Citywire nma real estate v2 (js 12 septermber 2013)


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Citywire nma real estate v2 (js 12 septermber 2013)

  1. 1. Citywire New Model Adviser Retreat Real Estate – The Forgotten Asset Class? 12/13 September 2013 This communication is intended for investment professionals only and must not be relied on by anyone else
  2. 2. 2On the cusp of a cyclical recovery! Source: IPD • Valuations have closely correlated with the path of GDP growth • UK real estate has corrected in line with the fundamentals • Growth should feed through quickly in the recovery given the current limited supply • We are predicting a slow growth path • Risk aversion is reducing and the income outlook improving • Valuations should improve as the economic outlook improves UK Real Estate Recovery
  3. 3. 3 UK Real Estate Recovery Healthy yield margin expected to persist Source: Thomson Reuters Datastream, IPD • The current margin over the risk free rate is around 350 bps • There remains a healthy buffer to ensure pricing remains resilient if interest rates trend upwards in the years ahead • Rental growth would also ensue as the economic recovery gains momentum
  4. 4. 4 UK Real Estate Recovery and Outlook Real estate returns are inextricably linked to the underlying economy • Inflation adjusted real estate returns are closely correlated to the economic environment • Occupier confidence is improving and tenants are broadly beginning to look to expansion strategies for the first time since the Financial Crisis • We anticipate reasonable single digit returns (8% p.a.) for real estate over the next three years • This translates to real returns of close to 6% Sources: IPD, Thomson Reuters Datastream, Consensus Economics
  5. 5. 5 Rolling Annual Correlation of Listed and Direct Real Estate Returns, 1993-2001 52238729-55-37Rolling 3 yr returns since 2000 41126427-48-34Rolling 3 yr returns since 1995 76203-123639Rolling 3 yr returns since 1988 38256923-25-13Annual returns since 2000 25146025-25-18Annual returns since 1995 509283-8-5Annual returns since 1985 T-Bills (90 day) % Equities % Direct Real Estate % REITs % Credit % Govt Bonds % US Asset Class Correlations to CPI to Q2 2012 • Direct real estate and REITs offer attractive inflation hedging characteristics • Generally, international leases indexed annually to CPI or other measures of inflation • Two exceptions: Economic weakness/contraction Volatile inflation (inefficient supply) US & European leases provide hedge under ‘controlled inflation’ Sources: Bonds & Credit Barclays Capital, CPI and S&P Bloomberg, NCREIF data from source & REIT data NAREIT from Bloomberg Inflation hedging characteristics
  6. 6. 6 Real Estate Summary • UK real estate is on the cusp of a long term cyclical recovery • We anticipate returns of approximately 8% p.a. over the next three years • Upside risk as the economic recovery gains a more robust foundation • Income is expected to provide three quarters of the return with capital value appreciation accounting for the remainder of returns • Global markets provide clear opportunities for diversification given that various markets are at differing stages of the recovery cycle Cyclical recovery in UK real estate is underway
  7. 7. 7 Real Estate House View Q3 2013 - 3 year view UK EU Canada Americas Asia VeryHeavy Regional Shopping Centres (>50k m²) Core West End Offices Grade A City of London Offices 10.5 Dublin Offices German Logistics Brussels Logistics Stockholm Logistics German Retail Munich Offices Ile De France Logistics Netherlands Logistics 9.5 Calgary Retail Edmonton Retail 5.0 Los Angeles Warehouse Seattle CBD Office West LA Office 8.9 Tokyo Offices Melbourne Industrial Brisbane Industrial Sydney Industrial Perth Industrial China Logistics 10.7 Heavy Retail Fashion Parks Major City Prime Shops Grade B City of London Offices South East Industrial Distribution Warehouses (London) Midtown London Offices Other M25 Offices Helsinki Logistics Stockholm Retail Helsinki Retail Stockholm Offices Helsinki Offices Paris CBD Offices Dublin Out of Town Retail Brussels Retail Ottawa Industrial Edmonton CBD Office Montreal Industrial Class B Montreal Industrial Montreal CBD Office Edmonton Industrial Boston Retail New York Midtown Office Los Angeles Retail Singapore Industrial Hong Kong Retail Australia prime regional SC Melbourne Offices Singapore Offices Sydney Offices Neutral Medium Town Prime Shops Retail Warehouse Bulky Goods Provincial Industrial District Shop Centres <50k m² M25 West/M4 Offices Distribution Warehouses (ex London) 8.0 Prague Retail Dublin Logistics Prague Logistics Paris Retail Warsaw CBD Offices Warsaw Logistics Brussels CBD Offices Italy Logistics Budapest Logistics Amsterdam CBD Offices Warsaw Retail 5.1 Montreal Retail Ottawa Retail Calgary Industrial Class B Calgary Industrial Edmonton Industrial Class B Toronto Industrial Calgary CBD Office Toronto Industrial Class B 3.7 San Francisco CBD Office San Francisco Bay Retail Boston CBD Office New York Retail Inland Empire Warehouse 7.2 Seoul Industrial Perth Offices Brisbane Offices China Retail Shanghai Offices Australia Residential Seoul Offices Singapore Retail 7.7 Light Secondary /Small Shops Provincial Offices Netherlands Retail Madrid CBD Offices Paris Offices (Ex In/Out Rims) Italy Retail Madrid/Barcelona Logistics Prague Offices Budapest Retail Barcelona CBD Offices Vancouver Industrial Toronto Suburban Office Vancouver Industrial Class B Toronto Retail Vancouver CBD Office Toronto CBD Office Chicago Warehouse New Jersey Warehouse East Bay Warehouse Sao Paulo Office Mumbai Offices Beijing Offices Hong Kong Industrial Seoul Retail Delhi Offices Shenzhen Offices VeryLight Secondary Shopping Centres Solus Retail Warehousing 4.6 Madrid/Barcelona Retail Budapest Offices Rome Offices Portugal Retail Lisbon Offices Milan Offices Portugal Logistics Madrid North Offices -0.1 Vancouver Retail Calgary Suburban Office Ottawa CBD Office Vancouver Suburban Office 1.6 New York Downtown Office Washington DC Office 2.7 Guangzhou Offices Hong Kong Offices China Residential Singapore Residential India Residential Hong Kong Residential -10.4 Figures above reflect forecast % annual total returns over the next 3years. Projected returns are unleveraged, not risk adjusted and do not reflect the inclusion of transaction costs. We do not expect the structure of all our property funds to exactly match the above as there are stock specific, transaction costs and liquidity issues that may work against each fund achieving the ideal structure.
  8. 8. UK Property Fund (PAIF) and Feeder Funds The new structure and the choices – effective 26.08.13 Feeder Trust Income & Accumulation sub-funds UK Property Fund (a PAIF) (OEIC) UK Property Fund (unit trust) Investors elect to move to Feeder or PAIF Property assets & cash • Corporate investors with >10%* • Investors unable to access PAIF • All other investors eligible for gross income: • SIPPs • ISAs • Charities • Individuals dealing direct with ACD • Corporates with <10% * Note: our operational limit is 9% 8
  9. 9. 9 UK Property Fund – an overviewVery Heavy Heavy Neutral Light Very Light Regional Shopping Centres Grade A City Offices West End Offices 8.4% Fashion Parks Secondary City Offices Rest ofSE Offices Major City Prime Shops Distribution Warehouse London South East Industrial 37.1% Medium Town Prime Shops Bulky Retail Parks Dist Warehouse ex London District Shopping Centres 24.8% Rest of UK Offices Rest of UK Industrial 17.2% Secondary Shops Secondary Shopping Centres Solus Retail Units 2.6% Other 9.9% SLI UK House View (Q3 2013) Sector UKPF June 2013 10.5% 8.0% 4.6% House View Forecasts • Fund size – c£475m (cash 10%) • Average unexpired lease 13.1 years v’s IPD of 8.9 years • 63% of Fund’s income rated low/negligible risk • 38% income subject to fixed or RPI increases • 51% of rent > 10 years (v IPD 32%) • Forecast distribution yield of c4.5% for tax exempt investors net of AMC at 85bps* A compelling solution for Real Estate investors * Standard Life Investments for tax-exempt investors via Platform 1 share class. Source: Standard Life Investments, September 2013
  10. 10. 10 2013 investment activity Source: Standard Life Investments August 2013 • Purchased £24.8m (Yields 7% offices; 5% retail) • Newly developed asset in a prime south east town • Lower ground & ground floor areas let to Wholefoods (20 year lease, fixed uplift at year 5) • 3 upper floors of grade A offices to be let quoting £39.50psf • 2 floors under offer • Potential capital uplift through letting c.£2m (8%) Eton Street, Richmond Prospect Park, Aberdeen • Purchased Q2 2013 • Off market : highly sought-after sub-market • £13.3m (7.3% yield ) – new building • 15 year term – strong tenant covenant • 3% per annum uplifts compounded 5 yearly • 8% capital appreciation during 1st 3 months
  11. 11. Appendices
  12. 12. 12 UK Real Estate Recovery Cyclical recovery in capital values underway… Source: IPD, Thomson Reuters Datastream • Real estate is a cyclical asset class! • Pricing has generally stabilised for prime and good secondary assets • Expectations are for the cyclical recovery in prices to continue
  13. 13. 13 UK Real Estate Recovery On the cusp of a cyclical recovery… Source: IPD, Thomson Reuters Datastream • Prices are edging up on a monthly basis at the All Property level • Poor quality secondary prices continue to fall • Good secondary asset pricing is stabilising
  14. 14. 14 UK Real Estate Recovery Income is expected to be a key component of future returns… Source: IPD, Thomson Reuters Datastream • …
  15. 15. Obtaining Real Estate Diversification Source: IPD, Global Key Cities Index 2012, Standard Life Investments Global markets provide diversification opportunities… Key European Markets Key Global Markets
  16. 16. 16 Select Property Fund – Portfolio breakdown 1 SL Green Realty (US) 1.9% 2 Unibail Rodamco (France) 1.8% 3 Prologis Inc (US) 1.4% 4 LXB Retail Properties PLC (UK) 1.3% 5 Simon Property Group Inc (US) 1.2% 6 Yatra Capital Ltd (India) 1.2% 7 Land Securities (UK) 1.1% 8 Hammerson (UK) 1.1% 9 Westfield Group (Australia) 1.0% 10 General Growth Properties Inc (US) 0.9% TOTAL 13.0% Top 10 listed holdings * Cash and Other includes cash and cash-like assets ** Other Countries include: Canada and Latin America Source: Standard Life Investments, 31 July 2013 Underlying geographic exposure Poland and Czech Logistics Australian Offices Cash and Other* USA Scandanavian Retail Indian Mixed Use Development Central & Eastern European Retail UK India Europe (Ex-UK) Hong Kong Australia Japan Other Countries** China 22.3 19.2 18.8 10.1 8.1 6.2 4.7 4.0 1.8 1.2 1.1 1.0 1.0 0.3 0.2
  17. 17. 17 Polish Logistics exposure Source: Standard Life Investments, 31.March 2013 LOGISTIC PARK MYSLOWICE I MYSLOWICE SILESIA, POLAND Year Built 2008/2009 Ownership 100% freehold Total (NLA) 43,677 m2 Valuation Metrics Net operating Income €2,668,000 Initial Yield 9.57% Reversionary yield 8.27% Valuation €27,850,000 Value ($/sqm) 598 €/m2 Valuation date 31 March 2013 External Valuer CBRE Tenancy Statistics WALE (by Income) 4.5 Occupancy 99% Major Tenants NLA InterCars 35% Partner Tech 30%
  18. 18. 18 Australian office exposure Source: Standard Life Investments, 28 February 2013 55 St George’s Terrace, Perth Year Built 1982 Grade B+ Ownership 100% Total (NLA) 8,503 sqm Typical Floor plate 806 sqm Car spaces 50 Valuation Metrics Net operating Income $4.4m Initial Yield 6.9% Reversionary yield 8.9% Valuation $55-$60m Value ($/sqm) c.$6,900 sqm Valuation date 28.02.13 External Valuer CBRE Tenancy Statistics WALE (by Income) 2 yrs 1 mnths Occupancy 100% Major Tenants % NLA Legal Aid 47% Commonwealth of Australia 9%
  19. 19. 19 Australian office exposure 182 St George’s Terrace, Perth Refurbished – Fully redeveloped on original shell 2003 Grade B+ Ownership 100% Total (NLA) 5,341 sqm Typical Floor plate 540 sqm Car spaces 28 Valuation Metrics Net operating Income $3m Initial Yield 7.5% Reversionary yield 8.5% Valuation $35-40m Value ($/sqm) c.$6,900sqm Valuation date 28.02.13 External Valuer CBRE Tenancy Statistics WALE (by Income) 2 yrs 10 mnths Occupancy 98% Major Tenants % NLA Rio Tinto 20% Momentum Partners 10% Source: Standard Life Investments, 28 February 2013
  20. 20. 20 Case Study – SL Green We believe: • Leasing concerns in NYC late in 2012 weighed on the stock Focus on Change: • Research team forecasted increased demand for space Emergence of tech and media tenants, improving employment outlook • Company meetings confirm demand outlook Strong demand from potential tenants for “value” price points, bid for NYC office assets by sovereign wealth funds Non-Consensus insights: Trigger – accelerating leasing velocity Conclusion – The largest overweight in the portfolio Top contributor to fund performance YTD through June -10% -5% 0% 5% 10% 15% 20% 31/01/13 28/02/13 31/03/13 30/04/13 31/05/13 SL Green FTSE EPRA NAREIT US $ Source: Datastream & Standard Life Investments, 30 June 2013
  21. 21. 2121 Case Study – Westfield Group We believe: • WDC has greatest exposure to the recovering UK/US economies • A$ currency to fall under new RBA language • NAV/earnings will gain as A$ weakens from record high Focus on Change: Company meeting reinforces our conviction: Potential asset sale to WRT; increase in share buybacks; strong US portfolio momentum Rational strategy – Brazil JV pullout Non-consensus insights: 15% drop in A$ so far already denting online retail growth Corroboration: US/UK analysts also confident of outlook Conclusion – the key stock pick in Australia We expect WDC to outperform in Australia in medium term Source: Datastream & Standard Life Investments, 30 June 2013 -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 31/01/13 28/02/13 31/03/13 30/04/13 31/05/13 Westfield Group FTSE EPRA NAREIT Australia A$
  22. 22. 22 The information shown relates to the past. Past performance is not a guide to the future. The value of investment can go down as well as up. 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**. 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** 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 means the relevant member of the Standard Life group, being Standard Life plc together with its subsidiaries, subsidiary undertakings and associated companies (whether direct or indirect) from time to time." Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. The Standard Life Investments group includes Standard Life Investments (Mutual Funds) Limited, SLTM Limited, Standard Life Investments (Corporate Funds) Limited, SL Capital Partners LLP and AIDA Capital Limited. Standard Life Investments Limited is authorised and regulated by the Financial Conduct Authority. Calls may be monitored and/or recorded to protect both you and us and help with our training. © 2013 Standard Life, images reproduced under licence