UK market overview
The Jones Lang LaSalle Balanced Fund Index has fallen 10.2% so far this year and 42% from its July 2007 peak, writes Julian Schiller. Taking into account secondary market pricing, peak-to-trough pricing continues to improve, to -35.6% in November, from-37.9% in October.
Despite interest from a diverse range of potential buyers, secondary deal volumes were very low in November due to a lack of vendors. Demand was channelled into primary markets instead, capital inﬂows reaching their highest level since Q2 2007. Capital was mainly placed in large open-ended, balanced funds, many of which now hold 10-20% of their net asset value in cash.
The few deals last month suggested improved pricing for the most popular funds, with premiums for seeded and lowly geared funds approaching double digits. Demand for less desirable funds in under-supplied segments is also rising, with bid prices now at or above NAV. Investors have even shown interest in once unpopular funds such as the Mall, X-Leisure and the Junction.
There were few deals in November due to a lack of units on the market. The deals that did happen (SEPUT and BlackRock) occurred at small premiums to NAV. Vendors that will sell can achieve near respective offer prices, as buyers accept that the only other way to invest is via primary subscription.
Balanced funds face having to close to inﬂows due to high cash holdings. Hermes and Threadneedle have already announced that they will limit new investment into their open-ended funds by staggering cash inﬂows, so that they are not under undue pressure to invest in a stock-constrained market.
Discounts, which were up to -50% in March for retail warehouses, have nearly vanished as sentiment improves. There have been several deals at or above November NAV for the bellwether funds. There have been few shopping centre deals, following October’s and November’s sizeable trades in Standard Life’s Shopping Centre Trust (at a small discount). But a small trade in the Mall provides evidence that typically out-of-favour funds are now also drawing some attention.
Industrial and ofﬁce funds
There have been few industrial deals. Buyers are bidding for any available units in low or ungeared funds, pushing bid prices to above NAV. For sought-after funds, bid prices are approaching double digits (off September NAV), but offer prices are not yet at that level.
Airport Industrial Property Unit Trust is seeking to raise capital – the second UK industrial primary capital raising, following Hansteen’s move earlier in the year. Investors in the more desirable ofﬁce funds remain content to enjoy increasing values and are under no pressure to sell. A few deals have occurred at or close to NAV, and premiums are expected to creep up.
Unite has raised £133m in a primary issue and applied for a further £23m capital commitment. Final subscriptions are likely to be capped at a total of £150m, so this fund raising is likely to be over-subscribed. There has also been interest in leisure funds, due to favourable pricing relative to other sectors.