Indirect investment market: Jones Lang LaSalle market commentary

UK market overview

The Jones Lang LaSalle Balanced Fund Index showed a modest 0.51% increase in January, but has fallen 2.61% over the past 12 months, writes Julian Schiller.

Taking into account secondary market pricing, the index remains relatively unchanged at -10.27% for the 12 months to the end of January. Secondary market activity is arguably at its highest level since 2006/2007. Investors are taking advantage of the recent boost in liquidity in the UK funds market, seeing an opportunity to rebalance portfolios or divest holdings that for much of 2009 were too challenging to warrant selling. Many buyers, bolstered by new equity inflows, have been eager to invest and benefit, at least in the short term, from continued uplifts in valuations.

Differences in opinion over the property market’s medium-term prospects have led investors to agonise over the right timing for indirect deals. However, now that funds’ net asset values are arguably reflecting their perceived worth more closely, secondary market discounts and premiums are close enough to NAV to encourage most investors to consider deals.

Balanced funds

Activity has been muted by the lack of vendors of units and given that many funds are now closed to new investment for the next few months, demand for entry via the secondary market is likely to increase. However, it is unclear where the sellers will come from. Pricing remains at just below offer price for most funds, but in some cases this has fallen in January due to lower forecast return expectations. A few deals have occurred at 2-4% premiums to January NAV.

Retail warehouse funds

Units in Henderson Retail Warehouse and Hercules Unit Trust have been sold at premiums of around 5-8% to December NAV; demand for this sector has been very strong, but much of this demand should be satisfied in the short term.

Shopping centre funds

This sector is still attracting steady interest from buyers. Last month there were deals in lower-geared funds, including Lend Lease Retail Partnership and Henderson Shopping Centres Fund, at premiums of around 4-8%. Off-market deals have been a common theme in this sector recently.

Industrial funds

The Q4 2009 unit prices announced in early January have provided sufficient clarity for investors to consider transacting on holdings, with the focus remaining on the lower-geared industrial funds. A handful of deals has taken place in this sector, with pricing varying widely from fund to fund, depending heavily on the quality of underlying portfolios and gearing levels.

Offices and alternative sectors

As has been the case for some time, interest remains concentrated on Central London- focused funds WELPUT and HCLOF. Units in these funds have sold recently at premiums to NAV of 3-7%. Lack of supply of units for these funds has led to heightened interest from buyers towards regionally-focused office funds, such as those managed by RREEF and UBS, the latter’s being focused on the South East as well as London.