AEW UK Real Estate Fund
Annual Report and Financial Statements for the year ended 31 December 2019
AEW UK Core Property Fund AEW UK Real Return Fund
2019 AEW UK – Winner, UK Property Manager of the Year Pension Investment Provider Awards Contents
Statement of Authorised Status of the Scheme 1 Basis of Reporting 1 Statement concerning the debts of the Company 1 Managing Director’s report 2-7 Role of the Authorised Corporate Director (ACD) 8-9 Report from the Chair of the Governance Committees 10-13 Assessment for Value report 14-17 Statement of the ACD’s Responsibilities 18 ACD’s Statement 18 Statement of Depositary’s Responsibilities 19 Report of the Depositary 19 Report of the Auditor 20-22
AEW UK Core Property Fund Fund Manager’s Report 24-35 Fund Objective 36 Investment Benchmark 36 Investment Policy 36 Investment Strategy 36 Investment Guidelines 37 Report of the Valuer 38-41 Portfolio Statement 42-44 Summary of Material Portfolio Changes 45 Fund Information 46-52 Statement of Total Return 53 Statement of Changes in Net Assets Attributable to Shareholders 53 Balance Sheet 54 Statement of Cash Flows 55 Notes to the Financial Statements 56-77 Distribution Tables 78-79
AEW UK Real Return Fund Fund Manager’s Report 81-90 Fund Objective 91 Reference Benchmark 91 Investment Policy 91 Investment Strategy 92 Investment Guidelines 92-94 Report of the Valuer 95-97 Portfolio Statement 98-100 Summary of Material Portfolio Changes 101 Fund Information 102-107 Statement of Total Return 108 Statement of Changes in Net Assets Attributable to Shareholders 108 Balance Sheet 109 Statement of Cash Flows 110 Notes to the Financial Statements 111-129 Distribution Tables 130-131 Depositary, ACD & Advisers 132
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Estate Fund
Statement of Authorised Status of the Scheme
The AEW UK Real Estate Fund (the ‘Company’) is an open-ended investment company which is a Property Authorised Investment Fund (‘PAIF’) registered in England and Wales under registered number IC000974. The Company is a Qualified Investor Scheme (‘QIS’) that is open to Eligible Investors as defined in the Collective Investments Schemes sourcebook (the ‘COLL Rules’) issued by the FCA. The Company is incorporated in England and Wales and is authorised by the FCA.
Basis of Reporting
The Company is structured as an umbrella Company and has two sub-funds in issue, the AEW UK Core Property Fund and the AEW UK Real Return Fund.
Statement concerning the debts of the Company
The Company is an Investment Company with Variable Capital (‘ICVC’). Shareholders of the ICVC are not liable for the debts of the ICVC.
Risk Warning Investors should be aware that there are risks inherent in the holding of investments. Past performance is no guide to the future. The value of shares, and any income from them, can go down as well as up, particularly in the short term, meaning that an investment may not be returned in full. The tax treatment of the Fund may change and such changes cannot be foreseen. Where regular investments are made with the intention of achieving a specific capital sum in the future, this will normally be subject to maintaining a specified level of investment. For further information, please refer to the Fund's prospectus and the risk management policies in the notes to the financial statements.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 1 AEW UK Real Estate Fund
Managing Director’s Report
AEW UK was established as a joint venture between AEW in Europe and the AEW UK Management Team1, to focus on UK real estate. The AEW UK team has been providing solutions for institutional investors for over 20 years and has developed a range of funds and segregated accounts to meet their differing needs, from value add strategies to traditional core style total return, a real return strategy and latterly a long lease strategy. The management team have worked together for an average of 18 years and are 50% equity owners in the business. This ownership over investment process and decision-making, helps deliver a consistent approach through different cycles. The AEW UK Core Property Fund was launched in Q1 2012 and is the top performing fund in the MSCI/AREF UK Quarterly Property Fund Index – All Balanced Property Fund Index over 1, 3, 5 and 7 years as at December 2019. In 2014 we launched the AEW UK South East Office Fund, a value add strategy focused on delivering enhanced returns from the South East office market. During the year ended 31 December 2018, as part of the disposal strategy, the Fund sold the whole portfolio to a single investor and distributed the majority of the proceeds to investors. For defined contribution pension schemes and the increasing amount of Private Wealth money now classified as Retail, the AEW UK REIT was launched in May 2015, to effectively replicate the Core Fund strategy in a listed company, as an alternative to daily dealing open ended retail funds. At the start of 2016 the AEW UK Real Return Fund was launched largely as a secure income solution for the increasing number of defined benefit schemes needing higher yielding real returns to match their cash flow liabilities and help scheme sponsors plug any deficit in funding that may exist. In June 2017 AEW launched AEW UK Long Lease REIT, a long lease strategy with inflation linked growth, diversified across alternative property sectors in strong locations across the UK. With a focus on capital preservation; a minimum of 85% income to benefit from inflation linked growth and a minimum weighted average unexpected lease term (WAULT) of 18 years at acquisition. AEW2 is one of the world’s largest real estate asset managers. As at 31 December 2019, AEW has €69.5 billion in assets under management, with over €33.0bn managed in Europe. The chart on page 5 shows how the business is split in terms of assets under management across North America, Europe and Asia. The second chart on page 6 shows the assets under management breakdown by sector and vehicles for AEW Europe. Both charts show data as at 31 December 2019. AEW completed €6.0bn of transactions across Europe last year, of which €3.1bn were acquisitions. A total of 271 transactions were completed in 2019. Rob Wilkinson, European CEO said: “While there was some macroeconomic uncertainty throughout the year, 2019 was another year of growth for AEW with strong capital raising, prudent deployment of funds, as well as disciplined sales and, notably, in the UK, the implementation of successful asset management initiatives on behalf of clients, against a difficult Brexit backdrop. This momentum continued in to the first two months of 2020 when suddenly in March we found ourselves faced with the COVID-19 pandemic and an almost global lockdown. Our teams have adapted incredibly well to the new situation and remain busy as they settle into the working from home environment. AEW has a significant amount of capital to invest in real estate and, while it is currently impossible to predict how long the crisis will last or what the final repercussions of it will mean for both the economy and the real estate sector, we fully expect to be able adapt our business and continue to successfully investing and asset managing on behalf of clients. In the meantime our number one propriety remains the health and safety of all our staff, business partners and stakeholders.”
1. AEW UK Management Team comprises Richard Tanner, Rachel McIsaac and Nick Winsley.
2. AEW is a group of companies which includes AEW SA and its subsidiaries as well as affiliated company AEW Capital Management, L.P. in North America and its subsidiaries. AEW SA, together with its subsidiaries AEW Europe LLP. AEW Sarl and AEW Ciloger and a joint venture with AEW UK Investment Management LLP, is a European real estate investment manager with headquarter offices in Paris and London. AEW SA is owned by Natixis Investment Managers and La Banque Postale and AEW Capital Management is owned by Natixis Investment Managers. Natixis Investment Managers is an international asset management group based in Paris, France, that is principally owned by Natixis, a French investment banking and financial services firm. Natixis is principally owned by BPCE, France’s second largest banking group.
2 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Estate Fund
Managing Director’s Report (continued)
UK Platform
AEW SA and the AEW UK Management Team have created a joint venture vehicle, AEW UK Investment Management LLP, which is the Authorised Corporate Director (ACD) and the Authorised Fund Manager (the “Manager”) of the AEW UK Real Estate Fund. Its board members for the year were:
Richard Tanner Managing Director, AEW UK Rachel McIsaac Managing Director, AEW UK Louise Staniforth Managing Director, AEW UK Jeff Furber Chairman, AEW Capital Management Rob Wilkinson Chief Executive Officer, AEW Europe LLP Russell Jewell Managing Director, AEW Europe LLP Alan Botterill Independent Non-Executive Alex Wilson Independent Non-Executive
As a joint venture company with a large global, multi boutique, asset manager, it benefits from the global strength and resource and access to investors you might expect, together with the true autonomy and culture of an employee owned business. Ownership is spread through our staff partners and consultants.
AEW UK: Funds and Separate Accounts Assets under management and capital raised
Total Assets Under Management Institutional Funds Separate Accounts £1.9bn £790m £1.2bn
EXPECTED RETURN/ VOLITILITY AEW Logistics UK • Build to core • Separate Account • Cornerstone investor c€290m
AEW UK Core Property Fund AEW UK REIT • Open-ended • Listed on LSE • Diversified • Diversified • GAV £315m • GAV £204m • Distribution yield 5.4% • Dividend yield 8p/share p.a.
AEW UK Real Return Fund • Open-ended • Alternative real estate • GAV £151m • Distribution yield 5.2%
AEW UK Long Lease REIT • IPO 31 May 2017 • Listed on LSE GAV £119m • EXPECTED RISK RISK FREE RATE AEW UK South East Office Fund (Value Add 1) • Closed-ended • Portfolio sold October 2018 • Expected IRR of 12%
Source: AEW UK, CPF and RRF on GAV basis as at 31 December 2019
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 3 AEW UK Real Estate Fund
Managing Director’s Report (continued)
AEW UK Organisational Structure
AEW UK oard
eff Furber Rob il inson Russell e ell Richard Tanner Rachel McIsaac Louise Staniforth Alan Botterill Alex ilson Chairman Chief Executive Managing Director Managing Director Managing Director Managing Director Independent Independent AE Capital Management Officer AE Europe LLP AE U AE U AE U on-Executive on-Executive AE Europe LLP
AEW UK anage ent Co ittee Richard Tanner 1 Rachel McIsaac 1 ic insley 1 Louise Staniforth Rob il inson Russell e ell Managing Director Managing Director Managing Director Managing Director Chief Executive Officer Managing Director AE U AE U AE U AE U AE Europe LLP AE Europe LLP
AEW UK In est ent Portfolio Fund Operations In estor Relations Asset anage ent Consultants anage ent Ris anage ent Capital Raising
Richard Tanner Rachel McIsaac Louise Staniforth ari Clar e ames yslop 1 Portfolio Manager Core Managing Director Managing Director Associate External Consultant
Charles Royle Andre Strang 1 ic insley Director on Saxton External Consultant Portfolio Manager UREF Director ic i Gladstone
Michael Shears Mar eting Communications Ian Mason George enshil ood Director Anish Shah Consultant Portfolio Manager Real Return Independent Chairman of Associate Director Governance Committees Alex Short Ross Burns Portfolio Manager REITs Tom ouston Olivia Balogun Associate Director Associate Investor Relations Assistant Laura El in Director enry Butt Associate Director Sam Archer Analyst Spencer Cor in Director arren Meech Francesca a ins Associate Director Ad in Operations Administrator Ed Long Millie Grant Gemma Fran lin Director Asset Management administrator PA to Richard Tanner
T E AEW EUROPE PLATFOR FUND PORTFOLIO ASSET INVESTOR LE AL INVEST ENT OPERATIONS RESEARC R CORPORATE IT SUPPORT ANA E ENT RELATIONS CO PLANCE DE T
1 Evergreen Member LLP shareholder As at 31 December 2019
4 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Estate Fund
Managing Director’s Report (continued)
North America, Europe and Asia Pacific
Over 30 years’ real estate NORTHAMERICA Boston EUROPE Paris Luxembourg • 286 staff LosAngeles • 415 staff London Milan investment management •2offices •9offices Düsseldorf Madrid Frankfurt Prague experience Warsaw
One of thelargest real estate investment managers in theworld with €69.5bn in assets undermanagement €33.0bn Over 700 stafflocated in AUM 15 officesacrossNorth €33.4bn AUM America, Europe andAsia Pacific
Broadexperienceacross €3.1bn allmajor real estate AUM marketsand investment strategies
Research driven approach to investment strategy and ASIA PACIFIC Singapore •33staff Hong Kong underwriting •4offices Sydney Tokyo Part of Natixis Investment Managers Figuresasat31December 2019.Total AEWGlobalAUM includes $42 billioninassets managedbyAEW CapitalManagementand itsaffiliates,ofthis $638 million in advisory/subadvisory securities wrap accounts forwhich AEWCapital Management provides only amodel portfolio.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 5 AEW UK Real Estate Fund
Managing Director’s Report (continued)
European Platform
ASSETS UNDERMANAGEMENT (€ BILLION)
36 33.0.0 London 31.4 65 staff 32 Amsterdam Luxembourg 28.4 1staff 12 staff 28 26.6 Düsseldorf Warsaw 24 22 staff 6staff Frankfurt 20 18.9 Antwerp 16.8 1staff 16 staff 16 12 8 4 Prague 0 Paris 3staff 2014 2015 2016 2017 2018 201919 273staff Munich 1staff Milan PROPERTY BY SECTOR PROPERTY BY VEHICLE 8staff
Office 40% Separate Accounts 46%
Retail 29% Funds 43% Madrid Logistics 13% Club Deals 11% 4staff Residential 8%
Other 10%
Figuresasat31December 2019. AUMincludes€861mn in European REIT Securities managedbyAEW CapitalManagement. Sector andvehicle breakdowns do notinclude European REIT securities AUM.
6 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Estate Fund
Managing Director’s Report (continued)
Market Outlook After perhaps the shortest relief rally in recent history, the optimism after the Conservative election victory has rapidly given way to the Covid 19 global crisis. The property market aggressively reversed direction as the country entered lockdown. Whilst signs are encouraging that the virus is slowing in the Northern Hemisphere, the way out of lockdown seems less clear and the negative impact on the economy increases the longer it continues.
This has undoubtedly been a Black Swan event and it is no surprise that it has come as a shock to markets. Putting aside the humanitarian costs, our job is to be a good custodian for investors’ capital. Firstly our team at AEW UK is functioning well, working from home and adapting well to the various practical issues this presents. Secondly the funds’ senior consultants on our Investment Management Committee, who work with the Independent advisors on our Governance Committee and Pricing Sub-Committees, come to the fore, with their many decades of experience. Finally, our asset managers are redoubling their dialogue with tenants on a case by case basis, working to find a solution to each tenant’s difficulties, but taking a much firmer line with those who won’t pay rent rather than can’t, or indeed won’t even discuss a solution.
Quoted REIT shares prices fell heavily at first followed by some limited recovery, as did bids on units in secondary open ended funds and real estate brokers are reporting falling prices, particularly in the hardest hit sectors. At a fund level, events have been similar to other shock events. Valuers have issued valuations with “uncertainty” clauses showing modest reductions in values. Once again we have an apparent dislocation between valuations and market prices which, without action, would risk returns for our longer term investors. These conditions have led many funds to suspend dealing, when perhaps the market opportunities for a long term value manager are at their best.
Meanwhile, with the agreement of RICS all valuers have started a phased reduction in valuations to reflect the impact of COVID-19 on the direct property market. Valuers look at each sector in different ways which is causing some short term volatility to performance across the range of funds in the MSCI/AREF UK Property Fund Index.
Shortly after the launch of the AEW UK Core Property Fund we set up an independently controlled Pricing Sub- Committee for this type of market dislocation. Whilst the valuation process remains unaltered, the changes they can recommend to the dealing price removes the arbitrage opportunity between valuations and market prices, hence protecting the interests of all investors. Removing this arbitrage has a number of beneficial results; firstly the requirements for funds to fire sell assets are reduced or eliminated, secondly buyers tend to re-emerge first in the secondary market providing more rapid liquidity for those that need it, and finally the fund, having effectively moved to the new market level is better placed to exploit the opportunities that arise for both existing investors and new ones.
As in previous market cycles, we can expect transaction prices to recover gradually with time and meet falling valuations over the coming months.
Managing Director, AEW UK
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 7 AEW UK Real Estate Fund
Role of the Authorised Corporate Director (ACD) of the AEW UK Real Estate Fund
Investment Decision Making AEW UK Investment Management LLP (“AEW UK”) in its capacity as the ACD and the Authorised Investment Fund Manager is responsible for setting, implementing and achieving the investment policies for each of the sub-funds. AEW UK follows a systematic and disciplined approach to the acquisition, management and disposal of investment assets. AEW UK operates an Investment Management Committee (IMC) ensuring that clients’ interests are central to all decision making. It has a single committee that sits over all mandates to provide a rounded view over all strategies and to ensure that market views are applied consistently. AEW UK has an Investment Strategy Committee (ISC) that meets every quarter (or more frequently if required) to help form broad views on the economy and other macro influences on the property market. The IMC takes these views into account in formulating policy, including sector views. Against this strategic overview, the IMC is responsible for: a) Review and authorise investment management decisions b) Review and challenge investment rationale c) To provide critical oversight over investment risk management d) Actively manage investment restrictions Corporate Governance
The Governance Committee The ACD appoints a Governance Committee in respect of each Fund. The Governance Committee will not be involved in the day-to-day decision-making but will be consulted by the ACD. It is designed to try to ensure that the principles of sound corporate governance are observed in the management of each Fund’s assets and to protect the interests of the Shareholders. The Governance structure combined with the management team owning 50% of the AEW UK business provides a strong and genuine form of alignment with client interests. The Governance Committee will be consulted, or can make certain recommendations to the ACD, on certain matters including the following (although the final decision in all cases will remain with the ACD): a) any adjustment to the price of shares in unusual market conditions to protect a Fund and continuing, entering and exiting Shareholders, to reflect the value of assets in those conditions having taken into consideration any other material information it may see fit and the long-term interests of investors. The ACD will only exercise this power where it believes it to be in the best interests of the Shareholders; b) specific issues relating to a Fund raised by the ACD or the Depositary from time to time; c) charges payable to the ACD on the launch of any new share classes; and d) amendments to the investment policy or guidelines of a Fund or a change to a Fund index or performance target. The ‘Terms of Reference’ document sets out the provisions for appointment of committee members and voting rights and is available upon request. The minutes of Governance Committee meetings are also available to investors upon request.
Conflicts of interest AEW UK’s business model revolves solely around providing UK real estate investment solutions to investors, either by way of investment opportunities through collective investment schemes or through individual advisory and asset management mandates. AEW UK has implemented a framework to manage potential conflicts of interest that is both comprehensive and tailored to its business. The full policy document detailing arrangements to handle conflicts of interest is available on request.
8 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Estate Fund
Role of the Authorised Corporate Director (ACD) of the AEW UK Real Estate Fund (continued)
Confidentiality and Disclosure The ACD and the Company are bound by confidentiality and disclosure provisions as specified in Clause 20 of the Management and Administration agreement dated 5 July 2013 between AEW UK Real Estate Fund and AEW UK Investment Management LLP. Fund Management and Administration The ACD is responsible for managing and administering the Company’s affairs in compliance with the Regulations, including portfolio management and risk management. The ACD may delegate its management and administration functions, but not responsibility, to third parties, including associates subject to the rules in the COLL Sourcebook. Appointments made on behalf of the Company are made by the ACD and are fully discretionary. The ACD is responsible for providing all relevant information to the appointed third parties. The appointments and performance of third parties are reviewed on a regular basis.
The Depositary The Depositary of the Company is The Bank of New York Mellon (International) Ltd (formerly BNY Mellon Trust & Depositary (UK) Limited). The ACD shall give the Depositary all the requisite information to enable the depositary to identify the property of the Company as belonging to the Company and shall comply with the Depositary’s reasonable requirements for the registration of Investments comprised in that property.
Standing Independent Valuer On behalf of the Company the ACD has appointed the Standing Independent Valuer (Knight Frank LLP) to provide certain independent valuation services. Under the terms of the Property Valuation Agreement, the Standing Independent Valuer must carry out its obligations under the agreement in accordance with the applicable provisions of COLL, on the basis of a physical inspection, with all information being made available to the Valuer by the ACD. The Valuer reports and has a fiduciary duty to the Company to provide independent valuation services.
Managing Agent On behalf of the Company the ACD has appointed the Managing Agents (MJ Mapp Limited, Mayfield Asset and Property Management Ltd and Workman LLP) to provide certain property management services.
The Administrator On behalf of the Company the ACD has appointed the Administrator, Link Alternative Fund Administrators Limited, to provide certain administration services including fund accounting and fund pricing services. The Administrator will be paid by the ACD out of its fee.
The Registrar On behalf of the Company the ACD has also appointed Link Fund Administrators Limited to act as registrar to the Company.
Termination The termination provisions of the ACD’s position are set out in clause 17 of the Management and Administration agreement dated 5 July 2013 between AEW UK Real Estate Fund and AEW UK Investment Management LLP. Details of all fund documentation and key appointments are available upon request from the ACD to existing investors and to prospective investors on a confidential basis.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 9 AEW UK Real Estate Fund
Report from the Chair of the Governance Committees
AEW UK Core Property Fund (‘Core Fund’) Governance Committee During 2019, four quarterly meetings and two additional meetings were held of the Core Fund Governance Committee; attendance is summarised in the following table:
Name Position Representing: No of Meetings Attended
George Henshilwood Chair of Committee Independent 6/6 Lawrence Thomas The Aon Group Investors 6/6 Linda McAleer* Hymans Robertson Investors 6/6 Tony Yu Kames Capital Investors 6/6 James Hyslop Consultant AEW(UK) 6/6 Andrew Strang Consultant AEW(UK) 5/6 Jon Saxton Secretary to Committee [non-voting] AEW(UK) 6/6 * Linda McAleer on maternity leave from Q4 2019 and was replaced by Adam Porter from Hymans Robertson I would like to thank everyone for their contribution to the work of the Committee during the year. No changes were made to the Committee’s Terms of Reference during the year. The process for appointing committee members and duration of appointments is stipulated in the Terms of Reference. No remuneration is paid to the Committee for their duties other than to me in my role as Chairman. The agreed remuneration is £2,500 per quarter plus expenses. Contact details for the members of the Committee are available to investors on request. The minutes of Committee meetings are available to investors on request. The main issues covered in the course of the year were as follows:
Recurring Agenda Items Performance: We monitor the performance of the Core Fund against its peer group (All Balanced Property Fund Index as contained in the MSCI/AREF UK Quarterly Property Fund Index). The Committee was pleased to note another year of strong performance for the Core Fund in comparison to the All Balanced Property Fund Index. The total return for 2019 for the Fund was 5.5% versus 1.6% for the All Balanced Property Fund Index. Risk Measures: At each meeting, we monitor a number of key risk indicators against the peer group and against any limits set out in the Fund Prospectus, both with a view to checking that no agreed limits have been breached but, more generally, to bring to the Manager’s attention any measure which we consider needs to be addressed. Voids: Although the Core Fund’s void rate remained within the 15% guideline set-out in the Core Fund’s prospectus, the Manager provided regular updates on movements in this important measure, focussing on tenants that were in financial difficulty and measures being implemented to mitigate the risk of higher vacancies. Cashflow: The Committee is responsible for making sure that any cashflows in or out of the Core Fund are managed sensibly in line with our agreed policies. There were no major movements during 2019. Pricing Sub-Committee: In my role as Chairman of the Pricing Sub-Committee I was able to report to the Governance Committee that the Committee continued to monitor the market on a regular basis. On account of a redemption served on the Core Fund, the Pricing Sub-Committee recommended a price swing to Bid for the 1 March 2019 dealing date, and a return to the normal Offer price with effect from 1 April 2019 unless any further significant redemption notices were served. In the event the price reverted to Offer from 1 April 2019.
10 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Estate Fund
Report from the Chair of the Governance Committees (continued)
One-off Agenda Items Fund/Business update: Richard Tanner, as the Fund Manager of the Core Fund and Managing Director of AEW UK, gave an update on the Core Fund and on the broader AEW UK business. Investment in AEW UK REIT Plc: The Manager proposed that the Core Fund be allowed to invest, subject to an agreed limit of 10% of NAV, in the AEW UK REIT Plc and in other listed REITs up to a limit of 5% of NAV. This proposal was triggered by the share price of the REIT falling to a meaningful discount relative to NAV. The Committee were invited to put forward their views which they did in writing. A meeting was then held in January 2019 to discuss this. Following the discussions, it was clear that the proposal would not be agreed unanimously. Accordingly, although no vote was taken, it was agreed not to proceed at this time. AEW UK undertook that any future investment in listed REITS will only be made with the agreement of the Governance Committee. Investment in specialist sector funds: Subsequent to that discussion, the Manager proposed that the Core Fund be allowed to invest in principle, subject to an agreed limit of 10% of NAV in specialist sector funds. This proposal was triggered by the price of a particle sector Fund in which the Manager was keen to invest in falling to a very substantial discount to NAV. A meeting was then held in June 2019 to discuss this. However, it was noted that any decision should be made on the general principles involved and not on the merits of the particular investment under consideration. The question of whether the investment case was ‘compelling’ was one for the Manager and for the Investment Management Committee who review all buy and sell decisions. Following discussions the proposal was then put to a vote where the Committee voted in favour by a majority decision, subject to a limit of 10%, and any future investment in specialist sector funds being made with the agreement of the Governance Committee. Cash holdings over 10% guideline limit: The Governance Committee was consulted on whether the manager could take advantage of compelling sales opportunities if these may push cash holdings over the Core Fund’s 10% investment guideline limit. The consensus view was that the Committee was relaxed on this point subject to it being closely monitored. In practice, the Committee would review the position on a quarter by quarter basis. Valuation process: In November 2019, the Committee invited the Standing Independent Valuer of the Fund – Knight Frank – to update the Committee on the valuation process. The Valuer attended the meeting in November 2019 and provided a detailed explanation of the process and how it monitored the market and tenant covenants. Other Matters: In my role as Chairman of the Committee, I attended an annual audit clearance meeting and was reassured that there were no issues of significance arising. I would like to thank all involved with AEW UK for their input to the smooth running of the Committee. AEW UK Real Return Fund (‘Real Return Fund’) Governance Committee During 2019, four quarterly meetings were held of the Real Return Fund Governance Committee; attendance is summarised in the following table:
Name Position Representing: No of Meetings Attended
George Henshilwood Chair of Committee Independent 4/4 Darren Robinson LaSalle Investment Management Investors 4/4 Laura Donohoe Schlumberger Investors 3/4 Stuart Pawson/ KPMG (Schlumberger Consultant) Investors 4/4 Khristina Wright [non-voting]
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 11 AEW UK Real Estate Fund
Report from the Chair of the Governance Committees (continued)
Name Position Representing: No of Meetings Attended
James Hyslop Consultant AEW(UK) 4/4 Andrew Strang Consultant AEW(UK) 3/4 Jon Saxton Secretary to Committee [non-voting] AEW(UK) 4/4 I would like to thank everyone for their contribution to the work of the Committee during the year. No changes were made to the Committee’s Terms of Reference during the year. The process for appointing committee members and duration of appointments is stipulated in the Terms of Reference. No remuneration is paid to the Committee for their duties other than to me in my role as Chairman. The agreed remuneration is £2,500 per quarter plus expenses. Contact details of the members of the Committee are available to investors on request. The minutes of Committee meetings are available to investors on request. The main issues covered in the course of the year were as follows:
Recurring Agenda Items Performance: We monitor the performance of the Real Return Fund, using the Long Income Property Fund and All Balanced Funds Indexes (contained within the AREF/MSCI UK Quarterly Property Fund Index) as reference benchmarks and comparing the inflation adjusted ‘total real return’ to the target return of 4%, net of all fees and expenses. The Committee was pleased to note another year of satisfactory performance relative to this mix of performance metrics. During the year the Real Return Fund achieved a one year total return performance of 5.9% (total real return 4.5%) as compared to the All Balanced Property Fund Index which had a weighted average return of 1.6% and the Long Income Property Fund Index which had a weighted average return of 5.5%. Risk Measures: At each meeting, we monitor a number of key risk indicators against the peer group and against any limits set out in the Fund Prospectus, both with a view to checking that no agreed limits have been breached but, more generally, to bring to the Manager’s attention any measure which we consider needs to be addressed. The majority of the investment guidelines only become applicable when the Real Return Fund reaches £200m in assets under management. No issues have arisen to date although the diversification limits are being closely monitored. Fund Update: Ian Mason as Fund Manager to the Real Return Fund attended the Committee meetings to give a regular update on capital raising and portfolio construction.
One-off Agenda Items Valuation process: In November 2019, the Committee invited the Standing Independent Valuer of the Fund - Knight Frank to provide an outline of the valuation process. The Valuer attended the meeting in November 2019 and provided a detailed explanation of the process and how it monitored the market and tenant covenants. Other Matters: In my role as Chairman of the Committee, I attended an annual audit clearance meeting and was reassured that there were no issues of any significance arising. Sector Weightings: In February 2019, the Committee debated the sector weighting guidelines included in the Prospectus and the need for any hard limits on exposure by defined sectors segments. The Committee agreed that whilst it is good to have constraints these should not be imposed on the Fund in an artificial way. It was agreed not to change the Prospectus and to leave flexibility in the funds sector exposure so long as there is diversification in the portfolio. I would like to thank all involved with AEW UK for their input to the smooth running of the Committee.
12 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Estate Fund
Report from the Chair of the Governance Committees (continued)
Pricing Sub-Committee A Pricing Sub-Committee has been in place since March 2016. In unusual market conditions, the Pricing Sub- Committee reviews market conditions and, if appropriate, recommends to the Manager changes to the share price of the Core Fund and Real Return Fund. The composition of the Pricing Sub-Committee is as follows:
Name Position Representing:
George Henshilwood Chair of Committee Independent James Hyslop Consultant AEW(UK) Andrew Strang Consultant AEW(UK) Charles Follows Consultant Independent Jon Saxton Secretary to Committee [non-voting] AEW(UK) George Henshilwood and Charles Follows have one vote each and Andrew Strang & James Hyslop share a vote. I would like to thank my fellow Committee members for their contribution to the work of the Committees over the course of the year. Remuneration of £2,500 per quarter is paid to Charles Follows in his capacity as an Independent Consultant to the Pricing Sub-Committee. The Pricing Sub-Committee met in January 2019 and recommended a price swing to bid for the Core Fund on the dealing date on 1 March 2019 as a prudent precautionary measure to protect long term investor’s returns. This was undertaken following a redemption request which exceeded 1% of the Fund’s Net Asset Value (NAV). £4.6 million of equity was redeemed on the 1 March dealing date. Following the price swing to bid as at 1 March and if there were no further redemptions during March, the Pricing Sub- Committee recommended the price revert to offer at the next dealing date (1 April 2019), to which the Manager agreed. No other recommended changes were made during the year. The Pricing Sub-Committee continued to monitor market conditions throughout the remainder of 2019 and met informally to discuss whether we might need to recommend any adjustments to prices around the General Election. In the event, none were considered necessary.. Our responsibilities to investors The Committees take very seriously their broader responsibility to ensure good stewardship of the Funds. The two consultants on the Committees are involved in most decision-making meetings and we are well placed to judge if the Manager is acting in line with its stated policies and approach and, more importantly, with best practice in this market. If any issues arise in the course of the year which are not resolved to the Committee’s satisfaction – none have arisen to date – we have the right to write directly to investors, explaining the issue and setting out our views. Of course, we will be only too happy to respond to any queries raised by investors; investors can write to the Committee, C/O Jon Saxton, at any time and we will respond in a timely fashion. I would like to thank all involved with AEW UK for their input to the smooth running of the Committee.
George L Henshilwood Independent Chair of the Governance Committees and Pricing Sub-Committee
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 13 AEW UK Real Estate Fund
Assessment for Value Report
Introduction The Financial Conduct Authority (FCA) requires all UK authorised fund managers (AFM’s) to assess the overall value that their authorised funds deliver to investors and to publish a summary of these assessments annually from 30 September 2019. The FCA has prescribed a minimum set of components which need to be considered to determine if value is being provided. These components filter down to three elements, being cost, performance against objectives and quality of service. The following describes how AEW UK Investment Management LLP (the ACD) in its capacity as the Authorised Fund Manager (AFM) approached the assessment in relation to the AEW UK Core Property Fund (Core Fund) and the AEW UK Real Return Fund (Real Return Fund), and conclusions reached from the assessment. It is the role of the ACD’s Independent Non-Executive Members (INEDs) to provide input and challenge as part of the Assessment for Value with a range of factors considered by the Company’s Board.
Component Value assessment approach Value assessment report
Quality of Consideration was given to the range and quality The range and quality of services provided was Service of services provided to investors. The assessment assessed as being good by the Board. Investors was not confined to services provided directly to were provided with clear and timely information on unitholders but also included services undertaken performance, risk, holdings, transactions, portfolio on their behalf by the AFM, such as quality of the activity, asset management initiatives etc. investment process used to make decisions about The quality of the AFM’s internal processes was managing the scheme property. considered appropriate. There were no material The range of services considered include: weaknesses identified in the relevant internal audits. There were no breaches of investment guidelines - discretionary management of the scheme; during the year. - periodic reporting on the scheme performance Minor recommendations for improvements in to unitholders; investor communication were identified during the - periodic reporting or transparency on the course of the review. scheme in relation to other matters e.g. performance attribution, risk metrics, list of holdings, transaction lists, etc; - investment research or access to similar materials provided to unit holders at no cost; - management of the dealing process into or out of the fund; and - the frequency of opportunities to deal. The range of quality of services considered include: - the history of errors or omissions, if any; - failed deals, if any; - pricing errors, if any; - breaches, if any; - the extent to which material provided to unitholders provides useful insights to assist in their evaluation of whether to invest/divest in the fund; and - how the service compares to that provided by comparable schemes managed by other AFMs.
14 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Estate Fund
Assessment for Value Report (continued)
Component Value assessment approach Value assessment report
Performance When assessing the performance the following was With consideration of all the assessment criteria, the considered: performance of both the Core Property Fund and the Real Return Fund is assessed as good by the Board. - the relevant benchmark as disclosed within the Prospectus; Despite the structural and geopolitical challenges impacting the direct commercial property sector, - comparable funds; the Core Fund has performed strongly relative to - a time horizon that is consistent with any its performance benchmark - MSCI/AREF UK All information provided to investors about Balanced Property Fund Index. As at 31 December suggested holding periods; 2019, over one, three, five and seven years the Core Fund was the top performing balanced fund with an - the market environment over the given timeline; annualised total return of 5.5%, 10.0%, 9.9% and - the associated risk level; and 12.6% respectively. The Core Fund has recorded an - the specified investment strategy and policy; average out performance of 3.3% p.a. over 5 years and the Fund’s investment objectives. and 4.9% since inception over seven years against the MSCI benchmark. The Real Return Fund has continued to deliver its performance objectives in terms of total real returns (of over 4% per annum) driven by a predictable and sustainable income distribution, having built a portfolio with 84% of rents linked to inflation or with fixed uplifts and with aWeighted Average Unexpired Lease Term (WAULT) of over 17 years. Authorised The purpose of this assessment is to consider The Board has concluded that the Fund Fund Manager the underlying expenses of the AFM against the Management Fee and Performance Fee are (AFM) Costs associated charge to the schemes. There is an considered to be reasonable when considering the expectation that the charge is commensurate with underlying costs, the active asset management the costs. undertaken, performance objectives and out- performance of the funds against benchmark and The Board undertook a review of: target returns. - All AFM fees applied to the Funds, being the Management Fee and the Performance Fee (Core Fund only); - Services paid by the AFM from its fees including but not limited to: - Services provided by third parties to the Funds but paid by the AFM from its fees; - AFM costs of providing services including direct and indirect costs. To assist with the assessment, net contribution by Fund (direct costs) and net profit allocation by Fund (including indirect cost allocation) exercise was undertaken. Whilst net contribution by Fund is a useful exercise as a snapshot, not all funds are stabilised and Funds in maturing or early stages incur significantly more costs to revenue than stabilised Funds.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 15 AEW UK Real Estate Fund
Assessment for Value Report (continued)
Component Value assessment approach Value assessment report
Economies of The Board considered how the AFM contracts with The Board concluded that the material contracts of Scale suppliers, to the AFM or to the Scheme directly, the Fund’s are sufficient for the size of the Funds and are priced and if the Scheme is receiving marginal to achieve economies of scale at the current scale to cost reductions where there is reducing marginal the Fund. Contracts are considered to be good. underlying costs (of the supplier or AFM) for The change in value of Funds during the year additional assets managed. does not identify any concerns over contracts of the Funds. Review of the principal contracts identifies that those that are able to benefit from current economies of scale – Valuer, Property Manager, Investment Manager and Depositary are appropriately linked to NAV/property income at this time. Comparable The Board reviewed how the costs in relation to the The Board considered the Management Fee is market rates services provided by the AFM to the Funds or where considered reasonable compared to market rates it is not providing the service directly to the Funds, of comparable funds taking into account the third parties costs, compare with market rates. underlying costs, the active asset management The assessment included review of market rates/ undertaken, performance objectives and out- comparisons for: performance of the Funds against benchmark and target returns. The Management Fee is a single fee - Management fee; and there is no other management fee levied on - Performance fee; investors entering or exiting the fund. - Administration fee; The Performance Fee on the Core Fund is dependent - Audit fee; on the Fund being ranked in the top ten funds of the All Balanced Property Funds Index – MSCI/AREF UK - Property Managers fee; Property Fund Index over a three year rolling period - Depositary/Trustee fee; and if the return is positive. The Board considered the Performance Fee is reasonable compared to - Property valuation fee; market rates of comparable funds. There is no - Other fund expenses; performance fee on the Real Return Fund - Total expense ratio; and In relation to third party fees, the Board recognised that direct comparisons are difficult due to limited - Property expense ratio. publically available information, however based on the information available from MSCI and published annual financial statements, and the range of factors considered in supplier selection criteria, the fees paid are considered to be competitive. Comparable The Board evaluated whether the AFM’s charges The comparable services provided by the AFM to services for comparable services provided to other clients/ other funds and separate accounts have different structures, including institutional mandates of a fee structures however the Board considered comparable size and having similar investment these are reasonable considering the nature of the objectives and policies, are reasonable. services provided. The comparable services are considered to be good.
16 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Estate Fund
Assessment for Value Report (continued)
Component Value assessment approach Value assessment report
Classes of The Board reviewed the costs applicable to each The pricing of each share class is considered to be units class of units with substantially similar rights, reasonable and is based on the eligibility criteria and evaluated against other classes of units with any target investor for each share class. All investors are cost differentials being identified and explained. invested appropriately in the share class they are eligible to hold in the Fund at date of assessment. As part of its review, the Board further reviewed any management fee rebates given to certain investors and considered these as reasonable.
Assessment Conclusion Some minor recommendations for improvements have been identified by the INEDs during the course of the assessment and these will be considered by the ACD’s Management Committee during the course of the year with appropriate action taken if appropriate. In conclusion, the Board has performed an in-depth review of all elements of the value for money assessment and has determined that good overall value has been provided to all investors by the AFM in context of charges, cost, performance against objectives and quality of service.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 17 AEW UK Real Estate Fund
Statements and Responsibilities
Statement of the ACD’s Responsibilities
The Collective Investment Schemes sourcebook published by the FCA, (“the COLL Rules”) require the Authorised Corporate Director (“ACD”) to prepare financial statements for each annual accounting period which give a true and fair view of the financial position of the Company and of the net income and net gains or losses on the property of the Company for the period. In preparing the financial statements the ACD is responsible for: • selecting suitable accounting policies and then applying them consistently; • making judgements and estimates that are reasonable and prudent; • following UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland; • complying with the disclosure requirements of the Statement of Recommended Practice for UK Authorised Funds issued by the Investment Management Association in May 2014; • keeping proper accounting records which enable it to demonstrate that the financial statements as prepared comply with the above requirements; • assessing the Company and its sub-funds’ ability to continue as a going concern, disclosing, as applicable, matters related to going concern; • using the going concern basis of accounting unless they either intend to liquidate the Company or its sub-funds or to cease operations, or have no realistic alternative but to do so; • such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and • taking reasonable steps for the prevention and detection of fraud and irregularities. The ACD is responsible for the management of the Company in accordance with its Instrument of Incorporation, the Prospectus and the COLL Rules.
ACD’s Statement for the year ended 31 December 2019 This report has been prepared under FRS 102 ‘The Financial Reporting Standard’ and in accordance with the requirements of the Statement of Recommended Practice as issued and amended by the Investment Association in May 2014.
AEW UK Investment Management LLP
18 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Estate Fund
Statements and Responsibilities (continued)
Statement of Depositary’s Responsibilities for the year ended 31 December 2019 The Depositary must ensure that the Company is managed in accordance with the Financial Conduct Authority’s Collective Investment Schemes Sourcebook, the Investment Funds Sourcebook, the Open-Ended Investment Companies Regulations 2001 (SI 2001/1228), as amended, the Financial Services and Markets Act 2000, as amended, (together “the Regulations”), the Company’s Instrument of Incorporation and Prospectus (together “the Scheme documents”) as detailed below. The Depositary must in the context of its role act honestly, fairly, professionally, independently and in the interests of the Company and its investors. The Depositary is responsible for the safekeeping of all custodial assets and maintaining a record of all other assets of the Company in accordance with the Regulations. The Depositary must ensure that: • the Company’s cash flows are properly monitored and that cash of the Company is booked into the cash accounts in accordance with the Regulations; • the sale, issue, repurchase and cancellation of shares are carried out in accordance with the Regulations; • the value of shares of the Company are calculated in accordance with the Regulations; • any consideration relating to transactions in the Company’s assets is remitted to the Company within the usual timeHaving limits; carried out such procedures as we consider necessary to discharge our responsibilities as • theDepositary Company’s ofincome the isCompany, applied in accordanceit is our opinion, with the Regulations;based on theand information available to us and the • theexplanations instructions ofprovided, the Alternative that in Investment all material Fund respects Manager the (“the Company, AIFM”) are acting carried through out (unless the they AIFM: conflict with the Regulations). (i) has carried out the issue, sale, redemption and cancellation, and calculation of the price of the Company’s shares and the application of the Company’s income in accordance with the ReportRegulations of and the the SchemeDepositary documents of the Company; and for the year ended 31 December 2019 (ii) has observed the investment and borrowing powers and restrictions applicable to the The DepositaryCompany also in accordancehas a duty to takewith reasonable the Regula caretions to ensure and Scheme that Company documents is managed of the in accordanceCompany. with the Scheme documents and the Regulations in relation to the investment and borrowing powers applicable to the Company. Having carried out such procedures as we consider necessary to discharge our responsibilities as Depositary of the Company,For and it is ouron behalfopinion, of based on the information available to us and the explanations provided, that in all material respects the Company, acting through the AIFM: The Bank of New York Mellon (International) Limited (i) hasOne carried Canada out theSquare issue, sale, redemption and cancellation, and calculation of the price of the Company’s shares andLondon the application E14 5AL of the Company’s income in accordance with the Regulations and the Scheme documents of the Company; and (ii) hasManager observed the investment and borrowing powers and restrictions applicable to the Company in accordance with the Regulations and Scheme documents of the Company.
For and on behalf of: The Bank of New York Mellon (International) Ltd
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 19 AEW UK Real Estate Fund
Report of the Auditor
Independent auditor’s report to the shareholders of AEW UK Real Estate Fund (‘the Company’) Opinion We have audited the financial statements of the Company for the year ended 31 December 2019 which comprise the Statements of Total Return, the Statements of Changes in Net Assets Attributable to Shareholders, the Balance Sheets, the Statement of Cash Flows and the Related Notes and Distribution Tables for each of the Company’s sub- funds listed on page 1 and the accounting policies set out on pages 56 to 59 and 111 to 114. In our opinion the financial statements: • give a true and fair view, in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, of the financial position of each of the sub-funds as at 31 December 2019 and of the total return and the net capital gains/net capital losses on the property of each of the sub-funds for the year then ended; and • have been properly prepared in accordance with the Instrument of Incorporation, the Statement of Recommended Practice relating to Authorised Funds, and the COLL Rules.
Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Company in accordance with, UK ethical requirements including the FRC Ethical Standard. We have received all the information and explanations which we consider necessary for the purposes of our audit and we believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion.
Going concern The Authorised Corporate Director has prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or its sub-funds or to cease their operations, and as they have concluded that the Company and its sub-funds’ financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements (“the going concern period”). We are required to report to you if we have concluded that the use of the going concern basis of accounting is inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis for a period of at least a year from the date of approval of the financial statements. In our evaluation of the Authorised Corporate Director’s conclusions, we considered the inherent risks to the company’s and its sub-funds’ business model and analysed how those risks might affect the company’s and its sub-funds’ financial resources or ability to continue operations over the going concern period. We have nothing to report in these respects. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditor's report is not a guarantee that the Company or its sub-funds will continue in operation.
20 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Estate Fund
Report of the Auditor (continued)
Other information The Authorised Corporate Director is responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work: • we have not identified material misstatements in the other information; and • in our opinion the information given in the Authorised Corporate Director’s Report is consistent with the financial statements.
Matters on which we are required to report by exception We have nothing to report in respect of the following matters where under the COLL Rules we are required to report to you if, in our opinion: • proper accounting records for the Company have not been kept; or • the financial statements are not in agreement with the accounting records.
Authorised Corporate Director’s (AEW UK Investment Management LLP) responsibilities As explained more fully in their statement set out on page 18 the Authorised Corporate Director is responsible for: the preparation of financial statements which give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Company and its sub-funds’ ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Company or its sub-funds or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 21 AEW UK Real Estate Fund
Report of the Auditor (continued)
The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the Company’s shareholders, as a body, in accordance with Rule 4.5.12 of the Collective Investment Schemes sourcebook (‘the COLL Rules’) issued by the Financial Conduct Authority under the Open- Ended Investment Companies Regulations 2001. Our audit work has been undertaken so that we might state to the Company’s shareholders those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s shareholders as a body, for our audit work, for this report, or for the opinions we have formed.
Henry Todd for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 12 May 2020
22 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Annual Report and Financial Statements for the year ended 31 December 2019 AEW UK Core Property Fund
Fund Manager’s Report
TO BE UPDATED
• The AEW UK Core Property Fund (‘the Fund’) is an open-end fund with a diversified, multi sector portfolio of commercial property assets throughout the UK. • The investment objective of this Fund is to provide a return from capital appreciation and income over the longer term and to deliver, over time, outperformance of the benchmark. The benchmark being the UK All Balanced Property Funds Index. • The Fund seeks to achieve superior investment returns through relatively high income returns, strong stock selection, seeking well located mispriced assets with strong tenant demand, and active management of all assets. • Investment guidelines adopted to control risks and maintain focus on key objectives such as zero permitted long term debt, voids, cash holdings, and measure sector allocations against benchmark. • The Fund has no current exposure to Central London offices. • The Fund is open to investment by pension funds, charities, SIPPS, insurance companies and other approved investors eligible to invest in a qualified investor scheme (QIS).
24 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Investment Summary – 2019 Despite the backdrop of Brexit and the emergence and spread of COVID 19 towards the end of the year, the Fund continued to perform strongly in 2019 relative to its peer group (All Balanced Property Fund Index as contained in the MSCI/AREF UK Quarterly Property Fund Index). As at 31st December, over one, three, five and seven years the Fund was the top performing balanced fund with an annualised total return of 5.5%, 10.0%, 9.9% and 12.6% respectively. The Fund NAV increased from £288.6 million as at 31 December 2018 to £301.8 million as at 31 December 2019. During the year, the Fund acquired three industrial properties for £15.9m. In the retail sector the Fund was active in selling properties for alternative uses. In total the Fund disposed of £8.9m of properties (seven disposals including four part unit disposals). Following the year end, the Fund purchased three properties for £12.8m being strategically located retail properties with alternative uses. The Fund’s Pricing Sub-Committee recommended a price swing to bid in March 2019 as a prudent precautionary measure to protect long term investor’s returns. This was undertaken following a redemption request which exceeded 1% of the Fund’s Net Asset Value (NAV). £4.6m of equity was redeemed on the 1 March dealing date. Following the price swing to bid as at 1st March and there being no further redemptions during March, the Pricing Sub- Committee recommended the price revert to offer at the next dealing date (1st April 2019), to which the Manager agreed. Following the year end, the emergence and spread of COVID 19 has resulted in significant changes in business activities and economic conditions. As at 31 March 2020, the Standing Independent Valuer has determined material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic. Following receipt of a redemption request for £6.8m for the 1 May 2020 dealing day, the ACD had taken the decision to defer redemptions in the Fund. The redemption request was subsequently withdrawn and the Fund currently has no redemptions in queue.
Performance The Fund has experienced strong outperformance when compared to our peers in the MSCI/AREF UK All Balanced Property Funds Index. This is despite costs incurred during the year in disposal and reinvestment of property sale proceeds. Fund performance as at 31 December 2019 (%)
%
14 AEW UK Core Property Fund 12 12.4% UK All Balanced Property Fund Index 10 10.0% 9.9% 8 7.5% 6 6.5% 6.6% 6.0% 5.5% 4
2 0.6% 0.7% 0.3% 1.5% 1.3% 1.6% 3 months 6 months 9 months 1 year 3 years 5 years 7.75 years (Since inception) Source: MSCI/AREF UK All Balanced Property Funds Index.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 25 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Historic true equivalent yield since inception (%)
%
12 AEW UK Core Property Fund 11.1% – True Equivalent Yield 10 10.0% 9.5% 9.2% 9.1% 8 8.4% 8.2% 8.1% MSCI/AREF UK All Balanced Property Funds Index – True Equivalent Yield 6.9% 6 6.8% (weighted average) 5.8% 5.6% 5.3% 5.4% 5.6% 5.8% 4
2
31 December 31 December 31 December 31 December 31 December 31 December 31 December 31 December 2012 2013 2014 2015 2016 2017 2018 2019 Source: Knight Frank.
Portfolio statistics Historic Net Asset Value Trend since inception (£m)
300
250 288.6 301.8 250 269.6 243.1 200 225.4
150 174.2
100
50 78.1
31 December 31 December 31 December 31 December 31 December 31 December 31 December 2013 2014 2015 2016 2017 2018 2019
Number of properties Number of tenancies Occupancy/vacancy rate
%
280 70 Occupancy 100 68 280 rate as % of 89.75 87.75 260 90 265 rental value 66 80 64 66 240 70 62 64 220 60 60 Vacancy 58 200 rate as % of 50 56 rental value 180 40 54 30 52 160 20 50 140 10 48 10.25 12.25 31 December 31 December 31 December 31 December 31 December 31 December 2018 2019 2018 2019 2018 2019
26 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Geographical allocation 31 December 2018 31 December 2019 South West, 21.6% South West, 20.6% West Midlands, 18.8% West Midlands, 19.0% North West, 14.5% North West, 16.6% South East, 11.3% South East, 11.2% Rest of London, 9.4% Yorkshire and Humberside, 9.1% Yorkshire and Humberside, 8.3% Rest of London, 9.0% Eastern, 6.3% Eastern, 5.9% Scotland, 4.7% Scotland, 4.2% Wales, 2.9% Wales, 2.6% North East, 2.2% North East, 1.8%
Sector allocation 31 December 2018 31 December 2019
Offices, Rest of South East and UK 13.0% Offices, Rest of South East and UK 11.8% City Offices, 0.0% City Offices, 0.0% West-end Offices, 0.0% West-end Offices, 0.0% Standard Retail, 13.1% Standard Retail, 10.5% Industrials, 38.9% Industrials, 45.0% Retail Warehouses, 9.3% Retail Warehouses, 7.0% Other, 21.5% Other, 20.8% Shopping Centres, 1.8% Shopping Centres, 1.4% Cash, 2.4% Cash, 3.5%
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 27 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Asset Management report
General The Asset Management team is focused on preserving and generating new income and driving capital growth predominantly through new lettings, refurbishments and lease re-structuring. Below is a summary of the major asset management initiatives implemented in 2019:
Grandstand Road, Jamage Industrial Wakefield Estate, Stoke on Trent In August 2018, we signed an We have completed a agreement for lease to extend 3 year reversionary lease the existing industrial unit. commencing in June 2020 We completed the extension at an increased rent of in H1 2019 which has £220,000 p.a. doubled the size of the unit to 200,000 sq ft. The new lease reflects an 11 year term, with RPI linked reviews.
The Rivergate Aztec West, Bristol Shopping Centre, We completed the letting of Peterborough the second floor on a 10 year lease with a break in year 5. In Q3 we completed 7 The tenant is guaranteed temporary lettings, with now by JLL (5A1). The rental tone only 3 vacant units in the is ahead of valuation and scheme. Flexible lettings will comfortably above the ERV enable redevelopment of the on purchase. centre with more ease.
St David’s Retail Park, Centre 27, Birstall Swansea We have secured outline We have completed on a planning consent for straight 15 year lease with RPI 85,000 sq ft of retail linked reviews to Bay Leisure warehousing. Junction 27 of Ltd (trading as Simply Gym), a the M62 is one of the UK’s strong leisure operator. strongest out-of-town retail destinations.
Weston Road, Crewe Leisure Park, Bristol The tenant did not action We have completed a their October 2019 break 20 year reversionary lease option. We subsequently to McDonald’s from 2023 in triggered rent review exchange for only 9 months’ negotiations and secured rent free. an increase of £53,480 to £800,000 pa.
28 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Anglo Office Park, High Globe Square Wycombe Industrial Estate, Following the strategic early Dukinfield lease surrender of Units 5 & We completed two lettings to 6 for a premium of £129,000, an existing tenant amounting the Fund completed the to £140,000 p.a. new income refurbishment and let the for the estate. whole first floor at a rent ahead of business plan.
Schoolbrow Retail New Look, Coventry Park, Warrington The tenant did not action We exchanged an agreement their March 2020 break. for lease with Farm Foods Attractive current yield of to expand on a new 15 17.5% and a capital value of year straight term which £35 psf. completed in January 2020.
Kayley Industrial Grazebrook Industrial Estate, Ashton Estate, Dudley We have received planning We have completed a 5 year approval for a 16,000 sq ft lease renewal on a 35,000 sq small unit scheme on the ft unit at 34% above ERV, front of the estate. Given the setting a new rental tone for units’ roadside frontage, we the estate. anticipate attracting trade- counter occupiers paying higher rents of £9 psf. The estate’s overall prominence will also be improved.
Kayley Industrial Estate, Ashton Having completed external cladding installations and decorations, as well as refurbishing vacant units, we completed approx. £300,000 p.a. of deals in H1 2019.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 29 AEW UK Core Property Fund
Fund Manager’s Report (continued)
AEW UK’s Approach to Socially Responsible Investing
Environmental, Social & Governance (‘ESG’) We believe that ESG should be the key principles of AEW’s approach to Responsible Property Investing (RPI) and that a sustainable and socially responsible approach to real estate investment management both protects and enhances the value of our clients’ assets, now and in the future. We are fully aware of the impact of our activities on environmental and social issues both from our own business and our investment, asset management and development activities. To this end we are committed to implementing a comprehensive Socially Responsible Investment (SRI) policy. By doing so we expect to meet our stakeholders’ expectations, whether they are clients, tenants, providers, employees, or any other individuals with whom we interact. Our policy is aligned with the international climate agreement signed in Paris in December 2015 as climate change is a major challenge for humanity that poses important risks and creates opportunities for the real estate industry. The real estate sector in Europe accounts for some 40% of total energy consumption and about 25% of greenhouse gases (GHG) emissions. Over the coming years we believe that both occupiers and investors will increasingly focus on the way in which ESG issues are managed. In turn, this is expected to impact on building obsolescence, lettability, rates of lease renewals and ultimately the rental and capital values for individual assets if ESG issues are ignored. However, our fiduciary duty to investors must always come first in all investment decision-making. We continue to engage with clients wherever possible to educate on the importance of ESG. Where we feel it is important to do so and costs can be justified in terms of performance objectives, or are required to comply with UK legislation, we will seek to incorporate or adopt best practice; usually this is done with little support from tenants who by and large remain reluctant to commit to ESG in a similar way.
Environment and sustainability 1) Global Real Estate Sustainability Benchmark (‘GRESB’) The Fund has again submitted to GRESB, the Global Real Estate Sustainability Benchmark. GRESB is an investor driven organisation assessing the sustainability performance of real estate portfolios. GRESB scores overall performance through two Dimensions: 1. Implementation and Measurement – actions and programmes that have been initiated by the Fund. 2. Management and Policy – relating to policies and processes that set out the Fund’s intent for managing sustainability issues. This year the Fund saw an improvement in its GRESB score (from 58 in 2018 to 65 in 2019). The Fund achieved a GRESB rating of two stars and was also awarded the additional ‘green star’ status. Performance was supported through the Fund producing a sustainability disclosure report and having established an Environmental Management System (EMS) and Data Management System (DMS). The DMS enables effective tracking of environmental performance data, including a process for managing EPC coverage, ratings and associated risks. Currently the fund has full EPC coverage.
30 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Despite the strengths, there are reasons why the Fund is below the peer average, including: • The Fund has a high percentage of single let assets where the tenant has sole responsibility for the operation and management of the property, as opposed to assets where the Fund is responsible for managing an estate via a service charge. As so much of the GRESB score relates to data coverage, which has increased over the years, the Fund does not score as well as funds with a smaller holding of single let assets. • The nature of assets typically acquired do not have a green building certificate. New office buildings in Central London usually have such certificates. The Fund is committed to improving ESG performance and GRESB scores, where in line with AEW’s commitment to its ESG agenda. We have completed a ‘deep dive’ analysis to identify where and how the Fund can improve scoring. This has involved a targeted approach towards implementing tenant engagement initiatives as well as more detailed analysis on the coverage of asset level initiatives, such as audits and efficiency measures. Results from this analysis shall be used to inform our future ESG strategy.
2) Minimum Energy Efficiency Standards (MEES) AEW UK are committed to ensuring compliance with MEES regulations, which came into effect from April 2018, requiring all new lettings to have a minimum ‘E’ rated EPC, unless listed buildings. The fund currently has full EPC coverage. The Fund undertook a gap analysis to identify any risks where EPCs did not meet minimum standards, these were then re-assessed and action plans created. The Fund has action plans in place to mitigate EPC below E, which currently represents 3% of the portfolio by floor area.
3) Portfolio Greenhouse Gas Emissions The Fund has followed UK Government environmental reporting guidelines and used UK Government 2018 greenhouse gas reporting conversion factors for company reporting to identify and report relevant GHG emissions over which it has Operational Control for the year ending 31 December 2018. GHG emissions have been reported against the following ‘Scopes’, as defined by the GHG Protocol and where relevant: • Scope 1: Direct emissions from owned vehicles, controlled boilers and fugitive emissions from air conditioning systems under landlord control. • Scope 2: Indirect emissions from electricity purchased by AEW UK Core Property Fund and consumed within real estate assets owned by the company. The Fund’s energy use and GHG emissions statements for the year ending 31 December 2018 are reported in the tables below. These set out the energy use/emissions, like-for-like1 and an intensity value per sector and for the entity overall. The approach taken follows guidance provided by the GHG Reporting Guidelines (BEIS, 2018) and INREV Sustainability Reporting Guidelines 2016. 1 Like for like excludes assets that were purchased, sold or under refurbishment during the two years reported.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 31 AEW UK Core Property Fund
Fund Manager’s Report (continued)
AEW UK Core Property Fund Greenhouse Gas Emissions Statement for the year ending 31 December 20182 Absolute Like For Like Energy Usage Like For Like Intensity (tCO2) (tCO2) (kgCO2) Sector Energy Source 2017 2018 2017 2018 Change 2017 2018 Change
Scope 1 – Gas 75.76 66.21 31.56 22.37 -29% Office 47.38 39.09 -29% Scope 2 – Electricity 448.41 343.40 319.40 267.13 -16%
Retail, Shopping Scope 1 – Gas 0.06 0.01 N/A N/A N/A 29.37 20.76 -29% Centre Scope 2 – Electricity 91.71 64.84 91.71 64.84 -29%
Lodging, Leisure Scope 1 – Gas N/A N/A N/A N/A N/A N/A N/A N/A & Recreation Scope 2 – Electricity N/A 13.55 N/A N/A N/A
Industrial, Scope 1 – Gas N/A 10.37 N/A N/A N/A N/A N/A N/A Business Parks Scope 2 – Electricity N/A 358.59 N/A N/A N/A Scope 1 – Gas N/A N/A N/A N/A N/A Other N/A N/A N/A Scope 2 – Electricity N/A 185.48 N/A N/A N/A Scope 1 – Gas 75.82 76.59 34.56 22.37 -29% Total N/A N/A N/A Scope 2 – Electricity 540.12 992.87 411.11 331.97 -19%
2 The statement for the year ending 31 December 2019 is not yet available.
32 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Fund Manager’s Report (continued)
AEW UK Core Property Fund Energy Statement for the year ending 31 December 20183 Like For Like/Degree Like For Like/Degree Absolute Day Adj Usage Day Adj Energy Usage (kWh) (kWh) Intensity Energy Sector Source 2017 2018 2017 2018 Change 2017 2018 Change
Gas 411,810 359,899 171,583 121,616 -29% Office Electricity 1,275,488 1,213,145 908,535 943,704 4% 146 144 -1% Total 1,687,298 1,573,044 1,080,118 1,065,320 -1% Gas 341 64 N/A N/A N/A Retail, Shopping Electricity 260,854 229,050 260,854 229,050 -12% 84 73 -12% Centre Total 261,195 229,114 260,854 229,050 -12% Gas N/A N/A N/A N/A N/A Lodging, Leisure Electricity N/A 47,870 N/A N/A N/A N/A N/A N/A & Recreation Total N/A 47,870 N/A N/A N/A Gas N/A 56,377 N/A N/A N/A Industrial, Electricity N/A 1,362,171 N/A N/A N/A N/A N/A N/A Business Parks Total N/A 1,418,548 N/A N/A N/A Gas N/A N/A N/A N/A N/A Other Electricity N/A 655,261 N/A N/A N/A N/A N/A N/A Total N/A 655,261 N/A N/A N/A Gas 412,151 416,340 171,583 121,616 -29% Total Electricity 1,536,342 3,507,497 1,169,389 1,172,755 0% N/A N/A N/A Total 1,948,493 3,923,837 1,340,972 1,294,371 -3%
3 The statement for the year ending 31 December 2019 is not yet available.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 33 AEW UK Core Property Fund
Fund Manager’s Report (continued)
4) Carbon Emissions Target The Fund is actively managing its carbon footprint and seeks to improve efficiency measures where it is able to influence the outcome. For example, we look to incorporate energy efficiency into refurbishments or at sites where we have management control. We consider all property types where there is a positive business case to do so. Quick wins are progressed where possible and larger capital expenditure projects are reviewed as part of an asset’s annual business plan. The Fund has set a target of reducing absolute GHG emissions by 15% by 2030 based on a 2018 baseline and we perceive the positive actions we take regarding improving our assets will support us to achieve this target. We would therefore expect on a like for like basis there to be a trend of reducing emissions over the near future. It is however important to note that changes in fund composition as we buy and sell assets will impact absolute emission figures. Currently we collect landlord consumption data on a bi-annual basis from our property managers, which enables us to track our emissions and review progress easily. Furthermore, we are continuing to engage with tenants regarding tenant procured consumption data, so we can better understand emissions relevant to their actions.
Governance The Fund is a member of the Association of Real Estate Funds (AREF). The aim of the AREF Code of Practice is to achieve high standards of transparency across the unlisted sector and promote consistency of reporting to allow investors to compare different funds. The Fund completes the MSCI/AREF Pooled Property Questionnaire each quarter, which is made available to all investors and which forms the basis of its entry in MSCI/AREF Property Fund Vision handbook. The Fund was awarded the 2019 AREF Corporate Governance Quality Mark on achieving a high standard of transparency and corporate governance. Part of the AREF Code of Practice sets on the requirements for oversight by supervisory or advisory committees. Pages 10-13 of this report set out the report of the Fund`s Independent Governance committee. When AEW UK launched its first authorised fund in 2013 we wanted to reflect the lessons learnt by the property fund industry in dealing with investor communications and liquidity management at the time of the Global Financial Crisis. As such the constitution of the Governance Committee and Pricing Sub-Committee reflects its independence from the manager, with an independent Chair, majority representation by investors and Terms of Reference will allows the Manager to be held to account. We believe that such transparent governance is not only best practice but also extremely rare amongst our peers.
34 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Portfolio Acquisitions in 2019
Units 2 & 4 Jamage Industrial Estate, Stoke on Trent Add to existing industrial estate
Property characteristics Investment summary Property type Industrial • 2 industrial units let on a low average passing rent of £3.70 per sq ft Property size 109,069 sq ft Purchase date August 2019 • Attractive net initial yield of 8.0%, equating to £44 per sq ft capital value Year built 1970’s Initial yield 8.2% • Strategically located adjacent to an existing Core Fund asset • Total investment now £7.1m, initial yield of 8.2%
Booker, Park Farm, Folkestone Established industrial unit
Property characteristics Investment summary Property type Industrial • South East industrial unit let to Booker Ltd Property size 30,090 sq ft • Investment price below vacant possession Purchase date August 2019 value Year built 1960's • Tenant has been in occupation since 1989 Initial yield 7.7% • Attractive reversionary yield of 7.7%
Kayley Industrial Estate, Ashton Multi-let industrial estate
Property characteristics Investment summary Property type Industrial • 154,048 sq ft warehouse in established industrial location Property size 154,048 sq ft Purchase date September 2019 • 6.5% NIY equating £54 psf capital value Year built 1970’s • Strategically located adjacent to an existing Initial yield 6.8% Core Fund asset • Total investment now £16.0m, initial yield of 6.8%
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 35 AEW UK Core Property Fund
Fund Objective The investment objective of the Fund is to provide a return from capital appreciation and income over the longer term and to deliver, over-time, outperformance against the Benchmark.
Investment Benchmark The Fund is benchmarked against the All Balanced Property Funds Index, MSCI/AREF UK Pooled Property Fund Index – weighted average.
Investment Policy The Fund is diversified geographically in the United Kingdom and across property sectors. The Fund mainly invests in office properties, retail warehouses, shopping centres, traditional industrial properties, other leisure properties, and unit shops. The ACD will manage the Fund with reference to the real estate sector allocation of the benchmark mentioned above. Whilst not a core part of the Fund’s investment policy, the ACD reserves the right to make investments which the ACD considers appropriate, including investments in derivative products, whether traded under the rules of a recognised or designated investment exchange or not. The ACD may also use them for hedging or efficient portfolio management purposes. It may invest through other collective investment vehicles or other investment vehicles, but only in limited circumstances. These are where direct investment in the underlying property is not possible or is impractical, for instance because a property would otherwise be too large for the portfolio, or not available in any other form. In such instances, the ACD would consult with and take into consideration the recommendations of the Governance Committee. The ACD will keep the investment policy under regular review, in conjunction with the Governance Committee, so that, if there are changes in market conditions or other relevant factors, the strategy can be adapted accordingly whilst retaining the broad objectives. If changes occur, investors will be promptly notified in writing and no later than within 60 days. The ACD’s Socially Responsible Investment Statement is published on the ACD’s website (www.aewuk.co.uk) and is available on request.
Investment Strategy The Fund will look for and capitalise on market inefficiencies with reference to the investment risk profile set by its benchmark. The investment process is very stock focused and draws upon our strong active asset management capabilities. As a value investor, the Fund will look to buy attractively priced and/or good quality real estate at the margins of prime locations aiming to provide good risk adjusted returns over the long term.
36 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Investment Guidelines
Guideline Limit Actual Parameters Guidelines as at 31 Dec 19 as at 31 Dec 19
Benchmark allocation The Fund will measure allocations of the gross asset value for the Fund against each of the following sectors: • ‘Business space’ (combining office and 38-78% 56.8% industrial classifications) • Retail (combining retail, shopping centres 6-46% 18.8% and retail warehouse classifications)
• Other 0-30% 20.8% The Fund will be limited to the MSCI/AREF UK Quarterly All Balanced Fund Property Fund Index exposure, plus or minus 20%. In addition, the Fund will retain not less than >25% 26.1% 25% exposure to the ‘South East’ of the UK. Investment in unoccupied 15% of Estimated Retail Value (20% at time 15% 12.3% and non-income producing of purchase). assets (i.e. vacant assets) Cash Subject to liquidity requirements, not more 10% 3.6% than 10% of the Net Asset Value of a Fund will be held in cash at any one time. Investment in a single 15% of gross asset value calculated at the 15% 6.8% investment date of investment. Investment in Collective 10% of NAV (restricted to 15% maximum). 10% 0.0% Investment Schemes Investment in property 10% of NAV. 10% 0.0% development (speculative complete demolition and reconstruction without a tenant) Borrowing The ACD will borrow only up to 10% of the 10% 0.0% NAV and in the form of a revolving credit facility.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 37 AEW UK Core Property Fund
Report of the Valuer
The Bank of New York Mellon (International) Ltd As a depositary of the AEW UK Core Property Fund (sub-fund of AEW UK Real Estate Fund). AEW UK Core Property Fund – Valuation date 31 December 2019 In accordance with your instructions, dated 12 January 2012 and July 2013, we now report to you formally, as The Standing Independent Valuer to AEW UK, our opinion of the Fair Values of the Fund’s direct property assets (“Immovables”), as at 31 December 2019, for accounting and performance monitoring purposes. Our valuations reflect usual deductions in respect of purchaser’s costs and, in particular, full liability for UK Stamp Duty as applicable at the valuation date. We are of the opinion that the aggregate of the Fair Values of the freehold, heritable, long leasehold and short leasehold interests in the 64 Immovables held in the scheme, as at 31 December 2019 (the measurement date), was £294,475,000 (Two Hundred and Ninety Four Million, Four Hundred and Seventy Five Thousand Pounds). Our valuation as at 31 December 2019 has been undertaken by us as qualified valuers and in accordance with RICS Valuation – Global Standards 2017, which incorporate the International Valuation Standards, and the RICS UK National Supplement effective from January 2019. References to the “Red Book” refer to either or both of these documents, as applicable. The properties have been valued on the basis of Fair Value in accordance with the RICS Valuation – Professional Standards VPS4 (7.1) Fair Value and VPGA1 Valuations for Inclusion in Financial Statements, which adopt the definition of Fair Value used by the International Accounting Standards Board: “The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.” We confirm that the valuations reported for properties located in the UK conform to the definition of Fair Value and furthermore they are expressed net of transaction costs. The Valuer's opinion of Fair Value was primarily derived using recent market transactions on arm's length terms, where available. We have assumed there to be good and marketable titles to the properties. The properties have been valued individually and not as part of a portfolio. Disposal as a portfolio, or by other prudent lotting, may result in either a premium or discount, depending upon market conditions. Our report does not seek to address this. We have made oral enquiries where appropriate and have taken account, insofar as we are aware, of unusual outgoings, planning proposals and onerous restrictions or local authority intentions which affect the properties. However, this information has been provided to us on the basis that it should not be relied upon. We have been supplied with details of tenure and tenancies and have valued on the basis that there are no undisclosed matters which would affect our valuation. AEW UK have also supplied floor areas which we have been instructed to rely upon. The adoption of IPMS (International Property Measurement Standards), for the office sector, became mandatory with effect from 1 January 2016 for all RICS members replacing NIA (Net Internal Area) as set out under the current Code of Measurement Practice (Sixth Edition). It has been agreed with you that until the new definition of measurement has been adopted by the leasing market, rental analysis for the office sector will continue to be shown on a net internal area basis. As or when buildings are re-measured, we will present our analysis on a dual basis, namely IPMS and NIA.
38 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Report of the Valuer (continued)
No allowance has been made in our valuation for expenses of realisation or for taxation which may arise in the event of a disposal and our valuations are expressed exclusive of any VAT that may become chargeable. The properties have been inspected during the last 12 months. We have not undertaken any building surveys or environmental audits and are therefore unable to report that the properties are free of any structural fault, rot, infestation or defects of any other nature, including inherent weaknesses due to the use in construction of materials now suspect. No tests were carried out on any of the technical services. However, we have reflected any apparent wants of repair in our opinion of value as appropriate. Minimum Energy Efficiency Standards are the standards set out by the Government for let properties in England and Wales. Buildings that have an EPC rating of F & G must be brought up to standard before they are let subject to some conditions, exemptions and relief. This commenced from 1 April 2018 for all new lettings and they apply to all continuing lettings from 1 April 2020 for domestic buildings and from 2023 for non-domestic buildings. For Scottish properties, the Assessment of Energy Performance of Non-Domestic Buildings (Scotland) Regulations 2016 came into force in Scotland in 2016 and does not incorporate a “ban” on new lettings. Owners are encouraged to carry out improvements, or improve efficiency through monitoring emissions from a building via creating an Action Plan. The Action Plan procedure will apply to the sale or letting of larger buildings, with a floor area >1,000 sqm. This only applies to buildings that are subject to a new sale or lease and buildings constructed to building standards applicable from March 2002, or otherwise meeting those standards, are exempt. We have consequently taken into account any capital expenditure that is required where energy efficiency standards need improving. We have assumed, except where we have been informed to the contrary, there to be no adverse ground or soil conditions or environmental contamination which would affect the present or future use of the properties and that the load bearing qualities of the site of each property are sufficient to support the buildings constructed or to be constructed thereon.
Ambi-Rad Unit, Fens Pool Avenue, Brierley Hill In respect of the Ambi-Rad Unit, Fens Pool Avenue, Brierley Hill we have had sight of a report prepared by Waterman Energy, Environment & Design Limited, dated February 2012. The property is located on a former landfill site, which was used to contain waste from the former Round Oak Steel Works. The property’s proximity to an area considered to have high environmental sensitivity, and the presence of a Secondary A aquifer beneath the site, have resulted in the report concluding that the property represents a medium risk of incurring contaminated land liabilities. The report recommends further investigations are made in this regard, specifically in relation to groundwater studies. Our valuation makes no allowance for any liabilities which may arise from these investigations, and we have assumed that the present or future use of the property is not affected. Should it, however, be established subsequently that contamination exists at the property or on any neighbouring land, or that the property has been or is being put to a contaminative use, this might reduce the value now reported. This property has high voltage overhead transmission lines that cross the yard to the rear of the property. The possible effects of electric and magnetic fields have been the subject of occasional media coverage, with the result that, where there is high-voltage electrical supply equipment close to the property, there is a risk that public perception may affect marketability. Nabarro LLP have made enquiries of The Coal Authority with regard to disused mineshafts located beneath this property. The search confirms details of the capping procedures adopted for two out of the three shafts.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 39 AEW UK Core Property Fund
Report of the Valuer (continued)
It is considered that any ground movement from these coal workings should now have ceased, and the property is not in the likely zone of influence for any present underground coal working. However, all mines and minerals rights under, or affecting the property still vest with the Coal Authority. We have assumed that the load bearing qualities of the site of the property is sufficient to support the building constructed thereon.
Centre 27, Birstal, Leeds In respect of the Centre 27, Birstal, Leeds we have had sight of a The Phase 1 desk top Environment Assessment summary, prepared by Delta Simons Consultants Ltd, dated 3 November 2014, which notes that the site is underlain by a coal seam which may have been worked, with a possible adit in the northeastern corner. Furthermore, the report states that the boundary of the Nab Land Refuse Tip extends to the south eastern part of the subject site and it is believed to have been the cause of the historic subsidence issues in regards to parts of the site. In its former configuration, the coal mining legacy and the fact that part of the south eastern site overlies a former land fill site was considered a low risk. However, should the site be redeveloped in the future, Delta Simons recommended that a full and detailed ground investigation of the site be commissioned before any works were undertaken.
New Hall Street, Stoke On Trent The Phase 1 desk top Environment Assessment summary states that according to a Coal Authority Non-Residential Mining Report, the site is in the likely zone of influence from workings in 15 seams of coal at 40 to 1,100 metres depth last worked in 1980. It notes that there are 3 mine entries on or within 20 metres of the site, of which one is a shaft beneath the building. Delta Simon have reviewed the Coal Authority Non-Residential Mining Report and have concluded that the risk of subsidence to the building in its current configuration as being small and the likelihood of the subject building being damaged as a consequence of that subsidence as being very small. In the unlikely event that coal mining subsidence damage does occur, they note that the property owner can rely on the provisions of the Coal Mining Subsidence Act 1991 to have the damage remedied by the Coal Authority.
Globe Square Industrial Estate, Dukinfield, Manchester The phase 1 Desk Top Environment Assessment summary prepared by Delta-Simons Environmental Consultants Ltd, undated, and a Stage 1 Contamination Assessment for Urban Regen Ltd, dated 26 January 2015, produced by Smith Grant, have both noted that soil, ground water contamination and ground gas were discovered at the site. Smith Grant noted the presence of asbestos cements on one location and that solvents were also present on the site. In its current configuration and existing use, Delta Simmons have concluded that the potential contamination on the site represents a low to medium risk. However, should the site be redeveloped in the future, the council would likely insist on remedial works and or the removal of the contamination from the site as part of the planning consent for the redevelopment. Delta Simmons have advised that the remedial costs, should the site be redeveloped, would range from £30,000 from £300,000 depending the severity of the contamination discovered.
Requirement of Financial Services Regulations We confirm that at the date of this Valuation Report we satisfy the requirements of an Appropriate Valuer as set out in COLL 5.6.18R (7) and the requirement of a Standing Independent Valuer as set out in COLL 5.6.20R (2) of the Collective Investment Scheme Sourcebook published by the Financial Conduct Authority as part of its Handbook of Rules made under the Financial Services and Markets Act 2000 (“COLL”).
Compliance and Independence In addition to The AEW UK Core Property Fund, Knight Frank LLP is also retained by AEW UK to value the following funds: i) The Pavilion Property Trustees Limited (Jersey) and Pavilion Trustees Limited (Jersey) c/o AEW Europe.
40 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Report of the Valuer (continued)
ii) AEW UK Real Return Fund. iii) AEW UK Long Lease REIT PLC. iv) AEW UK REIT PLC. We confirm that Knight Frank LLP meets the requirements of the Fund as an external valuer in the role of Standing Independent Valuer, having been appointed in July 2013, as defined by the RICS Valuation – Professional Standards and regulations made by the Financial Conduct Authority. We valued the property within the Fund before this date under different contracts before the Fund converted to a PAIF. For the avoidance of doubt, our role is limited to providing property valuations for assets held by the Fund, in accordance with the Red Book. We are your valuation advisors and are not acting as “External Valuers” as defined by The Alternative Investment Fund Managers Regulations 2013 and Directive 2011/61/EU or as valuers of the Fund itself. The valuation function for the Fund and the setting of the net asset value of the Fund remains with you and/or your duly appointed External Valuers. We recognise and support the RICS Rules of Conduct and have established procedures for identifying any conflicts of interest. We confirm that in relation to Knight Frank LLP’s preceding financial year the proportion of total fees paid by AEW UK to the total fee income of Knight Frank LLP was less than 5%. In compliance with UKVS 4.2 of the RICS Valuation Standards, where, in respect of any Immovable acquired in the 12 months preceding the date of valuation (as detailed below) Knight Frank received an introductory fee or negotiated the purchase on behalf of AEW UK, the instruction to undertake the valuation has been accepted only once another firm unconnected with Knight Frank LLP, at the time of, or, since the transaction was agreed, provided a valuation of that Immovable for the Fund. In accordance with VPS3 of the Red Book, the valuers, on behalf of Knight Frank LLP, with the responsibility for this report are Matthew Cripps FRICS Registered Valuer and Justin Partridge MRICS Registered Valuer. Parts of this valuation have been undertaken by additional valuers as listed on our file. We confirm that the valuer and additional valuers meet the requirements of the Red Book, having sufficient current knowledge of the particular market and the skills and understanding to undertake the valuation competently. We confirm “the signatories” of this Report, Matthew Cripps and Justin Partridge have been responsible for this instruction since 12 January 2012 and 3 March 2014 respectively. No valuations were provided prior to the start of the current relationship. Our report is subject to our General Terms of Business for valuations, a copy of which is included in this report. In accordance with our standard practice, we must state that this valuation report is for the use only of the party to whom it is addressed and no responsibility is accepted to any third party for the whole or any part of its contents. If our opinion of value is disclosed to persons other than the addressees of our report, the basis of valuation should be stated. Neither the whole or any part of the valuation report nor any reference thereto may be included in any published document, circular or statement nor published in any way whatsoever whether in hard copy or electronically (including on any web-site) without our prior written approval of the form and context in which it may appear. Yours faithfully,
Matthew Cripps FRICS Justin Partridge MRICS Partner, Valuation & Advisory Associate, Valuation & Advisory For and on behalf of Knight Frank LLP For and on behalf of Knight Frank LLP
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 41 AEW UK Core Property Fund
Portfolio Statement as at 31 December 2019
Investment Properties Number of Market Value Net Assets properties £’000 %
Sector Industrial 25 137,400 46 Leisure/Other 11 63,575 21 Offices 9 36,000 12 Retail: – Standard Retail 9 32,050 11 – Retail Warehouses 9 21,275 7 – Shopping Centres 1 4,175 1
Total Portfolio of Investments 64 294,475 98 Other Assets and Liabilities 7,302 2
Total Portfolio 64 301,777 100
Market value
Industrial Block L, Peartree Business Park, Dudley £0 to £5m MESL Microwave, 1 Queen Anne Drive, Newbridge £0 to £5m Booker, Park Farm, Folkestone £0 to £5m Unit 1 & 2, Royds Lane, Lower Wortley £0 to £5m Chainbridge Road, Blaydon on Tyne £0 to £5m Unit 62-85 Blackpole Trading Estate, Worcester £0 to £5m Phase I & II Billington Road, Rossendale Industrial, Burnley £0 to £5m Units F & G, Blackpole Trading Estate, Worcester £0 to £5m Puma Distribution Unit, Batley £0 to £5m Globe Square Industrial Estate, Dukinfield £0 to £5m HP Chemie Pelzer (UK). Ltd, Speke Hall Avenue, Speke £0 to £5m Units 8, 9 & 10, Bloxwich Lane, Walsall £0 to £5m Unit 15C, Blackpole Trading Estate, Worcester £0 to £5m Whitehall Trading Estate, Bristol £0 to £5m Blochairn Industrial Estate, Glasgow £0 to £5m The Bear, Ditchfield Road, Widnes £0 to £5m
42 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Portfolio Statement (continued) as at 31 December 2019
Market value Industrial (continued) Oak Furniture Land, Cheney Manor, Swindon £0 to £5m Ambi-Rad Unit, Willows Industrial Estate, Brierly Hill £0 to £5m George Wilson Industries, Aldermans Green Industrial Estate, Coventry £5m to £10m Grazebrook Industrial Park, Dudley £5m to £10m Units 1, 2 & 4, Jamage Industrial Estate, Stoke on Trent £5m to £10m Warehouse, Weston Road, Crewe £10m to £15m Spectrum, Mead Way, Swindon £10m to £15m Kayley Industrial Estate, Ashton £15m to £20m Wakefield 41, Grandstand Road, Wakefield £15m to £20m
Leisure/Other Ryde Arena, Ryde £0 to £5m Travelodge, Thurrock £0 to £5m Centre 27, Birstall £0 to £5m 233 High Street, Uxbridge £0 to £5m Planet Ice, Milton Keynes £0 to £5m Caesar's Palace, Skimpot Road, Luton £5m to £10m Monkspath Leisure Park, Solihull £5m to £10m The Kursaal, Southend on Sea £5m to £10m London East Leisure Park, Dagenham £10m to £15m Pryzm, Kingston Upon Thames £10m to £15m Hengrove Leisure Park, Hengrove Way, Bristol £10m to £15m
Offices Buchanan Gate, Glasgow £0 to £5m 32 South Gyle Crescent, Edinburgh £0 to £5m Units 6 & 8 Century Court, Rickmansworth £0 to £5m Dakota House, Colnbrook £0 to £5m Tangent House, Reading £0 to £5m Norseman and Westcott House, South Queensferry £0 to £5m Intec Business Park, Basingstoke £5m to £10m Anglo Office Park and Lincoln Inn Office Village, High Wycombe £5m to £10m 730 Aztec West, Bristol £5m to £10m
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 43 AEW UK Core Property Fund
Portfolio Statement (continued) as at 31 December 2019
Market value Standard Retail 69 Above Bar Street, Southampton £0 to £5m 91/101 Lower Precinct, Coventry £0 to £5m 24-32 Bond Street & 59-65 Horsefair, Bristol £0 to £5m 46-48 Dudley Street, Wolverhampton £0 to £5m 55-63 Cornwall Street, 50 New George Street and 131-147 Armada Way, Plymouth £0 to £5m 18/20 St. Mary’s Square, Swansea £0 to £5m Imperial Arcade, Brighton £0 to £5m 21-25 Bold Street, Liverpool £5m to £10m 36-42 Old Christchurch Road, Bournemouth £5m to £10m
Retail Warehouse 589-613 Hagley Road, West Quinton £0 to £5m Poundstretcher & HSS, Wallgate, Wigan £0 to £5m Magnet Limited, Pontrack Lane, Stockton on Tees £0 to £5m School Brow Retail Park, Warrington £0 to £5m Chaffinch Retail Park, Castletown £0 to £5m New Street Retail Park, Ashford £0 to £5m Go Outdoors, New Hall Street, Stoke-on-Trent £0 to £5m Jerome Retail Park, Walsall £0 to £5m St Davids Retail Park, Swansea £0 to £5m
Shopping Centres The Rivergate Shopping Centre, Peterborough £0 to £5m
44 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Summary of Material Portfolio Changes for the year ended 31 December 2019
Purchases and sales for the year Cost £’000
Purchases Booker, Park Farm, Folkestone £0 to £5m Units 2 & 4 Jamage Industrial Estate, Stoke on Trent £0 to £5m Kayley Industrial Estate, Ashton £5m to £10m
Total purchases for the year 15,874
Proceeds £’000
Sales Flats 2 & 8, Imperial Arcade, Brighton £0 to £5m 34 South Gyle Crescent, Edinburgh £0 to £5m 30A South Gyle Crescent, Edinburgh £0 to £5m 105-109 Foregate Street, Chester £0 to £5m Morrisons, Chaffinch Retail Park, Castletown £0 to £5m Wickes, Glebe Road, Scunthorpe £0 to £5m Rowland Hill Shopping Center, Kidderminster £0 to £5m
Total sales for the year 8,890
Purchases for the year include associated acquisition costs, with sales in the year stated net of sales costs.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 45 AEW UK Core Property Fund
Fund Information
Accounting and Distribution dates
XD date
First interim distribution 31 March 2019 Second interim distribution 30 June 2019 Third interim distribution 30 September 2019 Final distribution and year end 31 December 2019
Payment of distributions of income will normally be made within two months of the above XD dates, although the ACD reserves the right to pay at a later date but not later than four months as permitted by the Regulations. Income will be automatically reinvested unless instructions are given for payment. Income will be reinvested on the next dealing date following payment of distribution. The Fund has a distribution yield of 5.5% for the year ended 31 December 2019.
Distributions in the year Final First Interim Second Interim Third Interim Distribution 31 March 30 June 30 September 31 December 2019 2019 2019 2019 (p) (p) (p) (p)
Unit Class Unit Class A income 2.111 1.616 1.552 1.850 Unit Class C income* 2.111 1.616 1.552 1.850
* Distribution gross of tax.
46 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Fund Information (continued)
Performance Record
Highest Lowest Unit price Unit price Year Unit Class (p) (p)
2019 A income 143.57 131.71# 2019 C income 143.57 131.71#
2018 A income 142.26 136.20 2018 C income 142.26 136.20
2017 A income 135.79 124.86 2017 B income^ 135.63 124.86 2017 C income 135.79 124.86 2017 E income† 127.54 124.96
2016 A income 126.59 107.52 2016 B income 126.59 107.52 2016 C income 126.59 107.52 2016 E income 126.79 107.60
# The low unit price is due to the price being swung to bid price due to a large redemption being made in the month. † The E income Unit Class holdings were fully converted to Unit Class A income holdings in May 2017. ^ Class B Income were fully redeemed at 1 December 2017.
As at 31 December 2019, Class B and Class E are dormant.
Summary of unit dealing as at 31 December 2019 A income C income
Opening units in issue 202,747,290.640 15,910,973.560 Units issued in the year 4,135,651.255 11,166,361.946 Units cancelled in the year (5,482,448.183) – Units converted in the year 924,444.273 (924,444.273 )
Closing units in issue 202,324,937.985 26,152,891.233
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 47 AEW UK Core Property Fund
Fund Information (continued)
NAV (as calculated in accordance with the Prospectus)
NAV NAV of Unit Class per unit Year Unit Class £’000 Units in issue (p)
31 December 2019 A income 267,234 202,324,937.985 132.08 31 December 2019 C income 34,543 26,152,891.233 132.08
31 December 2018 A income 267,614 202,747,290.640 131.99 31 December 2018 C income 21,001 15,910,973.560 131.99
31 December 2017 A income 249,360 196,121,270.808 127.15 31 December 2017** B income – – – 31 December 2017 C income 20,199 15,886,913.890 127.15 31 December 2017* E income – – –
31 December 2016 A income 214,562 184,912,188.064 116.03 31 December 2016 B income 665 572,870.240 116.03 31 December 2016 C income 18,577 16,010,179.363 116.03 31 December 2016 E income 9,324 8,035,272.787 116.03
* The Unit Class E Income holdings were fully converted to Unit Class A Income holdings in May 2017. ** The Unit Class B Income holdings were fully redeemed in December 2017.
NAV represents a standard NAV as calculated in accordance with AREF’s Fund Pricing Recommendation.
Unit dealing Turnover of units During the year ended 31 December 2019, 15,302,013.201 units were created and 5,482,448.183 units were redeemed. 924,444.273 units were converted from C class units to A class units. The brokerage facility for secondary market trades was provided by CBRE Capital Advisors Ltd. There has been trading on the secondary market amounting to 1,591,060 units during the year.
Subscriptions Eligible Investors may purchase units in the Fund on a monthly basis on the dealing day, being the first business day in each calendar month, provided the subscription request has been made before the cut-off point for the Fund and the ACD is in receipt of cleared funds on the dealing date. The cut-off point for the Fund is the close of business on the business day 14 days before the dealing date. Valid applications to purchase units in the Fund will be processed at the unit price calculated at the next valuation point following receipt of the application, except in the case where dealing in the Fund has been deferred or suspended. The valuation point for the Fund is 11pm on the last calendar day of each month. The ACD will only issue units where it can do so without breaching its cash holding guidelines and there are sufficient prospective investments available to absorb the subscription monies. If there are more applications to subscribe for units than it has capacity to invest, then the ACD will operate a contractual waiting list.
48 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Fund Information (continued)
Each prospective application to subscribe will be satisfied in full or partially at the first dealing day for subscription at which the Fund has capacity. The subscription will remain at the top of the contractual waiting list until the application is fully satisfied. Each application will be retained and satisfied in strictly chronological order. The ACD will give 12 business days notice for the drawdown of funds before the dealing day for subscription, so that prospective subscribers can ensure that the ACD receives cleared funds in time. As at 31 December 2019, there were subscriptions of £0.7m in the queue which were called in January 2020.
Redemptions Every unitholder is entitled on any dealing day for redemption to redeem its units subject to the limitations on redemption. Valid redemption requests may be made to the ACD on any business day but must be received by the redemption cut-off point, being the close of business on the business day one month before the dealing date. Valid instructions to the ACD to redeem units in the Fund will be processed at the unit price calculated at the next valuation point following receipt of the instruction, except in the case where dealing in the Fund has been deferred or suspended. The valuation point for the Fund is 11pm on the last calendar day of each month. As at 31 December 2019 there were no redemptions in the queue.
Deferrals Where the ACD considers it to be in the best interests of the Unitholders, the ACD may in consultation with the Governance Committee defer redemptions on a dealing day to any one of the subsequent six dealing days for redemption. A redemption will be deferred to the dealing day for redemption when the Fund has sufficient liquidity to enable it to meet the redemption, providing it is in the best interests of the Unitholders to do so. The ACD will review the position every month. The ACD must give Unitholders notice of the deferral no later than seven business days before the relevant dealing day for redemption. The price at which the units will be redeemed will be the price for redemptions on the dealing day for redemption on which the units are actually redeemed.
Suspension The ACD may, with the prior agreement of the Depositary, and must without delay if the Depositary so requires, temporarily suspend the issue, cancellation, sale and redemption of Units in any or all of the Funds, where, due to exceptional circumstances, it is in the interests of all the Unitholders in the relevant Fund or Funds. Suspension will cease as soon as practicable after the exceptional circumstances leading to the suspension have ceased but the ACD and the Depositary will formally review the suspension at least every 28 days and will inform the FCA of the review and any change to the information given to Unitholders. For further information, please refer to clause 3.13 of the Prospectus. There have been no deferrals or suspensions during the year.
Adjustments to unit price In unusual market conditions the ACD in consultation with the Governance Committee, may adjust the unit price by a percentage independently reviewed or recommended by the Governance Committee to reflect the value of the assets in such circumstances based on information received from the MSCI, the Valuers and other material information which the ACD may think fit. This is to protect the interests of all Unitholders by ensuring that units are issued at a fair value. Prospective investors have the right to withdraw their applications for subscriptions or redemptions upon notification by the ACD of the price adjustment.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 49 AEW UK Core Property Fund
Fund Information (continued)
Secondary market In addition to purchasing and selling units through the ACD, units are able to be traded between parties using third party brokerage facilitates available in the market with the ACD able to assist with contacts if required.
Investor analysis Number of Total Percentage investors holding (%)
Ownership band Less than 1% of units in issue 34 9.17 1% or greater but less than 2% 7 10.86 2% or greater but less than 4% 4 11.90 4% or greater but less than 8% 6 30.01 8% or greater 2 38.06 Total 53 100.00
Percentage held by largest investor 19.15 Percentage held by top 5 investors 55.21
Treatment of certain investors The ACD has and will continue to enter into agreements with certain investors who may receive preferential treatment. These investors include (i) those investors that are investing sufficiently large amounts either initially or are anticipated to do so over time and (ii) Cornerstone investors that provide seed capital and take the initial risk in the early stage of the Fund. As a result, the terms and conditions of certain investor’s investment in the Fund may differ to those of other investors. Side letters are available on request. These side letters contain details of any ‘key person’ provisions.
Remuneration The AIFM has adopted a Remuneration Policy which accords with the principles established by AIFMD. AIFMD Remuneration Code Staff includes the members of the AIFM’s Management Committee, those performing Control Functions, Department Heads, Risk Takers and other members of staff that exert material influence on the AIFM’s risk profile or the AIFs it manages. Staff are remunerated in accordance with the key principles of the firm’s remuneration policy, which include (1) promoting sound risk management; (2) supporting sustainable business plans; (3) remuneration being linked to non- financial criteria for Control Function staff; (4) incentivise staff performance over longer periods of time; (5) award guaranteed variable remuneration only in exceptional circumstances; and (6) having an appropriate balance between fixed and variable remuneration.
50 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Fund Information (continued)
As required under section ‘Fund 3.3.5.R(5)’ of the Investment Fund Sourcebook, the following information is provided in respect of remuneration paid by the AIFM to its staff for the year to 31 December 2019:
Year ended 31 December 2019 Total remuneration paid to employees during financial year: a) remuneration, including, where relevant, any carried interest paid by the AIFM; £2,920,641 b) the number of beneficiaries 29
The aggregate amount of remuneration, of the AIFM Remuneration Code Staff, broken down by: a) senior management £738,634 b) members of staff £2,182,007
Fixed Variable Total remuneration remuneration remuneration £ £ £
Senior management 658,634 80,000 738,634 Staff 1,542,947 639,060 2,182,007 Total 2,201,581 719,060 2,920,641
Fixed remuneration comprises basic salaries and variable remuneration comprises bonuses.
Fund Performance Year ended 31 December 2019 %
MSCI/AREF All Balanced Property Fund Index – weighted average 1.6 AEW UK Core Property Fund 5.5
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 51 AEW UK Core Property Fund
Fund Information (continued)
Year ended 31 December 2019 %
Total Expense Ratio for the accounting year Fund Management Fees 0.70 Fund Operating Expenses 0.42 Total Expense Ratio (‘TER’) 1.12
Property Expense Ratio (‘PER’) (excludes items in TER) 1.34 Real Estate Expense Ratio (‘REER’) (TER + PER) 2.46
Transaction Costs 0.39 Performance Fees 0.25 Portfolio Turnover Ratio (1.29)
The TER represents the total annualised expenses of the Fund, excluding transaction costs, interest payable and expenses of a capital nature expressed as a percentage of the average net assets during the accounting year. The Portfolio Turnover Ratio indicates how much of the turnover in the portfolio has been driven by investment and withdrawals from the Fund. This represents the purchases and sales less subscriptions and redemptions expressed as a percentage of the average net assets during the accounting year. The following table analyses the operating costs incurred by the Fund for the year ended 31 December 2019:
Year ended 31 December 2019 %
Management Fees 0.70 Performance Fees 0.25 Depositary Fees 0.04 Valuation Fees 0.05 Other variable Fees 0.08
1.12
52 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Statement of Total Return for the year ended 31 December 2019
Year ended Year ended 31 December 2019 31 December 2018 Notes £’000 £’000 £’000 £’000
Income Net capital (losses)/gains 3 (1,023) 9,709 Revenue 6 23,741 22,174
Expenses: Direct property expenses 7 (4,073) (4,310) Operating expenses 7 (3,306) (2,924) Interest payable and similar charges 8 (201) (271) Net revenue before taxation 16,161 14,669 Taxation 9 – – Net revenue after taxation 16,161 14,669 Total return before distributions 15,138 24,378 Distributions 10 (16,161) (14,669) Change in net assets attributable to Shareholders from investment activities (1,023) 9,709
Statement of Changes in Net Assets Attributable to Shareholders for the year ended 31 December 2019
Year ended Year ended 31 December 2019 31 December 2018 £’000 £’000 £’000 £’000
Net assets at the start of the year 288,615 269,559
Amounts receivable on creation of shares 20,231 13,038 Less: amounts paid on cancellations of shares (7,246) (4,289) 12,985 8,749 Dilution adjustment 1,200 598 Change in net assets attributable to Shareholders from investment activities (1,023) 9,709 Closing net assets attributable to Shareholders 301,777 288,615
The notes on pages 56 to 77 form an integral part of these Financial Statements.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 53 AEW UK Core Property Fund
Balance Sheet as at 31 December 2019
As at As at 31 December 2019 31 December 2018 Note £’000 £’000 £’000 £’000
Assets Fixed assets: Investment properties 11 293,164 284,324
Current assets: Debtors 12 10,589 4,325 Cash and bank balances 13 11,378 8,088 Total current assets 21,967 12,413
Total assets 315,131 296,737
Liabilities Long term liabilities Finance lease obligations 15 (1,779) (1,965)
Current liabilities Finance lease obligations 15 (182) (213) Investment liabilities 17 (108) (644) Distribution payable 17 (4,309) (3,509) Other creditors 17 (6,976) (1,791)
Total current liabilities (11,575) (6,157)
Total liabilities (13,354) (8,122)
Net assets attributable to Shareholders 301,777 288,615
The Financial Statements on pages 53 to 77 were approved by the ACD on 12 May 2020 and signed on their behalf by:
On behalf of the ACD
The notes on pages 56 to 77 form an integral part of these Financial Statements.
54 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Statement of Cash Flows for the year ended 31 December 2019
Year ended Year ended 31 December 2019 31 December 2018 £’000 £’000 £’000 £’000
Total return before distributions for the year 15,138 24,378
Adjustments for: Capital losses/(gains) on investments 1,023 (9,709) Finance costs 201 271 Increase in debtors (6,434) (218) Increase in creditors 5,185 676 Net cash generated from operating activities 15,113 15,398
Cash flows from investing activities Paid for the purchase of investments (15,903) (58,391) Paid on capital expenditure (3,447) (3,736) Received on sale of investments 8,890 43,784 Net cash used in investing activities (10,460) (18,343)
Cash flows from financing activities Proceeds from issue of shares 20,231 13,038 Payments on cancellation of shares (7,246) (4,289) Equalisation (paid)/received (16) 44 Dilution adjustment received 1,200 598 Loan drawdowns – 15,500 Loan repayments – (15,500) Finance costs paid (187) (382) Distribution paid (15,345) (15,135)
Net cash used in financing activities (1,363) (6,126)
Net increase/(decrease) in cash for the period 3,290 (9,071) Cash and cash equivalents at start of the year 8,088 17,159 Cash and cash equivalents at end of the year 11,378 8,088
The notes on pages 56 to 77 form an integral part of these Financial Statements.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 55 AEW UK Core Property Fund
Notes to the Financial Statements for the year ended 31 December 2019
1. Accounting policies
1.1 Basis of accounting The Financial Statements have been prepared on a going concern basis, under the historical cost basis, as modified by the revaluation of investments, and in accordance with the applicable United Kingdom Accounting Standards, including FRS 102 ‘The Financial Reporting Standard’ and the Prospectus. The Financial Statements are also prepared in accordance with the Statement of Recommended Practice (‘SORP’) issued by the Investment Association in May 2014. The ACD has considered the impact of the COVID-19 global pandemic, which has resulted in unprecedented risks and significant levels of volatility on real assets. The main risks resulting from COVID-19 for the Fund is in respect of the impact on property valuations, liquidity and tenant defaults. The ACD has performed sensitivity analysis on the Funds cash flow forecasts under plausible downside scenarios and the Fund would remain liquid and have a positive cash balance after deducting the liabilities, commitments and expenses over the next 12 months. The ACD is satisfied that it is appropriate to continue to adopt the going concern basis in preparing these financial statements and, after due consideration, the ACD considers that the Fund is able to continue for the foreseeable future and at least twelve months from the date of this report. In order to protect the interests of continuing holders, the ACD may, at its discretion and in consultation with the Governance Committee, defer redemptions monthly for up to six months from the Valuation Date to which the redemption request relates. In exceptional circumstances, the ACD may, with the approval from the Depositary, decide to suspend both subscriptions and redemptions of shares for up to six months. The ACD will review the position every 28 days. On the basis that the ACD can defer redemptions, and suspend the Fund, the accounts have continued to be prepared under the going concern basis. Following receipt of a redemption request for £6.8m for the 1 May 2020 dealing day, the ACD has taken the decision to defer redemptions in the Fund for at least one month. Hence no redemptions will occur for this monthly dealing Fund at the next dealing date (1 May 2020). The deferral period will end when the Fund has sufficient liquidity to enable it to meet the redemption, providing it is in the best interests of the Unitholders to do so.
1.2 Revenue Rental income is recognised on an invoice basis. Invoices are raised by the property manager, usually quarterly in advance, and the income is deferred to the relevant period through the duration of the invoice quarter. Rent receivable comprises rental income on investment properties for the year, exclusive of service charges receivable. Provision is made when there is objective evidence that the Fund will not be able to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote. Lease incentives including rent free periods and payments to tenants are allocated to the Statement of Total Return on a straight-line basis over the lease term, or if in place prior to 1 January 2017, the period up to the first rent review date if shorter. The value of resulting accrued rental income is deducted from the carrying value of the respective investment property. Any dilapidation is recognised as income when received.
56 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
1. Accounting policies (continued)
1.3 Expenses All expenses, except for those relating to the purchase and sale of investments, stamp duty land tax and property development costs are charged against revenue. Costs incurred in the improvement of the portfolio which, in the opinion of the ACD, are not of a capital nature are charged against revenue. Irrecoverable running costs directly attributable to specific properties within the Fund’s portfolio are charged to the Statement of Total Return as other property expenses.
1.4 Allocation of income and expenses to multiple share classes Any revenue or expenses not directly attributable to a particular share class will normally be allocated pro-rata to the net assets of the relevant share class.
1.5 Taxation A PAIF is chargeable to corporation tax, but the regime enables a PAIF to manage itself in such a way that it should be able to ensure that the point of taxation is not with the Fund, but rather all income flows through to the investors who will then be charged tax at the appropriate rates for property income, savings income and dividend income respectively. Under PAIF tax rules, net income is streamed as follows: net income from the property investment business; UK dividends; and net income from the residual business. Expenses which are not directly attributable to any stream should be apportioned between the streams on a reasonable basis. Net income from the property investment business is exempt from tax in the PAIF. UK dividend income is also not subject to tax in the PAIF. The net income from the residual business is only subject to Corporation tax in the PAIF to the extent that the income has not been distributed to investors. Corporation tax is provided on taxable revenue, after the deduction of allowable expenses. The corporation tax rate applicable to PAIF is equivalent to the lower rate of income tax of 20%.
1.6 Distribution policy Net revenue after taxation, as disclosed in the Financial Statements, after adjustment for items of a capital nature and deduction of income tax, is distributable to Shareholders. Interim distributions may be made at the ACD’s discretion and the balance of revenue is distributed in accordance with the regulations. Distributions which have remained unclaimed by Shareholders for more than six years are credited to the capital assets of the Fund.
1.7 Equalisation Equalisation only applies to shares purchased during the distribution period (group 2 shares). It is the average amount of revenue included in the purchase price of all group 2 shares that is refunded to holders of these shares as a return of capital. Being capital, it is not liable to income tax but must be deducted from the cost of shares for capital gains tax purposes.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 57 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
1. Accounting policies (continued)
1.8 Investment properties Investment property comprises completed property and property under construction or re-development held to earn rentals or for capital appreciation or both. Investment property transactions are considered to have taken place where, by the end of accounting period, there is a legally binding, unconditional and irrevocable contract. Investment property is measured initially at cost including transaction costs. Transaction costs include transfer taxes, professional fees for legal services, agent’s fee and initial leasing commissions to bring the property to the condition necessary for it to be capable of operating. The carrying amount also includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met. Subsequent to initial recognition, investment property is stated at fair value. Gains or losses arising from changes in the fair values are included in the Statement of Total Return in the year when they arise. Investment properties are valued by the Valuation Agent on the basis of a full valuation with physical inspection at least once a year. Any valuation of an Immovable by the Valuation Agent must be undertaken in accordance with the current issue of RICS Valuation – Global Standards January 2017, or in the case of overseas immovables, on an appropriate basis, but guided by the FCA Rules. For the purposes of these Financial Statements, in order to avoid ‘double accounting’, the assessed fair value is: – reduced by the carrying amount of any accrued income resulting from the spreading of lease incentives; and – increased by the carrying amount of leasehold obligations Investment property is derecognised when it has been disposed of or permanently withdrawn from use and no future economic benefit is expected after its disposal or withdrawal. Any gains or losses on the retirement or disposal of investment property are recognised in the Statement of Total Return in the year of retirement or disposal. Gains or losses on the disposal of investment property is determined as the difference between the net sales proceeds and the carrying amount of the asset at the commencement of the accounting period plus capital expenditure in the period. For leasehold properties that are classified as investment properties, the associated leasehold obligations are accounted for as finance lease obligations. Properties held under operating leases are accounted for as investment properties.
1.9 Dilution levy In the PAIF a dilution levy will be reflected in the calculation of the share price and will reflect the associated property acquisition and disposal costs. The levy may vary from time to time to reflect matters such as changes in stamp tax or any other applicable taxes and fees. In unusual market conditions, the price may also be further adjusted by a percentage, in consultation with the Pricing Sub-Committee, to reflect the value of the assets in such circumstances based on information received from MSCI, valuation agents and any other material information as the ACD may see fit.
58 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
1. Accounting policies (continued)
1.10 Cash and cash equivalents Cash and cash equivalents include cash in hand and deposits held at banks. Cash is stated at its face value.
1.11 Debtors Amounts due but not received are included within debtors which are stated at transaction value less provision for impairment. Provision is made where there is objective evidence that the Fund will not be able to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote.
1.12 Interest bearing loans and liabilities All bank borrowings are initially recognised at transaction value net of attributable transaction costs. After initial recognition, all bank borrowings are measured at amortised cost using the effective interest method.
1.13 Finance leases Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the property and the present value of the minimum lease payments. The present value of the corresponding rental obligations are included as liabilities.
1.14 Creditors Deferred rental income is calculated by the property manager, it relates to income that has been invoiced in advance to the tenant but relates to future periods. Creditors are stated at their transaction value. Amounts received in respect of future periods are included within creditors as deferred income.
1.15 Significant estimation techniques The preparation of the Fund’s Financial Statements requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future years. The fair value of investment property is determined by independent real estate valuation experts using RICS Valuation – Professional Standards VPS4 (7.1) Fair Value and VPGA1 Valuations for Inclusion in Financial Statements, which adopt the definition of Fair Value used by the International Accounting Standards Board: “The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.” The Valuer's opinion of Fair Value was primarily derived using recent market transactions on arm's length terms, where available and assumes there to be good and marketable titles to the properties.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 59 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
2. Risk management policies
The Fund’s activities expose it to a variety of financial risks: market risk, credit risk, liquidity risk and further risks inherent to investing in investment property. The Fund’s objective in managing risk is the creation and protection of shareholder value. Risk is inherent in the Fund’s activities, but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. The Depositary on the recommendation of the ACD has appointed a Governance Committee with an independent chair, paid for by the Fund, with responsibility to oversee the aspects of risk control. The principal risks facing the Fund in the management of its portfolio are as follows:
2.1 Market price risk Market price risk is the risk that future values of investments in direct property and related property investments will fluctuate due to changes in market prices. To manage market price risk, the Fund diversifies its portfolio geographically in the United Kingdom and across property sectors. The disciplined approach to the purchase, sale and the management of assets ensures that the value is maintained to its maximum potential. Prior to any property acquisition or sale, detailed research is undertaken to assess expected future cash flow. The Investment Management Committee (‘IMC’) meets fortnightly and reserves the ultimate decision with regards to investments purchases or sales. In order to monitor property valuation fluctuations, the ACD meet with the independent external valuer on a quarterly basis. The valuer provides a property portfolio valuation monthly, so any movements in the value can be accounted for in a timely manner and reflected in the NAV every month.
2.2 Real Estate risk The Fund is exposed to the following risks specific to its investment property: Property investments are illiquid assets and valuing is difficult. Real estate can be difficult to sell, especially if local market conditions are poor. Illiquidity may also result from the absence of an established market for investments, as well as legal or contractual restrictions on resale of such investments. In addition, property valuation is inherently subjective due to the individual characteristics of each property, and thus, coupled with illiquidity in the markets, makes the valuation in the scheme property difficult and inexact. No assurances can be given that the valuations of properties will be reflected in the actual sale prices even where such sales occur shortly after the relevant valuation date. There is no guarantee that the Fund will be able to acquire a sufficient number of suitable properties which will enable a Fund to achieve its investment objective through its investment policy. Having excess uninvested cash and a larger number of shares in issue may affect a Fund’s ability to achieve its investment objective. In order to avoid holding excess cash the ACD exercises control over subscriptions into the Fund by sending capital call to investors only when there are suitable investments opportunities. In the event where direct investments in the underlying property is not possible or impractical, the Fund may invest up to 10% of its NAV into Collective Investment Schemes. There can be no assurance that the Fund will undertake to acquire any particular site or that it will be able to complete such acquisition if it is undertaken.
60 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
2. Risk management policies (continued)
2.2 Real Estate risk (continued) There can be no certainty regarding the future performance of any of the properties acquired for the Fund. The value of any property can go down as well as up. Property and property-related assets are inherently subjective as regards value due to the individual nature of each property. As a result, valuations are subject to uncertainty. Real property investments are subject to varying degrees of risk. The yields available from investments in real estate depend on the amount of income generated and expenses incurred from such investments. There are additional risks in vacant, part vacant, redevelopment and refurbishment situations although these are not prospective investments for the Fund.
2.3 Credit risk Credit risk is the risk that the counterparty (to a financial instrument) or tenant (of a property) will cause a financial loss to the Fund by failing to meet a commitment it has entered into with the Fund. It is the Fund’s policy to enter into financial instruments with reputable counterparties. The ACD closely monitors the creditworthiness of the Fund’s counterparties (e.g. Depositary, banks and tenants) by regularly reviewing their credit ratings, financial statements and press releases on a regular basis. All cash deposits are placed with an approved counterparty, Bank of New York Mellon, London Branch. In respect of property investments, in the event of a default by a tenant, the Fund will suffer a rental shortfall and additional costs concerning re-letting the property. The ACD monitors tenant arrears in order to anticipate and minimise the impact of defaults by occupational tenants. The table below shows the Fund’s exposure to credit risk:
As at As at 31 December 31 December 2019 2018 £’000 £’000
Debtors (excluding prepayments and rent incentive debtor) 7,054 1,750 Bank and cash 11,378 8,088
Total 18,432 9,838
2.4 Liquidity risk Liquidity risk is the risk that the Fund will encounter difficulty in realising assets to meet its financial commitments. The Fund is exposed to liquidity risk from the requirement to meet cash redemptions on its redeemable shares. Property investment is relatively illiquid compared to many classes of asset and in order to manage liquidity the ACD follows the following strategies: the Fund is intended for long-term investors who can accept the risks associated with liquidity; redemptions are restricted to the monthly dealing; and a proportion of the investments of the Fund are kept in more liquid assets.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 61 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
2. Risk management policies (continued)
2.4 Liquidity risk (continued) In order to protect the interests of continuing holders, the ACD may, at its discretion and in consultation with the Governance Committee, defer redemptions monthly for up to six months from the Valuation Date to which the redemption request relates. In exceptional circumstances, the ACD may, with the approval from the Depositary, decide to suspend both subscriptions and redemptions of shares for up to six months. The ACD will review the position every 28 days. The Fund invests primarily in investment property. The Fund’s policy is to maintain sufficient cash and cash equivalents to meet normal operating requirements and expected redemption requests. The ACD maintains close investor relationships in order to gauge redemption requirements.
2.5 Political/Economic risk Political and macroeconomic events present risks to the real estate and financial markets that affect the Fund and the business of our tenants. The level of uncertainty that such events bring has been highlighted in recent times, most pertinently as a result of the EU referendum vote (Brexit) in June 2016. The arrangements that would be put in place between the UK and the EU following Brexit could impact the health of the UK economy, make it more difficult for the Fund to raise capital and/or increase the regulatory compliance burden on the Fund.
2.6 Coronavirus risk The full impact of COVID-19 on real assets has yet to become clear, however under these circumstances, liquidity conditions and credit risks need to be closely monitored. The below summaries the risks faced by the Fund in context of the rapidly evolving Coronavirus situation: Real Estate Risk – As at 31 March 2020, the Standing Independent Valuer has determined material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic. The like for like property valuation movement in the Core Fund for Q1 2020 was a fall of (3.7%). Liquidity risk – As disclosed above, in unusual market conditions, to protect the interest of investors, the prospectus provides a mechanism for the ACD to i) Adjust the Fair Value of the Pricing or, ii) Defer Redemptions or iii) Suspend the Fund. As at 31 March 2020, following the Standing Independent Valuer’s determination of material valuation uncertainty, a Fair Value Pricing adjustment was applied to the Fund, being Offer price less 14%. Following receipt of a redemption request for £6.8m for the 1 May 2020 dealing day, the ACD had taken the decision to defer redemptions in the Fund. The redemption request was subsequently withdrawn and the Fund currently has no redemptions in queue. Counterparty Risk – Low rent collection will compromise the Fund’s ability to pay quarterly distributions. The Fund currently has sufficient cash reserves to pay the Q1 2020 distribution (to be paid on 31st May) and meet the running costs for the foreseeable future. Many tenants will be dependent on government support to survive. As a Fund judged on total return, the ACD is not pursuing just maximum rent collection but is in many cases exploring asset management opportunities that might be mutually beneficial for the Fund and its tenants.
62 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
2. Risk management policies (continued)
2.6 Coronavirus risk (continued) Market Risk – Interest Rates – Although the Fund is not leveraged, an upward trend in interest rates may impact the interest rate being applied to any drawn loans from the Fund’s £20m revolving credit facility. The interest rate on any drawn loan amounts drawn is equal to Libor plus margin. 3. Net capital (losses)/gains
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
Net proceeds from sales of investment properties during the year 8,890 43,784 Carrying value of investment properties sold during the year (8,517) (34,778)
Gains realised on investment properties during the year 373 9,006
Net unrealised valuation gain on investment properties 293 1,612 Adjustment for rent incentive debtor (1,689) (909) Net capital (losses)/gains (1,023) 9,709
4. Purchases and transaction costs
2019 % of purchases Year ended Year ended excluding 31 December 31 December transaction 2019 2018 costs £’000 £’000
Purchases excluding transaction costs 14,915 54,825
Commissions 1.4% 205 577 Taxes 4.8% 715 2,644 Other costs 0.3% 39 374
Total purchase transaction costs 6.5% 959 3,595
Purchases including transaction costs 15,874 58,420
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 63 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
5. Sales and transaction costs
2019 % of Year ended Year ended sales excluding 31 December 31 December transaction 2019 2018 costs £’000 £’000
Sales excluding transaction costs 9,128 44,250
Agent fees 1.6% (148) (286) Legal fees 1.0% (90) (179) Other costs 0.0% – (1)
Total sale transaction costs 2.6% (238) (466)
Sales including transaction costs 8,890 43,784
6. Revenue
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
Rental income 23,575 21,658 Dilapidation income 102 136 Lease surrender income 59 376 Sundry property income 5 4
Total revenue 23,741 22,174
64 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
7. Expenses
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
Direct property expenses: Irrecoverable service charge 1,194 1,262 Property legal and professional fees 929 809 Maintenance fees 491 207 Letting fees 350 280 Vacant property rates 311 579 Head rent 266 289 Bad debts 190 357 Managing Agent's fees 108 157 Abortive costs 75 1 Insurance 61 102 Utility fees 50 78 Marketing fees 48 53 Valuer’s fees –* 136 Total property expenses 4,073 4,310
* Current year valuer’s fees have been recognised in operating expenses in accordance with AREF guidelines.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 65 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
7. Expenses (continued)
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
Expenses associated to the ACD: Management fees 2,109 1,939 ACD’s performance fees 753 692 Expenses associated to the Depositary: Depositary fees 105 100 Other operating expenses: Valuer's fees 144* – Auditor's fees 38 34 Sustainability consultancy fees 38 41 Subscriptions 33 31 Other operating expenses 28 22 Legal and professional 25 29 Tax Agent's fees 18 21 Governance committee fees 15 15 Total operating expenses 3,306 2,924
Total expenses 7,379 7,234
* Current year valuer’s fees have been recognised in operating expenses in accordance with AREF guidelines.
8. Interest payable and similar charges
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
Analysis of finance costs Loan commitment fees 98 89 Loan arrangement fees 96 115 Bank charges 7 7 Loan interest – 60
Total finance costs 201 271
66 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
9. Taxation
Under PAIF tax rules, net income is streamed as follows: net income from the property investment business; UK dividend income and net income from the residual business. Expenses which are not directly attributable to any stream should be apportioned between the streams on a reasonable basis. Net income from the property investment business is exempt from tax in the PAIF. UK dividend income is also not subject to tax in the PAIF. The net income from the residual business is only subject to Corporation tax in the PAIF to the extent that income has not been distributed to investors.
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
(a) Analysis of tax charge for the year UK corporation tax – –
Total tax charge – –
(b) Factors affecting the tax charge for the year Net income before taxation 16,161 14,669
Theoretical tax at UK corporation tax rate of 20%* 3,232 2,934 Net property income not taxable (3,232) (2,934)
Total tax charge – –
* The corporation tax rate applicable to PAIF is equivalent to the lower rate of UK income tax.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 67 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
10. Distributions
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
(a) Analysis of distributions First interim 4,753 3,557 Second interim 3,652 4,417 Third interim 3,513 3,276 Fourth interim 4,227 3,463
Total distributions 16,145 14,713
Equalisation paid/(received) on the issue of shares 16 (44)
Net distribution for the year 16,161 14,669
(b) Reconciliation of net revenue after taxation to distributions Net revenue after taxation 16,161 14,669
Total distributions for the year 16,161 14,669
68 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
11. Investment properties
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
At valuation: At beginning of year at valuation 283,885 254,280 Acquisitions during the year 15,874 58,420 Capital expenditure during the year 2,940 4,351 Carrying value of properties sold during the year (8,517) (34,778) Net unrealised gain on revaluation 293 1,612
Professional valuation 294,475 283,885 Adjustment for rent incentive debtor (3,272) (1,739) Adjustment in respect of minimum payment under head leases separately included as a liability in the Balance Sheet 1,961 2,178 Carrying value at the end of the year 293,164 284,324
Fair value Valuation of investment property is performed by Knight Frank LLP, an accredited external valuer with recognised and relevant professional qualifications and recent experience of the location and category of the investment property being valued. The valuation of the Company’s investment property at fair value is determined by the external valuer on the basis of market value in accordance with the internationally accepted RICS Valuation – Global Standards January 2017. The determination of the fair value of investment property requires the use of estimates such as future cash flows from assets (such as lettings, tenants’ profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those assets.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 69 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
11. Investment properties (continued)
The following tables show an analysis of the fair values of financial instruments recognised in the balance sheet:
31 December 2019 Level 1 Level 2 Level 3 Total £’000 £’000 £’000 £’000
Assets measured at fair value* Investment properties – – 294,475 294,475
Professional valuation – – 294,475 294,475
31 December 2018 Level 1 Level 2 Level 3 Total £’000 £’000 £’000 £’000
Assets measured at fair value* Investment properties – – 283,885 283,885
Professional valuation – – 283,885 283,885
* before adjustments for carrying value of leasehold obligations and rent incentive debtors.
Explanation of the fair value hierarchy: Level 1 – Quoted prices for an identical instrument in active markets; Level 2 – Prices of a recent transactions for an identical instruments; Level 3 – Valuation techniques using non-observable data. Sensitivity analysis to significant changes in unobservable inputs within Level 3 of the hierarchy The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity’s portfolios of investment property are: 1) Estimated Rental Value (‘ERV’) 2) Rental growth 3) Long term vacancy rate 4) Discount rate/yield Increases (decreases) in the ERV (per sq ft p.a.) and rental growth p.a. in isolation would result in a higher (lower) fair value measurement. Increases (decreases) in the long term vacancy rate and discount rate (and exit or yield) in isolation would result in a lower (higher) fair value measurement.
70 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
11. Investment properties (continued)
The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the portfolio of investment property are:
31 December 2019 Fair Value Valuation Key Unobservable Class £’000 Technique Inputs Range
ERV per sq ft £1.00-£118.65 Investment Property 294,475* Income capitalisation Discount rate 4.00% – 12.48%
31 December 2018 Fair Value Valuation Key Unobservable Class £’000 Technique Inputs Range
ERV per sq ft £1.75-£115.00 Investment Property 283,885* Income capitalisation Discount rate 5.86% – 19.26%
* Before adjustments for carrying value of leasehold obligations and rent incentive debtors.
Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy amount to net unrealised gain of £293,000 (2018: £1,612,000) and are presented in note 3. The carrying amount of the assets and liabilities, detailed within the balance sheet is considered to be the same as their fair value. There have been no transfers between Level 1 and Level 2 during any of the periods nor have there been any transfers between any transfers in or out of Level 3. 12. Debtors As at As at 31 December 31 December 2019 2018 £’000 £’000
Rent receivable 5,866 1,274 Rent incentive debtor 3,272 1,739 Held by rent agent 1,188 476 Prepayments and other debtors 263 836
Total debtors 10,589 4,325
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 71 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
13. Cash and bank balances
As at As at 31 December 31 December 2019 2018 £’000 £’000
Amounts held at bank 11,378 8,088
Total cash and bank balances 11,378 8,088
14. Interest bearing loans and borrowings
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
Unsecured bank loans – –
Loan arrangement fee brought forward 127 16 Additional loan arrangement fee 82 226 Amortised loan arrangement fee for the year (96) (115)
Loan arrangement fee carried forward 113 127
On 9 March 2018, the Fund entered into an unsecured revolving credit facility with Lloyds Bank plc. The total commitment is £20m. The rate of interest is LIBOR plus a Margin of 1.20% per annum, and a commitment fee at a rate of 0.48% per annum on that Lender’s available commitment. An arrangement fee of £150,000 was paid on 7 March 2018 as well as associated legal costs of £61,000. There is also an annual monitoring fee of £15,000 payable in advance on each anniversary of the date of the Agreement. The facility was due to expire in February 2020 but has been extended for an additional 3 year term with effect from August 2019. The margin on the facility has increased from 1.20% to 1.30% with the non-utilisation fee increasing from 0.48% to 0.52%. During the year, no funds were drawn down from the loan facility. Subsequent to year end, the Fund has drawn down the full £20m of the loan facility. The loan issue costs shown above include loan arrangement fees and are detailed in note 8 on page 66. Prepaid loan issue costs as at 31 December 2019, £113,000 (2018: £127,000) have accordingly been reflected in prepayments and other debtors detailed in note 12 on page 71.
72 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
15. Finance lease obligations
Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the property and the present value of the minimum lease payments. The present value of the corresponding rental obligations are included as liabilities. The following table analyses the minimum lease payments under non-cancellable finance leases for each of the following periods:
As at As at 31 December 31 December 2019 2018 £’000 £’000
Within one year 182 213
After one year but not more than five years 571 657 More than five years 1,208 1,308
Long term 1,779 1,965
Total 1,961 2,178
16. Guarantees and commitments
Operating lease commitments – as lessor The Fund has entered into commercial property leases on its investment property portfolio. These non-cancellable leases have a remaining term of up to 23 years*. Future minimum rentals receivable under non-cancellable operating leases as at 31 December are as follows:
As at As at 31 December 31 December 2019 2018 £’000 £’000
Within one year 21,714 20,931
After one year but not more than five years 48,729 48,741 More than five years 34,335 34,448
83,064 83,189
104,778 104,120
* Excluding leases at peppercorn rents.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 73 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
17. Creditors
As at As at 31 December 31 December 2019 2018 £’000 £’000 Investment liabilities Capital expenditure payable 108 615 Sales costs payable – 23 Acquisition costs payable – 6 Total investment liabilities 108 644
Distribution payable 4,309 3,509
Other creditors Deferred rental income 4,228 396 Accruals and other creditors 1,499 946 VAT payable 1,249 449 Total other creditors 6,976 1,791 Total creditors 11,393 5,944
18. Transactions with significant parties
The following are considered by the ACD to be significant parties of the Fund. • The Depositary in accordance with the PAIF Instrument • The ACD in accordance with the PAIF Instrument The Depositary is entitled to receive a fee based on the sliding scale as shown below, subject to a minimum fee of £45,000 per annum:
Rate (% pa) Net Asset Value £0 – £100,000,000 0.05% £100,000,001 – £250,000,000 0.03% £250,000,001 – £500,000,000 0.02% £500,000,001 and above 0.01% The ACD is (in addition to reasonable out of pocket expenses) entitled to receive a fee at a rate of 0.70% per year of the NAV of the Fund.
74 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
18. Transactions with significant parties (continued)
In addition, the ACD is entitled to a performance fee of 0.0625% of the NAV in each quarter, if the Fund is ranked in the top ten funds of the All Balanced Property Funds Index, MSCI/AREF UK Pooled Property Fund Indices – weighted average over a three year rolling period and if the return is positive. During the year the following fees were accrued to significant parties:
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
ACD’s management fee 2,109 1,939 ACD’s performance fee 753 692 Depositary fee 105 100
Total 2,967 2,731
As at 31 December 2019 the following amounts were outstanding due to significant parties:
As at As at 31 December 31 December 2019 2018 £’000 £’000
ACD’s management fee 534 172 ACD’s performance fee 189 61 Depositary fee 18 9
Total 741 242
19. Derivatives
The Fund has no derivatives exposure at 31 December 2019 (2018: £nil).
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 75 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
20. Contingent liability
The Fund may from time to time be involved in legal or arbitration proceedings incidental to its operation. The Fund is currently involved in an arbitration proceeding in relation to a dispute over the breach of a lease provision of a long leasehold interest, and is defending a claim for forfeiture of its leasehold interest. The Fund’s lawyers advised that the Fund had a strong position going into the arbitration proceedings and accordingly no provision has been recognised as at 31 December 2019. In October 2019 the appellant made an approach to the Fund to commence without prejudice discussions to seek a resolution to the matter. Discussions are ongoing and a stay to arbitration proceedings has been extended. On the basis of the evidence available when the financial statements were approved, there is no obligation as a result of past events and the matter is accordingly disclosed as a contingent liability. 21. Subsequent events
Distribution On 28 February 2020, the Fund made a distribution of £4.2m, in respect of the period from 1 October 2019 to 31 December 2019. This was paid to the Shareholders of the Fund as at 31 December 2019.
Property acquisitions Since the period end the Fund has completed on the following acquisitions: • 17 February 2020, Broadmead and Merchant, Bristol • 28 February 2020, Fairfax and Nelson, Bristol • 2 March 2020, Soho Studios, Bristol
Property sales Since the period end the Fund has completed on the following sales: • 30 March 2020, Upper Floors, 21-25 Bold Street, Liverpool (partial sale) Investor commitment As at 31 December 2019, there were subscriptions in the queue for £0.7m which was called in January 2020. Subsequent to year end the Fund has received £1.2m of investor commitment, which was drawn in April 2020. There were no redemptions in the queue at 31 December 2019.
Loan Facility Subsequent to year end, the Fund has drawn down the full £20m of the loan facility.
76 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
21. Subsequent events continued
COVID-19 Global Pandemic The ACD considers the emergence and spread of COVID-19 to be a non-adjusting subsequent event, given the significant changes in business activities and economic conditions occurred as a result of events occurring after 31 December 2019. As at 31 March 2020, the Standing Independent Valuer has determined material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic. The like for like property valuation movement in the Core Fund for Q1 2020 was a fall of (3.7%). Following the Standing Independent Valuer’s determination of material valuation uncertainty, a Fair Value Pricing adjustment was applied to the Fund, being Offer price less 14% for the 1 April 2020 dealing day. Following receipt of a redemption request for £6.8m for the 1 May 2020 dealing day, the ACD has taken the decision to defer redemptions in the Fund for at least one month. The redemption request was subsequently withdrawn and the Fund currently has no redemptions in queue.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 77 AEW UK Core Property Fund
Distribution Tables for the year ended 31 December 2019
First Interim Group 1 – units purchased prior to 31 December 2018 Group 2 – units purchased on or after 1 January 2019 and on or before 31 March 2019
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Unit Class A Income Group 1 2.111 – 2.111 – 2.111 Group 2 0.962 – 0.962 1.149 2.111 Unit Class C Income Group 1 2.111 (0.004) 2.107 – 2.107 Group 2 2.110 (0.004) 2.106 0.001 2.107
Second Interim Group 1 – units purchased prior to 31 March 2019 Group 2 – units purchased on or after 1 April 2019 and on or before 30 June 2019
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Unit Class A Income Group 1 1.616 – 1.616 – 1.616 Group 2 0.596 – 0.596 1.020 1.616 Unit Class C Income Group 1 1.616 (0.003) 1.613 – 1.613 Group 2 0.596 (0.003) 0.593 1.020 1.613
78 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Core Property Fund
Distribution Tables (continued) for the year ended 31 December 2019
Third Interim Group 1 – units purchased prior to 30 June 2019 Group 2 – units purchased on or after 1 July 2019 and on or before 30 September 2019
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Unit Class A Income Group 1 1.552 – 1.552 – 1.552 Group 2 0.602 – 0.602 0.950 1.552 Unit Class C Income Group 1 1.552 (0.003) 1.549 – 1.549 Group 2 0.602 (0.003) 0.599 0.950 1.549
Fourth Interim Group 1 – units purchased prior to 30 September 2019 Group 2 – units purchased on or after 1 October 2019 and on or before 31 December 2019
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Unit Class A Income Group 1 1.850 – 1.850 – 1.850 Group 2 1.241 – 1.241 0.609 1.850 Unit Class C Income Group 1 1.850 (0.003) 1.847 – 1.847 Group 2 0.680 (0.003) 0.677 1.170 1.847
Equalisation Equalisation applies only to units purchased during the distribution period (Group 2 units). It represents the accrued revenue included in the purchase price of the units. After averaging it is returned with the distribution as a capital repayment. It is not liable to Income Tax but must be deducted from the cost of the units for Capital Gains Tax purposes.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 79 AEW UK Real Return Fund
Annual Report and Financial Statements for the year ended 31 December 2019 AEW UK Real Return Fund
Fund Manager’s Report
• The AEW UK Real Return Fund (“the Fund”) is a secure income strategy focused on inflation-linked cash flows to align the real benefits of property with the needs of long term savers. • Portfolio aims to provide better longer term inflation protection and capital preservation, targeting a 4% real total return (net of fees and expenses). • Long term gross income targeted at 5% p.a. The Fund achieves this through exposure to a diversified universe of all sectors, both traditional and alternatives such as healthcare, leisure, car parks and student housing etc. throughout the UK. • Alternative sectors are attractive as they provide access to occupiers who prefer longer leases and inflation linked income streams. • As at 31 December 2019, the Fund has 84% of income linked to inflation or with fixed uplifts (50% income must be linked to inflation). The weighted average unexpired lease term (“WAULT”) is 17.3 years. As a matter of policy the Manager will aim to maintain a WAULT of greater than 15 years in support of the overall objectives of the Fund. • Constraints adopted to control risks and maintain focus on key objectives, such as zero permitted debt and speculative development, voids, stock concentration and sector diversification. • It is a core property strategy, but has attracted capital from bond and indexed linked allocations as an alternative to long lease funds.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 81 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Investment Summary – 2019 During 2019, the Fund continued to deliver steady target total returns. During the year the Real Return Fund achieved a one year total return performance of 5.9% (total real return 4.5%) above the target real total return of 4% per annum. Over the year the Fund completed the purchase of two further care homes to back our conviction in the long term fundamentals of this sector, confirming our belief that where we can identify sustainable occupier needs, the Fund’s fiduciary objectives can be achieved alongside delivering a meaningful social impact. The Fund also completed on the purchase of two nurseries, increasing its exposure to the social sector to 40% and at the same time, built a defensive bedrock of secure income that is 100% linked to inflation and with a WAULT to expiry of over 24 years in this sector. The Fund NAV increased from £132.3m as at 31 December 2018 to £148.5m as at 31 December 2019. The four properties acquired in 2019 were for a purchase price (including costs) totalling £16.7m. This has taken the total number of properties as at 31 December 2019 to 49 properties. Following the year end, the emergence and spread of COVID 19 has resulted in significant changes in business activities and economic conditions. As at 31 March 2020, the Standing Independent Valuer has determined material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic. The like for like property valuation movement in the Real Return Fund for Q1 2020 was a fall of (1.4%). Following receipt of a redemption request for circa £7.5m for the 1 May 2020 dealing day, the ACD temporarily suspended all dealing in the above Fund with effect from Thursday 23 April 2020. Hence no dealing will occur for this monthly dealing fund at the next dealing date (1 May 2020). The ACD aims to lift the suspension as soon as confidence returns to the market and there is more certainty regarding asset valuations for the Real Return Fund, taking into account the best interests of investors.
Performance update Since inception Fund Performance to 3 months 6 months 9 months 1 year 2 year p.a. 3 year p.a. p.a. 31 December 2019 % % % % % % %
Total Return1 2.0 3.5 4.5 5.9 8.1 8.4 8.3 Income Return2 1.3 2.6 3.9 5.3 5.4 5.4 5.4 Total Real Return2 (adjusted for inflation3) 1.9 3.0 3.1 4.5 6.4 6.4 6.2 1 MSCI/AREF UK Quarterly Property Fund Index 2 Calculated by AEW. 3 CPIH
82 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Real estate still plays a role in optimising portfolios A new language of cash flow matching options to meet investor needs
PERCEIVED RISK
ROWT (TOTAL RETURN FOCUSED STRATE IES) Opportunistic
Value add
REAL ASS ET Core funds • Listed core REITS STRATE IES • Retail core funds • Institutional core funds ATC IN ( OND PROXIES) AEW UK Real Return Fund (RRF) • Open-ended • Alternative real estate • et 4% total real return target Long lease funds • Gross long term income 5% p.a.
Real estate de t funds
round lease funds
Inco e strips
EXPECTED RETURN
Source AE All typically see ing to outperform the MSCI peer group total return benchmar
Key data as at 31 December 2019
STRUCTURE FCA Regulated Open-ended PAIF Office Convenience Retail GEOGRAPHY UK Hotel NAV £148.5m Pubs & Restaurant Leisure NUMBER OF PROPERTIES 49 Industrial
4.5% p.a. real (net of fees expenses) 2 TOTAL RETURN Care Home 5.9% nominal 1 Car Showroom DISTRIBUTION YIELD 5.2% on current NAV price Residential – Supported Living Residential – Hospital Accommodation TRIPLE NET INITIAL YIELD (p.a.) 6.1%3 Nursery education TRUE EQUIVALENT YIELD (p.a.) 6.6%3
REVERSIONARY YIELD (p.a.) 7.1%
PERCENTAGE INCOME LINKED TO 84% INFLATION [INCLUDING FIXED UPLIFTS] WEIGHTED AVERAGE UNEXPIRED LEASE TERM 17.3 years TO EXPIRY (WAULT) WEIGHTED AVERAGE UNEXPIRED 16.4 years LEASE TERM TO BREAK (WAULT)
VOIDS Nil
Source: 1 MSCI /AREF UK All Balanced Property Fund Index 2 AEW 3 Knight Frank (After deductions of void costs and rent free)
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 83 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Sector weightings as at 31 December 2018 Sector weightings as at 31 December 2019 MSCI categorisation MSCI categorisation
Standard Retail, 25.2% Standard Retail, 22.7% Offices, 2.1% Offices, 2.0% Industrial, 14.0% Industrial, 12.5% Other Property, 54.1% Other Property, 59.5% Cash, 4.6% Cash, 3.3%
Industry categorisation Industry categorisation Leisure, 18.2% Care Home, 22.2% Care Home, 15.4% Leisure, 16.7% Industrial, 13.9% Industrial, 12.3% Pubs/Restaurants, 12.5% Pubs/Restaurants, 11.2% Residential – Hospital Residential – Hospital Accomodation, 10.8% Accommodation, 9.6% Car Showroom, 8.8% Car Showroom, 7.5% Cash, 4.7% Residential – Supported Living, 4.2% Hotel, 4.5% Hotel, 4.0% Residential – Supported Living, 4.0% Convenience Retail, 3.2% Convenience Retail, 3.9% Nursery Education, 3.8% Office, 2.1% Cash, 3.3% Nursery Education, 1.2% Office, 2.0%
Source: MSCI/AREF UK Quarterly Property Fund Index. AEW UK Real Return Fund sector weightings ‘based on industry categorisation’ determined by AEW.
84 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Asset Management report
General We continue to actively asset manage the portfolio, with a number of lease regears completed and anticipated in our “tactical” assets over the coming months. This re-emphasises active asset management as being central to the Real Return Fund investment process, as it should be for any core property strategy focussed on capital preservation and growth:
Crosspoint, Coventry Active asset management creates additional inflation linked income
• A new drive-thru pod unit constructed at Crosspoint, Coventry. • PC Dec 2019 – lease has completed and store is now open. • Let to Starbucks on a 15 year full repairing and insuring lease (FRI) lease with RPI reviews in years 5 and 10 (cap and collar of 0% and 4%). • Complements the existing tenants and improves the overall leisure offering on the park. • Strong trade predicted owing to Tesco Extra, Showcase Cinema and Premier Inn being in the immediate vicinity.
Slug & Lettuce, Public House, Colchester Tactical acquisition transitions to strategic hold
• Town centre public house in popular South East market town. • On purchase let to Slug & Lettuce Limited for a further 7 years. • By investing £400k in the pub, the tenant demonstrated their long term commitment to the unit. We therefore approached them regarding a reversionary lease to protect their investment beyond 2025. • In exchange for a 12 month rent free we have secured a 15 year reversion with 5 yearly OM rent reviews. • Stronger covenant, Stonegate Pub Company Limited, also secured as part of lease regear.
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Fund Manager’s Report (continued)
Rudford Industrial Estate, Ford 9 year lease extension and 5 yearly RPI reviews secured
• Attractive initial yield at purchase of 7.4% with 16.7 year WAULT. Reversion to 8.6% with RPI increase in 2020 and reviews to OMRV in 2025 and 2030. • Business refinancing, asking to pay rent in monthly instalments. We saw this as an opportunity to extend lease and improve lease terms at a more sustainable rent. • 9 year reversionary lease (25 years in total) secured with 5 yearly RPI (1.5% - 3%) reviews at a reduced rent of £350k pa (£4.21 psf). • Schedule of Condition replaced with FRI lease in return for periodic maintenance & repairing liability being dropped too. £300,000 valuation increase. AEW UK’s Approach to Socially Responsible Investing
Environmental, Social & Governance (‘ESG’) We believe that ESG should be the key principles of AEW’s approach to Responsible Property Investing (RPI) and that a sustainable and socially responsible approach to real estate investment management both protects and enhances the value of our clients’ assets, now and in the future. We are fully aware of the impact of our activities on environmental and social issues both from our own business and our investment, asset management and development activities. To this end we are committed to implementing a comprehensive Socially Responsible Investment (SRI) policy. By doing so we expect to meet our stakeholders’ expectations, whether they are clients, tenants, providers, employees, or any other individuals with whom we interact. Our policy is aligned with the international climate agreement signed in Paris in December 2015 as climate change is a major challenge for humanity that poses important risks and creates opportunities for the real estate industry. The real estate sector in Europe accounts for some 40% of total energy consumption and about 25% of greenhouse gases (GHG) emissions. Over the coming years we believe that both occupiers and investors will increasingly focus on the way in which ESG issues are managed. In turn, this is expected to impact on building obsolescence, lettability, rates of lease renewals and ultimately the rental and capital values for individual assets if ESG issues are ignored. However, our fiduciary duty to investors must always come first in all investment decision- making. We continue to engage with clients wherever possible to educate on the importance of ESG. Where we feel it is important to do so and costs can be justified in terms of performance objectives, or are required to comply with UK legislation, we will seek to incorporate or adopt best practice; usually this is done with little support from tenants who by and large remain reluctant to commit to ESG in a similar way.
86 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Environment and sustainability 1) Global Real Estate Sustainability Benchmark (GRESB) The Fund again submitted to GRESB. GRESB is an investor driven organisation assessing the sustainability performance of real estate portfolios. GRESB scores overall performance through two Dimensions: 1. Implementation and Measurement – actions and programmes that have been initiated by the Fund. 2. Management and Policy – relating to policies and processes that set out the Fund’s intent for managing sustainability issues. This year the Fund saw a notable improvement in its GRESB score (from 50 in 2018 to 63 in 2019). The Fund achieved a GRESB rating of two stars and was also awarded the additional ‘green star’ status. The Fund is committed to improving ESG performance and GRESB scores, where in line with AEW’s commitment to the broader ESG agenda. We completed a ‘deep dive’ analysis to identify where and how the Fund can improve scoring. This has involved a targeted approach towards implementing tenant engagement initiatives as well as more detailed analysis on the coverage of asset level initiatives, such as audits and efficiency measures. Results from this analysis shall be used to inform our future ESG strategy.
2) Minimum Energy Efficiency Standards (MEES) AEW UK are committed to ensuring compliance with MEES regulations, which came into effect from April 2018, requiring all new lettings to have a minimum ‘E’ rated EPC, unless listed buildings. The Fund undertook a gap analysis to identify any risks where EPCs did not meet minimum standards, these were then re-assessed and action plans created. The Fund has action plans in place to mitigate EPCs below an E rating, which currently represents less than 1% of the fund by floor area.
3) Portfolio Greenhouse Gas Emissions The Fund has followed UK Government environmental reporting guidelines and used UK Government 2018 greenhouse gas reporting conversion factors for company reporting to identify and report relevant GHG emissions over which it has Operational Control for the year ending 31 December 2018. GHG emissions have been reported against the following ‘Scopes’, as defined by the GHG Protocol and where relevant: • Scope 1: Direct emissions from owned vehicles, controlled boilers and fugitive emissions from air conditioning systems under landlord control. • Scope 2: Indirect emissions from electricity purchased by the Fund and consumed within real estate assets owned by the Fund. • Scope 3: Indirect emissions from electricity and gas purchased / consumed within the Fund assets, by tenants, where the tenant is counterparty to the energy supply. The AEW UK Real Return Fund Energy Use and GHG Emissions Statements for the year ending 31 December 2018 are reported in the tables below. These set out the energy use/emissions, like-for-like1 and an intensity value2 per sector and for the entity overall. The approach taken follows guidance provided by the GHG Reporting Guidelines (BEIS, 2018) and INREV Sustainability Reporting Guidelines 2016. 1 Like for like excludes assets that were purchased, sold or under refurbishment during the two years reported. 2 Leisure intensity value is calculated on a kWh/common area m2.
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Fund Manager’s Report (continued)
AEW UK Real Return Fund Greenhouse Gas Emissions Statement for the year ending 31 December 20183
Absolute Energy Like For Like Like For Like Intensity Usage (tCO2e) (tCO2e) (kgCO2e) Sector Energy Source 2017 2018 2017 2018 Change 2017 2018 Change
Scope 1 – Gas N/A N/A N/A N/A N/A Leisure 28 16 -42% Scope 2 – Electricity 38 25 37 22 -41%
Scope 1 – Gas N/A N/A N/A N/A N/A Total 28 16 -42% Scope 2 – Electricity 38 25 37 22 -41% 3 The statement for the year ending 31 December 2019 is not yet available. AEW UK Real Return Fund Energy Statement for the year ending 31 December 20184
Absolute Energy Like For Like Usage Like For Like Usage (kWh) (kWh) Intensity Sector Energy Source 2017 2018 2017 2018 Change 2017 2018 Change
Gas N/A N/A N/A N/A N/A Leisure Electricity 107,025 87,898 103,897 76,846 -26% 78 58 -26% Total 107,025 87,898 103,897 76,846 -26%
Gas N/A N/A N/A N/A N/A Total Electricity 107,025 87,898 103,897 76,846 -26% 78 58 -26% Energy 107,025 87,898 103,897 76,846 -26% 4 The statement for the year ending 31 December 2019 is not yet available.
4) Carbon Emissions Target The Fund is actively managing its carbon footprint and seeks to improve efficiency measures where it is able to influence the outcome. For example, we look to incorporate energy efficiency into refurbishments or at sites where we have management control. We consider all property types where there is a positive business case to do so. Quick wins are progressed where possible and larger capital expenditure projects are reviewed as part of an asset’s annual business plan. The Fund has set a target of reducing absolute GHG emissions by 15% by 2030 based on a 2018 baseline and we perceive the positive actions we take regarding improving our assets will support us to achieve this target. We would therefore expect on a like for like basis there to be a trend of reducing emissions over the near future. It is however important to note that changes in fund composition as we buy and sell assets will impact absolute emission figures. Currently we collect landlord consumption data on a bi-annual basis from our property managers, which enables us to track our emissions and review progress easily. Furthermore, we are continuing to engage with tenants regarding tenant procured consumption data, so we can better understand emissions relevant to their actions.
88 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Social Responsibility The Fund’s Alternative strategy supports social “impact” investing where we believe it prudent to do so. In addition to the care home and supported living investments acquired in earlier years, the sale and lease back of the NHS Residences makes an impact on the funding of a major NHS Trust. The lease back arrangement provides the Fund with secure inflation-linked income for 20 years, but both Fund and Trust anticipate that the demand for this vital part of the hospital’s social infrastructure will be sustained for far longer than the lease term. During the year the Fund purchased two additional homes and two nurseries, which has increased the Fund’s exposure to the social sector to 40%. This confirms our belief that where we can identify sustainable occupier’s needs, the Fund’s objectives can be achieved alongside delivering a meaningful social impact.
Governance The Fund is a member of the Association of Real Estate Funds (AREF). The aim of the AREF Code of Practice is to achieve high standards of transparency across the unlisted sector and promote consistency of reporting to allow investors to compare different funds. The Fund completes the MSCI/AREF Pooled Property Questionnaire each quarter, which is made available to all investors and which forms the basis of its entry in MSCI/AREF Property Fund Vision handbook. The Fund was awarded the 2019 AREF Corporate Governance Quality Mark on achieving a high standard of transparency and corporate governance. Part of the AREF Code of Practice sets on the requirements for oversight by supervisory or advisory committees. The Annual Report and Financial Statements set out the report of the Fund’s Independent Governance committee. When AEW UK launched its first authorised fund in 2013 we wanted to reflect the lessons learnt by the property fund industry in dealing with investor communications and liquidity management at the time of the GFC. As such the constitution of the Governance Committee and Pricing Sub-Committee reflects its independence from the manager, with an independent Chair, majority representation by investors and Terms of Reference allows the Manager to be held to account. We believe that such transparent Governance is not only best practice but also extremely rare amongst our peers. Investors in AEW UK Real Return Fund are invited to join AREF in the newly created Investor Member category. This is free of charge. Much of what AREF is striving to achieve is ultimately for the benefit of the underlying investors in the funds that make up its membership. So, AREF not only represents the interests of its member funds and those firms that advise and support them, but also the end-investors. AREF is proactively reaching out to professional investors and/or their advisers, looking for their engagement to help set AREF’s agenda. For further information, please visit www.aref.org.uk or email [email protected].
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 89 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Portfolio Acquisitions in 2019
Happy Days, Lyde Green, Bristol Increasing allocation to social sector
Property characteristics Investment summary Property type Nursery • Newly developed nursery located in new residential area. Property size 5,335 sq ft • Let to Happy Days Nursery. Property purchase date December 2019 • 25 years unexpired with five yearly reviews Initial yield 6.3% linked to RPI (2%–4% collar and cap). Year built 2019 • £1.9m reflecting 6.3% net initial yield.
Kido Day Nursery, Camden, London Increasing allocation to social sector
Property characteristics Investment summary Property type Nursery • Newly converted nursery located in a Central London residential area. Property size 3,478 sq ft Property • Let to Safari Kid Day Nursery. purchase date August 2019 • 25 years unexpired with reviews linked Initial yield 5.3% to RPI. Year built 2019 conversion • £2.2m reflecting 5.3% net initial yield.
Project Campion acquisitions Springhill, Fairfield Street, Accrington & Birch Green Care Home, Skelmersdale
Accrington Property characteristics Investment summary Property type Care Home • 2 care homes located in Skelmersdale and Accrington. Property size 110 beds Property • Homes are well suited for their purchase date June 2019 respective target markets. Initial yield 7.1% • Let to Prime Life for 30 years with Year built 1990's. Refurbished 2013 annual rent reviews linked to RPI (2.0% collar, 3.5% cap). Skelmersdale Property characteristics • Rents set by operator at affordable and Property type Care Home sustainable levels for each home. Property size 72 beds • Deal done in partnership with Prime Life. Property purchase date June 2019 • Investment value significantly underpinned by going concern value. Initial yield 6.7% Year built 1990's
90 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Fund Objective It is intended that the AEW UK Real Return Fund be a PAIF at all times and its investment objective is to: 1. carry on Property Investment Business; and 2. to manage cash raised from investors for investment in the Property Investment Business as further described below. The AEW UK Real Return Fund is intended to provide a total real return over the longer term of inflation (as measured by CPIH) + 4%, net of all fees and expenses.
Reference Benchmark The Fund is not managed to an investment benchmark. It has a “Reference Benchmark” for risk control purposes which is the All Balanced Property Funds Index (MSCI/AREF UK Property Fund Index) but the Fund does not aim to track or outperform that benchmark and investment will not be constrained by the sector and geographic weightings of the reference benchmark.
Investment Policy The AEW UK Real Return Fund will be diversified across all real estate sectors including alternative real estate sectors. Whilst not a core part of the AEW UK Real Return Fund’s investment policy, the ACD reserves the right to make investments which the ACD considers appropriate, including investments in derivative products, whether traded under the rules of a recognised or designated investment exchange or not. The ACD may also use them for hedging or efficient portfolio management purposes. It may invest through other Collective Investment Schemes or other investment vehicles, but only in limited circumstances. These are where direct investment in the underlying property is not possible or is impractical, for instance because a property would otherwise be too large for the portfolio, or not available in any other form. In such instances, the ACD shall consult with and take into consideration the recommendations of the Governance Committee. The ACD will keep the investment policy under regular review, in consultation with the Governance Committee, so that, if there are changes in market conditions or other relevant factors, the policy can be adapted accordingly whilst retaining the broad objectives. If changes occur, investors shall be notified promptly in writing and within no more than 60 days.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 91 AEW UK Real Return Fund
Investment Strategy By aiming to deliver a 4% per annum total real return, the ACD seeks to offer a total return objective that provides a stable measure to allow investors to better allocate property against their known liabilities. In order to achieve this the strategy will: (a) be focused on income and growth; (b) offer greater diversification and therefore lower volatility by investing in a far wider investible universe, that embraces the many “alternative” sectors of the UK economy rather than being constrained by the sector and geographic weightings of the Reference Benchmark; and (c) by combining (a) and (b) above, the aim is to optimise the benefits of property and avoid traditional risks like speculative development, to build a portfolio that should provide better longer term inflation protection and capital preservation when compared with the traditional core funds and long lease funds.
Investment Guidelines
Guideline Actual Limit as at as at Parameters Investment Guidelines 31 Dec 19 31 Dec 19 Comments
% allocation to Minimum 50% of gross passing rent 50% 78% Applicable once inflation linked leases the Fund reaches (applicable once the AUM of £200m. Fund reaches AUM of Excludes leases £200m) with fixed rental uplifts 6%. Average lease length WAULT must be in excess of the Expiry/Break Expiry/Break Applicable (applicable once the equivalent measure from the reference 8.6 years/ 17.3 years/ once the Fund Fund reaches AUM of benchmark 7.1 years 16.4 years reaches AUM of £200m) £200m. Diversification limits Unconstrained but as a guideline no 15% Refer Page Applicable more than 15% of NAV invested in any 84 Sector once the Fund one segment, with segment defined Weightings reaches AUM of but not limited to the segments £200m within the PPFI (excluding Other and Cash) plus student accommodation, education, healthcare, hotels, other leisure, residential, energy, waste, data centres other social infrastructure (e.g. Municipal buildings) as may exist or be defined from time to time (will not apply until the Fund reaches £200m)
92 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Investment Guidelines (continued)
Guideline Actual Limit as at as at Parameters Investment Guidelines 31 Dec 19 31 Dec 19 Comments
Investment in Not permitted 0% 0% property development (speculative complete demolition and reconstruction without a tenant) Investment in pre let Maximum 20% of NAV (will not apply 20% 0% Applicable development until the Fund reaches £200m) once the Fund reaches AUM of £200m Investment in a single Maximum 10% of the gross asset value 10% 10% Applicable asset calculated at the time of investment once the Fund (will not apply until the Fund reaches reaches AUM of £200m) with the target that single £200m. assets should not exceed 5% of gross asset value at the time of acquisition Investment in Maximum 10% of the Estimated Rental 10% 0% unoccupied and non- Value of the existing portfolio at any income producing one time. Therefore the purchase of an assets (i.e. vacant additional asset (which its self should assets) not have more than 20% void ERV), will be governed by the void existing in the portfolio at the time of purchase Investment in The Fund may only invest in structures N/A 0% Collective Investment owning a single property or portfolio, Schemes where direct investment in the underlying property or portfolio is not possible or is impractical, for instance because a property would otherwise be too large for the portfolio, or not available in any other form. Planned expenditure The ACD does not intend to spend 5% 0% on refurbishment any more than 5% of NAV in any rolling 12 month period on (a) the refurbishment of previously occupied space within the existing portfolio or (b) the refurbishment of new properties acquired with vacant units. Investment in REITs Maximum 20% of NAV with a 20% 0% maximum 5% of NAV in any one REIT, and will be used to capture tactical benefits from specialist portfolios and to enhance diversification
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 93 AEW UK Real Return Fund
Investment Guidelines (continued)
Guideline Actual Limit as at as at Parameters Investment Guidelines 31 Dec 19 31 Dec 19 Comments
Derivatives Maximum 25% of the NAV can be 25% 0% invested in derivative products. Investment in derivatives will be for strategic investment purposes as well as for the purposes of efficient portfolio management and hedging. The value of any derivative product for the purposes of this limitation will be the notional value of the derivative not the capital invested. Long and short positions may be taken in derivatives, to the extent permitted by the COLL Sourcebook. Value of the top The ACD will aim to maintain 49.1% 52.7% Applicable 10 holdings as a the percentage value of the top once the Fund percentage of total 10 holdings of the Fund below the reaches AUM of portfolio comparable figure for the MSCI £200m. benchmark (will not apply until the Fund reaches £200m) Investments in AEW Maximum 10% of NAV. Fees payable 10% 0% UK CIS and/or AEW UK to AEW UK in the investment vehicle listed entries will be rebated back for the benefit of investors in the Fund Borrowing The ACD will borrow only up to 10% of 10% 0% the NAV and in the form of revolving credit facility only Cash Not more than 10% of the net asset 10% 3.3% value may be held in uncommitted cash at any one time where that cash is from the issue of new shares in the Fund. Cash may exceed 10% of NAV in the short term to meet liquidity requirements. Cash may exceed 10% where the cash is from the proceeds of sales made where the cash is then held as part of the investment strategy and/ or for efficient portfolio management, including being held as collateral for Financial Instruments which may be used from time to time. Source: MSCI as at 31 December 2019.
94 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Report of the Valuer
The Bank of New York Mellon (International) Ltd As depositary of the AEW UK Real Return Fund (sub-fund of AEW UK Real Estate Fund). AEW UK Real Return Fund – Valuation date 31 December 2019. In accordance with your instructions, dated 4 February 2016, we now report to you formally, as External Valuers, our opinion of the Fair Values of the direct property assets held by the AEW UK Real Return Fund, as at 31 December 2019, for financial reporting under FRS102. Our report is subject to our General Terms of Business for Valuations. We are of the opinion that the aggregate of the Fair Values of the freehold and leasehold interests in the properties valued by Knight Frank LLP, as at 31 December 2019, (the measurement date), was £143,435,000 (One Hundred and Forty Three Million, Four Hundred and Thirty Five Thousand Pounds). We confirm that the valuations stated in this report have been undertaken in accordance with RICS Valuation – Global Standards 2017, which incorporate the International Valuation Standards, and the RICS UK National Supplement effective from January 2019. References to the “Red Book” refer to either or both of these documents, as applicable. As required by the Red Book, some key matters relating to this instruction are set out below. The properties have been valued on the basis of Fair Value in accordance with the RICS Valuation – Professional Standards VVPS4 (1.5) Fair Value and VPGA1 Valuations for Inclusion in Financial Statements, which adopt the definition of Fair Value used by the International Accounting Standards Board: “The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.” We confirm that the valuations reported for properties located in the UK conform to the definition of Fair Value and furthermore they are expressed net of transaction costs. The Valuer's opinion of Fair Value was primarily derived using recent market transactions on arm's length terms, where available. We have assumed there to be good and marketable titles to the properties. The properties have been valued individually, not as part of a portfolio. We have made oral enquiries where appropriate and have taken account, insofar as we are aware, of unusual outgoings, planning proposals and onerous restrictions or local authority intentions which affect the properties. However, this information has been provided to us on the basis that it should not be relied upon. We have been supplied with details of tenure and tenancies and have valued on the basis that there are no undisclosed matters which would affect our valuation. AEW has also supplied floor areas which we have been instructed to rely upon. The adoption of IPMS (International Property Measurement Standards), for the office sector, became mandatory with effect from 1 January 2016 for all RICS members replacing NIA (Net Internal Area) as set out under the current Code of Measurement Practice (Sixth Edition). It has been agreed with you that until the new definition of measurement has been adopted by the leasing market, rental analysis for the office sector will continue to be shown on a net internal area basis. As or when buildings are re-measured, we will present our analysis on a dual basis, namely IPMS and NIA. No allowance has been made in our valuation for expenses of realisation or for taxation which may arise in the event of a disposal and our valuations are expressed exclusive of any VAT that may become chargeable.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 95 AEW UK Real Return Fund
Report of the Valuer (continued)
The properties have been inspected. We have not undertaken any building surveys or environmental audits and are therefore unable to report that the properties are free of any structural fault, rot, infestation or defects of any other nature, including inherent weaknesses due to the use in construction of materials now suspect. No tests were carried out on any of the technical services. However, we have reflected any apparent wants of repair in our opinion of value as appropriate. We have assumed that all of the required licences and consents are in place, without materially adverse conditions, at each of the respective properties, in order for each of them to operate. We have assumed, except where we have been informed to the contrary, there to be no adverse ground or soil conditions or environmental contamination which would affect the present or future use of the properties and that the load bearing qualities of the site of each property are sufficient to support the buildings constructed or to be constructed thereon. Our valuation makes no allowance for any liabilities which may arise from these investigations, and we have assumed that the present or future use of the property is not affected. Should it, however, be established subsequently that contamination exists at the property or on any neighbouring land, or that the property has been or is being put to a contaminative use, this might reduce the value now reported. Minimum Energy Efficiency Standards are the standards set out by the Government for let properties in England and Wales. Buildings that have an EPC rating of F & G must be brought up to standard before they are let subject to some conditions, exemptions and relief. This commenced from 1 April 2018 for all new lettings and they apply to all continuing lettings from 1 April 2020 for domestic buildings and from 2023 for non-domestic buildings. For Scottish properties, the Assessment of Energy Performance of Non-Domestic Buildings (Scotland) Regulations 2016 came into force in Scotland in 2016 and does not incorporate a “ban” on new lettings. Owners are encouraged to carry out improvements, or improve efficiency through monitoring emissions from a building via creating an Action Plan. The Action Plan procedure will apply to the sale or letting of larger buildings, with a floor area >1,000 sqm. This only applies to buildings that are subject to a new sale or lease and buildings constructed to building standards applicable from March 2002, or otherwise meeting those standards, are exempt. Where F and G ratings occur we have taken them into account. In addition to The AEW UK Real Return Fund, Knight Frank LLP is also retained by AEW UK to value the following funds: i) The Pavilion Property Trustees Limited (Jersey) and Pavilion Trustees Limited (Jersey) c/o AEW Europe. ii) AEW UK Core Property Fund. iii) AEW UK Long Lease REIT PLC. iv) AEW UK REIT PLC. We confirm that Knight Frank LLP meets the requirements of the Fund as an external valuer in the role of Standing Independent Valuer, having been appointed in February 2016, as defined by the RICS Valuation – Professional Standards and regulations made by the Financial Conduct Authority. For the avoidance of doubt, our role is limited to providing property valuations for assets held by the Fund, in accordance with the Red Book. We are your valuation advisors and are not acting as “External Valuers” as defined by The Alternative Investment Fund Managers Regulations 2013 and Directive 2011/61/EU or as valuers of the Fund itself. The valuation function for the Fund and the setting of the net asset value of the Fund remains with you and/or your duly appointed External Valuers.
96 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Report of the Valuer (continued)
The valuer, on behalf of Knight Frank LLP, with the responsibility for this report is Mathew Cripps FRICS Registered Valuer and Alex Burgoyne MRICS, Registered Valuer. Parts of the valuation have been undertaken by additional valuers. We confirm that the valuer and additional valuers collectively meet the requirements of RICS Valuation – Professional Standards (January 2014) Global and UK PS 2(3.1) having sufficient current knowledge of the particular market and the skills and understanding to undertake the valuation competently. We confirm “the signatory” of this report, Mathew Cripps FRICS and Alex Burgoyne MRICS, have been responsible for this instruction since 31 October 2018. We confirm that in relation to Knight Frank’s preceding financial year, the total fees paid by AEW UK, as a percentage of the total fee income of Knight Frank, was less than 5%. Finally, we recognise and support the RICS Rules of Conduct and have procedures for identifying conflicts of interest. In accordance with our standard practice, we must state that this valuation report is for the use only of the party to whom it is addressed and no responsibility is accepted to any third party for the whole or any part of its contents. If our opinion of value is disclosed to persons other than the addressees of our report, the basis of valuation should be stated. Neither the whole or any part of the valuation report nor any reference thereto may be included in any published document, circular or statement nor published in any way whatsoever whether in hard copy or electronically (including on any web-site) without our prior written approval of the form and context in which it may appear.
Yours faithfully,
Matthew Cripps FRICS Alex Burgoyne MRICS RICS Registered Valuer RICS Registered Valuer Partner, Valuation & Advisory Associate, Valuation & Advisory For and on behalf of Knight Frank LLP For and on behalf of Knight Frank LLP
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 97 AEW UK Real Return Fund
Portfolio Statement as at 31 December 2019
Investment Properties Number of Market Value Net Assets properties £’000 %
Sector Care Home 5 32,760 22 Leisure 4 24,650 17 Residential (supported living, hospital accommodation) 3 20,600 14 Industrial 6 18,270 12 Pub/Restaurants 17 16,595 11 Car Showroom 4 11,120 8 Hotel 1 6,000 4 Nursery Education 3 5,700 4 Convenience Retail 5 4,790 3 Office 1 2,950 2
Total Portfolio of Investments 49 143,435 97 Other Assets and Liabilities 5,031 3
Total Portfolio of Investments 49 148,466 100
Market value
Care Homes Holmes Court & Holmes House, Kenilworth Road, South Wigston £2.5m to £5m Birch Green Care Home, Skelmersdale £2.5m to £5m Ashlands & St Georges, Ratcliffe Road, Leicester £5m to £10m Larkland House, London Road, Ascot £5m to £10m Springhill, Fairfield Street, Accrington £5m to £10m
Leisure Cinema and Restaurants, Denmarkek Street, Altrincham £2.5m to £5m Clifton Boulevard, Redfield Way, Nottingham £5m to £10m The Point, Borehamwood, Shenley Road £5m to £10m Cross Point, Oliver Way, Coventry £5m to £10m
98 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Portfolio Statement (continued) as at 31 December 2019
Market value Residential – Supported Living Hestia House, 22 Old Walsall Road, Birmingham £0 to £2.5m Bentley Court, Victoria Street, Bolton £2.5m to £5m
Residential – Hospital Accommodation The Residences, James Cook University Hospital, Middlesbrough £10m to £15m
Industrial Stanley Green Industrial Estate, Duke Avenue, Cheadle £0 to £2.5m Tinsley Industrial Estate, Coleford Road, Sheffield £0 to £2.5m Uint 1, Ferrous Way, North Bank Industrial Park, Irlam £2.5m to £5m Units 7A & 7B, Gatehouse Way, Aylesbury £2.5m to £5m Marshall 41, James Way, Denbigh West, Milton Keynes £2.5m to £5m Unit A, Rudford Industrial Estate, Ford £2.5m to £5m
Pubs/Restaurants Bugle Inn, 24 St Martins Street, Brighton £0 to £2.5m Greyhound, 2 High Street, Stockbridge £0 to £2.5m Abbots Mitre, Village Street, Stockbridge £0 to £2.5m Churchill Arms, Paxford, Chipping Camden £0 to £2.5m The Jubilee Inn, Main Road, Flax Bourton £0 to £2.5m The Royal Oak, Oaklands Lane, Midhurst £0 to £2.5m White Horse Hotel, 2 The Square, Storrington £0 to £2.5m Craft Beer, Uppernorth Street, Brighton £0 to £2.5m The Goudhurst Inn, Cranbrook Road, Goudhurst £0 to £2.5m Cricket Inn, Penny Lane, Totley £0 to £2.5m Woodbridge Inn, Ironbridge, Telford £0 to £2.5m Thomas Tripp, 10 Wick Lane, Christchurch £0 to £2.5m Slug & Lettuce, 110/111 High Street, Colchester £0 to £2.5m New Pear Tree Inn, Crannock Road, Wolverhampton £0 to £2.5m Tickled Trout, Lower Road, West Farleigh £0 to £2.5m The Hare & Hounds, 75 London Road, Brighton £0 to £2.5m White Hart, Chapel Green, Crowborough £0 to £2.5m
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 99 AEW UK Real Return Fund
Portfolio Statement (continued) as at 31 December 2019
Market value Car Showroom KIA Doncaster, Bullrush Grove, Doncaster £0 to £2.5m Stoneacre Fiat, Sefton Street, Liverpool £0 to £2.5m Trident Park Audi, Whitebrik Drive, Blackburn £2.5m to £5m Audi Car Showroom, Wheatley Road, Doncaster £2.5m to £5m
Hotel Travelodge Hotel, Providence Place, West Bromwich £5m to £10m
Nursery Education The Nursery Building, Elstree Way, Abbey Meads Village Centre, Swindon £0 to £2.5m Happy Days, Lyde Green, Bristol £0 to £2.5m Kido Day Nursery, Camden, London £0 to £2.5m
Convenience Retail Tesco Express, 4 Eaton Green, Luton £0 to £2.5m Tesco Express, 1 Canterbury Road, Sittingborne £0 to £2.5m Tesco Express, Westbury Hill, Westbury on Trym £0 to £2.5m Tesco Express, 80 Cove Road, Farnborough £0 to £2.5m The Co-operative, 205 Fairmile Road, Christchurch £0 to £2.5m
Office Regeneration House, Gorsey Lane, Coleshill £2.5m to £5m
100 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Summary of Material Portfolio Changes for the year ended 31 December 2019
Purchases and sales for the year Cost £’000
Purchases Springhill, Fairfield Street, Accrington £5m to £10m Happy Days, Lyde Green, Bristol £0 to £5m Kido Day Nursery, Camden, London £0 to £5m Birch Green Care Home, Skelmersdale £0 to £5m
Total purchases for the year 16,620
Sales There were no property sales during the period
Purchases for the year include associated acquisition costs.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 101 AEW UK Real Return Fund
Fund Information
Accounting and Distribution dates
XD date
First interim distribution 31 March 2019 Second interim distribution 30 June 2019 Third interim distribution 30 September 2019 Final distribution and year end 31 December 2019
Payment of distributions of income will normally be made within two months of the above XD dates, although the ACD reserves the right to pay at a later date but not later than four months as permitted by the Regulations. Income will be automatically paid out unless instructions are given for reinvestment. Income will be reinvested on the next dealing date following payment of distribution. The Fund has a distribution yield of 5.2% for the year ended 31 December 2019.
Distributions in the year Final First Interim Second Interim Third Interim Distribution 31 March 30 June 30 September 31 December 2019 2019 2019 2019 (p) (p) (p) (p)
Unit Class Unit Class A income 1.343 1.309 1.395 1.340 Unit Class C income –+ 1.309* 1.395* 1.340*
* Distribution gross of tax. + As at 31 March 2019, there were no Unit Class C investors.
102 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Fund Information (continued)
Performance Record Highest Unit price Lowest Unit price Offer basis Bid basis Offer basis Bid basis Year Unit Class (p) (p) (p) (p)
2019 A income 112.03 103.32 110.25 101.68 2019 C income 112.03 103.32 110.25 101.68
2018 A income 111.69 103.01 106.23 97.98 2018 C income 111.69 103.01 106.23 97.98
2017 A income 106.30 98.05 102.68 94.70 2017 C income 106.30 98.05 102.68 94.70
2016* A income 103.02 95.02 100.57 92.75 2016# C income 103.02 95.02 101.02 93.17
* From 5 February 2016 to 31 December 2016. # From 14 July 2016 to 31 December 2016.
Summary of unit dealing as at 31 December 2019 A income C income
Opening units in issue 124,592,153.418 3,351,539.439 Units issued in the year 12,090,300.791 5,891,416.659 Units cancelled in the year – (3,351,539.439) Closing units in issue 136,682,454.209 5,891,416.659
NAV (as calculated in accordance with the Prospectus) NAV NAV of Unit Class per unit Year Unit Class £’000 Units in issue (p)
31 December 2019 A income 142,331 136,682,454.209 104.13 31 December 2019 C income 6,135 5,891,416.659 104.13 31 December 2018 A income 128,997 124,592,153.418 103.54 31 December 2018 C income 3,470 3,351,539.439 103.54 31 December 2017 A income 79,006 79,765,295.294 99.05 31 December 2017 C income 2,325 2,347,431.726 99.05 31 December 2016* A income 50,928 53,189,794.190 95.75 31 December 2016# C income 2,248 2,347,431.726 95.75
* From 5 February 2016 to 31 December 2016. # From 14 July 2016 to 31 December 2016. NAV represents a standard NAV as calculated in accordance with AREF’s Fund Pricing Recommendation.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 103 AEW UK Real Return Fund
Fund Information (continued)
Unit dealing Turnover of units During the year ended 31 December 2019, 17,981,717.450 units were created and 3,351,539.439 units were redeemed. No units were traded on the secondary market. There has been no consolidation or sub-division of units during the year.
Subscriptions Eligible Investors may purchase units in the Fund on a monthly basis on the dealing day, being the first business day in each calendar month, provided the subscription request has been made before the cut-off point for the Fund and the ACD is in receipt of cleared funds on the dealing date. The cut-off point for the Fund is the close of business on the business day 14 days before the dealing date. Valid applications to purchase units in the Fund will be processed at the unit price calculated at the next valuation point following receipt of the application, except in the case where dealing in the Fund has been deferred or suspended. The valuation point for the Fund is 11pm on the last calendar day of each month. The ACD will only issue units where it can do so without breaching its cash holding guidelines and there are sufficient prospective investments available to absorb the subscription monies. If there are more applications to subscribe for units than it has capacity to invest, then the ACD will operate a contractual waiting list. Each prospective application to subscribe will be satisfied in full or partially at the first dealing day for subscription at which the Fund has capacity. The subscription will remain at the top of the contractual waiting list until the application is fully satisfied. Each application will be retained and satisfied in strictly chronological order. The ACD will give 12 business days notice for the drawdown of funds before the dealing day for subscription, so that prospective subscribers can ensure that the ACD receives cleared funds in time. As at 31 December 2019, there were no subscriptions in the queue.
Redemptions Every unitholder is entitled on any dealing day for redemption to redeem its units subject to the limitations on redemption. Valid redemption requests may be made to the ACD on any business day but must be received by the redemption cut-off point, being the close of business on the business day one month before the dealing date. Valid instructions to the ACD to redeem units in the Fund will be processed at the unit price calculated at the next valuation point following receipt of the instruction, except in the case where dealing in the Fund has been deferred or suspended. The valuation point for the Fund is 11pm on the last calendar day of each month. As at 31 December 2019, there were no redemptions in the queue.
Deferrals Where the ACD considers it to be in the best interests of the Unitholders, the ACD may in consultation with the Governance Committee defer redemptions on a dealing day to any one of the subsequent six dealing days for redemption. A redemption will be deferred to the dealing day for redemption when the Fund has sufficient liquidity to enable it to meet the redemption, providing it is in the best interests of the Unitholders to do so. The ACD will review the position every month. The ACD must give Unitholders notice of the deferral no later than seven business days before the relevant dealing day for redemption. The price at which the units will be redeemed will be the price for redemptions on the dealing day for redemption on which the units are actually redeemed.
104 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Fund Information (continued)
Suspension The ACD may, with the prior agreement of the Depositary, and must without delay if the Depositary so requires, temporarily suspend the issue, cancellation, sale and redemption of Units in any or all of the Funds, where, due to exceptional circumstances, it is in the interests of all the Unitholders in the relevant Fund or Funds. Suspension will cease as soon as practicable after the exceptional circumstances leading to the suspension have ceased but the ACD and the Depositary will formally review the suspension at least every 28 days and will inform the FCA of the review and any change to the information given to Unitholders. For further information, please refer to clause 3.13 of the Prospectus. There have been no deferrals or suspensions during the year.
Adjustments to unit price In unusual market conditions the ACD in consultation with the Pricing Sub-Committee, may adjust the unit price by a percentage independently reviewed or recommended by the Pricing Sub-Committee to reflect the value of the assets in such circumstances based on information received from MSCI, the Valuers and other material information which the ACD may think fit. This is to protect the interests of all Unitholders by ensuring that units are issued and redeemed at a fair value. Prospective investors have the right to withdraw their applications for subscriptions or redemptions upon notification by the ACD of the price adjustment.
Secondary market In addition to purchasing and selling units through the ACD, units are able to be traded between parties using third party brokerage facilitates available in the market with the ACD able to assist with contacts if required.
Investor analysis Number of Total Percentage investors holding (%)
Ownership band Less than 1% of units in issue 6 0.81 1% or greater but less than 2% 1 1.47 2% or greater but less than 4% 1 3.51 4% or greater but less than 8% 2 9.23 8% or greater 7 84.98 Total 17 100.00
Percentage held by largest investor 16.99 Percentage held by top 5 investors 65.85
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 105 AEW UK Real Return Fund
Fund Information (continued)
Treatment of certain investors The ACD has and will continue to enter into agreements with certain investors who may receive preferential treatment. These investors include (i) those investors that are investing sufficiently large amounts either initially or are anticipated to do so over time and (ii) Cornerstone investors that provide seed capital and take the initial risk in the early stage of the Fund. As a result, the terms and conditions of certain investor’s investment in the Fund may differ to those of other investors. Side letters are available on request. These side letters contain details of any ‘key person’ provisions.
Remuneration The AIFM has adopted a Remuneration Policy which accords with the principles established by AIFMD. AIFMD Remuneration Code Staff includes the members of the AIFM’s Management Committee, those performing Control Functions, Department Heads, Risk Takers and other members of staff that exert material influence on the AIFM’s risk profile or the AIFs it manages. Staff are remunerated in accordance with the key principles of the firm’s remuneration policy, which include (1) promoting sound risk management; (2) supporting sustainable business plans; (3) remuneration being linked to non-financial criteria for Control Function staff; (4) incentivise staff performance over longer periods of time; (5) award guaranteed variable remuneration only in exceptional circumstances; and (6) having an appropriate balance between fixed and variable remuneration. As required under section ‘Fund 3.3.5.R(5)’ of the Investment Fund Sourcebook, the following information is provided in respect of remuneration paid by the AIFM to its staff for the year to 31 December 2019:
Year ended 31 December 2019 Total remuneration paid to employees during financial year: a) remuneration, including, where relevant, any carried interest paid by the AIFM; £2,920,641 b) the number of beneficiaries 29
The aggregate amount of remuneration, of the AIFM Remuneration Code Staff, broken down by: a) senior management £738,634 b) members of staff £2,182,007
Fixed Variable Total remuneration remuneration remuneration £ £ £
Senior management 658,634 80,000 738,634 Staff 1,542,947 639,060 2,182,007 Total 2,201,581 719,060 2,920,641
Fixed remuneration comprises basic salaries and variable remuneration comprises bonuses.
106 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Fund Information (continued)
Fund Performance Year ended 31 December 2019 %
Total Expense Ratio for the accounting year Fund Management Fees 0.75 Fund Operating Expenses 0.24 Total Expense Ratio (‘TER’) 0.99
Property Expense Ratio (‘PER’) (excludes items in TER) 0.20 Real Estate Expense Ratio (‘REER’) (TER + PER) 1.19
Transaction Costs 0.80 Portfolio Turnover Ratio (4.53)
The TER represents the total annualised expenses of the Fund, excluding transaction costs, interest payable and expenses of a capital nature expressed as a percentage of the average net assets during the accounting year. The Portfolio Turnover Ratio indicates how much of the turnover in the portfolio has been driven by investment and withdrawals from the Fund. This represents the purchases and sales less subscriptions and redemptions expressed as a percentage of the average net assets during the accounting year. The following table analyses the operating costs incurred by the Fund for the year ended 31 December 2019:
Year ended 31 December 2019 %
Management Fees 0.75 Depositary Fees 0.04 Valuation Fees 0.05 Other variable Fees 0.15
0.99
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 107 AEW UK Real Return Fund
Statement of Total Return for the year ended 31 December 2019
Year ended Year ended 31 December 2019 31 December 2018 Notes £’000 £’000 £’000 £’000
Income Net capital gains 3 28 1,194 Revenue 6 9,043 7,067 Expenses: Direct property expenses 7 (291) (301) Operating expenses 7 (1,398) (996) Interest payable and similar charges 8 (2) (2) Net revenue before taxation 7,352 5,768 Taxation 9 – – Net revenue after taxation 7,352 5,768 Total return before distributions 7,380 6,962 Distributions 10 (7,352) (5,768) Change in net assets attributable to Shareholders from investment activities 28 1,194
Statement of Changes in Net Assets Attributable to Shareholders for the year ended 31 December 2019
Year ended Year ended 31 December 2019 31 December 2018 £’000 £’000 £’000 £’000
Net assets at the start of the year 132,282 81,331 Amounts receivable on creation of shares 18,588 46,564 Amounts paid on cancellation of shares (3,469) – Dilution adjustment 1,037 3,193 16,156 49,757 Change in net assets attributable to Shareholders from investment activities 28 1,194 Closing net assets attributable to Shareholders 148,466 132,282
The notes on pages 111 to 129 form an integral part of these Financial Statements.
108 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Balance Sheet as at 31 December 2019
As at As at 31 December 2019 31 December 2018 Note £’000 £’000 £’000 £’000
Assets Fixed assets: Investment properties 11 143,787 126,487 Current assets: Debtors 12 2,959 859 Cash and bank balances 13 7,220 9,205
Total current assets 10,179 10,064
Total assets 153,966 136,551
Long term liabilities Finance lease obligations 14 (972) (972)
Current liabilities Finance lease obligations 14 (73) (73) Investment liabilities 16 (32) (32) Distribution payable 16 (1,926) (1,812) Other creditors 16 (2,497) (1,380)
Total current liabilities (4,528) (3,297)
Total liabilities (5,500) (4,269)
Net assets attributable to Shareholders 148,466 132,282
The Financial Statements on pages 108 to 129 were approved by the ACD on 12 May 2020 and signed on their behalf by:
On behalf of the ACD
The notes on pages 111 to 129 form an integral part of these Financial Statements.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 109 AEW UK Real Return Fund
Statement of Cash Flows for the year ended 31 December 2019
Year ended Year ended 31 December 2019 31 December 2018 £’000 £’000 £’000 £’000
Total return before distributions for the year 7,380 6,962
Adjustments for: Capital gain on investments (28) (1,194) Finance costs 2 2 Increase in debtors (2,114) (424) Increase in income creditors 1,131 86
Net cash generated from operating activities 6,371 5,432
Cash flows from investing activities Paid for the purchase of investment properties (16,620) (44,456) Paid on capital expenditure (652) (93) Received on sale of investment – 238
Net cash used in investing activities (17,272) (44,311)
Cash flows from financing activities Proceeds from issue of shares 18,588 46,564 Payments on cancellation of shares (3,469) – Equalisation received 69 331 Dilution adjustment received 1,037 3,193 Distribution paid (7,307) (5,385) Finance costs paid (2) (2)
Net cash generated from financing activities 8,916 44,701
Net (decrease)/increase in cash for the year (1,985) 5,822 Cash and cash equivalents at start of year 9,205 3,383
Cash and cash equivalents at end of year 7,220 9,205
The notes on pages 111 to 129 form an integral part of these Financial Statements.
110 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Notes to the Financial Statements for the year ended 31 December 2019
1. Accounting policies
1.1 Basis of accounting The Financial Statements have been prepared on a going concern basis, under the historical cost basis, as modified by the revaluation of investments, and in accordance with the applicable United Kingdom Accounting Standards, including FRS 102 ‘The Financial Reporting Standard’ and the prospectus. The Financial Statements are also prepared in accordance with the Statement of Recommended Practice (‘SORP’) issued by the Investment Association in May 2014. The ACD has considered the impact of the COVID-19 global pandemic, which has resulted in unprecedented risks and significant levels of volatility on real assets. The main risks resulting from COVID-19 for the Fund is in respect of the impact on property valuations, liquidity and tenant defaults. The ACD has performed sensitivity analysis on the Funds cash flow forecasts under plausible downside scenarios and the Fund would remain liquid and have a positive cash balance after deducting the liabilities, commitments and expenses over the next 12 months. The ACD is satisfied that it is appropriate to continue to adopt the going concern basis in preparing these financial statements and, after due consideration, the ACD considers that the Fund is able to continue for the foreseeable future and at least twelve months from the date of this report. In order to protect the interests of continuing holders, the ACD may, at its discretion and in consultation with the Governance Committee, defer redemptions monthly for up to six months from the Valuation Date to which the redemption request relates. In exceptional circumstances, the ACD may, with the approval from the Depositary, decide to suspend both subscriptions and redemptions of shares for up to six months. The ACD will review the position every 28 days. On the basis that the ACD can defer redemptions, and suspend the Fund, the accounts have continued to be prepared under the going concern basis. Following receipt of a redemption request for circa £7.5m for the 1 May 2020 dealing day, the ACD temporarily suspended all dealing in the above Fund with effect from Thursday 23 April 2020. Hence no dealing will occur for this monthly dealing fund at the next dealing date (1 May 2020). The ACD aims to lift the suspension as soon as confidence returns to the market and there is more certainty regarding asset valuations for the Real Return Fund, taking into account the best interests of investors. 1.2 Revenue Rent receivable comprises rental income on investment properties for the year, exclusive of service charges receivable. Provision is made when there is objective evidence that the Fund will not be able to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote. Lease incentives including rent free periods and payments to tenants are allocated to the Statement of Total Return on a straight-line basis over the lease term, or if in place prior to 1 January 2017, the period up to the first rent review date if shorter. The value of resulting accrued rental income is deducted from the carrying value of the respective investment property. Any dilapidation is recognised as income when received.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 111 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
1. Accounting policies (continued)
1.3 Expenses All expenses, except for those relating to the purchase and sale of investments, stamp duty land tax and property development costs are charged against revenue. Costs incurred in the improvement of the portfolio which, in the opinion of the ACD, are not of a capital nature are charged against revenue. Irrecoverable running costs directly attributable to specific properties within the Fund’s portfolio are charged to the Statement of Total Return as other property expenses. 1.4 Allocation of income and expenses to multiple share classes Any revenue or expenses not directly attributable to a particular share class will normally be allocated pro-rata to the net assets of the relevant share class. 1.5 Taxation A PAIF is chargeable to corporation tax, but the regime enables a PAIF to manage itself in such a way that it should be able to ensure that the point of taxation is not with the Fund, but rather all income flows through to the investors who will then be charged tax at the appropriate rates for property income, savings income and dividend income respectively. Under PAIF tax rules, net income is streamed as follows: net income from the property investment business; UK dividends; and net income from the residual business. Expenses which are not directly attributable to any stream should be apportioned between the streams on a reasonable basis. Net income from the property investment business is exempt from tax in the PAIF. UK dividend income is also not subject to tax in the PAIF. The net income from the residual business is only subject to Corporation tax in the PAIF to the extent that the income has not been distributed to investors. Corporation tax is provided on taxable revenue, after the deduction of allowable expenses. The corporation tax rate applicable to PAIF is equivalent to the lower rate of income tax of 20%.
1.6 Distribution policy Net revenue after taxation, as disclosed in the Financial Statements, after adjustment for items of a capital nature and deduction of income tax, is distributable to Shareholders. Interim distributions may be made at the ACD’s discretion and the balance of revenue is distributed in accordance with the regulations. Distributions which have remained unclaimed by Shareholders for more than six years are credited to the capital assets of the Fund.
1.7 Equalisation Equalisation only applies to shares purchased during the distribution period (group 2 shares). It is the average amount of revenue included in the purchase price of all group 2 shares that is refunded to holders of these shares as a return of capital. Being capital, it is not liable to income tax but must be deducted from the cost of shares for capital gains tax purposes.
112 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
1. Accounting policies (continued)
1.8 Investment properties Investment property comprises completed property and property under construction or re-development held to earn rentals or for capital appreciation or both. Investment property transactions are considered to have taken place where, by the end of accounting period, there is a legally binding, unconditional and irrevocable contract. Investment property is measured initially at cost including transaction costs. Transaction costs include transfer taxes, professional fees for legal services, agent’s fee and initial leasing commissions to bring the property to the condition necessary for it to be capable of operating. The carrying amount also includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met. Subsequent to initial recognition, investment property is stated at fair value. Gains or losses arising from changes in the fair values are included in the Statement of Total Return in the year when they arise. Investment properties are valued by the Valuation Agent on the basis of a full valuation with physical inspection at least once a year. Any valuation of an Immovable by the Valuation Agent must be undertaken in accordance with the current issue of RICS Valuation – Global Standards January 2017, or in the case of overseas immovables, on an appropriate basis, but guided by the FCA Rules. For the purposes of these Financial Statements, in order to avoid ‘double accounting’, the assessed fair value is: – reduced by the carrying amount of any accrued income resulting from the spreading of lease incentives; and – increased by the carrying amount of leasehold obligations Investment property is derecognised when it has been disposed of or permanently withdrawn from use and no future economic benefit is expected after its disposal or withdrawal. Any gains or losses on the retirement or disposal of investment property are recognised in the Statement of Total Return in the year of retirement or disposal. Gains or losses on the disposal of investment property is determined as the difference between the net sales proceeds and the carrying amount of the asset at the commencement of the accounting period plus capital expenditure in the period. For leasehold properties that are classified as investment properties, the associated leasehold obligations are accounted for as finance lease obligations. Properties held under operating leases are accounted for as investment properties.
1.9 Dilution levy In the PAIF a dilution levy will be reflected in the calculation of the share price and will reflect the associated property acquisition and disposal costs. The levy may vary from time to time to reflect matters such as changes in stamp tax or any other applicable taxes and fees. In unusual market conditions, the price may also be further adjusted by a percentage, in consultation with the Pricing Sub-Committee, to reflect the value of the assets in such circumstances based on information received from MSCI, valuation agents and any other material information as the ACD may see fit.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 113 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
1. Accounting policies (continued)
1.10 Cash and cash equivalents Cash and cash equivalents include cash in hand and deposits held at banks. Cash is stated at its face value.
1.11 Debtors Amounts due but not received are included within debtors which are stated at transaction value less provision for impairment. Provision is made where there is objective evidence that the Fund will not be able to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote.
1.12 Finance leases Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the property and the present value of the minimum lease payments. The present value of the corresponding rental obligations are included as liabilities.
1.13 Creditors Deferred rental income is calculated by the property manager, it relates to income that has been invoiced in advance to the tenant but relates to future periods. Creditors are stated at their transaction value. Amounts received in respect of future periods are included within creditors as deferred income.
1.14 Significant estimation techniques The preparation of the Fund’s Financial Statements requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future years. The fair value of investment property is determined by independent real estate valuation experts using RICS Valuation – Professional Standards VPS4 (7.1) Fair Value and VPGA1 Valuations for Inclusion in Financial Statements, which adopt the definition of Fair Value used by the International Accounting Standards Board: “The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.” The Valuer's opinion of Fair Value was primarily derived using recent market transactions on arm's length terms, where available and assumes there to be good and marketable titles to the properties. 2. Risk management policies
The Fund’s activities expose it to a variety of financial risks: market risk, credit risk, liquidity risk and further risks inherent to investing in investment property. The Fund’s objective in managing risk is the creation and protection of shareholder value. Risk is inherent in the Fund’s activities, but it is managed through a process of ongoing identification, measurement and monitoring, subject to risks limits and other controls. The Depositary on the recommendation of the ACD has appointed a Governance Committee with an independent chair, paid for by the Fund, with responsibility to oversee the aspects of risk control.
114 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
2. Risk management policies (continued)
The principal risks facing the Fund in the management of its portfolio are as follows:
2.1 Market price risk Market price risk is the risk that future values of investments in direct property and related property investments will fluctuate due to changes in market prices. To manage market price risk, the Fund diversifies its portfolio geographically in the United Kingdom and across property sectors. The disciplined approach to the purchase, sale and assets’ management ensures that the value is maintained to its maximum potential. Prior to any property acquisition or sale, detailed research is undertaken to assess expected future cash flow. The Investment Management Committee (‘IMC’) meets fortnightly and reserves the ultimate decision with regards to investments purchases or sales. In order to monitor property valuation fluctuations, the ACD meet with the independent external valuer on a regular basis. The valuer provides a property portfolio valuation monthly, so any movements in the value can be accounted for in a timely manner and reflected in the NAV every month.
2.2 Real Estate risk The Fund is exposed to the following risks specific to its investment property: Property investments are illiquid assets and valuing is difficult. Real estate can be difficult to sell, especially if local market conditions are poor. Illiquidity may also result from the absence of an established market for investments, as well as legal or contractual restrictions on resale of such investments. In addition, property valuation is inherently subjective due to the individual characteristics of each property, and thus, coupled with illiquidity in the markets, makes the valuation in the scheme property difficult and inexact. No assurances can be given that the valuations of properties will be reflected in the actual sale prices even where such sales occur shortly after the relevant valuation date. There is no guarantee that the Fund will be able to acquire a sufficient number of suitable properties which will enable a Fund to achieve its investment objective through its investment policy. Having excess uninvested cash and a larger number of shares in issue may affect a Fund’s ability to achieve its investment objective. In order to avoid holding excess cash the ACD exercises control over subscriptions into the Fund by sending capital call to investors only when there are suitable investments opportunities. In the event where direct investments in the underlying property is not possible or impractical, the Fund may invest up to 10% of its NAV into Collective Investment Schemes. There can be no assurance that the Fund will undertake to acquire any particular site or that it will be able to complete such acquisition if it is undertaken. There can be no certainty regarding the future performance of any of the properties acquired for the Fund. The value of any property can go down as well as up. Property and property-related assets are inherently subjective as regards value due to the individual nature of each property. As a result, valuations are subject to uncertainty. Real property investments are subject to varying degrees of risk. The yields available from investments in real estate depend on the amount of income generated and expenses incurred from such investments. There are additional risks in vacant, part vacant, redevelopment and refurbishment situations although these are not prospective investments for the Fund.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 115 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
2. Risk management policies (continued)
2.3 Credit risk Credit risk is the risk that the counterparty (to a financial instrument) or tenant (of a property) will cause a financial loss to the Fund by failing to meet a commitment it has entered into with the Fund. It is the Fund’s policy to enter into financial instruments with reputable counterparties. The ACD closely monitors the creditworthiness of the Fund’s counterparties (e.g. Depositary, banks and tenants) by regularly reviewing their credit ratings, Financial Statements and press releases on a regular basis. All cash deposits are placed with an approved counterparty, Bank of New York Mellon, London Branch. In respect of property investments, in the event of a default by a tenant, the Fund will suffer a rental shortfall and additional costs concerning re-letting the property. The ACD monitors tenant arrears in order to anticipate and minimise the impact of defaults by occupational tenants. The table below shows the Fund’s exposure to credit risk:
As at As at 31 December 31 December 2019 2018 £’000 £’000
Debtors (excluding prepayments and rent incentive debtors) 2,229 298 Bank and cash 7,220 9,205
Total 9,449 9,503
2.4 Liquidity risk Liquidity risk is the risk that the Fund will encounter difficulty in realising assets to meet its financial commitments. The Fund is exposed to liquidity risk from the requirement to meet cash redemptions on its redeemable shares. Property investment is relatively illiquid compared to many classes of asset and in order to manage liquidity the ACD follows the following strategies: the Fund is intended for long-term investors who can accept the risks associated with liquidity; redemptions are restricted to the monthly dealing; and a proportion of the investments of the Fund are kept in more liquid assets. In order to protect the interests of continuing holders, the ACD may, at its discretion and in consultation with the Governance Committee, defer redemptions monthly for up to six months from the Valuation Date to which the redemption request relates. In exceptional circumstances, the ACD may, with the approval from the Depositary, decide to suspend both subscriptions and redemptions of shares for up to six months. The ACD will review the position every 28 days. The Fund invests primarily in investment property. The Fund’s policy is to maintain sufficient cash and cash equivalents to meet normal operating requirements and expected redemption requests. The ACD maintains close investor relationships in order to gauge redemption requirements.
116 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
2. Risk management policies (continued)
2.5 Inflation risk The performance objective is to deliver a total return of 4% per annum, net of fees and expenses and adjusted for, or after removing the effect of, inflation. Whilst the annualised returns for property have averaged just over 5% pa above inflation for the last 30 years (source MSCI) this has included periods of high inflation when property’s performance has not kept pace with inflation. If such inflationary conditions occur again it is likely that there will be periods when the AEW UK Real Return Fund does not achieve its performance objective. To mitigate the inflation risk, the AEW UK Real Return Fund has an Investment guideline to allocate a minimum of 50% of gross income inflation linked leases.
2.6 Political/Economic risk Political and macroeconomic events present risks to the real estate and financial markets that affect the Fund and the business of our tenants. The level of uncertainty that such events bring has been highlighted in recent times, most pertinently as a result of the EU referendum vote (Brexit) in June 2016. The arrangements that would be put in place between the UK and the EU following Brexit could impact the health of the UK economy, make it more difficult for the Fund to raise capital and/or increase the regulatory compliance burden on the Fund.
2.7 Coronavirus risk The full impact of COVID-19 on real assets has yet to become clear, however under these circumstances, liquidity conditions and credit risks need to be closely monitored. The below summaries the risks faced by the Fund in context of the rapidly evolving Coronavirus situation: Real Estate Risk – As at 31 March 2020, the Standing Independent Valuer has determined material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic. The like for like property valuation movement in the Real Return Fund for Q1 2020 was a fall of (1.4%). Liquidity risk – As mentioned above, in unusual market conditions, to protect the interest of investors, the prospectus provides a mechanism for the ACD to i) Adjust the Fair Value of the Pricing or, ii) Defer Redemptions or iii) Suspend the Fund. As there were no dealings in the Fund, there were no changes made to the dealing process for the 1st April 2020 dealing date. Following receipt of a redemption request for circa £7.5m for the 1 May 2020 dealing day, the ACD temporarily suspended all dealing in the above Fund with effect from Thursday 23 April 2020. Counterparty Risk – Low rent collection will compromise the Fund’s ability to pay quarterly distributions. The Fund currently has sufficient cash reserves to pay the Q1 2020 distribution (to be paid on 31st May) and meet the running costs for the foreseeable future. Many tenants will be dependent on government support to survive. The ACD is not pursuing just maximum rent collection but is in many cases exploring asset management opportunities that might be mutually beneficial for the Fund and its tenants.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 117 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
3. Net capital gains
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
Proceeds from sales of investment properties during the year – 238 Carrying value of investment properties sold during the year – (300) Loss realised on investment properties during the year – (62)
Net unrealised valuation gain on investment properties 266 1,431 Adjustment for rent incentive debtor (238) (175) Net capital gains 28 1,194 4. Purchases and transaction costs
2019 % of purchases Year ended Year ended excluding 31 December 31 December transaction 2019 2018 costs £’000 £’000
Purchases excluding transaction costs 15,489 41,912
Commissions 1.2% 183 419 Taxes 4.6% 722 1,754 Other costs 1.5% 226 316
Total purchase transaction costs 7.3% 1,131 2,489
Purchases including transaction costs 16,620 44,401
118 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
5. Sales and transaction costs
2019 % of Year ended Year ended sales excluding 31 December 31 December transaction 2019 2018 costs £’000 £’000
Sales excluding transaction costs – 250
Agent fees – – (6) Legal fees – – (6)
Total sale transaction costs – – (12)
Sales including transaction costs – 238
6. Revenue
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
Rental income 9,034 7,066 Sundry property income 9 1
Total revenue 9,043 7,067
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 119 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
7. Expenses
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
Direct property expenses: Property legal and professional fees 87 78 Head rent 83 80 Managing Agent's fees 44 49 Abortive costs 22 17 Insurance 13 16 Valuer's fees* – 54 Letting fees 36 4 Other expenses 6 3 Direct property expenses 291 301
Expenses associated to the ACD: Management fees 1,047 781
Expenses associated to the Depositary: Depositary fees 62 51
Other operating expenses: Irrecoverable VAT 91+ – Valuer's fees* 67 – MSCI subscription fees 32 57 Auditor's fees 30 27 Other operating expenses 19 21 Legal & professional fees 17 22 Ta x Agent's fees 12 19 Governance committee fees 12 6 Sustainability consultancy fees 9 12 Total operating expenses 1,398 996 Total expenses 1,689 1,297
* Current year valuer’s fees have been recognised in operating expenses in accordance with AREF guidelines. + Including irrecoverable VAT of £65,000 relating to 2018.
120 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
8. Interest payable and similar charges
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
Bank charges 2 2
Total finance costs 2 2
9. Taxation
Under PAIF tax rules, net income is streamed as follows: net income from the property investment business; UK dividend income and net income from the residual business. Expenses which are not directly attributable to any stream should be apportioned between the streams on a reasonable basis. Net income from the property investment business is exempt from tax in the PAIF. UK dividend income is also not subject to tax in the PAIF. The net income from the residual business is only subject to Corporation tax in the PAIF to the extent that income has not been distributed to investors. Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
(a) Analysis of tax charge for the year UK corporation tax – –
Total tax charge – –
(b) Factors affecting the tax charge for the year Net income before taxation 7,352 5,768
Theoretical tax at UK corporation tax rate of 20%* 1,470 1,154 Net property income not taxable (1,470) (1,154)
Total tax charge – –
* The corporation tax rate applicable to PAIF is equivalent to the lower rate of UK income tax.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 121 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
10. Distributions Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
(a) Analysis of distributions First interim 1,722 1,159 Second interim 1,832 1,442 Third interim 1,957 1,694 Fourth interim 1,910 1,804
Total distributions 7,421 6,099
Equalisation received on the issue of shares (69) (331)
Net distribution for the year 7,352 5,768
(b) Reconciliation of net revenue after taxation to distributions Net revenue after taxation 7,352 5,768
Total distributions for the year 7,352 5,768 11. Investment properties
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
At valuation: At beginning of year at valuation 125,910 80,285 Acquisitions during the year 16,620 44,401 Capital expenditure 639 93 Carrying value of property sold – (300) Net unrealised capital gain 266 1,431 Professional valuation 143,435 125,910 Adjustment for rent incentive debtor (693) (468) Adjustment in respect of minimum payment under head leases separately included as a liability in the Balance Sheet 1,045 1,045 Carrying value at the end of the year 143,787 126,487
122 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
11. Investment properties (continued)
No properties under development were held as at 31 December 2019 or 31 December 2018. Fair value Valuation of investment property is performed by Knight Frank LLP, an accredited external valuer with recognised and relevant professional qualifications and recent experience of the location and category of the investment property being valued. The valuation of the Company’s investment property at fair value is determined by the external valuer on the basis of market value in accordance with the internationally accepted RICS Valuation – Global Standards January 2017. The determination of the fair value of investment property requires the use of estimates such as future cash flows from assets (such as lettings, tenants’ profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those assets. The following tables show an analysis of the fair values of financial instruments recognised in the balance sheet:
31 December 2019 Level 1 Level 2 Level 3 Total £’000 £’000 £’000 £’000
Assets measured at fair value* Investment properties – – 143,435 143,435
Professional valuation – – 143,435 143,435
31 December 2018 Level 1 Level 2 Level 3 Total £’000 £’000 £’000 £’000
Assets measured at fair value* Investment properties – – 125,910 125,910
Professional valuation – – 125,910 125,910
* before adjustments for carrying value of leasehold obligations and rent incentive debtors.
Explanation of the fair value hierarchy: Level 1 – Quoted prices for an identical instrument in active markets; Level 2 – Prices of a recent transactions for an identical instruments; Level 3 – Valuation techniques using non-observable data. Sensitivity analysis to significant changes in unobservable inputs within Level 3 of the hierarchy
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 123 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
11. Investment properties (continued)
The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity’s portfolios of investment property are: 1) Estimated Rental Value (‘ERV’) 2) Rental growth 3) Long term vacancy rate 4) Discount rate/yield Increases (decreases) in the ERV (per sq ft p.a.) and rental growth p.a. in isolation would result in a higher (lower) fair value measurement. Increases (decreases) in the long term vacancy rate and discount rate (and exit or yield) in isolation would result in a lower (higher) fair value measurement. The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the portfolio of investment property are: 31 December 2019
Fair Value Valuation Key Unobservable Class £’000 Technique Inputs Range
ERV per sq ft £4.21-£37.50 Investment Property 143,435* Income capitalisation Discount rate 5.22% to 10.43%
31 December 2018
Fair Value Valuation Key Unobservable Class £’000 Technique Inputs Range
ERV per sq ft £4.25-£29.25 Investment Property 125,910* Income capitalisation Discount rate 5.21% to 10.08%
* before adjustments for carrying value of leasehold obligations and rent incentive debtors
Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy amount to a net gain of £266,000 (2018: £1,431,000) and are presented in note 3. The carrying amount of the assets and liabilities, detailed within the balance sheet, except for investment properties, is considered to be the same as their fair value. There have been no transfers between Level 1 and Level 2 during any of the periods nor have there been any transfers between any transfers in or out of Level 3.
124 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
12. Debtors
As at As at 31 December 31 December 2019 2018 £’000 £’000
Capital VAT receivable 35 119
Total capital debtors 35 119
Rent incentive debtor 693 468 Rent receivable 2,111 179 Agent float account 83 – Prepayments and other debtors 37 93
Total income debtors 2,924 740
Total debtors 2,959 859
13. Cash and bank balances
As at As at 31 December 31 December 2019 2018 £’000 £’000
Amounts held at bank 7,220 9,205
Total cash and bank balances 7,220 9,205
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 125 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
14. Finance lease obligations
Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the property and the present value of the minimum lease payments. The present value of the corresponding rental obligations are included as liabilities. The following table analyses the minimum lease payments under non-cancellable finance leases for each of the following periods:
As at As at 31 December 31 December 2019 2018 £’000 £’000
Within one year 73 73
After one year but not more than five years 243 243 More than five years 729 729
Long term 972 972
Total 1,045 1,045
15. Guarantees and commitments
Operating lease commitments – as lessor The Fund has entered into commercial property leases on its investment property portfolio. These non-cancellable leases have a remaining term of between 0 and 30 years. Future minimum rentals receivable under non-cancellable operating leases as at 31 December are as follows*:
As at As at 31 December 31 December 2019 2018 £’000 £’000
Within one year 9,363 8,112
After one year but not more than five years 35,743 31,745 More than five years 108,325 86,481
144,068 118,226
Total 153,431 126,338
* The above analysis excludes any fixed minimum increments which reflects the expected general inflation.
126 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
16. Creditors
As at As at 31 December 31 December 2019 2018 £’000 £’000
Investment liabilities Acquisition costs payable 32 32
Total investment liabilities 32 32
Distribution payable 1,926 1,812
Other creditors Accruals and other creditors 398 176 Deferred rental income 2,099 1,204
Total other creditors 2,497 1,380
Total creditors 4,455 3,224
17. Transactions with significant parties
The following are considered by the ACD to be significant parties of the Fund. • The Depositary in accordance with the PAIF Instrument • The ACD in accordance with the PAIF Instrument The Depositary is entitled to receive a fee based on sliding scale as shown below, subject to a minimum fee of £45,000 per annum.
Rate (% pa) Net Asset Value £0 – £100,000,000 0.05% £100,000,001 – £250,000,000 0.03% £250,000,001 – £500,000,000 0.02% £500,000,001 and above 0.01% The ACD is (in addition to reasonable out of pocket expenses) entitled to receive a fee at a rate of 0.75% per year of the NAV of the Fund.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 127 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
17. Transactions with significant parties (continued)
During the year the following fees were payable to significant parties.
Year ended Year ended 31 December 31 December 2019 2018 £’000 £’000
ACD’s management fee 1,047 781 Depositary fee 62 51
Total 1,109 832
As at 31 December 2019 the following amounts were outstanding due to significant parties.
As at As at 31 December 31 December 2019 2018 £’000 £’000
ACD’s management fee 95 85 Depositary fee 11 12
Total 106 97
18. Derivatives
The Fund has no derivative exposure at 31 December 2019 (2018: £nil). 19. Reconciliation of Net Assets per the financial statements to the Net Asset Value (‘NAV’) previously reported
As at As at 31 December 31 December 2019 2018 £’000 £’000
NAV previously reported 148,466 132,467 Unrealised rent incentive adjustment – (185)
Net assets as reported per the Balance Sheet* 148,466 132,282
* Balance Sheet as reported on page 109.
128 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2019
20. Subsequent events
Distribution On 28 February 2020, the Fund made a distribution of £1.9m, in respect of the period from 1 October 2019 to 31 December 2019. This was paid to the Shareholders of the Fund as at 31 December 2019.
Property transactions There have been no subsequent property acquisitions or sales.
Investor commitment At 31 December 2019, there were no subscriptions in the queue. Subsequent to year end the Fund has received £9.5m of investor commitment, which remains undrawn. There were no redemptions in the queue as at 31 December 2019.
COVID-19 Global Pandemic The ACD considers the emergence and spread of COVID-19 to be a non-adjusting subsequent event, given the significant changes in business activities and economic conditions occurred as a result of events occurring after 31 December 2019. As at 31 March 2020, the Standing Independent Valuer has determined material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic. The like for like property valuation movement in the Real Return Fund for Q1 2020 was a fall of (1.4%). Following receipt of a redemption request for circa £7.5m for the 1 May 2020 dealing day, the ACD temporarily suspended all dealing in the above Fund with effect from Thursday 23 April 2020. Hence no dealing will occur for this monthly dealing fund at the next dealing date (1 May 2020). The ACD aims to lift the suspension as soon as confidence returns to the market and there is more certainty regarding asset valuations for the Fund, taking into account the best interests of investors.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 129 AEW UK Real Return Fund
Distribution Tables for the year ended 31 December 2019
First Interim Group 1 – units purchased prior to 31 December 2018 Group 2 – units purchased on or after 1 January 2019 and on or before 31 March 2019
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Unit Class A Income Group 1 1.343 – 1.343 – 1.343 Group 2 0.511 – 0.511 0.832 1.343 Unit Class C Income* Group 1 – – – – – Group 2 – – – – –
* As at 31 March 2019, there were no Unit Class C investors.
Second Interim Group 1 – units purchased prior to 31 March 2019 Group 2 – units purchased on or after 1 April 2019 and on or before 30 June 2019
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Unit Class A Income Group 1 1.309 – 1.309 – 1.309 Group 2 0.406 – 0.406 0.903 1.309 Unit Class C Income Group 1 – – – – – Group 2 1.309 (0.002) 1.307 – 1.307
Third Interim Group 1 – units purchased prior to 30 June 2019 Group 2 – units purchased on or after 1 July 2019 and on or before 30 September 2019
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Unit Class A Income Group 1 1.395 – 1.395 – 1.395 Group 2 0.472 – 0.472 0.923 1.395 Unit Class C Income Group 1 1.395 (0.003) 1.392 – 1.392 Group 2 – – – – –
130 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 AEW UK Real Return Fund
Distribution Tables (continued) for the year ended 31 December 2019
Fourth Interim Group 1 – units purchased prior to 30 September 2019 Group 2 – units purchased on or after 1 October 2019 and on or before 31 December 2019
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Unit Class A Income Group 1 1.340 – 1.340 – 1.340 Group 2 0.852 – 0.852 0.488 1.340 Unit Class C Income Group 1 1.340 (0.003) 1.337 – 1.337 Group 2 – – – – –
Equalisation Equalisation applies only to units purchased during the distribution period (Group 2 units). It represents the accrued revenue included in the purchase price of the units. After averaging it is returned with the distribution as a capital repayment. It is not liable to Income Tax but must be deducted from the cost of the units for Capital Gains Tax purposes.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 131 Depositary, ACD & Advisers
Depositary Managing Agents The Bank of New York Mellon (International) Ltd For: AEW UK Core Property Fund One Canada Square M J Mapp Limited London 180 Great Portland Street E14 5AL London W1W 5QZ ACD AEW UK Investment Management LLP Mayfield Asset and Property Management Ltd 33 Jermyn Street 36-38 Wigmore Street London London SW1Y 6DN W1U 2RU
Registrar and Transfer Agent For: AEW UK Real Return Fund Link Fund Administrators Limited Workman LLP 6th Floor Alliance House 65 Gresham Street 12 Caxton Street London London EC2V 7NQ SW1H 0QS
Fund Administrator Custodian Link Alternative Fund Administrators Limited The Bank of New York Mellon (International) Ltd The Registry One Canada Square 34 Beckenham Road London Beckenham E14 5AL Kent BR3 4TU Solicitors For properties in England and Wales: Auditor Mischon de Reya LLP KPMG LLP Summit House 15 Canada Square 12 Red Lion Square London London E14 5GL WC1R 4QD Valuers CMS Cameron McKenna Nabarro Olswang LLP 78 Cannon Street Knight Frank LLP London 55 Baker Street EC4N 6AF London W1U 8AN Pinsent Masons LLP 1 Park Row Legal Advisers Leeds Eversheds LLP LS1 5AB One Wood Street London For properties in Scotland EC2V 7WS Brodies LLP 15 Atholl Crescent Edinburgh EH3 8HA
132 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2019 United Kingdom 33 Jermyn Street London SW1Y 6DN
+44 20 7016 4800 www.aewuk.co.uk
France 22 rue du Docteur Lancereaux 75008 Paris France
+33 1 78 40 92 00 www.aew.com
United States of America Two Seaport Lane Boston MA 02210 United States
+1 617 261 9000 www.aew.com MSCI/AREF PROPERTY FUND VISION Dec 2019
AEW UK Core Property Fund
INVESTMENT POLICY AND OBJECTIVES The AEW UK Core Property Fund is a core balanced fund targeting value investment opportunities. It comprises a property portfolio diversified geographically in the UK and across all property sectors. Its investment objective is to provide a return from income and capital appreciation over the long term, and to out-perform its benchmark (the MSCI/AREF UK Quarterly Property Fund Index) over three-year rolling periods.
INVESTOR CONSTITUENCY The AEW UK Core Property Fund will look for and capitalize on market inefficiencies with reference to the investment risk profile set by its benchmark. The investment process is very stock focused and draws upon our strong active asset management capabilities. As a value investor, the AEW UK Core Property Fund will look to buy attractively priced and/or good quality real estate at the margins of prime locations aiming to provide good risk adjusted returns over the long term.
INVESTOR CONSTITUENCY The Fund is open to investment by pension funds, charities, insurance companies and other approved capital gain tax exempt investors.
Fund details Type of fund Property Authorised Investment Fund Residence UK Launch date March 2012 Open/closed-ended Open-ended Year-end 31-Dec NAV (GBPm) 301.8 Source: AEW
Management/professional advisors Trust Manager AEW UK Property investment manager AEW UK Portfolio Manager Richard Tanner Trustee BNY Mellon Trust & Depositary Auditors KPMG Source: AEW
Investment rates of return, % MSCI/AREF UK Quarterly Property Fund Index*
Other balanced All balanced AEW UK Core Property Fund All funds funds funds
3 months 0.6 0.3 0.3 0.0 Year-to-date 5.5 1.8 1.6 0.7 12 months 5.5 1.8 1.6 0.7 3 years+ 10.0 6.5 6.0 5.3 5 years+ 9.9 7.2 6.6 6.0 10 years+ - 8.1 7.7 7.7 Note: * Weighted average returns + Annualized Source: MSCI/AREF UK Quarterly Property Fund Index (Sponsored by Property Match)
MSCI.COM MSCI/AREF PROPERTY FUND VISION Dec 2019
Property investment restrictions Maximum development exposure 10% Maximum speculative development exposure 10% Maximum lot-size holding as a standing investment 15% Maximum lot-size holding permitted at purchase 15% Maximum exposure to limited partnerships * Maximum exposure to joint ventures * Maximum exposure to closed and open-ended property unit trusts * Note: *None specified Source: AEW
Portfolio distribution % MSCI/AREF UK Quarterly Property Fund Index** AEW UK CORE Other balanced All balanced PROPERTY All funds funds funds FUND*
Standard retail – South East 1.7 7.38 6.79 5.60 Standard retail – Rest of UK 8.8 2.97 3.18 3.56 Shopping centres 1.4 1.28 1.95 6.56 Retail warehouses 7.0 12.33 12.03 10.77 All UK retail 18.8 23.96 23.95 26.49 City offices 0.0 3.62 3.29 2.88 West End offices 0.0 7.57 8.03 6.75 Rest of South East offices 6.6 11.62 10.84 7.60 Rest of UK offices 5.2 6.26 5.85 4.97 All UK offices 11.8 29.08 28.03 22.20 South East industrial 0.6 19.57 19.86 15.93 Rest of UK industrial 44.4 10.50 10.23 8.26 All UK industrial 45.0 30.07 30.09 24.19 Other UK properties 20.8 11.74 10.68 21.44 Cash 3.6 5.15 7.25 5.69 Overall 100.0 100.0 100.0 100.0 Sources: *AEW ** MSCI/AREF UK Quarterly Property Fund Index (Sponsored by Property Match)
Property ownership structure % of total Number of assets Valuation (GBPm) portfolio Direct holdings 64 294.5 100.0 Joint and indirect holdings 0 0.0 0.0 Listed investments 0 0.0 0.0 Total 64 294.5 100.0 Source: AEW
MSCI.COM MSCI/AREF PROPERTY FUND VISION Dec 2019
Largest direct investments by lot size & percentage of total portfolio Valuation % of total Property Location Sector (GBPm) portfolio Wakefield 41 Wakefield Industrial 15-20 5-10% Ashton-Under- Kayley Industrial Estate Industrial 15-20 5-10% Lyne Spectrum Swindon Industrial 10-15 0-5% Hengrove Leisure Park Bristol Leisure 10-15 0-5%
Kingston Upon Przym Leisure 10-15 0-5% Thames
London East Leisure Park Dagenham Leisure 10-15 0-5% Warehouse Crewe Industrial 10-15 0-5%
36-42 Old Christchurch Road Bournemouth Retail Other 5-10 0-5%
730 Aztec West Bristol Office 5-10 0-5%
Lincolns' Inn Office, Anglo Office Park High Wycombe Office 5-10 0-5%
10 largest investments as % of portfolio 125.4 42.6 Source: AEW
Direct portfolio structure by lot-size bands Number of Valuation % of total Value band (GBPm) assets (GBPm) portfolio 0 -2.5 24 39.4 13.4 2.5 - 5 23 87.2 29.6 5-10 10 69.1 23.4 10-25 7 98.9 33.6 25 - 50 - - - 50 - 100 - - - 100-150 - - - Over 150 - - - Total 64 294.5 100.0 Average lot size 4.6 Source: AEW
Property Yield Voids as % of ERV Net initial yield 6.70% Investments 12.30% Nominal equivalent yield 7.75% Developments 0.00% True equivalent yield 8.14% Total 12.30% Net reversionary yield 7.86% Source: Knight Frank
Rental income & ERV by type of property
Rental income Estimated % rental value %
Standard retail 15.8 12.1 Retail warehousing 7.8 7.9 Shopping centres 2.0 2.3 Central London offices 0.0 0.0 Other offices 12.2 13.0 Industrial 41.9 46.2 Other 20.3 18.5 Overall 100.0 100.0 Source: AEW
MSCI.COM MSCI/AREF PROPERTY FUND VISION Dec 2019
Over Renting and Reversionary Potential, % Rent Passing
Reversionary Development Investment Reversionary Market Rent Passing, Rent Free , % Over rented,% potential Net of Sector vacancy, % vacancy, % potential,% Rent Value,% Rent GBP Millions Rent Passing Rent Passing Over renting,% Rent Passing Rent Passing Passing Passing Rent Passing
Standard retail 3.7 0.0 0.0 6.0 -22.7 1.5 -21.2 84.8 Retail warehousing 1.8 0.0 0.0 18.0 -8.7 3.6 -5.1 112.9 Shopping centres 0.5 0.0 0.0 14.5 -15.4 33.0 17.7 132.2 Central London offices ------Other offices 2.9 0.8 0.0 12.8 -2.1 7.2 5.0 118.6 Industrial 9.8 6.1 0.0 14.2 -3.2 5.8 2.6 122.9 Other 4.8 1.9 0.0 17.3 -23.3 5.5 -17.7 101.5 Overall 23.4 3.1 0.0 13.6 -10.9 5.6 -5.3 111.4 *Comprising the ERV of developments in progress or contracted which have not been pre-let Source: AEW
Listed Investments Valuation Est. % of total % of Issue held (GBPm) portfolio ------
The unexpired term of leases Years % of rent passing 20 years or greater 0.0 15 years or greater, but less than 20 4.6 10 years or greater, but less than 15 9.7 5 years or greater, but less than 10 12.4 Less than 5 years 73.3 Source: AEW
Joint and Indirect property holdings Est. % of total Holdings Sector Joint/Indirect Vehicle Type Ownership % Valuation portfolio ------Source: AEW
MSCI.COM MSCI/AREF PROPERTY FUND VISION Dec 2019
Debt analysis Fixed rate borrowings Variable rate borrowings Rate above Off balance Amount drawn Average rate Average Amount drawn LIBOR (incl sheet debt (GBPm) (%) unexpired term (GBPm) expenses) (GBPm)+ (years) (%)
------Source: AEW
Development exposure* Capital value of developments Cost to complete schemes in Not yet started In progress+ All developments progress+ GBPm - - - - % of all directly held properties* - - - - * Includes joint ventures in which the Fund has an interest of 50% or more Source: AEW
Valuations/performance monitors/affiliations Frequency of valuation Monthly Valuers Knight Frank Portfolio performance monitored by MSCI Yes Constituent of MSCI/AREF UK Quarterly Property Fund Index Yes Member of the Association of Real Estate Funds Full member Source: AEW
Restrictions on holdings of cash/borrowings Maximum total gearing permitted 10% Cash holdings (maximum) 10% Cash holdings (minimum) * Source: AEW Note: Long term gearing not permited
MSCI.COM MSCI/AREF PROPERTY FUND VISION Dec 2019
The contribution of major tenants to rental income Tenant % Bestway Ltd 4.3 The Deltic Group Ltd 4.2 Cooper Tire & Rubber Company Europe Ltd 4.0 J E Beale Plc 3.9 Vue Entertainment Ltd 3.5 Whitecroft Lighting Ltd 2.6 Integrated Third Party Logistics Ltd 2.6 Cine-UK Ltd 2.5 New Look Retailers Ltd 2.4 George Wilson Industries Ltd 2.2 Three largest tenants' contribution to rental income 12.5 Five largest tenants' contribution to rental income 19.9 Ten largest tenants' contribution to rental income 32.2 Source: AEW
Balance sheet/gearing Indirect Listed Direct holdings Joint holdings Total investments investments Balance sheet (GBPm) Properties at valuation 294.5 0.0 0.0 0.0 294.5 Listed investments 0.0 0.0 0.0 0.0 0.0 Debt 0.0 0.0 0.0 0.0 0.0 Cash 11.0 0.0 0.0 0.0 11.0 Other net assets/liabilities -3.7 0.0 0.0 0.0 -3.7 Total net assets 301.8 0.0 0.0 0.0 301.8 Gearing (%) Net debt (cash)/properties -3.7 - - - -3.7 Net debt (cash)/equity -3.6 - - - -3.6 Source: AEW
Quarterly data per unit As at 30-Sep-18 31-Dec-18 31-Mar-19 30-Jun-19 30-Sep-19 31-Dec-19 Bid (GBP) ------Offer (GBP) 1.408 1.410 1.415 1.426 1.421 1.411 Mid (GBP) ------Bid/offer spread ------Net asset value (GBP) 1.318 1.320 1.325 1.335 1.331 1.321 Quarterly distribution (GBP) 0.0155 0.0158 0.0211 0.0162 0.0155 0.0185 Yield 5.4% 5.2% 5.5% 5.1% 5.2% 5.4% Source: AEW
MSCI.COM MSCI/AREF PROPERTY FUND VISION Dec 2019
Unit pricing The Fund’s NAV and the single (bid/offer) price of its units are calculated on the date of the monthly revaluation of the portfolio as at the last day of each month
Distributions Distributions are declared on a quarterly basis and paid within two months of the end of the quarter during which they were earned
Minimum investment/disinvestment A minimum initial investment of £100,000, although the Manager may approve smaller holdings
Creation, transfer and realisation of units Units may be issued by the Depositary on the direction of the Manager on giving notice at least 14 business days ahead of the next Dealing Day for Subscriptions which is the first business day in each calendar month.
Redemptions Units may be redeemed on written notice to be received by the Manager at least one month prior to the next Dealing Day for Redemptions which is the first business day in each calendar month. At its discretion and in consultation with the Governance Committee, the Manager may defer redemptions for up to six months.
Taxation Capital Gains Tax The Fund is not subject to capital gains tax.
Income Tax The Fund qualifies as a PAIF for tax purposes. Accordingly, the income generated by their Property Investment Business will be exempt from tax.
Charges Annual Fee The Fund Manager is entitled to an annual fee (payable quarterly) equivalent to 0.70% pa of the Net Asset Value of the Fund, plus VAT.
Initial charge No initial charge is levied by the Trust Manager on investors acquiring units in the Fund
Performance Fee The Property Investment Manager may earn a performance fee of 0.25% p.a. (plus VAT) of NAV if the Fund is ranked above the weighted average performance the top ten funds within the All Balanced Funds component of the MSCI/AREF UK Quarterly Property Fund Index over three year rolling periods (providing its return over the period is positive).
Leverage The Fund may only borrow up to 10% of the NAV and in the form of a revolving credit facility. Leverage may take the form of temporary cash borrowings, financial derivative instruments and reinvestment of cash allocated in the context of securities lending.
MSCI.COM MSCI/AREF PROPERTY FUND VISION Dec 2019
Unit holder analysis Number of unitholders Total % held Less than 1% of units in issue 33 9.2 1% or greater but less than 2% 7 10.9 2% or greater but less than 4% 4 11.9 4% or greater but less than 8% 6 30.0 Greater than 8.0% 2 38.1 Total 52 100.0 Major investors Largest holder 1 19.2 Three largest holders 3 45.5 Five largest holders 5 55.2 Ten largest holders 10 75.4 Internal/external investors Internal 3 0.4 External 49 99.6 Source: AEW
Liquidity Year to Year to Year to Year to Year to Dec 2017 Year to Dec 2018 Period Dec 2014 Dec 2015 Dec 2016 Dec 2019 Issues and redemptions
Units in issue as at start of period 78,343,346 157,204,632 193,021,067 209,530,510 212,008,201 218,658,263
Units issued during period 78861286 35,988,327 19,012,340 4,218,577 9,947,189 15,302,013
Units redeemed during period - -171892 -2,502,897 -1,740,886 -3,297,128 -5,482,448
Units in issue at end of period 157,204,632 193,021,067 209,530,510 212,008,201 218,658,263 228,477,828
Unit transfers Matched bargains 50849766 15,164,063 2,649,301 1,338,285 Matched bargains %* - - 0.2427 7.15% 1.21% 0.59% * as % of units in issue at the end of the period Source: AEW
MSCI.COM MSCI/AREF PROPERTY FUND VISION Dec 2019
AEW UK Real Return Fund
INVESTMENT POLICY AND OBJECTIVES The AEW UK Real Return Fund (“the Fund”) strategy is to align the real benefits of property with the needs of long-term savers. It aims to deliver better risk adjusted liability focused returns, with inflation-linked cash flow and income growth central to strategy. The Fund has a total real return performance target and will access a wider UK investible universe of traditional and alternative sectors such as healthcare, leisure, car parks, social infrastructure and student housing, aiming to generate greater diversification and lower volatility.
INVESTOR CONSTITUENCY The Fund is open to investment by UK and Overseas Corporate Pension Funds, Local Authorities, Charities, SIPPS, UK and Overseas Corporates and Wealth Managers.
Fund details Type of fund Property Authorised Investment Fund Residence UK Launch date Q1 2016 Open/closed-ended Open-ended Earliest date of winding up N/A Year-end 31 December NAV (GBPm) 148.5 Source: AEW
Management/professional advisors Manager AEW UK Investment Advisor AEW UK Fund Manager Ian Mason Depository BNY Mellon Trust & Depositary Auditors KPMG Source: AEW
Investment rates of return, % MSCI/AREF UK Quarterly Property Fund Index*
All balanced AEW UK Real Return Fund Long income Funds All funds funds
3 months 2.0 1.4 0.3 0.0 Year-to-date 5.9 5.5 1.6 0.7 12 months 5.9 5.5 1.6 0.7 3 years+ 8.4 7.6 6.0 5.3 5 years+ - 7.2 6.6 6.0 10 years+ - 7.7 7.7 Note: * Weighted average returns (Annualized) Source: MSCI/AREF UK Quarterly Property Fund Index (Sponsored by Property Match) ** Target 4% pa total real return
MSCI.COM MSCI/AREF PROPERTY FUND VISION Dec 2019
Property investment restrictions Maximum development exposure 20% (pre let development) Maximum speculative development exposure Not Permitted Maximum lot-size holding as a standing investment n/a Maximum lot-size holding permitted at purchase 10% Maximum exposure to limited partnerships * Maximum exposure to joint ventures * Maximum exposure to closed and open-ended property unit trusts Not Permitted Note: *None specified Source: AEW
Portfolio distribution % MSCI/AREF UK Quarterly Property Fund Index**
AEW UK REAL Long Income All balanced funds All funds RETURN FUND* Funds
Standard retail – South East*** 8.7 9.05 6.79 5.60 Standard retail – Rest of UK*** 13.2 8.97 3.18 3.56 Shopping centres 0.0 0.82 1.95 6.56 Retail warehouses 0.0 1.99 12.03 10.77 All UK retail 21.9 20.84 23.95 26.49 City offices 0.0 3.78 3.29 2.88 West End offices 0.0 2.40 8.03 6.75 Rest of South East offices 0.0 5.54 10.84 7.60 Rest of UK offices 2.0 8.56 5.85 4.97 All UK offices 2.0 20.27 28.03 22.20 South East industrial 7.6 2.24 19.86 15.93 Rest of UK industrial 4.7 6.34 10.23 8.26 All UK industrial 12.3 8.58 30.09 24.19 Other UK properties 60.5 48.53 10.68 21.44 Cash 3.3 1.77 7.25 5.69 Overall 100.0 100.00 100.00 100.00 Sources: *AEW ** MSCI/AREF UK Quarterly Property Fund Index (Sponsored by Property Match) *** MSCI Standard Retail Definition includes public houses, car showrooms and other alternative sub sectors.
Property ownership structure Number of assets Valuation (GBPm) % of total portfolio Direct holdings 49 143.4 100.0 Joint and indirect holdings 0 0.0 0.0 Listed investments 0 0.0 0.0 Total 49 143.4 100.0 Source: AEW
MSCI.COM MSCI/AREF PROPERTY FUND VISION Dec 2019
Largest direct investments by lot size & percentage of total portfolio
Property Location Sector Valuation (GBPm) % of total portfolio
Residential – Hospital The Residences Middlesbrough 10-15 5-10% Accommodation Springhill Care Centre Accrington Healthcare 5-10 5-10% Cross Point Coventry Leisure 5-10 5-10% Larkland House Care Centre Ascot Healthcare 5-10 5-10% Ashlands Mews And St George's Leicester Healthcare 5-10 5-10% The Point Borehamwood Leisure 5-10 0-5% Travelodge Hotel West Bromwich Hotel 5-10 0-5% Clifton Boulevard Nottingham Leisure 5-10 0-5% Holmes Court And Holmes House Wigston Healthcare 0-5 0-5% Unit A, Rudford Industrial Estate Arundel Industrial 0-5 0-5% 10 largest investments as % of portfolio 75.7 52.7 Source: AEW
Direct portfolio structure by lot-size bands Number of Valuation Value band (GBPm) % of total portfolio assets (GBPm) 0 -2.5 29 34.8 24.3 2.5 - 5 12 42.2 29.4 5-10 7 52.2 36.4 10-25 1 14.3 10.0 25 - 50 - - - 50 - 100 - - - 100-150 - - - Over 150 - - - Total 49 143.4 100.0 Average lot size 2.9 Source: AEW
Property Yield Voids as % of ERV Net initial yield 6.09% Investments 0.00% Nominal equivalent yield 6.30% Developments 0.00% True equivalent yield 6.55% Total 0.00% Net reversionary yield 7.10% Source: Knight Frank Source: Knight Frank
Rental income & ERV by type of property Rental income Estimated rental value % % Standard retail 23.5 25.6 Retail warehousing 0.0 0.0 Shopping centres 0.0 0.0 Central London offices 0.0 0.0 Other offices 2.3 2.3 Industrial 13.5 13.6 Other 60.6 58.5 Overall 100.0 100.0 Source: AEW
MSCI.COM MSCI/AREF PROPERTY FUND VISION Dec 2019
Over Renting and Reversionary Potential, % Rent Passing Reversionary Development Reversionary Rent Passing, Rent Free , % Investment vacancy, % Over rented,% potential Net of Market Value,% Rent Sector vacancy, % potential,% Rent GBP Millions Rent Passing Rent Passing Rent Passing Over renting,% Passing Rent Passing Passing Rent Passing Standard retail 2.2 -3.8 0.0 0.0 -4.5 11.8 7.3 111.2 Retail warehousing ------Shopping centres ------Central London offices ------Other offices 0.2 0.0 0.0 0.0 0.0 0.0 0.0 100.0 Industrial 1.3 0.0 0.0 0.0 0.0 2.9 2.9 102.9 Other 5.7 -1.2 0.0 0.0 -6.5 3.8 -2.7 98.5 Overall 9.4 -1.6 0.0 0.0 -5.0 5.5 0.5 102.1 Source: AEW * 84% of income linked to inflation or fixed uplifts
Listed Investments Valuation % of Issue held (GBPm) Est. % of total portfolio ------
The unexpired term of leases* Years % of rent passing 20 years or greater 34.2 15 years or greater, but less than 20 25.4 10 years or greater, but less than 15 11.3 5 years or greater, but less than 10 14.9 Less than 5 years 14.2 Source: AEW * WAULT to break 16.4 years
Joint and Indirect property holdings
Holdings Sector Joint/Indirect Vehicle Type Ownership % Valuation Est. % of total portfolio
------Source: AEW
MSCI.COM MSCI/AREF PROPERTY FUND VISION Dec 2019
Debt analysis Fixed rate borrowings Variable rate borrowings
Rate above LIBOR Amount drawn Average rate Average Amount drawn Off balance sheet debt (incl expenses) (GBPm) (%) unexpired term (GBPm) (GBPm)+ (%) (years)
------Source: AEW
Development exposure* Capital value of developments Cost to complete Not yet started In progress+ All developments schemes in progress+ GBPm - - - - % of all directly held properties* - - - - * Includes joint ventures in which the Fund has an interest of 50% or more
Valuations/performance monitors/affiliations Frequency of valuation Monthly Valuers Knight Frank Portfolio performance monitored by MSCI Yes Constituent of MSCI/AREF UK Quarterly Property Fund Index Yes Member of the Association of Real Estate Funds Full Member Source: AEW
Restrictions on holdings of cash/borrowings Maximum total gearing permitted For investment purposes * Cash holdings (maximum) 10%** Source: AEW *Long term gearing not permitted **Due to unit creations. Can be higher due to strategy
MSCI.COM MSCI/AREF PROPERTY FUND VISION Dec 2019
The contribution of major tenants to rental income Tenant % Prime Life Limited 18.1 Tenpin Ltd 8.7 South Tees NHS Trust 8.0 Volkswagen Group UK Limited 5.9 Care UK Community Partnerships Ltd 5.1 Jablite Limited 3.7 Travelodge Hotels Ltd 3.6 Barclay & Mathieson Ltd 3.2 Buzz Group Limited 3.1 Tesco Stores Limited 2.6 Three largest tenants' contribution to rental income 34.8 Five largest tenants' contribution to rental income 45.8 Ten largest tenants' contribution to rental income 62.0 Source: AEW
Balance sheet/gearing Listed Direct holdings Joint holdings Indirect investments Total investments Balance sheet (GBPm) Properties at valuation 143.4 0.0 0.0 0.0 143.4 Listed investments 0.0 0.0 0.0 0.0 0.0 Debt 0.0 0.0 0.0 0.0 0.0 Cash 4.9 0.0 0.0 0.0 4.9 Other net assets/liabilities 0.1 0.0 0.0 0.0 0.1 Total net assets 148.5 0.0 0.0 0.0 148.5 Gearing (%) Net debt (cash)/properties -3.4 - - - -3.4 Net debt (cash)/equity -3.3 - - - -3.3 Source: AEW
Quarterly data per unit As at 30-Sep-18 31-Dec-18 31-Mar-19 30-Jun-19 30-Sep-19 31-Dec-19 Bid (GBp) 1.014 1.020 1.020 1.017 1.018 1.026 Offer (GBp) 1.100 1.106 1.106 1.103 1.104 1.112 Bid/offer spread 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% Net asset value (GBp) 1.030 1.035 1.036 1.032 1.034 1.041 Quarterly distribution (GBp) 0.0141 0.0141 0.0134 0.0131 0.0140 0.0134 Yield 5.2% 5.3% 5.3% 5.3% 5.3% 5.2% Note: *The Fund’s distribution yield is calculated once it has made four quarterly distributions
**Based on MSCI methodology as a Percentage of Offer Price. Bid / offer spread as a Percentage of NAV price is 8.3% Source:AEW Unit pricing The Fund’s NAV and the bid / offer price of its units are calculated on the date of the monthly revaluation of the portfolio as at the last day of each month.
Distributions Distributions are declared on a quarterly basis and paid within two months of the end of the quarter during which they were earned.
Minimum investment/disinvestment A minimum initial investment of £1,000,000, although the Manager may approve smaller holdings.
Creation, transfer and realisation of units Units may be issued by the Depository on the direction of the Manager on giving notice at least 14 business days ahead of the next Dealing Day for Subscriptions which is the first business day in each calendar month.
MSCI.COM MSCI/AREF PROPERTY FUND VISION Dec 2019
Redemptions Units may be redeemed on written notice to be received by the Manager at least one month prior to the next Dealing Day for Redemptions which is the first business day in each calendar month. At its discretion and in consultation with the Governance Committee, the Manager may defer redemptions for up to six months.
Taxation Capital Gains Tax The Fund is not subject to capital gains tax.
Income Tax The Fund qualifies as a PAIF for tax purposes. Accordingly, the income generated by their Property Investment Business will be exempt from tax.
Charges Annual charges: The Fund Manager is entitled to an annual fee (payable monthly) equivalent to 0.75% pa of the Net Asset Value of the Fund.
Unit holder analysis Number of unitholders Total % held Less than 1% of units in issue 6 0.8 1% or greater but less than 2% 1 1.5 2% or greater but less than 4% 1 3.5 4% or greater but less than 8% 2 9.2 Greater than 8.0% 7 85.0 Total 17 100.0 Major investors Largest holder 1 17.0 Three largest holders 3 44.5 Five largest holders 5 65.9 Ten largest holders 10 97.7 Internal/external investors Internal 5 0.7 External 12 99.4 Source: AEW
Liquidity Year to Year to Year to Year to Period Dec 2016 Dec 2017 Dec 2018 Dec 2019 Issues and redemptions Units in issue as at start of period - 55,537,227 82,112,727 127,943,693 Units issued during period 55,537,227 26,575,500 45,830,966 17,981,717 Units redeemed during period - - - -3,351,539 Units in issue at end of period 55,537,227 82,112,727 127,943,693 142,573,871 Unit transfers Matched bargains - - - - Matched bargains %* - - - - * as % of units in issue at the end of the period Source: AEW
MSCI.COM