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The Big Picture

The national picture viewed by our team of


Latest Hot Property

Industrial units in Chessington, Surrey

Two Minutes With...

An interview with Stephen Elliott –

Senior Fund Manager of the Royal London

Property Fund





The RLAM Property team comprises 19 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.





in total


RLAM Property – Funds under management

No of

holdings holdings (£m) Value of by value %

Retail 154 2,461 46% Other 25 351 7% Office 88 1,628 31% Industrial 78 833 16% Total assets 345 5,273 100% RL CIS £1.64bn TOTAL £5.3bn RLPP £1.93bn RLLTF £1.24bn RL Ireland £7m SLLTF £14m RLPF £350m RLMF £172m

Total rental


£250m p.a.

Total transactions

2013 2014 Sales £180m £58m Sales (number of ) 14 15 Purchases £360m £219m

Purchases (number of) 16 13

Total transactions £540m £277m

Total AUM and the split between the sectors




Asset and Fund

managers Development Managers Portfolio Services

Note: Total FUM includes Royal London Pension Property (RLPP), Royal London Co-operative Insurance Services (RL CIS), Royal London Property Fund (RLPF), Royal London Long Term Fund (RLLTF), Royal Liver Main Fund (RLMF), Scottish Life Long Term Fund (SLLTF)

Source: RLAM as at 31 March 2015

Total number of tenants, across

all the property portfolios



Business Centre,


The Royal London Property Fund purchased Compass Business Centre, in Q3 2014. The acquisition of this high quality development, off market direct from the developer following completion, demonstrates the confidence RLAM has in the ability to implement a successful letting programme. With units ranging in size from 4,766 sq ft to 51,889 sq ft this well-located, quality warehouse scheme, offers cutting edge energy saving technologies. The largest unit on the scheme is already under offer at a level of rent in excess of our expectations and will provide an annual rent level of £210,000.



Commentary from our Head of Property



Latest aquisitions

to our portfolio


he IPD Monthly Index posted a total return of 19.3% for 2014, with industrials, offices and retail returning 24%, 24% and 14%, respectively. After a strong finish to 2014, total returns for All Property were slightly more subdued at 3.0% in Q1 2015, driven by capital value growth of 1.6%. Offices and industrials continued to outperform the retail sector. All Property equivalent yields moved seven basis points lower over the quarter to 6.3%. In terms of prime and secondary yields, better secondary property closed the gap on prime assets.

2015 has seen investor appetite for UK commercial property remain strong and we are predicting All Property returns of just over 15% for 2015 with the risk weighted to the upside. Whilst yield compression in London is likely to be modest, the gap between regional yields is set to narrow. London’s performance will be driven by strong rental growth in the near term while a stronger

economy, stronger occupier demand and nascent rental growth will push yields in the regions. Total transaction activity in the first quarter of 2015 was £16.1 billion, 25% lower than in Q4 2014 but 38% higher than in Q1 2014. Overseas investors accounted for just under half of total transactions across the UK, although this increases to 66% for Central London office investment. As a result, Q1 2015 transaction volumes were at their highest first quarter level for four years.

Continued strong economic growth and increasing employment has had a positive impact on the commercial property market in the UK. However, the weakness of nominal earnings growth and the continued growth of e-commerce still present challenges to retailers. This is confirmed by the evidence of the falling rental values in retail, but earnings growth are forecast to pick up in the near future which will boost consumer optimism.


Gareth Dickinson

Whilst the outcome of the UK general election is now known, this does not necessarily remove the level of uncertainty for property markets. A referendum on EU membership could impact business growth and confidence in general, as well as City and Central London markets as both investor and occupier sentiment weakens. All the main political parties made much of the need to build more houses - a sentiment we agree with - but there remain many obstacles to bringing this to fruition, not least of which is the underlying planning system. Hopefully the removal of the twin threats of a mansion tax and some form of rent control will be welcomed by the residential sector. Other issues to be monitored include the varying forms of devolution being proposed and now looking more likely (from Scotland to the “northern powerhouse”) and the risks posed by deflation However, on a more upbeat note the general economic news remains very positive and we believe property fundamentals (in particular supply and demand) also remain favourable.


Drew Watkins

With the increase in online and click-and-collect, there is an urgent need for most town centres to evolve to cater for the changing needs of consumers. Demand from non-food retailers for big unit out-of-town space is high, but the uncertainty over the future of ‘big box’ superstores, and decline in DIY has led to a slow-down in out-of-town development. In terms of the grocery sector in the UK, intense competition, ongoing price wars and over-supply in some locations may deter investors, but some may well see this as an opportunity. Discount supermarkets such as Aldi and Lidl are still expanding, with Aldi set to open 60 stores in 2015, and Lidl planning between 20 and 40 new stores.

Household incomes and earnings are improving. Retail sales have been on an improving trend for some time, and survey measures show positive consumer sentiment. For 2015 we predict better returns for retail warehousing than for other retail formats. London standard shops and retail warehouses are anticipated to see the strongest rental growth over the coming year.




2014 saw a strong demand for office

accommodation in central London and

an improvement in consumer confidence,

boosted by falling levels of inflation and a

rise in wages. But will these trends continue

into 2015?

Industrials delivered a total return of 3.6% in the first quarter of 2015, according to IPD. This meant the annual return to the end of March 2015 was 22.7%. The start of 2015 has continued to see strong investor demand for industrial assets, which has pushed initial yields down by almost 75 basis points in the course of the past 12 months. However, rental growth is increasingly contributing to returns in the sector, with the rental value growth rate rising to 3.3% for the 12 months to the end of March 2015. Indeed in the first quarter alone, rents grew by 1.1%. In London and the South East, growth rates are in excess of 4% and rental growth rates have now been above 2% for almost a year, the first time this has been the case since the late 1990s. With inflation rates currently low (Consumer Price Index at 0.0%), this means that

there is significant real growth in rents on industrials. On the investment side, the market continues to be led by equity buyers and forward funding deals, such as the Tritax Big Box REIT, who have acquired the new Ocado distribution warehouse in Erith, paying £98.9m at a yield of 5.25%.

The outlook for industrial is very positive and we anticipate that returns will be just above 15% in 2015. We envisage a couple of years of above trend rental growth especially in London and the South East where competition with other land uses will limit supply whilst demand remains strong. We anticipate a further fall in the level of prime yields given the high levels of investor demand for the sector.

All UK Offices delivered a total return of 4.0% during the first quarter of 2015, meaning the annual return to the end of March 2015 was 22.9%. In Q1, City offices delivered a return of 7.0%, compared to 6.6% for Midtown and West End offices and 6.3% for the South East. Regional markets lag behind, but returns are strengthening: 4.6% in Q1 2015. Investor demand in the regions continues to be focused on the larger cities, although investment opportunities are increasingly limited. As such we are seeing interest spill over to other locations, and second tier cities will increasingly feature on investors’ radars during 2015. Already in Q1, over one-third of 2014’s investment volumes has completed in the regions, led by the sale of a 50% stake in Media City UK in Salford for circa £250m. Elsewhere we have seen some overseas purchasers active in the regions

for the first time: for example VGV’s acquisition of three blocks at Brindleyplace, Birmingham.

For office property the outlook is buoyant and spreading out across the UK, rather than just being a London and South East story. Investors are still seeking yield and this is driving them to look at prime stock in second-tier locations where the demand prospects have shown signs of improvement. Aside from that, London still remains in favour with a significant amount of capital looking to buy. Our 2015 forecast predicts rest of UK offices will provide a total return of c. 11%, compared with our prime Central London office forecast return of closer to 20%. Quality remains paramount to performance and poor secondary and tertiary properties in weak locations are expected to continue to struggle.

Total returns for All Retail were 1.93% in Q1 2015, with capital values increasing by 0.46% over the quarter. The annual return to the end of March 2015 was 13.4%. After the strong finish to 2014, retail sales continued to increase steadily but slower in the first quarter of the year. Retail sales growth was only 0.5% in Q1, significantly lower than Q4 2014 level (2.5%). In terms of the internet sales, the value decreased by 2.3% compared with January 2015 and accounted for 11.6% of all retail sales in February 2015. Consumer confidence is trending up, as lower inflation boosts disposable incomes, which will provide a welcome fillip for the retail sector.

Rental values for all UK retails remained flat in Q1 2015. While rental values for high street shops and retail

warehouses continued to increase, rents for shopping centres fell. Overall, retail is underperforming the other sectors in terms of rental value growth, capital value growth and total returns as well. Shop vacancy rates across Britain’s high streets fell to 13% in March, the lowest level since 2010. There is also regional divergence in terms of vacancy rates, with the South East, particularly London recording the lowest. In contrast, the worst affected region was the North East, with no sign of improvement.

The first quarter of 2015 has witnessed exceptional demand from retailers seeking space in Central London, with the large number of new entrants to the UK. This pushed rents higher in some locations such as Oxford Street.




James Orr Head of Industrial Keith Miller Head of Offices Drew Watkins Head of Retail







RLAM manages Halbeath Retail Park, Dunfermline and confirmed on 3 March that a planning application had been submitted to Fife Council for additional retail units at the park, a revised service route, enhanced soft and hard landscaping, cycle racks, trolley bays, speed safety measures and

improved pedestrian links across the park. The new units are anchored by a store for a leading discount retailer. The development will add to the attractions in the town and stop local people having to travel further afield to Kirkcaldy or Edinburgh to find the range of goods and services they seek.



RLAM has purchased Scimitar Park in Basildon for the Royal London Pension Property Fund. We consider this to be a prime South East multi-let industrial estate with significant rental growth prospects in a very competitive market place. The prime industrial estate totals 129,991 sq ft and is multi-let to four

tenants at a passing rent of £708,890 per annum. This equates to £5.47 per sq ft and provides a good base for growth. The average weighted unexpired lease term is c. 6.5 years.




On 28 January planning permission was unanimously approved for the 107,500 sq ft office building, Tamesis T1 in Egham. The building has been pre-let with a new 15 year lease to global information technology research and advisory company, Gartner as their new European Headquarters. Situated on the south side of The Glanty (A308),

the approval allows for the redevelopment of the site, replacing an existing 45,000 st ft, 1980s three-storey building with a new five-storey commercial headquarters office. This will be an exciting project for the next two years and a significant investment for RLAM, retaining an important tenant.




Source: RLAM as at 31 March 2015

“ Given the level of

yield compression

evidenced across all

sectors over recent



levels of rental


will be a

key factor in driving

returns this year ”




Stephen Elliott, Senior Fund Manager – Royal London

Property Fund, reveals why the gains made in UK property

in 2014 could be repeated again this year


Is the hunt for income increasing demand for property assets?

Last year property was one of the best asset classes available in the UK, with an impressive total return well above most equities or fixed income investments. While such gains may cause investors to pause and consider their options, we see many reasons why it could turn out to be a very similar story in 2015.

There have been two major factors driving returns for UK property investors in recent years: attractive yields and high demand. Faced with a world of near zero interest rates, investors have turned to assets like property to generate returns.

Many assets have done well over the last three years against such a backdrop, but it is that alignment of returns which is now creating problems for income hunters. The price of equities and gilts, for example, have moved upwards in tandem, with government bonds showing record low yields and equity markets touching record highs – leaving both potentially vulnerable to corrections. The range of options available to investors looking to maintain a healthy income are becoming increasingly limited, therefore asset classes which can still pay out healthy dividends continue to attract interest. Property is squarely in that camp. Last year our Royal London Property Fund generated a total return of 14.5% (Source: RLAM as at 31 December 2014), with around 5% attributed to its rental income. We think such returns could be achievable again in 2015 as a similar outlook remains.

Are rental levels set to increase?

2015 is also being billed as the year when widespread rental growth finally returns to the sector, having all but vanished since the credit crisis.

Rental growth has not been strong in recent years, but that appears to be changing, and crucially we are in a far better place as an

economy. This is important because it means the legacy of the financial crisis – which saw construction of new property fall markedly - could actually start to help investors. For example, if you look at the availability of good quality, well-located buildings for businesses to expand into, many locations are presenting little or no option. Therefore, as companies continue to recover and expand again, demand for existing premises will only increase. This has a knock-on positive effect on rents, and many areas are already seeing rental growth.

So what kind of deals have been attracting your attention?

The focus continues to be on quality assets, with the ability to provide stable income streams and the opportunity to grow those rents over time. The Royal London Property Fund has bought into a high-quality business park in Chessington which was recently completed and showcased in the “Hot Property” section. The park is currently unoccupied but we anticipate strong occupier demand and believe it will see substantial lettings in 2015.

This is a big step-change in our market. Even 12 to 18 months ago we would not have invested in such sites because of the lack of occupants, but the environment has moved on and we now see this is a way to generate attractive returns. The advantage of investing in good quality but unoccupied properties is that you buy in at a discount, so although you surrender some income initially, the asset is best in class and yield improvement is expected when let. So while this year should continue to see some solid returns, we think now is the time to look for alternative sources of income which – while not completely apparent yet – should provide a healthy boost to the Fund later this year. That is not to say the environment of capital growth is over, but after such a great run it is prudent to widen our range of investments as we strive to deliver a strong total return in 2015.

“ The


has moved on

and we now

see this is a way

to generate




The construction industry seems to have never been busier. As a result contractors are finding it difficult to source labour and materials, driving tender price inflation particularly in London and the South East. Building contractors are increasingly only tendering for work on a ‘two stage’ basis. The ‘first stage’ only encompassing site running costs, programme and mark-up. The client therefore takes all the risk as the contractor buys the subcontract packages and is reliant on the builder’s ability to get competitive prices from his supply chain (the ‘second’ stage). On projects with higher risk profiles it can be difficult to find four builders willing to tender, even on a two stage basis.

The market conditions are making budget control challenging, with many projects coming in over budget expectations once the ‘second stage’ tenders have been completed.

In order to ensure we get value for money for our clients, we consider it is important to introduce as much competition as possible during the procurement process. We are therefore managing the procurement risks in a number of ways.

We make sure the risk profile of projects is acceptable to contractors. This will include not only how the project is procured, but the terms and conditions of contract that we are offering. After all, there is little point asking a builder to accept conditions of contract that we know they will not accept or which carry an additional ‘risk’ premium. By

offering reasonable terms we are also demonstrating that we understand the current market and the difficulties builders face engaging with and getting their supply chain to perform. It gives the builder confidence that they will be treated fairly.

On less risky projects we will seek ‘hybrid’ two stage tenders. The first stage tender will include much of the initial work such as the foundations. This enables us to establish a fixed price for a large section of the project early in the procurement process, which in turn gives both us and the builder confidence the budget is achievable. We may, if the risk profile is right and the first stage tender has given us confidence

in the budget, instruct the builder to proceed while the later trades are tendered.

We also trust in our reputation as a ‘fair’ client. We do not ask builders to tender for projects unless we fully intend to build them.



Insight into...

Ensuring best value for developments

Gareth Dickinson

Head of Property

Drew Watkins

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

James Orr

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

Stephen Elliott

Senior Fund Manager – Royal London Property Fund

Keith Miller

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

Philip Sutton

Head of Development Project Management

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

Stephen Elliott manages the Royal London Property Fund. Stephen deals across a number of different sectors but mainly focuses on the Retail sector.

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.

Philip is the Head of Development Project Management and is responsible for overseeing the development and refurbishment projects across the funds.


Issued by Royal London Asset Management May 2015. For professional investors and advisers only. All data as at 31 March 2015 unless otherwise stated. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. 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 (CIS) 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: 357-PRO-04/2015-CH

Royal London Asset Management

55 Gracechurch Street London EC3V 0RL


020 7506 6754


020 7506 6796





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