Commercial Property Training

James Allum – Client Portfolio Manager

Moira Gorman – Client DirectorPrepared for London Borough of Hounslow

(not to be used with or passed on to retail clients)

October 2018

Section 1

What is Commercial Property

Investment?

So, what is Commercial Property?

3

Source: IPD Index Sector Weightings, as at 30 June 2018.

Office High Street Retail Retail Warehousing

Car Showroom* Hotel* Leisure*

Industrial

Sector Weights in Market Retail Office Industrial Other *

IPD Monthly Index 34.3% 31.1% 26.3% 8.3%

How Does Commercial Property Derive a Return?

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Two components of Property returns:

Income Return – “Yield” and “Rental Growth”

(Occupational Markets)

Capital Return – Market Movements (Capital

Markets)

Understanding both markets is key

Source: IPD UK Monthly Index, as at 30 June 2018.

-30%

-20%

-10%

0%

10%

20%

2000 2003 2006 2009 2012 2015 2018R

etu

rn

IPD Income Return IPD Capital Return

Income forms the core component of total

return

2000-2018 YTD income = 70% of total return

Section 2

Why invest in Commercial Property?

0

2

4

6

8

10

12

14

3 year 5 year 10 year 20 year

UK Property UK Equity UK Gilts

Strong total returns

6

Portfolio diversification

Low correlation with other asset

classes

Relative performance

Rewards long-term investor

Source: Columbia Threadneedle Investments, as at 31 August 2018.

UK Property – IPD Actual, UK Equity MSCI UK Gross Return, UK Gilts JPM 7-10 Yr Gilts.

Total return by asset class

Section 3

How to make money… and how to lose it!

How to make money…

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Timing…Timing…Timing!

Buy strong fundamentals

Target distressed vendors

Buy mispriced risk

Acquire assets with potential to add value

Undertake extensive due diligence

Diversify

Don’t be afraid of taking profit

How to lose money!

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Timing…Timing…Timing!

Buy weak fundamentals

Over leverage

Compromise in investment strategy – pressure to

invest

Weak due diligence

Failure to diversify

Greed…

Section 4

Property case studies

Property case study –acquisition 2018Mis-priced property risk – an imperfect market

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All intellectual property rights in the brands and logos set out in this slide are reserved by the owner.

Springfield Retail Park, Haverfordwest, South West Wales

Sector: Retail Warehouse

Valuation: £17.5 million (NIY @ 7.6%)

Description:

2008 developed 101,500 sq ft

dominant retail park benefiting from a wide Bulky Goods

Planning Permission.

Average Weighted Unexpired Lease Term (to break

option) of 9.6 years.

Investment Considerations:

‘Off market’ acquisition. Distance from London limits those

prepared to do the due diligence

Fully let to seven tenants –Wickes, Currys/PC World,

Homebase, Pets at Home, Carpetright, DFS and Topps

Tiles

Modest rental tone £14.50 per square foot, appropriate for

area

Location means limited competition from internet same

day delivery services.

Tenants trade well reducing CVA risks

Property case study – acquisition 2017Unrealised asset management potential

12

Deeside Industrial Park, Deeside

Sector – Multi let industrial

Valuation: £40.8 million (NIY @ 7%, RY @ 8.4%)

Description:

Well configured 818,162 sq ft multi-let industrial estate.

46 separate units

4 development sites totalling 11.75 acres.

36 separate tenants

(10%) of vacant accommodation in nine units.

The AWULT (to break option) across the asset is 5.5

years

Investment considerations:

Severe shortage in supply of accommodation in the North

West industrial leasing market

Pricing underpinned by vacant possession value /

replacement cost

Huge potential to add value through pro-active asset

management

Requires systems and personnel capable of active

management to exploit the opportunity

All intellectual property rights in the brands and logos set out in this slide are reserved by the owner.

Property case study – disposal 2018Profit crystallisation and risk reduction

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65-68 South Molton Street, London W1

Sale Price: £55 million

Sector – Retail/Office

Description:

Prime Mayfair, long leasehold, mixed use retail/office asset

(33% retail and 67% office) fully let to 10 tenants.

Average retail rents reflect £480 ZA and average office rents

reflect £57.50 psf overall.

Tenure: Long Leasehold

Disposal Rationale

Limited potential to add value through proactive asset

management.

Sale at £55M reflects 2.8% NIY reflects peak pricing for

comparable Mayfair long leasehold assets with limited

rental growth potential.

Sale crystallises a significant profit valuation

Sale decreasing exposure to ex growth central London

assets at premium investment pricing.

Profit on Valuation: £5.3 million (9% uplift)

All intellectual property rights in the brands and logos set out in this slide are reserved by the owner.

Important information

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For internal use and for Professional and/or Qualified Investors only (not to be used with or passed on to retail clients)

All data is sourced from Columbia Threadneedle Investments as of 31st March 2018, unless otherwise stated.

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