sfp ast global core property hedged chf

29 March 2019

SFP AST GCP Hedged /2

SFP AST Global Core Property Hedged CHF

Profile

The investment group SFP AST Global Core Property Hedged CHF offers Swiss pension schemes a global broadly diversified portfolio of real estate funds. The different target funds invest directly in real estate according to their strategies. The focus of the two investment groups is directed on open-ended, unlisted, liquid and conservative investing real estate funds. The core investment strategy focuses on stable returns on investment.

Key Facts

Legal form Swiss Investment Foundation – the Investment

Group is subject to „foreign real estate“ (article

53, paragraph 1, letter c, BVV 2)

Investment manager Swiss Finance & Property Funds AG

Depositary bank UBS Switzerland AG

Investment strategy Core

Regional exposure Global (excl. Switzerland)

Sector exposure Office, retail, residential, other

Launch date 29 September 2017

Currency CHF

Foreign currency hedge In relation to the foreign currency hedging, the

investor has the option to invest in a hedged or a

non-hedged investment group

Leverage No leverage at the investment group level

Portfolio build up period 24 months (no redemption possible)

Issue of claims Quarterly

Next closing: 28 June 2019 (valuta)

Capital commitment: 10 June 2019

Redemption of Claims Quarterly

(after the portfolio build-up period)

Notice Period 12 months

Management Fee (p.a.)

According to Investment

Volume

Unit class(es) within the investment groups

(ISIN-Number)

0.60% A Hedged (CH0370142694)

Between CHF 10 mn

and CHF 25 mn

0.40% B Hedged (CH0370142728)

Between CHF 25 mn

and CHF 50 mn

0.35% C Hedged (CH0370142736)

Between CHF 50 mn

and CHF 100 mn

0.30% D Hedged (CH0370142744)

> CHF 100 mn 0.25% E Hedged (CH0370142991)

Accessible with a

discretionary mandate

X Hedged (CH0370143023)

Issue surcharge /

redemption deduction

1% each

(in favour of the investment group)

Investment Focus

– Exclusive investments in unlisted global real estate funds – Only open-end core funds – Focus on growing dividends based on stable cash flows of the

underlying funds – Asset class definition as “foreign real estate” according to

BVV2 (maximum weight of 10%) – Collective capital investments that exceed a loan-to-value ratio of

50% are excluded (Borrowed capital ratio of 0%)

Implementation Strategy

– The investment decisions are made according to structured and documented audit, selection and control processes (due diligence) with qualitative and quantitative criteria

– The research process is based on consistent analysis from a broad array of sources (e.g. management interviews, real estate and finance experts, property tours, financial statements and market statistics)

– Broad diversification according to managers, geographic location and property usage will be pursued

Investment Strategy

– Appropriate risk diversification – Active portfolio management: The investments in global real estate

assets require active management in terms of selection, monitoring and reinvestment of the investment funds due to the respective limited timing of access and scant availability of market information

– The selection of individual target funds is based on top-down / bottom-up analysis that is compiled in collaboration with the Chief Economist of SFP Group

– Focus on core with long term rental agreements (average target portfolio: >5 years) and low vacancy rates (average of target portfolio: +/- 5%)

Financial Objectives

– Total Return: 4.0% - 6.0% (hedged)

Investment Reasons

– Easy, secure and efficient access to global real estate – Globally broadly diversified portfolio of over 1000 properties with a

total value of more than CHF 70 billion – Low risk due to clearly defined core strategy (open, unlisted core

real estate funds with maximum leverage according to the prospectus of 50%)

– Attractive administration fees – Participation in the ongoing cash flows from day 1 on the basis of a

capital-call structure

29 March 2019

SFP AST GCP Hedged /2

Net Asset Value

Share class A CHF 1 020.08

Share class B CHF 1 023.07

Share class C CHF 1 023.82

Net Performance (reset on base 100, Share Class A)

Cumulative Net Performance (in %)

YTD 3 M 1 J 3 J 5 J Seit Beginn

Class A -0.07% -0.07% 0.50% - - 2.01%

Class B -0.02% -0.02% 0.69% - - 2.31%

Class C 0.00% 0.00% 0.73% - - 2.38%

Portfolio Key Figures

TNA value of the investment group (in CHF mn) 171.1

Total capital commitments (in CHF mn) 184.55

Number of funds committed 12

Number of funds invested 11

Number of underlying properties 1024

Value of underlying property assets (in bn CHF) 73.0

Average occupancy across underlying funds (in %) 95.4

WAULT (in years) 5.2

Leverage (% of GAV) 18.1

Sector Exposure

Regional Exposure

Investment Type

Currencies %

Investor Relations

Urs Kunz | Seefeldstrasse 275 | 8008 Zürich | [email protected] | +41 43 344 74 78

Disclaimer This document is intended solely for use on a confidential basis by those persons to whom it is transmitted. Recipients, by accepting and retaining this information material, acknowledge and agree to preserve its confidentiality. Recipients may not distribute this document to third parties, in particular, not to retail clients. This material may not be reproduced or copied in whole or in part for any purpose without Swiss Finance & Property Investment AG prior written consent. This document does not constitute a solicitation or offer to buy or sell any security or instrument and should not be construed as investment advice or any other kind of decision-making aid or advice on legal, taxation or other issues. Note that this document is addressed to you in your capacity as an institutional investor with a professional treasury. Past performance does not guarantee or indicate current or future value or earnings. The performance shown does not take account of any commissions and costs charged when subscribing and redeeming units.

29 March 2019

SFP AST GCP Hedged Page 1/5

SFP AST Global Core Property

Portfolio Allocation (Hedged CHF & Unhedged)

Target Fund Currency Capital commitment (in

fund currency)

Called

(in fund currency)

Current value

(in fund currency)

Allocation

Based on

CHF

LaSalle US Property Fund USD 13'500'000 13'500'000 13'700'509 5.50%

Heitman America Real Estate Trust USD 12'000'000 9'000'000 9'044'406 3.62%

Lion Properties Fund USD 33'000'000 33'000'000 35'358'337 15.17%

UBS Trumbull Property Fund USD 33'000'000 33'000'000 34'544'706 14.63%

CBRE Pan European Core Fund EUR 20'000'000 16'641'454 16'781'479 7.84%

Encore+ EUR 16'000'000 13'000'000 13'224'886 6.26%

Aberdeen European Balanced Property Fund EUR 10'500'000 10'500'000 10'655'208 5.19%

Invesco UK Residential Property Fund GBP 13'750'000 13'750'000 13'647'770 7.03%

M&G European Property Fund EUR 13'000'000 13'000'000 13'072'702 5.97%

Invesco Real Estate Asia Fund USD 16'000'000 16'000'000 16'805'465 7.09%

AMP Capital Wholesale Office Fund AUD 37'500'000 37'500'000 38'901'188 11.24%

JP Morgan Strategic Property Fund Asia USD 5'000'000 - - 2.70%

Fund Manager Report Q1 2019

Performance:

The investment group SFP AST Global Core Property Hedged CHF realized a net performance of -0.07% (class A), -0.02% (class B) and 0.0% (class C) for Q1 2019. The hedging costs remained high, reaching almost 0.6% for the quarter.

In the US, Europe and Australia, some of the underlying funds saw a weakening in the valuation of their retail portfolios. This is something we also witnessed throughout the market, in funds where we are not in-vested as well as at listed real estate companies. This negatively im-pacted performance.

The returns for the US funds ranged between 0.5% and 1.8% for the quarter. For Q1, performances were driven by the income returns. All four funds outperformed the ODCE-benchmark (Open End Diversified Core Equity Fund Index) income return of 1.01%. On a net total return basis, three out of the four funds outperformed the BM. Across the different funds, the sector industrial/logistics continued to realize the highest return (+/- 3%). Retail on the other hand remains the weakest sector, and showed negative valuation results for three of the four in-vested funds. This is an industry-wide phenomenon, and the ODCE-BM saw a negative valuation result in the sector. Two of the funds also showed negative debt revaluations as a result of the decline in interest rates.

The funds in Asia were unable to repeat the strong performance figures that they realized in the previous quarter. Invesco’s diversified fund, which called the latest tranche of our commitment in early January, realized a return of 1%. The AMP Capital Diversified Property Fund saw a return of -0.2% in the first quarter. AMP’s return reduction was due to more conservative valuation assumptions in its retail portfolio. The Garden City shopping center in Perth saw a decrease in value as the planned redevelopment will start later than expected and the fund low-ered the assumptions on future rents upon completion of the redevel-opment. The shopping center is one of the top five centers in Australia and has never had a vacancy of more than 1% over the last 30 years. The fund is confident that it will remain one of the top centers in country due to the redevelopment.

In Europe, three of the four diversified funds realized returns between 0.6% and 1.3%. Aberdeen, the remaining diversified fund, published a negative return of -0.56%. This was entirely down to the decline in value

of four retail assets that are on its disposal list. The income return re-mains attractive at around 1%. The fundamentals of the fund are still very strong; it has an occupancy rate of 98.4% and a LTV of only 9%. The sale of the retail properties will decrease the retail exposure and increase the quality of the total portfolio. We see this as a positive step in the long-term, despite the short-term negative impact. Therefore, we see a potential buying opportunity in this fund. The UK-residential fund returned -0.2%. We expect this return to develop positively in the com-ing quarters as development projects stabilize. The uncertainty around Brexit will have no (or very limited) impact on this fund as we expect demand for quality apartments in strong locations to remain high.

Investments:

During the first quarter of 2019, the two investments groups received CHF 250’000 of new commitments. We are in close contact with a few clients and are confident that we will attract more client commitments in the next quarters. As at the end of March 2019, the two investment groups have received CHF 246.5 million of capital commitments. 100% of the client commitments received up until September 2018 have been called. Of the received client commitments, CHF 221.3 million is com-mitted to 12 funds.

At the end of the first quarter in 2019, the investment group SFP AST Global Core Property Hedged CHF was invested in 11 core real estate funds (4 in the USA, 5 in Europe and 2 in Asia).

In the USA, the investment group SFP AST Global Core Property Hedged CHF has committed capital to four diversified core funds. All but one have called 100% of the committed capital. Heitman will prob-ably call the remainder at the end of the second quarter this year.

In Asia, SFP AST Global Core Property Hedged CHF is committed to three funds. Two have already called the full commitment and the other fund will probably call our new commitment towards the end of the second quarter.

In Europe, SFP AST Global Core Property is committed to five funds, of which four were able to call all of the investment groups’ committed capital by mid-April.

At the end of March, the cash-position was at 10%. After the capital calls in April, this was reduced to below 8%.

29 March 2019


Conclusion

Our exposure to retail will reduce going forward as the underlying funds sell retail properties and maintain only the top retail assets in their port-folios. We will increase exposure to funds with little or no retail proper-ties in their portfolio, or with a clear retail strategy focusing only on prime properties within the sector.

As the downward yield shift in many markets is most probably over, we will continue to focus on funds investing in quality assets with stable

income streams in liquid markets. The previous five years have pro-duced high returns across all regions and we expect these returns to moderate in the near future. Thanks to the high and stable income returns of our funds and the expected rental growth in certain sectors (especially logistics) and regions, we remain confident that we will hit our target returns. This thanks to the improvement in the fundamentals of our portfolio. The vacancy has been reduced to 4% and the WAULT increased to 6 years. This supports the stability and longevity of the cash flow of the underlying funds.

Market Comment

Europe and China support the expansion in the US

Slowly but surely, the fear of recession in the USA seems to be abating. As well as the uninterrupted expansion in the US labour market, with unemployment figures recently reaching their lowest point in 50 years, the latest data from China indicate that industrial activity in the first quarter of 2019 has once again reached the solid figure of over 6% p.a.

In view of the important role that China holds in the global structure of the supply chain, this indicates that the activities of its upstream and downstream global operations should have been affected as well.

The same can be said for Europe. Although it is clear that the collapse in the capital goods sector, which was triggered by the confusion about the proposed Brexit deal that the British government is trying to achieve as well as the so-called Dieselgate emissions scandal, was somewhat greater than expected, the data, both in Germany and in the periphery, nevertheless indicate that real growth rates will pick up speed once again in the second half of 2019. Overall, it is still possible to see that the economic development in Europe is following almost exactly the same pattern as that of the US recovery, although with a time lag of some three or four years. The main reason for this has to be the excel-lent performance of the German export industry and the clear reduction

in private debt in the southern European countries of the EU. In the meantime, at around 3%, even non-performing-loans have reached a level that finally raises expectations of a slow expansion in the granting of credit and thus an acceleration in the real growth rate.

The significance of this current interlude at international level lies less in material consolidation, given the robust US economy, than in the fact that the pessimistic expectations in the US money and bond markets have little credibility in the face of such data. In a first step, efforts will be made to relativize the declining dollar rate expectations of the US Fed and to interpret the current Fed position as being precisely in line with what it announced, namely that it must first wait and see. This will have two consequences. On the one hand, the drastic decline in interest rates since October last year should now be corrected. This will reduce the pressure on the ECB and the SNB, so that the fist interest rate movements upwards in Europe in the course of the year will finally become reality. Whether this will happen in the final quarter of this year or in the first quarter 2020 is of secondary interest.

In addition, the changed expectations in the economy should then start to synchronize more strongly. This is bound to have a positive impact on the capital goods sector, in particular in Germany and thus also in Switzerland. At the same time, such a positive trend would make way for a revision in the undervaluation of the EUR and the low interest rates.

USA LAST* 2019** 2020** 2021** Asia ex. Japan LAST* 2019** 2020** 2021**

Real GDP 3.00 2.40 1.90 1.80 Real GDP 5.72 5.67 5.59 5.53

CPI YoY 2.45 1.90 2.19 2.23 CPI YoY 2.19 2.25 2.44 2.58

Unemployement 3.89 3.70 3.60 4.00 Unemployement 3.69 3.91 3.91 3.96

Central Bank rates 2.50 2.60 2.55 - Central Bank rates 4.23 4.26 4.25 -

10Y Gov bond 2.41 2.96 3.02 - 10Y Gov bond 3.92 3.79 3.77 -

Eurozone LAST* 2019** 2020** 2021** Japan LAST* 2019** 2020** 2021**

Real GDP 1.10 1.20 1.40 1.50 Real GDP 0.30 0.70 0.50 0.80

CPI YoY 1.76 1.40 1.50 1.80 CPI YoY 0.83 0.90 1.25 0.80


Central Bank rates 0.00 0.00 0.10 - Central Bank rates -0.06 0.00 0.10 -

10Y Gov bond -0.07 0.45 0.73 - 10Y Gov bond -0.08 0.06 0.19 -

Switzerland LAST* 2019** 2020** 2021** United Kingdom LAST* 2019** 2020** 2021**

Real GDP 1.50 1.30 1.60 1.40 Real GDP 1.40 1.30 1.50 1.68

CPI YoY 0.96 0.70 1.00 0.90 CPI YoY 2.27 2.00 2.00 2.00


Central Bank rates -0.75 -0.75 -0.55 - Central Bank rates 0.75 0.95 1.30 -

10Y Gov bond -0.41 0.03 0.09 - 10Y Gov bond 1.00 1.68 1.94 -

* Official

** Average forecasts

29 March 2019


The rise of co-working

Coworking space enables workers from differ-ent organizations to operate in one shared office space, through either memberships or traditional leases. The spaces initially attracted startups, free-lancers, entrepreneurs, and remote workers.

However, as the sector continues to develop, coworking operators are targeting larger firms. The movement has spread excessively since the global financial crisis. The number of coworking spaces in the US grew from less than 300 in 2010 to over 4,000 at the end of 2017, resulting in a compound annual growth rate of almost 50%.[1] Outside the US, 200 spaces have increased to 10,000 over the same time period, represent-

ing a compound annual growth rate of over 80%.[2] Cushman and Wake-field branded 2018 as the year of the coworking/flexible office sector.

Leasing activity for coworking firms accounted for 18 percent of all office deals in Manhattan in 2018, further accentuating the sector’s progression.[1] Additionally, WeWork, a renowned coworking operator, recently became the biggest renter of office space in Manhattan (492,000 sqm.), surpassing JP Morgan (483,000 sqm.).[2] WeWork’s valuation is now larger than any office real estate investment trust in the US and it is largely accountable for the coworking sector’s increasing stake in office take-up levels.

Coworking share of inventory and growth in the US

Coworking space share of total office

inventory

Coworking space share of total office

inventory

Coworking space share

of inventory growth

2016 Q2 2018 % change 2016–Q2 2018

Manhattan 1.40% 2.10% 52.90%

Other top 10 markets 0.90% 1.40% 28.30%

Secondary markets (9) 1.10% 1.50% 17.20%

Total, all metros 1.10% 1.60% 31.30%

Source: Colliers International

Coworking operators in the US

Total sqm. leased Number of sites Avg. space per site (sqm.)

WeWork 1’130’000 154 7’300

Regus 437’000 224 2’000

Knotel 232’000 120 2’000

Spaces 78’000 29 2’700

Convene 50’000 14 3’500

Industrious 49’000 22 2’200

Level Office 48’000 8 5’900

MakeOffices 40’000 12 3’300

Premier Business Centers 27’000 19 1’400

Jay Suites 24’000 8 3’000

Top 10 2’115’000 610 3’300

Other operators 483’000 301 1’600

Grand total 2’598’000 911 2’900

However, as the sector continues to develop, coworking operators are targeting larger firms. The movement has spread excessively since the global financial crisis. The number of coworking spaces in the US grew from less than 300 in 2010 to over 4,000 at the end of 2017, resulting in a compound annual growth rate of almost 50%.[1] Outside the US, 200 spaces have increased to 10,000 over the same time period, represent-ing a compound annual growth rate of over 80%.[2] Cushman and Wake-field branded 2018 as the year of the coworking/flexible office sector.

Leasing activity for coworking firms accounted for 18 percent of all office deals in Manhattan in 2018, further accentuating the sector’s progression.[1] Additionally, WeWork, a renowned coworking operator, recently became the biggest renter of office space in Manhattan (492,000 sqm.), surpassing JP Morgan (483,000 sqm.).[2] WeWork’s valuation is now larger than any office real estate investment trust in the US and it is largely accountable for the coworking sector’s increasing stake in office take-up levels.

29 March 2019


There are several motives for landlords to include a coworking element in a property. It offers tenants flexibility in the form of short-term leases, the opportunity to scale up or down, and immediate availability. Coworking spaces commonly provide amenities, modern technology and exposure to innovators, start-up communities and creative envi-ronments. As these offerings are desired by millennials, firms may en-hance their chances of attracting talent by renting a coworking space. Tenants do not have to pay for fit-out costs up front or all at once, and coworking spaces may also represent a solution for renting out smaller areas in a property that may typically be difficult to fill. Lastly, the higher footfall due to the higher number of workers per square meter can boost ground retail sales of an office property. A competitive labor market, the increase in remote workers and coworking’s reputation of enhancing creativity and productivity build a strong case for flexible workspace. [1] WeWork claims that its locations can generate 29% in rent premiums for landlords.[2]

The typical office space is approximately 15 sqm. per person. Cowork-ing operators utilize space efficiently and usually reduce this to about 7 sqm. per person. This higher density comes with considerations for landlords as capital expenditure requirements are significantly higher than for traditional office spaces. Coworking office fit-outs increase wear and tear, energy usage, and security issues. The lower allotted space per person may be concluded as inadequate in the future.

The sector’s perceived downside risk in a financial crisis is an area of concern. In the event of an economic downturn, coworking operators are not expected to display much resilience. Coworking operators are naturally vulnerable in a recession. They possess fixed long-term leases with landlords, yet their own short-term contracts with tenants and members are likely to drop in both price and frequency.[3] Moreover, the business model of short-term leases and a tenant-base predominantly comprised of entrepreneurs and small start-ups appears more volatile in comparison to that of a traditional landlord which has longer leases with more established businesses. On the other hand, a premium might even be created for coworking space if occupiers were to place a high value on flexibility during a downturn.

CBRE recently conducted a study on coworking space’s impact on property valuations. The firm analyzed 31 sales transactions of office buildings with at least a 10% coworking occupancy, against 104 peer transactions (comparable geographic proximity, building age, size and quality, date of sale) with no coworking occupancy. The transactions occurred across 13 markets and within the last 5 years. When compar-ing cap rates for coworking transactions to their peers, only 10% had a lower cap rate, whilst 45% had a cap rate on par with peers and 45% displayed higher cap rates. Furthermore, 64% of buildings with more than 40% coworking space had higher cap rates than their peers, and 67% of buildings with less than 40% coworking traded on par with peers. Thus, a risk premium is currently associated with a higher amount of flexible space at a property. The sample set of the study is, however, limited. If the sector’s prevalence continues, a clearer story concerning valuations will arise.[4]

Coworking has swayed the construction and design of the modern workplace, prompting landlords to re-evaluate the dynamics and de-signs of their office spaces. The sector’s evolution and strong growth trajectory over recent years suggest a continuation of development. Nonetheless, time will tell whether WeWork and its fellow operators will prove successful in the long-term.

Image source: https://www.wework.com/de-DE/

We sent out a set of questions to the underlying funds in SFP AST Global Core Property asking what percentage of their office exposure is let to co-working operators and whether or not they aim to increase or decrease this exposure going forward. The majority of the underlying funds have no exposure to the co-working sector. The highest exposure is just over 4.0% of the fund’s passing rent, and a few funds have slight allocations of up to 1.0% to the sector. The managers tend to have no concrete plan regarding an adjustment to co-working allocations in the future and will evaluate prospective tenants on a case by case basis. It is evident in the responses that the funds are aware of the growth and benefits of the sector, and that they have a prudent approach to ac-commodating co-working tenants in their office properties by maintain-ing a focus on the credit nature of tenants. In some of the responses, a co-working tenancy is stated as viable through a limited exposure in a multi-let situation after a thorough credit/risk evaluation.

1. Colliers International. 2019. “U.S. Flexible Workspace And Coworking: Established, Expand-ing And Evolving.”

2. Colliers International (¹)

3. Rizzi, Nicholas. 2019. “NYC Coworking Leasing Activity Climbs 200 Percent Last Year: Report”. Commercial Observer. https://commercialobserver.com/2019/01/coworking-leasing-activity increased-by-200-percent-last-year-report/.



6. Wework. https://wework.com/de-DE/landlords.


8. CBRE. 2019. “The Property Value Implications of Flexible Space.”

29 March 2019


Property of the Quarter

Property Name Paris - Rue Réamur

Country France

City Paris

Sector Office

Property Description

This office / retail asset is located in the 3rd arrondissement of Paris, France, on the corner of Boulevard Sébastopol and Rue Réaumur creating two well visible façades. This building in attractive Haussmannien architecture comprises of three retail units on the ground floor and five floors of office spaces, in addition, 96 under-ground parking places in the basements. The property has great access to public transportations and is located direct-ly opposite the metro station Réaumur – Sébastopol and 500 metres walking distance to the Forum des Halles, a major leisure and retail complex.

Latest Asset Management Initiatives

The property has recently undergone a renovation which invloves cleaning the Haussmannien style street façades, the project started end-2018 and will be completed in 2019.

Construction/Renovation

year:

1856/2006

Gross Leasable Area (sqm) 5'360

Occupancy: 98.1%

Number of Tenants: 22

Anchor Tenants: Caisse d’Epargne, Ville de Paris, Pepe Jeans,

Intercloud

WALT (incl. break/excl.

break):

2.5 years/3.3 years

Annual Rent: 2'755'000

Valuation: 69'900'000

Yield: 3.90%

% of Fund: 8.2%

Acquisition year: 2007

Acquisition value: 52'000'000

Sustainability rating: EPC: D

Location in Paris

Rue Réamur 51, Paris

Investor Relations

Urs Kunz | Seefeldstrasse 275 | 8008 Zürich | [email protected] | +41 43 344 74 78

Disclaimer This document is intended solely for use on a confidential basis by those persons to whom it is transmitted. Recipients, by accepting and retaining this information material, acknowledge and agree to preserve its confidentiality. Recipients may not distribute this document to third parties, in particular, not to retail clients. This material may not be reproduced or copied in whole or in part for any purpose without Swiss Finance & Property Investment AG prior written consent. This document does not constitute a solicitation or offer to buy or sell any security or instrument and should not be construed as investment advice or any other kind of decision-making aid or advice on legal, taxation or other issues. Note that this document is addressed to you in your capacity as an institutional investor with a professional treasury. Past performance does not guarantee or indicate current or future value or earnings. The performance shown does not take account of any commissions and costs charged when subscribing and redeeming units.

sfp ast global core property hedged chf

Documents