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Improving income in a low interest rate environment
A focus on commercial property
John Kelly
Head of Client Investment
Page 1
What we will cover
• Current interest rates and expectations
- improving cash returns
• Opportunities and risks of other investments
– a maturing cycle
– valuations
• Commercial property
– return characteristics
– costs and liquidity
Page 2
Latest expectation for interest rates
Consensus expectations for Base Rate
5
Implied Rate 10.10.2014
Implied Rate 05.08.2014
Implied Rate 20.06.2014
4
3
2
1
0
2014
2014
2015
2015
2016
2016
Source: Bloomberg / CCLA as at 10.10.2014, 05.08.2014 and 20.06.2014
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2017
2017
2018
2018
2019
Interest rates will be slow to rise because:
• Inflation is not a threat
• Debt levels are still high
• Strong sterling is a concern
• Government policy will continue to drag on activity
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Improving cash returns
• By lending longer
• Term rates are not attractive:
– one year 0.5%
– three years 1.1%
– five years 1.6%
CPI 1.2%
• Reduce opportunity and flexibility, increase risk
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Improving cash returns II
• By reducing credit quality
• The asymmetry of risk for cash investors
• Bail-ins – a particular threat to the sector
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Asset classes other than cash
UK fixed interest, 10 year gilt yield
12
10
8
6
4
2
0
01/03/92
01/03/94
Source: Bloomberg (10.09.2014)
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01/03/96
01/03/98
01/03/00
01/03/02
01/03/04
01/03/06
01/03/08
01/03/10
01/03/12
01/03/14
Asset classes other than cash II
Equities, 10 year returns to 30 September 2014
+160.0%
+140.0%
+120.0%
+100.0%
+80.0%
+60.0%
+40.0%
+20.0%
+0.0%
-20.0%
30/09/2004
30/09/2006
UK Equities +120.22%
Cash +26.13%
30/09/2008
30/09/2010
Global Equities +141.91%
Inflation +37.14%
30/09/2012
30/09/2014
UK Government Bonds +71.95%
UK Commercial Property +76.92%
Sources: Bloomberg, IPD: FTSE All-Share Total Return Index, FTSE All-World Total Return Index, FTSE UK Govt All-Stocks Total Return Index,
IPD Monthly Total Return Index*, 7 Day LIBID, Retail Price Index* (*lagged a month to give a contemporaneous picture).
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Asset classes other than cash III
Commercial property
• An inefficient asset class
• Predictable income, based on contract
• Valuations compressed by recession
• Occupier markets just starting to recover
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Long term characteristics are the most important
Property investment returns since 1970
%
30
20
10
0
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
-10
-20
-30
Source: CCLA and IPD
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Income return*
Capital growth*
*Past performance is no guarantee of future returns
2007
2010
2013
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar13
Jun-13
Sep-13
Dec-13
Property: prime vs secondary
Low Yield
Source: IPD
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High Yield
200.0
190.0
180.0
170.0
160.0
150.0
140.0
130.0
120.0
110.0
100.0
Current conditions: a building recovery
• Economic and financial climate helps not hinders
• Activity levels higher, valuations recovering
• A gradual thaw in occupier markets?
– void rates still high
– rents improving in some areas
• We expect positive returns for the medium term
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Short term trends are positive
Source: Investment Property Databank
Page 13
How to invest:
• Funds are the lower risk choice
• Diversification reduces risk, improves income certainty
• Costs and liquidity are important factors
Page 14
LAPF Property Fund
Fund performance – total returns (NAV) basis
% longer term returns to 30 June 2014
• Unique accounting advantages
17.8
18.0
15.2
16.0
14.0
• Strong independent governance
12.4
12.0
9.3
10.0
8.0
6.0
• Attractive income
8.9
6.6
5.0
4.0
• Excellent performance
4.0
2.0
0.0
10 yrs pa*
LAPF
5 yrs pa*
3 yrs pa*
1 yr pa*
Other Balanced Property Funds Index
Source: CCLA and IPD – Annualised past performance is no guarantee of future returns.
NAV basis is after the deduction of all expenses
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Property portfolio
• Top quality office/lab facility in
Cambridge let to AstraZeneca
• Current yield 6.1%
• Expected yield of 7.2% on
renewal
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Building 310, Cambridge
Property portfolio
• Distribution warehouse let to
Royal Mail
• Yield 7.8%
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Royal Mail North West Regional
Distribution Centre, Winwick Quay,
Warrington
Property portfolio
• Well located and popular
distribution facility let to DHL
• Bought for £9 million on a 9%
yield
• Current value £13.5 million, 6%
yield
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3310 Hunter Boulevard, Magna
Park, Lutterworth, Leicestershire
Property portfolio
22/23 Gentleman’s Walk, Norwich
• Prime retail shop in dominant
regional location
• Refurbished and new trading
floor opened
• Achieved highest rent in
Norwich since financial crisis
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Property portfolio
292 St Vincent Street, Glasgow
• Current value £2.7m and initial
yield 10.0%
• Income secured by extending
lease to February 2019
• Prime Glasgow office street
• Significant office development
opposite will further enhance the
location
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Regulatory information and risk warning
We do not represent that this information, including any third party information, is accurate or complete and it
should not be relied upon as such. Opinions expressed herein are subject to change without notice.
The services described are provided by CCLA Fund Managers Limited (CCLA), a firm authorised and regulated
by the Financial Conduct Authority. This document is issued for information purposes only and is not a
solicitation to buy or sell any investment. Nothing in the document should be deemed to constitute the provision
of financial, investment or other professional advice.
Past performance is not an indication of future performance. Values of investments, and any income derived
from them, may fall as well as rise and you may not get back the amount you invested. Exchange rate changes
may have an adverse effect on the value, price or income of investments. The levels and bases of, and relief
from, taxation may change. You should obtain tax advice where appropriate before proceeding with any
investment. Investments in higher yielding bonds issued by borrowers with lower credit ratings may result in a
greater risk of default and have a negative impact on income and capital value. Income payments may
constitute a return of capital in whole or in part. Income may be achieved by foregoing future capital growth.
There may be additional risks associated with investment in emerging and developing markets.
Where reference is made to COIF Funds CCLA Fund Managers Limited is the appointed Manager and these
may be Unregulated Collective Investment Schemes. The Funds may deal infrequently and may limit
redemption. Share values may reflect fluctuations in property and share prices. Fund charges may be applied
to capital which may result in capital erosion.
Any forward-looking statements are based upon our current opinions, expectations and projections. We
undertake no obligation to update or revise these. Actual results could differ materially from those anticipated.
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Senator House, 85 Queen Victoria Street, London EC4V 4ET
www.ccla.co.uk
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