UK market overview
The Jones Lang LaSalle Balanced Fund Index rose 0.51% last month, compared with 0.34% in April, writes Julian Schiller. The index is up 1.83% since the start of the year and 4% up over the past 12 months. Taking into account secondary market pricing, the 12-month return falls to just 2.64%.
There has been a notable rise in secondary market demand over the month for the more sought-after balanced funds, which has pushed up pricing. This seems to have been spurred by investors’ reluctance to subscribe for new equity, but to seek more attractive secondary market pricing instead. There was buying interest in funds including BlackRock, Hermes, Threadneedle PUT and Lothbury at small discounts to their offer prices (i.e. premiums to net asset value). Prices are also being pushed closer to NAV because fund managers are managing redemption requests in a timely manner. Therefore, even secondary market deals for less sought-after funds are occurring at around NAV. In all cases, to our knowledge, pricing is above the funds’ bid price.
Demand for core retail exposure remains healthy, with a narrowing of discounts across all the frequently traded retail warehouse and shopping centre funds. Shopping centre fund trading has risen, with several trades being agreed and/or settled in Standard Life Shopping Centres, Lend Lease Retail Partnership, Henderson Shopping Centres and Grosvenor Shopping Centres.
In several cases, the trade sizes have been around £10m, and in some cases above £50m There has also been more trading in the three bellwether retail warehouse funds in the past month. Portfolio rebalancing and higher allocations to the sector have helped push discounts to NAV down to single digits, in some cases halving in a month. Buyers of Standard Life Retail Parks, Henderson Retail Warehouse Fund and Hercules Unit Trust are willing to trade at discounts of around 2-5%. These trends suggest that the over-correction of retail warehouse pricing has now been reversed, and is now more in line with other sectors.
Central London funds are still at the forefront of many UK focused investors’ requirements. Premiums have improved slightly since last month, with bids of around 1-3% common for WelPUT and Henderson Central London Office Fund (HCLOF). As is often the case in this market, vendors are reluctant to sell a holding they expect to outperform the market, causing something of an impasse. Activity for regional office funds remains practically non-existent. Primary capital raisings for both WelPUT and Henderson’s CLOF 2 continue to be of interest to equity sources, but the cost of subscription is still an entry barrier for many.
There have been some deals in IPIF and Falcon at modest NAV discounts of around 2-5%, but volumes are low. Investors rebalancing their portfolios have been the common source of equity, with few new investors seeking industrial exposure. There is some interest in Ashtenne and AIPUT, but few deals to provide solid pricing evidence.