UK market overview
Average secondary market pricing continued to improve across all UK sectors in March, moving closer to net asset value by a further 0.33%, to an average discount to NAV of just 0.43%, writes Ashley Marks.
The improvement was driven by the balanced and retail warehousing sectors, as investors seek higher-income-producing funds, which remain in short supply on the secondary market. During Q1 2014 average secondary market pricing across all UK sectors improved by 130bps, from -1.73% in December.
Average balanced fund pricing moved from a 2.79% premium to NAV in February to a 3.0% premium in March. A number of investors faced with a lack of re-investment opportunities are seeking balanced fund exposure rather than holding cash, due to the higher distributions. This has added further demand to an already constrained market, pushing pricing further upwards.
During March, average pricing for retail warehouse funds shifted 127bps from a 3.77% discount to February NAV to a 2.50% discount. This was driven by increasing demand for Henderson Retail Warehouse Fund and Hercules Unit Trust.
Investors are looking for strong income return and potential capital growth from these funds. But sellers remain scarce with the funds in discount territory. Demand for shopping centre funds is still strong, but there has been little activity, as buyers are unwilling to meet sellers at or above NAV.
Industrial pricing remained unchanged in March due to lack of available stock. IPIF buy-side demand remained at around a 5.5% premium to NAV. Some investors are considering joint ventures and separate accounts to access the sector due to the limited availability in the fund universe.
Activity in CLOF and WELPUT remained thin, but is likely to increase after their restructurings. Both funds continued to deliver improving returns in Q1. Pricing for WELPUT is at around a 2-3% discount, while CLOF remains at NAV or at a small premium.
Interest in Continental Europe is for funds with exposure to prime, core assets in main cities, as investors seek to minimise potential downside risks. Pricing is still at deep discounts for funds with structural, debt or expiry problems.