Indirect investment market: Jones Lang Lasalle market commentary

UK market overview

The Jones Lang LaSalle Balanced Fund Index was flat in December, lifting just 0.01% after November’s and October’s similarly modest gains of 0.15% and 0.22% respectively, writes Ashley Marks. The index rose 3.01% over 2011 – 4.31% when including secondary market pricing. This compares favourably with the IPD UK commercial property monthly index, which rose just 1.2% over the year. Secondary market pricing has deteriorated in almost all cases, as low property return forecasts have affected market sentiment.

Balanced funds

The JLLCF balanced fund secondary market pricing index continued to decline from its peak in July 2011 of a 1.57% premium, falling from a 0.66% premium to November NAV to just 0.30% to December NAV. The funds transacting above NAV remain a small yet familiar group, including BlackRock UKPF, Threadneedle PUT and Hermes PUT.

Retail funds

Secondary market pricing for the low and ungeared shopping centre funds has also deteriorated slightly, with discounts to NAV slipping to 3–6%. Bearish forecasts for retail warehouses, coupled with fund-specific issues in some cases, have led investors to reduce their exposure to this sector. Therefore secondary market pricing is continuing to fall, with average discounts of 3–7%, though closer to 30% discount for The Mall.

Office and industrial funds

The desirability of central London office funds has reversed and there has been a further decline in indicative pricing.
For example, WelPUT is now available at around 3% discount to NAV, compared with a premium just one month ago.

The industrial sector has seen few transactions, with SWIP AIPUT and L&G IPIF still the main investor targets. Discounts for these funds remain at around a 5% discount to December NAV. Higher-geared funds, such as The Industrial Trust and Ashtenne, remain at far larger discounts (greater than 20%).

UK secondary market overview 2011

2011 was a record year for the UK secondary market, with JLLCF estimating that approximately £1.3bn was traded – almost a third of the global total (around $5.5bn). The UK’s high level of transparency helped it maintain its unique status as the global leader in secondary market activity. Around 60% of these transactions were brokered through intermediaries, demonstrating the increasing reliance on third parties seeking pricing validation by investors.

Thanks to the favourable redemption and subscription facilities offered by most UK balanced fund managers, JLLCF witnessed twice as many closed-ended, sector-specific trades as open-ended, balanced fund trades.

UK investors continue to dominate transactions, as they are both more familiar with the market and more conservative in pricing than most of the opportunistic global secondary market participants.  Multi-managers are again among the most active secondary market participants.

It remains to be seen what impact market consolidation will have on activity.

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