Real Insights Issue 3

REAL INSIGHTS

ROYAL LONDON ASSET MANAGEMENT • QUARTERLY PROPERTY REVIEW • ISSUE THREE

This issuePortfolio SalesDelivering performance through active management

Latest Hot PropertyMixed use, redevelopment in the West End of London

The Big PictureThe national picture viewed by our team of experts

Lexington Street, London W1

For professional investors and advisors only

2 • ISSUE THREE • REAL INSIGHTS

ACTIVEPROPERTYMANAGEMENT

The RLAM Property Team comprises 20 sector and area specialists, focused on active asset management. The team seek to re-position property assets in order to maximise capital and income growth.

PROPERTY TEAM MAKE UP

1,995

20 in total

FUM BY FUNDRLAM Property – Funds under management

No of holdings

Value of holdings (£m)

% by value

Retail 133 2,459 44%

Other 24 382 7%

Office 83 1,747 31%

Industrial 82 1,040 18%

Total assets 322 5,628 100%

RLCIS £1.79bn

TOTAL£5.9bn

RLPPF £2.27bn

RLLTF £1.40bn

SLLTF £18m

RLPF £376m

Royal Liver funds £81m

Total rental income

£261m p.a.Total transactions 2014 2015 YTD

Sales £58m £419m

Sales (number of ) 15 29

Purchases £219m £109m

Purchases (number of ) 13 8

Total transactions £277m £528m

Total AUM and the split between the sectors

Asset and Fund Managers

Development Managers

Portfolio Services

Note: Total FUM includes Royal London Pension Property Fund (RLPPF), Royal London Co-operative Insurance Services (RL CIS), Royal London Property Fund (RLPF), Royal London Long Term Fund (RLLTF), Royal Liver funds, Scottish Life Long Term Fund (SLLTF). Values include cash holdings.

Source: RLAM as at 30th September 2015

Total number of tenants, across all the property portfolios

11 3 6

REAL INSIGHTS • ISSUE THREE • 3

Oxford Street/Berwick Street, London W1RLAM have recently completed and fully let a fantastic new development scheme in the heart of London’s prime retailing district. The original building comprised a poorly configured retail unit on a very complex and sensitive site. The outcome of the feasibility and design stages was a decision to create a mixed use scheme with a brand new retail unit fronting onto Oxford Street with a separate access off Berwick Street for “media style” offices and six residential apartments.Whilst the eastern side of Oxford Street is now undergoing a radical overhaul with the advent of Crossrail and multiple development sites which have been proposed and started, at the time this scheme was devised and designed the proposal was more ground breaking.Following completion of the development the retail unit has been let in its entirety to Matalan, fully justifying the original idea to create a very large modern unit. The offices have also been let to a single tenant, as have the residential units. As an indication of the continuing strength of the Central London office market, the offices were originally under off at an annual rent of £635,000 but the tenant withdrew during negotiations. The offices were then put back under offer three months later at a rent of £700,000 – a 10% uplift over the period. The investment continues to benefit from a strong reversion as the retail location goes from strength to strength. Overall the development has delivered over a 50% profit on cost for the Royal London CIS Fund.

PAST, PRESENT,FUTURECommentary from our Head of Property

Hot PropertyLatest asset management activity in our portfolio

The third quarter of 2015 saw the UK property market continue to deliver above-trend performance, with a

number of the themes observed earlier in the year continuing to play out. Momentum may have cooled ever so slightly, but year-to-date total returns stand at a healthy 10.4%. Office and industrial were again the strongest performing sectors.

With the end of the year approaching, our thoughts turn to 2016 and what it may bring. We believe that market conditions will remain strong in the near term. Loose monetary policy continues to offer an attractive spread when comparing property yields relative to bonds. Signs point to a strengthening domestic economy, with unemployment now at a seven year low. Coupled with strong business and consumer confidence indicators, job market strength should boost demand from occupiers. Recent rental growth figures have picked up markedly supporting this argument and we expect this to continue in 2016. With the development cycle playing catch up with the market, the supply of top quality space will remain constrained driving up rents in desirable locations.

On a more cautionary note, history tells us that property markets are cyclical and the current run must come to an end at some point. Global deflationary factors, driven by weak commodity prices may extend the current UK cycle, with official interest rate sentiment remaining unclear. But with yields in London already at historic lows, investors are increasingly looking to alternative provincial markets in search of value. Vacancy rates are at 15 year lows in Central London and with occupier demand still strong we predict that rental growth in Central London will continue to support capital appreciation throughout 2016 and into early 2017.

Beyond that though, political uncertainty surrounding the EU vote is the biggest downside risk and as this decision nears we anticipate a slowdown. Furthermore, given the yield compression we have seen in recent years, the timing and rate of monetary policy tightening will inevitably dictate investor appetite for UK real estate in the medium term.

Gareth Dickinson


PORTFOLIO SALES

At the start of 2015, it was recognised that two of our funds would need to dispose of a number of assets during the course of the next few years.

Our experience of recent individual asset sales, our view of the investment cycle and the specifics of some of the assets concerned, led the team to consider all disposal options.

A review of the portfolios identified that the sales should be focused on the retail sector and the assets held in Ireland and rather than drip feed individual assets to the market, consideration was given to portfolio sales.

In this edition of the Newsletter, RLAM fund manager Michael Lawrence sets out the issues and challenges faced when selling difficult assets and how with some creative thinking, a very positive outcome can be achieved for the client.

Retail Market Performance

Both funds were overweight in the high street retail sector so this was considered a likely source of sales. Despite the property market recording strong performance over recent years, the high street retail sector has generally underperformed, providing an annualised total return of 12.2% compared to a market return of 17.4%. With the exception of Central London and the very best retail centres, the sector has seen static or in some cases falling rents and little positive yield compression. This underperformance is largely a function of the ongoing changes to the traditional retail landscape. As the internet has developed and retailers have improved their online presence, the way consumers shop in traditional town centres has changed. As retailers have changed their space requirements, many traditional town centres have experienced an oversupply of retail units.

The Types of Assets

The retail assets within the funds that were being considered for sale were generally smaller lot sizes in the £1m to £5m range, situated in good but not top quality towns such as Carlisle, Taunton and Colchester. Whilst there were a couple of assets in the £5m - £10m lot size range, these were located in towns that were considered to be less attractive. The assets being considered were let to a variety of occupiers, some of which had unexpired lease terms in excess of ten years and others had more immediate lease expiries.

The Nature of Investor Demand

Institutional demand for high street retail investment remains focussed

on larger lot sizes in the top towns. Outside these, due to the small lot sizes of much of the stock, the investor base is dominated by private individuals and small property companies. This capital is relatively footloose and price sensitive. Given the over-renting apparent in the majority of towns, investors have been cautious around pricing. The competitive tension seen in some other sectors of the market has not been apparent in much of the high street, and transactions have, as a result, been slow or assets have failed to sell.

RLAM’s Market Experience

Over the last two years, Royal London has marketed for sale a number of small retail units across the country. Generally, these were located in reasonably well considered towns but were often over-rented and were let on leases with under 10 years to expiry. The results of the marketing campaigns were mixed. Some assets sold, albeit at relatively high yields, whilst others were not well received and attracted only derisory bids. Much of the stock being considered for disposal was of a similar nature which raised concerns about the saleability of individual assets.

Irish Market Performance

From 2007 to 2012, the Irish commercial property market experienced severe declines in valuations across all sectors, losing 65% from the peak value. This sustained period of re-pricing eventually turned in 2013 and confidence and investors returned the following year. Dublin property prices have recovered about 40% from the lows of 2012 but were still down significantly from peak 2007 levels.

The Types of Assets

In Ireland one specific Fund held both retail assets in prime or good secondary locations as well as a number of poor quality offices in suburban Dublin and Cork.

The retail properties were generally located in Central Dublin, a market that has seen a resurgence in demand from both occupiers and investors in recent years. These assets could have been sold individually with few

THE ISSUES – UK

THE ISSUES – IRELAND

THE BRIEF

RETAIL PORTFOLIO 16 LOTS • NE FOCUSED

70% let to strong covenants • 12 years average unexpired lease term£26M

RETAIL PORTFOLIO 28 LOTS • SE FOCUSED

5.5 years average unexpired lease term£22M


problems and there would have been sufficient investor interest to create competitive bidding for these assets. In contrast, the office portfolio generally comprised out of town properties situated on business parks. Whilst occupier and investor demand for Central Dublin offices had recovered, the out of town market remains oversupplied. With weak tenant demand and a high level of vacancy, rental levels are still under pressure. The sale of the offices would therefore be much more problematic. The types of investor most active in the Irish market would not consider these assets to be an attractive investment opportunity. Buyers would be few and far between, sales would be at rock bottom prices and timescales would be far from certain.

The Nature of Investor Demand

There was very limited investor demand during the downturn as rental levels across all sectors fell sharply and capital values crashed. As the market stabilised and then started to improve, demand improved but remained focussed on larger lot sizes at the prime end of the market. The most active buyers tended to be private equity players who naturally

favour large deals. Savills estimate that over the last three years, 57% of all spending on Irish commercial property investment has been transacted in deals of over €50m. Demand for smaller lot sizes or more secondary assets remained limited.

RLAM’s Market Experience

The Fund was closed ended and in run off and RLAM had client instructions to dispose of the Irish assets over a five year period. However, a phased sale would have resulted in the poorer quality assets having to be retained or only being capable of being sold at heavily discounted levels. Discussions with local agents made it clear that scale was important as it would attract overseas investors and the larger institutional buyers.

Benefits of Portfolio Sales

For the UK High Street portfolio, creating a larger lot size made the sale attractive to a wider variety of investor. Rather than offering small individual lot sizes to the private investor market, a portfolio becomes attractive to smaller pension funds, larger private property companies and most importantly in the current cycle, the geared private equity market. This latter class of investor has been very active in recent years. The UK property market is attractive to a wide variety of overseas investors, more so at the present time when the cost of debt is low and there are an increasing number of lenders offering debt. The secondary property market offers a higher level of yield, and once debt has been layered in, the leveraged returns look attractive. This investor class has generally focussed on secondary shopping centres, attracted by the larger lot sizes and spread of risk offered by a diversified tenant base. For the Irish assets, whilst a portfolio sale was slightly at odds with the agreed disposal strategy, it similarly created a sale proposition that was extremely attractive to the most active and aggressive type of investor in the Irish market.

Importance of Asset Mix

The decision was taken to create two UK High Street portfolios – one for each Fund. Whilst the two portfolios were marketed separately, investors were given the opportunity to bid on an individual or combined basis. The two portfolios were quite distinct in terms of the assets within them. One portfolio (c. £26m) comprised larger average lot sizes but with a bias towards the north east. Whilst these locations might be less

sought after by investors, some 70% of the income was secured on very strong covenants and the average weighted unexpired lease term was in excess of 12 years. In contrast, the other portfolio (c. £22m) comprised smaller lot sizes but with a bias to the south east. However, the unexpired lease term was only 5.5 years. As a combined portfolio of c. £48m, it offered an attractive and diverse spread of assets. The properties in the south east offered better rental growth prospects and asset management potential but the shorter lease terms of these assets was countered by the quality of income and length of lease from the north eastern assets. From a banking perspective, the two portfolios complimented each other and this was uppermost in our thoughts when deciding on the marketing strategy for the sales. In Ireland, marketing all of the retail and office assets together, created a €110m portfolio that would attract the interest of both overseas investors and local REITS. The quality and liquidity of the Central Dublin retail assets balanced the less attractive poorly located offices. The latter only accounted for circa 25% of the value and it was considered an investor would be better able to “take a view” on the pricing of these assets as they were acquiring some very good quality retail assets as part of the same portfolio.

The Importance of Timing

Portfolio sales are also more likely to deliver certainty in terms of timing. Selling assets individually would have taken far longer. Market conditions remain extremely favourable but it likely that this will turn at some stage, especially for weaker assets and the team were keen to capitalise on current market conditions.

Retail

Our decision to offer the two portfolios for sale as a whole or in parts was vindicated by the interest received from the investor market. Offers were received for both the individual portfolios and the two portfolios together. Ultimately, the highest bid came from a geared private equity investor who bid on both portfolios. The end result was that contracts were exchanged on the sale at a combined figure 17% above the current valuations of the individual assets. A very good result for both funds and a perfect example of how to maximise value by knowing your markets. Identifying the most likely class

of purchaser and tailoring asset sales towards their requirements resulted in a successful transaction which maximised the sale proceeds.

Ireland

After a period of marketing, which included the creation of a data room full of information on the portfolio, bids were called for. A number of good bids were received from a range of investors and we exchanged contracts a month later. Pricing was c. 40% higher than the most recent valuations. The client was delighted with both the price achieved but also the fact that a number of difficult assets had been disposed of.

THE SOLUTION

THE RESULT

Source: RLAM as at 30 September 2015.

IRISH PORTFOLIO 13 LOTS • DUBLIN RETAIL FOCUS (61%)

6.8 years average unexpired lease termf110M


THE BIG PICTURE

2015 has seen the market produce a total return of 10.4% year-to-date. We forecast that performance will moderate in 2016, with income returns exceeding capital growth.

Industrials delivered a total return of 4.6% in Q3 2015, up slightly from 4.4% in Q2. The twelve month return is now at 19.7% according to the IPD Monthly Index. Rental growth has ticked up to 1.4% for the quarter, with the twelve month rental growth rate of 4.6%. Rental growth is increasingly driving sector returns and it continues to be most marked in London and the South East markets where occupier demand is at its greatest and there is a restricted supply pipeline. Other key distribution locations include the ‘golden triangle’ in the Midlands and the North West of England.

Consumer spending habits continue to shift to online and retailers give up more store space to sales, rather than stock.

Big logistics and distribution centers in key locations are highly sought after by retailers. Non-food retailers and particularly discount and e-tailers have been the most active this year. Mid-range manufacturing SMEs are showing increasing demand for smaller and medium sized units.

Speculative completions are beginning to turn the corner and ease some of this pressure, but supply remains limited and values have continued to rise at a pace. Investor appetite remains extremely strong, with prime yields now below 5%. With income returns still relatively high when compared to retail and offices, the outlook remains positive and there is still potential for further downward yield movement, albeit stabilising in the medium term.

Offices saw a slight softening in performance terms compared to Q2, but nonetheless remain the best performing sector over 12 months, returning 20.5% according to IPD. Year-on-year rental growth is now up to 8.5%. The core London markets of the City, Midtown and the West End remain very strong and the focus of much investor activity, with other London submarkets also boosting the overall sector figures.

Rental levels in these markets continue to rise, with developers of new properties signing up tenants at near record rents. The Leadenhall building officially opened in October. The 610,000-square-foot, 45-floor tower is 90 percent occupied. Notable transactions include the acquisition of 14 Finsbury Square for £280m, reflecting a yield of 3.9%. Following competitive bidding at

better than the quoted price, the Davidson Building in Southampton Street WC2 recently sold for £66.2m, reflecting a yield of 3.9%.

There have been some noteworthy letting deals in the West End this quarter, with technology and media occupiers acquiring large volumes of space. Facebook is taking nearly 300,000 sq ft off the market in two deals at One Rathbone Square and Regents Place. King Digital have acquired 65,000 sq ft at Ampersand, Wardour Street.

Outside London, offices in the South East have led the way in terms of performance, although rental growth has picked up throughout the country. Investor demand away from London has tended towards good city locations, with quality remaining important.

The UK retail industry is undergoing significant structural changes in terms of how it interacts with the consumer in a digital age and the requirements for physical space that this entails. Polarisation between prime locations and good quality schemes compared to outdated, secondary units in unpopular town centres is stark. Regional city centre markets have low vacancy, are able to attract the major new retail brands and see improved trading conditions. Whereas other sites will need to evolve to become attractive to consumers and retailers, or change use.

With consumer spending being boosted by low inflation, accelerating wage growth, rising house prices and steady employment growth, the retail sector looks set to recover. Total returns delivered by the sector though continue to lag industrials and offices by a considerable margin. Q3

saw returns hold steady at 2.2% for the quarter, with the 12 month return returning to single digits at 9.5%. Rental growth was fairly stable at 0.3% for the quarter, but looks modest over the 12 months at only 0.5%.

London and core towns and cities continue to form the focus of retail requirements. This is reflected in the performance figure YTD. When looking at capital growth over the nine months to September, the polarisation is clear. Central London continues to outperform the market with ease, with year to date capital growth of 13.7%. However, all remaining regions underperform the market average at 6.0%. Shopping Centres and Retail Warehouses also underperform, but we remain positive on the medium-term outlook for the sector and expect it to turn the corner as the UK economy gains momentum.

OFFICES

RETAIL

INDUSTRIAL

James OrrHead of Industrial

Keith MillerHead of Offices

Drew WatkinsHead of Retail


1

2

3

Source: RLAM as at 30 September 2015

LETTING ARROW, DUKERIES INDUSTRIAL ESTATE, WORKSOP

Extending to 330,000 sq ft and constructed by CIS/AXA in 2007, Arrow is a modern, high specification distribution warehouse. Unfortunately completion coincided with the end of the last property cycle and as a consequence of challenging market conditions an occupier was never secured. The RLAM property team assumed responsibility for the property in 2014 and undertook a review of the

marketing strategy. At this time a food manufacturer was expressing an interest in acquiring the freehold and the Fund could have secured its exit from what was a challenging asset. However, our experience and activity on other similar assets intimated that market conditions were improving and we decided to retain the property. Letting negotiations commenced with the food manufacturer and a 20 year lease was completed in Sept 2015. The value of the property has increased by more than 50% since Dec 2014 and should continue to see positive market movement now it is let.

1

ASSET MANAGEMENT – LETTING18/20 HIGH STREET, WINCHESTER

The Royal London Property Fund has taken advantage of a strong retail market in Winchester. The building occupies a prime location in the High Street and was purchased by the Fund in 2011 for £4.4m. The double fronted unit was let to HMV at an annual rent of £225,000, with a lease expiring 2017. Following HMV falling into administration, the Fund actively pursued obtaining vacant possession of the unit, in order to re-let at a high rent level and to an improved covenant. Following a widespread marketing campaign, a new letting has been secured with Holland and Barrett, for a new 10 lease at an annual rent of £260,000 pax, which represents an increase of 15.5% over the previous passing rent. As a result of the re-letting and the strengthening in the high street retail sector, this asset has seen an increase in value of 27% to £5.6m

3

REFURBISHMENT AND LETTING PENINSULAR HOUSE 30 MONUMENT STREET, LONDON EC3

RLAM has recently had an opportunity to take advantage of the strong City leasing market. Earlier this year the lease on the fourth floor of Peninsular House expired allowing RLAM to update and modernise the accommodation. Being the first of the ‘Tower’ floors the fourth floor looked out over the flat roof of the ‘podium’ part of the building. Over recent years, outside amenity space and usable terraces have become more important to London office tenants as they can improve the outlook from the office accommodation, provide the staff with valuable amenity/break-out space and provide a venue for corporate entertainment in the summer months. RLAM were able to construct a large terrace of 1,800 sq ft accessed direct from the office floor which together with the quality of the refurbished accommodation enabled a rent of close to £55 per sq ft to be achieved, a new high for the building.

2


MINUTES WITH...

James Crookes heads up the Real Estate Investment & Asset Management practice at Pinsent Masons LLP, an international law firm headquartered in London. James has responsibility for market-facing business growth, business strategy and management of a 150 strong team. He is also a key contact for a range of clients including Union Investments, Standard Life Investments, AEW, Tristan Capital Partners, Trinova Real Estate, Ardstone and Royal London Asset Management, in respect of all real estate matters. James shares his views on some particularly topical legal items.

5RL: Are there any areas of law that investors are particularly requiring advice about, at the moment?

JC: Whilst we continue to see the full range of asset management and Landlord & Tenant issues, I would highlight two areas where we are increasingly active – rights of light on development and health and safety in the context of construction and operations more generally.

Rights of light are a vital consideration for any party embarking on a development project. The upturn in the development market has consequently seen an increase in the number and scale of rights of light instructions we are receiving. We’re privileged to be advising in relation to rights of light on some of the largest and most significant development projects across London and further afield. We have also acted on some of the leading cases on rights of light over the past few years including the Heaney case.

Rights of light arise where legal rights to the enjoyment of light belonging to owners of buildings adjacent to a development site are interfered with by the proposed development to such an extent the interference allows the bringing of a claim to cut back the development and / or for damages often based on shares of development profit. Strategies for dealing with rights of light are ideally devised well before development commences to de-risk projects and avoid delay caused by claims and the undesirable consequences of a failure to engage with affected owners and occupiers.

Until recently, the law relating to rights of light was very much in favour of those whose rights of light were interfered with. There has been a move lately by the courts to redress the balance and introduce more flexibility and

commerciality into decisions about cut backs which, whilst remaining the primary remedy for interference with rights, are overall less likely to be ordered.

Until there is formal law reform, however, something being discussed as a way of avoiding the perceived stifling of development caused by rights of light, these remain high on the agenda for developers and precautionary steps are essential. One of our partners is an invited member of the Law Commission’s advisory board on rights of light and as such we are fortunate to be at the cutting edge of developments in this area.

The new Construction (Design & Management) Regulations 2015 came into force on 6 April 2015 and they have certainly enhanced the duties and expectations of “clients” commissioning construction work – for example, they have to take reasonable steps to make sure that the designers and contractors appointed to undertake the project comply with their duties. Careful thought is needed to decide how that can be done effectively.

A significant change from the previous CDM regime is the replacement of the often criticised role of CDM co-ordinator with a “principal designer” who is responsible for coordinating the pre-construction work of designers and contractors. This is a new role that requires hybrid design and safety “skills, knowledge and experience”. Identifying who is able, and prepared, to do this has been something that all those involved in construction works have been wrestling with.

The principal designer needs to be appointed whenever construction work involves more than one contractor, even if the work will be over quickly and is of low value. This creates real operational and practical issues for

James Crookes

Partner,Pinsent Masons


construction work that is effectively routine maintenance.

Members of our team are in close contact with the Health and Safety Executive (HSE) officials responsible for writing and introducing the new regulations, which has provided a real insight into their thinking and expectations of what duty holders should do to comply with the law. As an example, those property owners who use managing agents to look after day to day operations should be aware that the HSE view is that in most cases the owners of the property will remain the “client” for the purpose of CDM and not the managing agent.

RL: Are you seeing any changes to the services that investors require from their lawyers?

JC: Yes – although it’s less about changes to the services themselves, and more about the way in which those services are delivered. Investors are increasingly demanding new methods of service delivery which are tailored to their specific requirements and make their lives easier, and they see this as the norm, not an added extra. This requires lawyers to embrace innovation as never before. In response, we have developed our own bespoke service delivery methodology – “SmartDelivery” – and we have just been rated as “Most innovative law firm in Europe” at the FT Innovation Awards. All lawyers are expected to provide succinct legal advice and understand their clients’ commercial drivers, but we are increasingly told that it is the efficient, consistent, bespoke service delivery that is the differentiator. And, by streamlining transactions and keeping as much process and “admin” away from lawyers as possible, it actually makes our jobs more interesting!

“ Investors are increasingly demanding new methods of service delivery which are tailored to their specific requirements and make their lives easier, and they see this as the norm, not an added extra. This requires lawyers to embrace innovation as never before.”

The Heaney CaseIn 2010, Marcus Heaney won a High Court case forcing a developer to remove the top two storeys of an office building next to his property because it blocked the light. Mr Heaney persuaded the judge to rule in his favour using the right to light law designed to allow people to have sunlight in their homes. The judge granted the mandatory injunction even after the work had been completed and the seventh floor of the development had been rented out to a firm of accountants.

Furniture Village, Old Shoreham Road, Hove - Extension of existing unit and lease regear with current tenant.

Quadrant Park, Welwyn Garden City - recent industrial acquisition.


In an environment of higher volatility and lower returns, the level of scrutiny placed on fund management companies has increased. Investors, advisors and the regulatory community place greater emphasis on transparency and consistency across all asset classes. Therefore, an effective and accurate performance measurement function has become increasingly essential.Evaluating an investment can encompass a wide variety of different measures and indicators. Importance should be placed on aligning the measurement criteria back to the investment objectives, ensuring that reporting is relevant and supports effective decision making.Investment performance is normally referenced in terms of return on capital employed. In property, total return is made up of capital growth (i.e. the movement in value of the assets, less any capital expenditure) and income return (the monies received in the form of rent, less any associated costs). The value of any building is fundamentally driven by two keys elements. The Estimated Rental Value (ERV) indicates the rental income that the property would expect to achieve in today’s open market. This is important as it indicates the future income streams that the

building would be expected to deliver. The second driver is the discount rate placed upon those cashflows, which reflects the yield at which a buyer would be willing to acquire the asset.Various factors will cause the rental value to change, for example the state of the building, the desirability of the location, latest occupier demand trends, proximity to modernised transport links. Achieving rental value growth over time is a key driver of delivering performance back to investors in the form of sustaining valuations and generating higher levels of income. At Royal London we seek to generate rental value growth wherever possible, be that through refurbishment of buildings or redevelopment of sites, or via renegotiation of terms with tenants.When looking at real estate yields several different measures are often used.Initial Yield is the annualised rents of a fund expressed as a percentage of the total capital value of the fund. This shows the income return being delivering by the rental agreements currently in place, as at today.Reversionary Yield is the anticipated yield to which the initial yield will rise (or fall) once the rent reaches the estimated open market value.

This shows what the fund could be expected to deliver in the current market, if all the leases were to be re-negotiated.Due to the relative long length of UK leases, when markets rise or fall suddenly, the relationship between rent and the actual letting value of the property, the ERV, can start to diverge quite sharply. The solution has been to determine the internal rate of return of the current income to the next rent change and then discount the perpetual current rental value thereafter. This is known as the Equivalent Yield.The weighted average unexpired lease term (WAULT) of a fund shows the duration of income left according to the current leases agreement in place with existing tenants. It is calculated by taking the time left on each lease and multiplying that by the current rent to establish a weighted average.Understanding what drives performance across all our funds assists our decision making process, identifies our key strengths and highlights potentially investment opportunities.Performance measurement provides our fund management team with a greater level of detail and contributes to inform our investment strategies.

THE CONTRIBUTORS

Insight into... Performance Analysis at RLAM Property

Gareth DickinsonHead of Property

Gareth is Head of Property at RLAM. He has overall responsibility for the Department’s funds and processes whilst retaining responsibility for a number of assets in the South East and regional office portfolio.

Drew WatkinsHead of Retail and Senior Fund Manager – The Royal London Long Term Property Fund

Drew is the portfolio fund manager for the Royal London Long Term Property Fund and heads up the Retail team with a particular specialism in retail warehousing.

James OrrHead of Industrial and Senior Fund Manager – The Royal London Pension Property Fund

James is the portfolio fund manager for the Royal London Pension Property Fund and heads up the Industrial team.

Keith MillerHead of Offices and Senior Fund Manager – The Royal London CIS Property Fund

Keith is the portfolio fund manager for the Royal London CIS Property Fund and heads up the Office team, with a particular specialism in the Central London office market.

Tim GreenwayProperty Researcher and Financial & Performance Analyst

Michael LawrenceProperty Fund Manager

Tim is responsible for providing research and forecasting support to the fund managers. He is also responsible for coordinating fund reporting and performance analysis across the team.

Michael is a fund manager working on the retail properties within the Life, Unit Linked and Royal Liver funds. His role is to help drive forward asset management and asset enhancement initiatives for the retail portfolio and to extract added value.


In thepicture...Ham Yard Hotel,London W1Modern and exclusive 5 star hotel situated in a prime location within Soho. Providing long-term, index-linked secure income.

Issued by Royal London Asset Management December 2015. Information correct at that date unless otherwise stated. This document is for professional customers only. The views expressed are the authors own and do not constitute investment advice. Royal London Asset Management Limited, registered in England and Wales number 2244297; Royal London Unit Trust Managers Limited, registered in England and Wales number 2372439. RLUM Limited, registered in England and Wales number 2369965. All of these companies are authorised and regulated by the Financial Conduct Authority. All of these companies are subsidiaries of The Royal London Mutual Insurance Society Limited, registered in England and Wales number 99064. Registered Office: 55 Gracechurch Street, London, EC3V 0RL. The marketing brand also includes Royal London Asset Management Bond Funds Plc, an umbrella company with segregated liability between sub-funds, authorised and regulated by the Central

Bank of Ireland, registered in Ireland number 364259. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland. Ref: 1072/-PRO-11/2015-CH

CONTACTFor further information about any of

our products or services, please contact:

Royal London Asset Management 55 Gracechurch Street London EC3V 0RL

Tel020 7506 6754

Fax020 7506 6796

[email protected]

www.rlam.co.uk

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Real Insights Issue 3