UK market overview
The Jones Lang LaSalle Balanced Fund Index started 2011 in a similar fashion to the end of last year, with a modest gain of just 0.22%, compared to 0.33% in December, writes Julian Schiller. Average secondary market pricing for balanced funds improved from -1.00% in December 2010 to -0.21%. Taking into account secondary market pricing, the 6.89% 12-month return falls to just 2.68% over the same period (a slight improvement from last month, due to the improvement in premiums being paid).
Initial signs that there would be a fair number of deals in January proved false, mainly because many market participants are still working out or refining their 2011 investment strategies before trading. Many asset aggregators (i.e. multi-managers and consultants) have also cut their allocations compared with last year and this relative absence of new money in the market has reduced overall liquidity.
This sector continues to be the most active. Both pricing and deal volumes remain steady, with most deals occurring within 2% of the most recent net asset value. Small premiums can still be achieved for the favoured funds, with less favoured ones still trading relatively close to NAV.
This sector can expect to experience the highest levels of trading in the coming weeks, driven by the demand for core retail that still dominates investors’ target allocations, and vendors being more accessible. Pricing in the shopping centre segment remains at modest discounts. The most frequently traded funds – Standard Life’s, Henderson Shopping Centres and Lend Lease Retail Partnership – are changing hands at discounts of -3% to -6%. Deals in the Mall have occurred at big discounts to NAV, largely due to the fund’s gearing level.
There were few retail warehouse fund deals this month, as buyers’ and sellers’ pricing expectations continue to be too far apart. Prices have changed little since December, ranging from -3% to -11% for the more frequently traded vehicles (Standard Life Retail Parks Trust, Henderson Retail Warehouse Fund and Hercules Unit Trust). Most other funds outside this small group have failed to transact recently. But the pricing differential between buyers and sellers should narrow slightly over the coming weeks, allowing trading to pick up.
As per last month, there has been little activity in this sector. A handful of deals in the sector’s most liquid fund, IPIF, occurred at small discounts of between NAV and -5%, but these involved fairly small volumes, mainly less than £3m. Vendors seeking to sell larger volumes will suffer because of a relative lack of demand. Most investors continue to avoid the higher-geared industrial funds.
A number of office-sector deals have taken place, but all within Central London, a sub-sector that has remained consistently in demand. Prices remain marginally above NAV, at premiums of 0.5% to 2%, for WELPUT and Henderson CLOF. Regional office funds are still out of favour.