UK market overview
Last month the Jones Lang LaSalle Balanced Fund Index experienced its strongest rate of growth since the middle of last year, rising 0.45%, compared to 0.22% in January, writes Julian Schiller. The index has risen 1.0% in the past three months and 6.26% for the preceding 12 months.
Taking into account secondary market pricing, the 12-month return falls to a more modest 3.37%. The improvement was driven largely by higher premiums paid for balanced exposure, which moved into positive territory in February, at 0.39%, from -0.21% in January.
Trading was still muted, particularly compared to late 2010, with only a handful of deals, as few new investors are seeking indirect market exposure via the secondary route. But some deals are rumoured to have taken place at significant levels, which could have somewhat distorted overall pricing.
Funds in this sector remain the most frequently traded, with a number of sub-£5m transfers taking place in several funds, including those managed by BlackRock, Hermes and Threadneedle.
There is still healthy demand for units in many other funds, including those managed by Royal London, Lothbury and Aviva, although demand has been tempered by a lack of sellers at near to net asset value.
Both underlying performance and secondary market pricing improved this month for the first time since Q2 2010 and overall pricing has returned to premium levels for the most sought-after funds. This trend has been largely driven by steady demand on the primary market.
Achievable pricing remains in a narrow band of around 2% above or below NAV, but is highly dependent on the fund. All funds in the balanced universe would probably now trade within the bid/offer spread.
Demand for core retail funds remains steady, although investors are becoming selective on acquisitions. The sought-after shopping centre funds managed by Standard Life, Henderson and Lend Lease trade at small discounts of around 2-6%, while less favoured funds trade at big discounts. Even with increased interest, the Mall still trades at discounts of near -20%. This is up from around -40% last year, but still fails to take into account big valuation uplifts for the fund.
Retail warehouse fund deals are rare, but pricing has remained relatively stable. The emerging trend is for modest falls in discounts from current levels of around -3% to -12%.
Few investors are seeking industrial exposure and demand has largely been limited to IPIF, at small discounts to NAV. Other industrial funds tend to trade at discounts of around -5% to -10%. Interestingly, recent trades in CBRE Investors’ Falcon fund have taken place at between -2% and -4% discounts to NAV.
For larger lot sizes, it is challenging to dispose of holdings at this level of pricing, and there is expected to be a significant impact on pricing for larger stakes.
Central London offices remain the only real area of interest for investors. Purchasers remain relatively content to acquire units in Schroders WELPUT and Henderson CLOF at small premiums to NAV of around 1%.