, which secured an uplift of 37%

▸ Sold for £34.5m a Net Initial Yield of 3.23%


Q1 2019


Forecasts and Outlook

▸ Returns from UK commercial real estate continued to slow over the period. Industrial and long income type sectors continue to generate the strongest returns while the retail sector continued to weaken with capital and rental value growth trending negative. We believe that UK property continues to provide a supportive role as part of a balance portfolio although the returns from the UK commercial real estate market are expected to continue to moderate. Given the backdrop of continuing heightened macro uncertainty, however, we expect to see more polarised performance between prime and secondary assets and across the sectors. Asset specifics are key however the Fund maintains a focus toward prime / core assets and an overweight exposure to the favoured industrial sector. We will continue to implement asset management initiatives across the portfolio aimed towards maintaining income and capital preservation.

Performance Overview

The Fund performed in line with the Authorised Property Unit Trust (‘APUT’) / Property Authorised Investment Fund (‘PAIF’) MSCI Benchmark (Direct Property) for Q4 2018 recording a Total Return of 0.6% against a benchmark of 0.6%. The Fund has outperformed this benchmark over 1, 3 & 5 year periods. The fund returned 0.15% over Q1 against an IA UK Direct sector return of 0.32%. The MSCI Benchmark Information is yet to be released for Q1 2019.

The Fund’s industrial assets continued to provide the strongest returns in line with the market. The retail sector as a whole however is providing a drag on performance as the sector addresses structural changes.(*1)Source: Standard Life Investments / Morningstar. Fund returns net of Platform 1 fees.

London Standard Industrial 9.9%Rest of SE Standard IndustrialLondon Distribution WarehousesRest of SE Distribution WarehousesRest of UK Standard IndustrialHealthcareHotelsBuild to Rent (Rest of UK)Rest of UK Distribution WarehousesStudent HallsEdinburgh OfficesBuild to Rent (London)SupermarketsLeeds OfficesBristol OfficesGlasgow OfficesManchester OfficesBirmingham OfficesALL PROPERTY 1.8%LeisureRest of UK OfficesInner London OfficesMid Town OfficesRest of SE OfficesCity OfficesRest of London ShopsSolus Retail WarehousesDominant Standard ShopsCentral London ShopsWest End OfficesRetail ParksDominant Regional Shopping CentresOther Standard ShopsOther Shopping Centres -6.6%

3-year Total Return, 1.8% p.a., from Dec 18 Forecast profile of sector preference remains largely unaltered


Risk Profile

Investors should be aware of the following risk factors:

(a) Commercial property is less liquid than other asset classes such as bonds or equities. Selling property can be a lengthy process so investors in the fund should be aware that they may not be able to sell their investment when they want to.

(b) Commercial property transaction charges are higher than those which apply in other asset classes. Investors should be aware that a high volume of transactions would have a material impact on fund returns.

(c) Property valuation is a matter of judgement by an independent valuer and is therefore a matter of the valuer’s opinion rather than fact.

(d) The use of derivatives carries the risk of reduced liquidity, substantial loss and increased volatility in adverse market conditions, such as a failure amongst market participants. The use of derivatives may result in the fund being leveraged (where market exposure and thus the potential for loss by the fund exceeds the amount it has invested) and in these market conditions the effect of leverage will be to magnify losses. The fund does not make extensive use of derivatives.

The fund employs a single swinging pricing methodology to protect against the dilution impact of transaction costs. Due to the high transaction charges associated with the fund’s assets, a change in the pricing basis will result in a significant movement in the fund’s published price.

All investment involves risk. This fund offers no guarantee against loss or that the fund’s objective will be attained.

Risk Profile

Past performance is not a guide to future returns and future returns are not guaranteed. The price of assets and the income from them may go down as well as up and cannot be guaranteed; an investor may receive back less than their original investment.

Inflation reduces the buying power of your investment and income.

The value of assets held in the fund may rise and fall as a result of exchange rate fluctuations.

The fund could lose money if an entity (counterparty) with which it does business becomes unwilling or unable to honour its obligations to the fund.

In extreme market conditions some securities may become hard to value or sell at a desired price. This could affect the fund’s ability to meet redemptions in a timely manner.

The fund could lose money as the result of a failure or delay in operational processes and systems including but not limited to third party providers failing or going into administration.

Annual returns to 31 March 2019 (%)

2019 2018 2017 2016 2015

SLI UK Real Estate Fund 3.1 7.1 -6.0 7.9 10.8

Source: Aberdeen Standard Investments, 31 March 2019Fund performance is quoted net of Platform 1 fees (GBP).


Q1 2019

Important Information

This document is intended for use by individuals who are familiar with investment terminology. To help you understand this fund and for a full explanation of specific risks and the overall risk profile of this fund and the shareclasses within it, please refer to the Key Investor Information Documents and Prospectus which are available on our website – www.standardlifeinvestments.com.

Aberdeen Standard Investments has not considered the suitability of investment against your individual needs and risk tolerance. If you are in any doubt as to whether this fund is suitable for you, you should seek advice. An adviser is likely to charge for advice. We are unable to provide investment advice.

http://uk.standardlifeinvestments.com/O_M_UK_Real_Estate/getLatest.pdf

*Any data contained herein which is attributed to a third party (“Third Party Data”) is the property of (a) third party supplier(s) (the “Owner”) and is licensed for use by Standard Life Aberdeen**. Third Party Data may not be copied or distributed. Third Party Data is provided “as is” and is not warranted to be accurate, complete or timely. To the extent permitted by applicable law, none of the Owner, Standard Life Aberdeen** or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Past performance is no guarantee of future results. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates.

**Standard Life Aberdeen means the relevant member of the Standard Life Aberdeen group, being Standard Life Aberdeen plc together with its subsidiaries, subsidiary undertakings and associated companies (whether direct or indirect) from time to time.

“FTSE®”, “FT-SE®”, “Footsie®”, [“FTSE4Good®” and “techMARK] are trade marks jointly owned by the London Stock Exchange Plc and The Financial Times Limited and are used by FTSE International Limited (“FTSE”) under licence. [“All-World®”, “All- Share®” and “All-Small®” are trade marks of FTSE.]

The Fund is not in any way sponsored, endorsed, sold or promoted by FTSE International Limited (“FTSE”), by the London Stock Exchange Plc (the “Exchange”), Euronext N.V. (“Euronext”), The Financial Times Limited (“FT”), European Public Real Estate Association (“EPRA”) or the National Association of Real Estate Investment Trusts (“NAREIT”) (together the “Licensor Parties”) and none of the Licensor Parties make any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE EPRA NAREIT Developed Index (the “Index”) and/or the figure at which the said Index stands at any particular time on any particular day or otherwise. The Index is compiled and calculated by FTSE. However, none of the Licensor Parties shall be liable (whether in negligence or otherwise) to any person for any error in the Index and none of the Licensor Parties shall be under any obligation to advise any person of any error therein.

“FTSE®” is a trade mark of the Exchange and the FT, “NAREIT®” is a trade mark of the National Association of Real Estate Investment Trusts and “EPRA®” is a trade mark of EPRA and all are used by FTSE under licence.”

Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments.

Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments Limited is authorised and regulated by the Financial Conduct Authority.

www.aberdeenstandard.com

Further Information

Web: www.aberdeenstandardinvestments.com