AEW UK Real Estate Fund
Annual Report and Financial Statements for the year ended 31 December 2018
AEW UK Core Property Fund AEW UK Real Return Fund 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 Statement of the ACD’s Responsibilities 14 ACD’s Statement 14 Statement of Depositary’s Responsibilities 15 Report of the Depositary 15 Report of the Auditor 16-18
AEW UK Core Property Fund Fund Manager’s Report 20-32 Fund Objective 33 Investment Benchmark 33 Investment Policy 33 Investment Strategy 33 Investment Guidelines 34 Report of the Valuer 35-38 Portfolio Statement 39-41 Summary of Material Portfolio Changes 42 Fund Information 43-49 Statement of Total Return 50 Statement of Changes in Net Assets Attributable to Shareholders 50 Balance Sheet 51 Statement of Cash Flows 52 Notes to the Financial Statements 53-73 Distribution Tables 74-75
AEW UK Real Return Fund Fund Manager’s Report 77-88 Fund Objective 89 Reference Benchmark 89 Investment Policy 89 Investment Strategy 90 Investment Guidelines 90-92 Report of the Valuer 93-95 Portfolio Statement 96-98 Summary of Material Portfolio Changes 99 Fund Information 100-105 Statement of Total Return 106 Statement of Changes in Net Assets Attributable to Shareholders 106 Balance Sheet 107 Statement of Cash Flows 108 Notes to the Financial Statements 109-126 Distribution Tables 127-128 Depositary, ACD & Advisers 129
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 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.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 1 AEW UK Real Estate Fund
Managing Director’s Report
AEW UK Investment Management LLP is a 50:50 joint venture between the UK Management Team1 and AEW2. 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, 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 3 and 5 years as at December 2018.
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 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 unexpired lease term (WAULT) of 18 years at acquisition.
AEW is one of the world’s largest real estate asset managers. As at 31 December 2018, AEW has €65.5 billion in assets under management, with over €31 billion 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 2018.
AEW completed €4.0 billion of transactions across Europe last year, of which €2.5 billion were acquisitions, marking another strong year. A total of 215 transactions were completed in 2018, with acquisitions predominantly made in France, Germany, the UK, Italy, Spain and the Netherlands.
Rob Wilkinson, European CEO said: “These figures show that in 2018 we were able to build on the positive momentum achieved by our European platform for both our institutional business as well as our private clients. In 2019, we will direct our fundraising activities to those strategies which best suit the current market outlook, namely those best able to deliver stable returns in a more volatile economic environment.”
1. AEW UK Management Team comprises Richard Tanner, Rachel McIsaac and Nick Winsley. 2. AEW comprises AEW SA and AEW Capital Management, L.P. and their respective subsidiaries as well as AEW UK Investment Management LLP. AEW SA and AEW Capital Management, L.P. are subsidiaries of Natixis Investment Management (NIM) SA. Data as at 31st December 2018.
2 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 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 Executive Director, AEW UK Jeff Furber Chairman, AEW Capital Management Rob Wilkinson Chief Executive Officer, AEW Europe LLP Russell Jewell Managing Director, AEW Europe LLP
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 Asset Under Management Institutional Funds Separate Accounts £1.8bn* £743m* £1.0bn*
EXPECTED RETURN/ AEA EW UKUK UrbanU rban Real Estate Fund VOLITILITY • CClosed-ended,losed-en ded, valuevalue adaddd • 6 year lifelife • TTargetarget IRR 12%12%
AEWUK Core Property Fund AEWUKREIT • Open-ended • Listed on LSE
• Diversified • Diversified
• GAV £296m • GAV £203m
• Distribution yield 5.2%* • Dividend 8p/share p.a.*
AEWUKReal Return Fund • Open-ended • Alternativ e real estate • GAV £137m • Distribution yield 5.3%*
AEWUKLong Lease REIT
• IPO 31 May 2017
• Listed on LSE
• GAV £108m
• Divided 5.5p/share p.a.*
EXPECTED
RISK RISK FREE Source: AEW UK, CPF and RRF on GAV basis as at 31 December 2018 RATE Proposed new launch Source: AEW UK, AEWU and AEWL on GAV basis as at 30 September 2018 * As at 31 December 2018
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 3 AEW UK Real Estate Fund
Managing Director’s Report (continued)
AEW UK Organisational Structure
AEW UK Board Jeff Furber Rob Wilkinson Russell Jewell Richard Ta nner Rachel McIsaac Louise Staniforth Chairman Chief Executive Officer Managing Director Managing Director Managing Director Executive Director AEW Capital Management AEW Europe LLP AEW Europe LLP AEW UK AEW UK AEW UK
AEW UK Management Committee Richard Tanner 1 Rachel M c Is aac 1 N ick Winsley 1 Louise Staniforth Rob Wilkinson Russell Jewell Serge Bataillie Managing Director Managing Dir ector Managing Director E xecutive Director Chief Executive Officer Managing Director Chief Operating Officer AEW UK AE W UK AEW UK AEW UK AEW Europe LLP AEW Europ e LLP AEW Europe LLP
AEW UK
Investment & Portfolio Fund Operations & Client Management & Asset Management Consultants Management Risk Management Capital Raising
Richard Tanner Rachel McIsaac Louise Staniforth Douglas Rowlands James Hyslop 1
Portfolio Manager, Core Managing Director Executive Director Director External Consultant
Nick Winsley Charles Royle Jon Saxton Andrew Strang 1 Director Portfolio Manager, SEOF Director External Consultant Michael Shears Kari Clarke Ian Mason Director Anish Shah Portfolio Manager, Real Return Associate Director Associate George Henshilwood Andrew Playfer Independent Chairman of Alex Short Director Tom Houston Governance Committees Portfolio Manager, REITs Ross Burns Associate Nicki Gladstone Laura Elkin Associate Director Marta Piechowska Marketing & Communications Director Henry But t Associate Associate Director Consultant Spencer Corkin Sam Archer Warren Meech Admin Director Analyst Associate
Ed Long Millie Grant Francesca Hawkins Lauren Kirby Gemma Franklin
Director Asset Management administrator Operations administrator Investor Relations Assistant PA to Richard Tanner AEW Europe LLP Resources
Client Management / Legal, Compliance and Research Investment Asset Management Debt Capital Raising Corporate
Hans Vrensen Rob Wilkinson Simon Barrett Marcus Davidson- Wright Alex Griffiths Ed North Head of Research Chief Executive Officer Executive Director Managing Director Executive Director Legal and Compliance Officer Mina Kojuri
Jonathan Cherel Russell Jewell Jason Langle y Associate Director Lucinda Seddon
Research Analyst Head of Private Equity Funds Director Eleanor Champion Human Resources
Associate Dennis Schoenmaker Ramesa Moghal
Associate Client Management – NIM Finance
Andrew Bouton
Will Fox-Robinson
Fred McNeil
Carlos Vilares
1 Evergreen Member LLP shareholder as at December 2018 As at 31 March 2019
4 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Estate Fund
Managing Director’s Report (continued)
North America, Europe and Asia Pacific
. Over 30 years’ real estate NORTH AMERICA Boston EUROPE Paris Luxembourg • 275 staff Los Angeles • 401 staff London Milan investment management Düsseldorf Madrid • 2 offices • 9 offices Frankfurt Prague experience Warsaw
. One of the largest real estate investment managers in the world with €65.5bn in assets under management
. Over 700 staff located in €31.4bn AUM 15 offices across North €31.8bn America, Europe and Asia AUM Pacific
. Broad experience across all major real estate €2.3bn AUM markets and investment strategies
. Research driven approach to investment strategy and ASIA PACIFIC Singapore underwriting • 29 staff Hong Kong • 4 offices Sydney Tokyo . An Affiliate of Natixis Investment Managers Figures as at 31 December 2018. Total AEW Global AUM includes $39.7 billion in assets managed by AEW Capital Management and its affiliates, of this $603 million in advisory/subadvisory securities wrap accounts for which AEW Capital Management provides only a model portfolio.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 5 AEW UK Real Estate Fund
Managing Director’s Report (continued)
European Platform
ASSETS UNDER MANAGEMENT
36 London Amsterdam Luxembourg 31.4 32 65 staff 1 staff 9 staff 28.4 28 26.6 Düsseldorf Warsaw 6 staff 24 Antwerp 17 staff 1 staff Frankfurt n 20 18.8 b 12 staff € 15.9 16.6 16.7 16
12
8
4 Prague 0 Paris 3 staff 2012 2013 2014 2015 2016 2017 2018 275 staff
Milan 7 staff PROPERTY BY SECTOR PROPERTY BY VEHICLE
Office 42% Separate Accounts 46%
Retail 33% Funds 40% Madrid Logistics 12% Club Deals 14% 2 staff Residential 8%
Other 5%
Figures as at 31 December 2018. AUM inclusive of European REIT Securities managed by AEW Capital Management. Sector and vehicle breakdowns do not include European REIT securities AUM.
6 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Estate Fund
Managing Director’s Report (continued)
Economic and property market overview Another market outlook and still Brexit dominates the headlines. Clearly as the continued uncertainty from Westminster gives UK business good reason to delay investment decisions, this has a negative impact on real estate market sentiment.
Despite the doom and gloom stories relating to UK-EU Brexit negotiations, the UK economy has itself proven to be resilient, with the full year 2018 GDP growth recorded at 1.4%. Strong investor demand for UK commercial property continues and for the time being we continue to see yields remaining stable in the most sought after areas of the market, predominantly in large logistics assets, prime industrial and in the long-leased market.
There is no need to rehearse the seemingly endless bad news stories that have inflicted the high street. It is clear that physical retailing is in transition but high streets and town centres will regenerate with different styles of retailing and service provision and different uses focused on the needs of today’s communities and the affordability of the traders.
The speed of change will, to a large extent, be dependent on central and local Governments’ willingness to embrace the need for change to the planning process and overhauling the rates system which is now nothing more than an archaic tax on businesses who need to occupy property. In some towns it will need to involve the redevelopment of whole shopping centres to, most likely, affordable residential at the heart of the community.
It is a poignant observation that the sector that commanded the highest yields due to the lowest rates of obsolescence is now under threat from the bulldozer. Sadly, for investors who have enjoyed the dynamism of the retail sector over the last 30-40 years it has entered a new era where past performance is most definitely not a guide to the future.
On the contrary, we expect that business space assets, particularly industrial and warehouses which are continuing to see a transfer of activity from the retail sector, will continue to benefit from low supply and strong demand and the current demographic and lifestyle trends will continue to support the fundamentals driven alternatives sector.
If one does dare to dream, there is a growing weight of opinion that the UK could be one of the stronger G7 economies as we move into 2020/21, and more so with the increasing possibility of a post-Brexit “bounce”: not great for the credit cycle but real assets should benefit from the long awaited recovery. There may yet be positive resolutions to the Brexit talks and the US-China trade wars, and whilst the threat of rising interest rates may weigh on demand, any interest rate increases are likely to be gradual.
Managing Director, AEW UK
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 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 institutional 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 2018 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, Mayfields 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 2018 9 AEW UK Real Estate Fund
Report from the Chair of the Governance Committees
AEW UK Core Property Fund (‘Core Fund’) Governance Committee During 2018, Duncan Graham (The Townsend Group) and Matt Day (Kames Capital) resigned from the Governance Committee. I would like to thank them both for their contribution to the work of the Committee. Duncan Graham has been replaced by Lawrence Thomas from The Townsend Group and Matt Day has been replaced by Tony Yu from Kames Capital. During 2018, four quarterly meetings were held of the Core Fund Governance Committee; attendance is summarised in the following table:
No. of Meetings Name Position Representing Attended
George Henshilwood Chair of Committee Independent 4/4 Duncan Graham/ The Townsend Group Investors 4/4 Lawrence Thomas Linda McAleer Hymans Robertson Investors 4/4 Matt Day/Tony Yu Kames Capital Investors 3/4 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 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. The total return for 2018 was 9.4% versus 6.5% for the All Balanced Property Fund Index. Risk Measures: At each meeting, we monitor a number of key risk indicators against the peer group, 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 was within the 15% guideline set-out in the Core Fund’s prospectus, the Manager provided regular updates 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 2018.
10 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Estate Fund
Report from the Chair of the Governance Committees (continued)
Pricing Committee: In my role as Chairman of the Pricing Committee I was able to report to the Governance Committee that the Committee continued to monitor the market on a regular basis but the Pricing Committee did not feel, at any time during 2018, that any adjustment was appropriate or necessary. The Manager did not ask us to review the pricing during 2018.
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. Property acquisitions: The acquisitions of The Kursall, Southend and London East Leisure Park, Dagenham were flagged by the Manager to the Governance Committee due to their vacancy rates on acquisition. Given the background to the acquisitions, I approved both transactions on behalf of the Governance Committee. The Committee was happy to endorse this when discussed at the meeting. Prospectus: A number of small updates were made to the prospectus during the year and submitted to the FCA, which was brought to the attention of the Governance Committee. AEW Investor Conference: The November 2018 Governance Committee meeting took place during the Managers Annual Investor Conference. The meeting took the form of a presentation by the Manager to investors as to how the Governance Committee operates. Investment in AEW UK REIT Plc: During the year, 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 at a limit of 5% of 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 have undertaken that any future investment in listed REITS will only be made with the agreement of the Governance Committee. Other Matters: In my role as Chairman of the Committee, I attended an annual audit clearance meeting and was reassured that there were no major issues arising.
AEW UK Real Return Fund (‘Real Return Fund’) Governance Committee During 2018, four quarterly meetings were held of the Real Return Fund Governance Committee; attendance is summarised in the following table:
No. of Meetings Name Position Representing Attended
George Henshilwood Chair of Committee Independent 4/4 Darren Robinson LaSalle Investment Management Investors 3/4 Laura Donohoe Schlumberger Investors 1/4 Stuart Pawson/ KPMG (Schlumberger Consultant) [non-voting] Investors 2/4 Khristina Wright James Hyslop Consultant AEW(UK) 4/4 Andrew Strang Consultant AEW(UK) 3/4 Ian Mason Fund Manager [non-voting] AEW(UK) 4/4 Jon Saxton Secretary to Committee [non-voting] AEW(UK) 4/4
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 11 AEW UK Real Estate Fund
Report from the Chair of the Governance Committees (continued)
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 £1,250 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 MSCI/AREF 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. During the year the Real Return Fund achieved a one year total return performance of 10.2% (total real return 8.2%) and was the joint top performing Fund over one year in the All Balanced Property Fund Index which had a weighted average return of 6.5%. Risk Measures: At each meeting, we monitor a number of key risk indicators against the peer group, 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 an AUM of £200m. No issues have arisen to date although the diversification limits are being closely monitored. Diversification Limit: The Real Return Fund has a guideline of 15% of NAV invested in any one segment, which is applicable once the Fund reaches an AUM of £200m. The Governance Committee sought clarification on the definition of a segment. The Manager produced an analysis showing how the segments could be split into sub-segments. Following discussion, it was agreed that if the 15% guideline was imposed as a limit, it was too restrictive and limited the Real Return Fund in terms of investment opportunities. The Fund may exceed the guideline should a suitable investment opportunity arise, providing the investment rationale is additive to the Funds’ performance and segment categorisation is 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 Prospectus: A number of small updates were made to the prospectus during the year and submitted to the FCA, which was brought to the attention of the Governance Committee. An update was also made to change the inflation measure for reporting of performance in real terms of the Real Return Fund. Other Matters: In my role as Chairman of the Committee, I attended an annual audit clearance meeting and was reassured that there were no major issues arising.
12 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 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 changes in the Core and Real Return Fund’s share price to the Manager. 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. Remuneration of £2,500 per quarter is paid to Charles Follows in his capacity as an Independent Consultant for the Pricing Committee. The Pricing Sub-Committee have been in regular contact during 2018 and agreed that there were no times when market conditions were exceptional. As such the Sub-Committee did not consider it appropriate to recommend any pricing changes to the Manager.
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 (I attend most as an observer) 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 my fellow Committee members for their contribution to the work of the Committees over the course of the year.
George L Henshilwood Independent Chair of the Governance Committees and Pricing Committee
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 13 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 2018 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
14 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Estate Fund
Statements and Responsibilities (continued)
Statement of Depositary’s Responsibilities for the year ended 31 December 2018 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 time limits; • the Company’s income is applied in accordance with the Regulations; and • the instructions of the Alternative Investment Fund Manager (“the AIFM”) are carried out (unless they conflict with the Regulations).
Report of the Depositary for the year ended 31 December 2018 The Depositary also has a duty to take reasonable care to ensure that Company is managed in accordance 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, it is our opinion, based on the information available to us and the explanations provided, that in all material respects the Company, acting through the AIFM: (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 Regulations and the Scheme documents of the Company; and (ii) has 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 2018 15 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 2018 which comprise the Statements of Total Return, the Statements of Changes in Net Assets Attributable to Shareholders, the Balance Sheets, the Statements of Cash Flows and the Related Notes and Distribution Tables for each of the Company’s sub- funds listed on page 1. 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 2018 and of the net revenue/deficit of revenue 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.
The impact of uncertainties due to Britain exiting the European Union on our audit Uncertainties related to the effects of Brexit are relevant to understanding our audit of the financial statements. All audits assess and challenge the reasonableness of estimates made by the Authorised Corporate Director, such as valuation of investment properties and related disclosures and the appropriateness of the going concern basis of preparation of the financial statements. All of these depend on assessments of the future economic environment and the Company’s future prospects and performance. Brexit is one of the most significant economic events for the UK, and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown. We applied a standardised firm-wide approach in response to that uncertainty when assessing the Company’s future prospects and performance. However, no audit should be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit.
Going concern 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 twelve months from the date of approval of the financial statements. We have nothing to report in these respects.
16 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Estate Fund
Report of the Auditor (continued)
Other information The Authorised Corporate Director is responsible for the other information, which comprises the Annual Report. 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 14 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 2018 17 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.
Bill Holland for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 30 April 2019
18 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Annual Report and Financial Statements for the year ended 31 December 2018 AEW UK Core Property Fund
Fund Manager’s Report
• 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 All Balanced Property Funds Index. • The Fund secured an MSCI/AREF performance award for the best risk-adjusted return over a 5-year period to the end of the second quarter of 2017, relative to the MSCI/AREF UK Quarterly Property Fund Index (UK PFI).* • 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).
* With effect from 8 December 2018, the AREF/IPD UK Quarterly Property Fund Index is now known as the MSCI/AREF UK Quarterly Property Fund Index.
20 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Investment Update In an uncertain market, primarily due to Brexit, we are pleased that performance continues to be strong with the Fund attaining a total return of 9.4% for 2018 whilst maintaining a high distribution yield in the Fund’s peer group at 5.2%. Another strong year maintains the Fund’s position as the top performing fund in the benchmark over three and five years and is driven primarily by business space assets dominating the depressed returns in the retail sector. The Fund NAV increased from £269.6 million as at 31 December 2017 to £288.6 million as at 31 December 2018. During the year, the Fund acquired 7 new properties and 2 freehold interests for a purchase price (plus costs) of £58.4 million and sold 9 properties (less sale costs) for £43.8m. This has taken the number of properties held by the Fund as at 31 December 2018 to 66 properties. During 2018, we were very active in repositioning the portfolio as warehouses continued to experience a bull market and conversely retail a bear market simultaneously. In 2018 the portfolio team sold 9 assets at an average of 37% above purchase price. These were a mixture of good investments in the business space sector where we were locking in strong performance and some poorer performing assets in the retail sector. The team reinvested these proceeds back into new assets with good fundamentals which should provide a steadily increasing distribution yield for investors going forwards. Fundamentally, the markets in which the Fund operates seem to be in reasonable shape excluding the well-publicised woes of retail, however this is a diminishing issue for the Fund. Much of our retail is underpinned by long term residential values, which might soon benefit from the governments consultation into planning uses on the high street. Whilst we might see some investors rotating their positions due to Brexit concerns, the Fund has significant cash holdings (post year-end). For most investors with long term horizons (including a large number of the team) we might expect something brighter later in the year. Meanwhile, the Fund’s Pricing Sub-Committee recommended a price swing to bid in February 2019 as a prudent precautionary measure to protect long term investor’s returns, in light of the uncertainty surrounding the UK’s departure from the European Union in March, understanding that some investors may require liquidity. £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.
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 2018 (%)
%
14 AEW UK Core Property Fund 13.2% 13.5% 12
All Balanced Property Fund Index 10 10.0% 9.4% 9.7% 8 8.4%
6.8% 6 6.5% 6.4%
4 4.5% 3.2% 2 2.5% 1.3% 0.9% 3 months 6 months 9 months 1 year 3 years 5 years 6.75 years (Since inception)
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 21 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Source: MSCI/AREF UK All Balanced Property Funds Index.
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% MSCI/AREF UK All Balanced Property Funds Index – True Equivalent Yield 6.9% 6 6.8% 5.8% 5.6% 5.3% 5.4% 5.6% 4
2
31 December 31 December 31 December 31 December 31 December 31 December 31 December 2012 2013 2014 2015 2016 2017 2018 Source: Knight Frank.
Portfolio statistics Historic Net Asset Value Trend since inception (£m)
300 288.6 250 269.6 243.1 225.4 200
150 174.2
100 78.1 50
31 December 31 December 31 December 31 December 31 December 31 December 2013 2014 2015 2016 2017 2018
Number of properties Number of tenancies Occupancy/vacancy rate
%
280 72 Occupancy 100 70 rate as % of 89.7 89.2 260 90 68 70 265 rental value 80 66 240 64 66 240 70 220 62 60 Vacancy 60 200 rate as % of 50 58 rental value 56 180 40 54 30 160 52 20 50 140 10 48 10.3 10.8 31 December 31 December 31 December 31 December 31 December 31 December 2017 2018 2017 2018 2017 2018
22 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Geographical allocation 31 December 2017 31 December 2018 West Midlands, 21.0% West Midlands, 18.8% South East, 14.5% South East, 11.3% Yorkshire and Humberside, 7.0% Yorkshire and Humberside, 8.3% Eastern, 9.3% Eastern, 6.3% Wales, 4.1% Wales, 2.9% Rest of London, 5.7% Rest of London, 9.4% South West, 18.1% South West, 21.6% North West, 12.2% North West, 14.5% North East, 3.4% North East, 2.2% Scotland, 4.7% Scotland, 4.7%
Sector allocation 31 December 2017 31 December 2018
Offices, Rest of South East and UK 20.8% Offices, Rest of South East and UK 13.0% City Offices, 0.0% City Offices, 0.0% West-end Offices, 0.0% West-end Offices, 0.0% Standard Retail, 16.7% Standard Retail, 13.1% Industrials, 32.2% Industrials, 38.9% Retail Warehouses, 11.2% Retail Warehouses, 9.3% Other, 10.9% Other, 21.5% Shopping Centres, 2.2% Shopping Centres, 1.8% Cash, 6.0% Cash, 2.4%
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 23 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. Over the past year, our in-house asset managers have identified trends in the wider UK market, resulting in opportunities to add value to the Fund’s properties. This has resulted in approx. £2.35 million/500,000 sq ft of new lettings, renewals and lease renegotiations across the Fund, equating to circa 10.25% of the total Fund income/circa 11% total floor area. Set against the backdrop of Brexit, our tenants have remained relatively positive outside of the retail markets where we have seen lower returns in contrast with those from our business space and leisure use assets. Where the Fund’s tenants have been subject to CVAs, we have quickly identified solutions to stabilise the income profile and value of our assets. We also continue to move our retail exposure to properties where values are supported by alternative use. We are rotating out of the other smaller retail assets in regional markets with a view to reinvesting in south east locations and industrial/ logistics assets with much more potential for value enhancing/alternative use. Initiatives that have had the most significant impact on value this year have generally been: 1) Capturing rental growth in the supply constrained industrial sector; 2) Exploring longer term alternative use values on retail assets; and 3) Securing residential planning consent, via Permitted Development Rights (PDR), on office buildings. The above themes were identified in a number of the Fund’s properties. Consequently we have been able to drive the Fund’s performance. Rental growth in the industrial sector With a supply constrained market and consistently improving tenant demand, industrial and logistics units are letting at rents above ERV with incentives coming under downward pressure. Rents have been helped by a significant lack of speculative development in the industrial sector for the past 10 years.
Grandstand Road, Wakefield In August 2018, we signed an agreement for lease to extend the existing industrial unit to facilitate the current tenant remaining in occupation, thus enabling them to operate a large distribution contract. On completion (due April 2019) the extension will have doubled the size of the unit to 200,000 sq ft. The new lease reflects an 11 year term, with RPI linked reviews.
Proposed extension New extension (PC due April 2019)
24 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Barlow Road, Coventry After protracted negotiations, we have successfully agreed a new 5 year lease renewal with the tenant. No incentive or capex was granted as part of the transaction. The rent agreed reflected a 21% increase on the previous passing rent.
British Steel, Blaydon-upon-Tyne We have completed the lease renewal of an 115,000 sq ft industrial warehouse at a rent of £220,000 pa (£1.90 psf), a 20% increase, with no incentive given. The lease term is now 11 years, with an option to break in 2024.
Kayley Industrial Estate, Ashton under Lyme Our recent purchase of this property has led to a busy time for the team. Having completed external cladding installations and decorations, as well as refurbished vacant units, we have completed c £170,000 p.a. of lettings and renegotiations over the past year and have a further £300,000 p.a. deals in solicitors’ hands.
After Puma Distribution Unit, Batley We have secured a 9.5% increase to £390,000 pa on the June 2016 rent review.
Whitehall Trading Estate, Bristol We have documented a rent review at a £14,000 pa increase, a 37% uplift on the passing rent. We have achieved further lettings at our Bristol and Glasgow industrial estates, taking them both to a 100% occupancy level.
Southam Vacant possession disposal of a 65,226 sq ft modern manufacturing and distribution unit to an owner occupier. Acquired in November 2012 for £2.0m and let to Adare Precison who vacated in June 2018. Sold for £6m (£91 psf) to a local packaging business.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 25 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Administrations, Company Voluntary Arrangements (‘CVAs’) and lease re-negotiations Issues for retailing have been well documented and, as we suspected, we have seen a large number of CVAs and administrations in the sector with tenants restructuring their leases or vacating altogether. Where tenants of ours have become insolvent, we have identified solutions, either through lease regears or assignments to new companies. We also continue to monitor the financial strength of our tenants, working with Coface* who assess the risk of our tenants’ businesses defaulting.
Weston Road, Crewe In May, Bargain Booze went into administration. Following the business sale, the Administrator then unlawfully granted Bestway a licence to occupy, allowing the business to continue operating from the property. Having put the Administrator on notice to terminate the licence and forfeit the lease, we successfully agreed an assignment of the lease to Bestway, a much stronger tenant.
St Mary’s Square, Swansea We have completed a new 5 year lease to New Look which secures the occupation of the unit for a further 5 years in a demand constrained market. The site provides access for a Council promoted retail and leisure scheme.
Wickes, Scunthorpe We have completed a new 10 year lease to Wickes at ERV (£202,000 pa) expiring in 2027. Wickes’ previous lease expired in 2020, so a further 7 years income to a strong tenant has been secured.
St David’s Retail Park, Swansea We have built a 1,800 sq ft drive-thru pod development let to a Starbucks franchise on a 15 year FRI lease at a rent of £58,500 pa (£32.50 psf). The pod improves the overall retail offering and secures the location’s future as a retail/ leisure destination.
* Coface is the world's leading credit insurer which helps companies assess trade risks
26 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Crystallising value through disposals and via Permitted Development Rights on office buildings Having executed the asset management initiatives, i.e. letting refurbished/vacant accommodation, completing lease renewals/regears and securing alternative use values (via PDR), a decision was made to sell a number of the properties last year, crystallising the capital appreciation achieved. River Court, Uxbridge We have sold the property for £7.1m to Big Yellow having acquired the property in June 2014 for £5.3m. Permitted development rights for conversion to residential had been secured, so a decision was made to sell the property, capitalising on the market’s buoyant appetite from alternative use buyers. Cresta House, Luton Having secured PDR consent to convert 25,000 sq ft of offices to residential, we sold the property to a residential developer at a price of £6.4m (£105 psf), having acquired the property for £3.9m (£63 psf) back in March 2015. Radlett 40,777 sq ft office building comprising a combination of office, production and storage accommodation alongside 123 car parking spaces. With limited asset management opportunities going forward without taking on more risk, a decision was made to accept an off market offer of £9.8m. At the time the property was valued at £6.6m. River Court, Albert Drive, Woking Multi let office park acquired in 2013 for £2.3m sold for £5.4m to residential developer. Permitted development rights from office to 32 residential units had recently been achieved, substantially increasing the property’s valuation as an alternative use had been secured. Cadogan House, Reading Single let office building acquired in 2013 for £1.2m. Tenant was unlikely to renew and was marketing their accommodation. Building required significant capital expenditure in order to relet at lease expiry. Having secured Permitted Development Rights the building was sold for £2.5m to residential developer.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 27 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).We believe 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. Having demonstrated year-on-year improvements for the past four years, the Fund saw a reduced score this year, but still achieved two Green Stars. Despite the reduction overall, the Fund outperformed or matched its peer group across four of the seven GRESB aspects. 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.
28 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Despite the strengths, there are reasons why the Fund saw a reduced score, 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 service charge 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. • Points for EPC coverage reduced this year (from 5 to 3) whereas points for green building certification increased from 10 to 12. The nature of assets typically acquired do not have a green building certificate. 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 for 2019. 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.
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 2018 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 Subcommittee 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.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 29 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Portfolio Acquisitions in 2018
Kayley Industrial Estate, Ashton Multi-let industrial estate
Property characteristics Investment summary Property type Industrial • Established multi-let industrial estate. Property size 231,537 sq ft • Currently let to 18 tenants with the potential Purchase date January 2018 to generate further income through new lettings. Year built 1970’s Initial yield 8.2% • Low capital value per sq ft. • Highly reversionary.
Anglo Office Park and Lincoln’s Inn Office Village, High Wycombe Multi-let office park
Property type Office Investment summary Property size 26,219 sq ft / 23,779 sq ft • Modern multi-let office scheme located within an established commercial area of Purchase date January 2018 High Wycombe. Year built 2005 • Strong transport links to Central London and Initial yield 7.3% proximity to M40 / M25 motorways. • Attractive price per sq ft. • Underpinned by alternative use demand including C1 (residential) and B8 (industrial) uses.
London East Leisure Park, Dagenham Purpose built leisure park
Property characteristics Investment summary Property type Leisure • Freehold leisure scheme 11 miles east of Central London. Property size 76,787 sq ft Purchase date March 2018 • Approximately 12.5 years of unexpired income (5 years to break). Year built 1990’s Initial yield 8.8% • Underpinned by long term redevelopment opportunities. • Attractive NIY of 8.8% for 3 years.
30 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Portfolio Acquisitions in 2018 (continued)
The Kursaal, Southend-on-Sea Attractive yield and low capital value
Property characteristics Investment summary Property type Leisure • Modern building behind listed facade. Property size 117,853 sq ft • Over 10 years WAULT to expiry. Purchase date September 2018 • Attractive yield and low capital value Year built 1995 refurbished per sq ft. Initial yield 9.7% • Potential longer term redevelopment.
Hengrove Leisure Park, Hengrove Way, Bristol Dominant leisure park
Property type Leisure Investment summary Property size 87,873 sq ft • Well established leisure destination. Purchase date October 2018 • Over 11 years WAULT to expiry with Year built 1990’s asset management opportunities. Initial yield 7.3% • Attractive income yield of 7.3% increasing to 7.9% in May 2019. • Strong trading feedback from incumbent tenants.
Grazebrook Industrial Park, Dudley Established multi-let industrial estate
Property characteristics Investment summary Property type Industrial • Established industrial estate. Property size 180,000 sq ft • Low passing rents creating opportunity Purchase date October 2018 for repositioning and rental growth. Year built 1970’s • Low capital value per sq ft and per acre, Initial yield 6.9% in line with development values. • Potential to add value through development.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 31 AEW UK Core Property Fund
Fund Manager’s Report (continued)
Portfolio Acquisitions in 2018 (continued)
Phase I & II Billington Road, Rossendale Industrial Estate, Burnley Established industrial estate
Property characteristics Investment summary Property type Industrial • Prominent unit within an established industrial estate. Property size 63,707 sq ft Purchase date November 2018 • Low passing rent per sq ft. Year built 1990’s • Capital value per sq ft in line with vacant Initial yield 6.1% possession values. • Newly re-geared lease showing tenant commitment.
Any opinions expressed are those of the Fund Manager. They should not be viewed as a guarantee of return from an investment in the Fund. The content of the commentary should not be viewed as a recommendation to invest. Past performance is not a guide to the future. Investors should be aware that the value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.
32 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 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.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 33 AEW UK Core Property Fund
Investment Guidelines
Guideline Limit Actual Parameters Guidelines as at 31 Dec 18 as at 31 Dec 18
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% 51.9% industrial classifications) • Retail (combining retail, shopping centres 8-48% 24.2% and retail warehouse classifications)
• Other 0-30% 21.5% 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% 27.0% 25% exposure to the ‘South East’ of the UK Investment in unoccupied 15% of Estimated Rental Value (20% at time 15% 10.8% and non-income producing of purchase) assets (i.e. vacant assets) Cash Subject to liquidity requirements, not more 10% 2.4% than 10% of the Net Asset Value (‘NAV’) 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% 5.4% 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 ACD may borrow only up to 10% of the NAV 10% 0.0% and in the form of a revolving credit facility
34 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 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 2018 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 Investment Management LLP (“AEW UK”), our opinion of the Fair Values of the Fund’s direct property assets (“Immovables”), as at 31 December 2018, 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 66 Immovables held in the scheme and described in the attached schedule, as at 31 December 2018 (the measurement date), was £283,885,000 (Two Hundred and Eighty Three Million, Eight Hundred and Eighty Five Thousand Pounds). This valuation has been undertaken in accordance RICS Valuation – Global Standards 2017, incorporating the International Valuations Standards, and RICS Professional Standards UK January 2014 (revised April 2015). 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. 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 2018 35 AEW UK Core Property Fund
Report of the Valuer (continued)
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, Brierly 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.
36 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 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 Centre 27, Birstal, Leeds we have had sight of 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 north-eastern 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”).
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 37 AEW UK Core Property Fund
Report of the Valuer (continued)
Compliance and Independence 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
38 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Portfolio Statement as at 31 December 2018
Investment Properties Number of Market Value Net Assets properties £’000 %
Sector Industrial 24 113,175 39 Offices 9 34,975 12 Retail: – Standard Retail 10 38,025 13 – Retail Warehouses 10 27,125 9 – Shopping Centres 2 5,275 2 Leisure 11 65,310 23
Total Portfolio of Investments 66 283,885 98 Other Assets and Liabilities 4,730 2
Total Portfolio 66 288,615 100
Market value
Industrial Block L, Peartree Business Park, Dudley £0 to £5m Chainbridge Road, Blaydon on Tyne £0 to £5m Unit 1 & 2, Royds Lane Lower Wortley £0 to £5m Unit 1 Jamage Industrial Estate, Stoke on Trent £0 to £5m MESL Microwave, 1 Queen Anne Drive, Newbridge £0 to £5m Phase I & II Billington Road, Rossendale Industrial Estate, Burnley £0 to £5m Unit 62-85, Blackpole Trading Estate, Worcester £0 to £5m Units F & G, Blackpole Trading Estate, Worcester £0 to £5m Units 8, 9 & 10, Bloxwich Lane, Walsall £0 to £5m HP Chemie Pelzer (UK). Ltd, Speke Hall Avenue, Speke £0 to £5m Puma Distribution Unit, Batley £0 to £5m Unit 15C, Blackpole Trading Estate, Worcester £0 to £5m Whitehall Trading Estate, Bristol £0 to £5m The Bear, Ditchfield Road, Widnes £0 to £5m Globe Square Industrial Estate, Dukinfield £0 to £5m Blochairn Industrial Estate, Glasgow £0 to £5m
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 39 AEW UK Core Property Fund
Portfolio Statement (continued) as at 31 December 2018
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 Kayley Industrial Estate, Ashton £5m to £10m Grazebrook Industrial Park, Dudley £5m to £10m Warehouse, Weston Road, Crewe £10m to £15m Wakefield 41, Grandstand Road, Wakefield £10m to £15m Spectrum, Mead Way, Swindon £15m to £20m
Offices Units 6 and 8 Century Court, Rickmansworth £0 to £5m Dakota House, Colnbrook £0 to £5m Tangent House, Reading £0 to £5m Buchanan Gate, Glasgow £0 to £5m 30A, 32 & 34 South Gyle Crescent, Edinburgh £0 to £5m Norseman and Westcott House, South Queensferry £0 to £5m Intec Business Park, Basingstoke £5m to £10m 730 Aztec West, Bristol £5m to £10m Anglo Office Park and Lincoln Inn Office Village, High Wycombe £5m to £10m
Standard Retail 69 Above Bar Street, Southampton £0 to £5m 24-32 Bond Street & 59-65 Horsefair, Bristol £0 to £5m 46-48 Dudley Street, Wolverhampton £0 to £5m 105-109 Foregate Street, Chester £0 to £5m 91/101 Lower Precinct, Coventry £0 to £5m 18/20 St. Mary’s Square, Swansea £0 to £5m Imperial Arcade, Brighton £0 to £5m 55-63 Cornwall Street, 50 New George Street and 131-147 Armada Way, Plymouth £0 to £5m 21-25 Bold Street, Liverpool £0 to £5m 36-42 Old Christchurch Road, Bournemouth £10m to £15m
40 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Portfolio Statement (continued) as at 31 December 2018
Market value 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 New Street Retail Park, Ashford £0 to £5m Wickes, Glebe Road, Scunthorpe £0 to £5m Chaffinch Retail Park, Castletown £0 to £5m Go Outdoors, New Hall Street, Stoke-on-Trent £0 to £5m St Davids Retail Park, Swansea £0 to £5m Jerome Retail Park, Walsall £0 to £5m
Shopping Centres Rowland Hill Shopping Center, Kidderminster £0 to £5m The Rivergate Shopping Centre, Peterborough £0 to £5m
Leisure 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 Monkspath Leisure Park, Solihull £0 to £5m Caesar's Palace, Skimpot Road, Luton £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
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 41 AEW UK Core Property Fund
Summary of Material Portfolio Changes for the year ended 31 December 2018
Purchases and sales for the year Cost £’000
Purchases Phase I & II Billington Road, Rossendale Industrial Estate, Burnley £0 to £5m Anglo Office Park and Lincoln Inn Office Village, High Wycombe £5m to £10m The Kursaal, Southend on Sea £5m to £10m Kayley Industrial Estate, Ashton £5m to £10m Grazebrook Industrial Park, Dudley £5m to £10m London East Leisure Park, Dagenham £10m to £15m Hengrove Leisure Park, Hengrove Way, Bristol £10m to £15m Wickes, Glebe Road, Scunthorpe* £0m to £5m Globe Square Industrial Estate, Dukinfield^ £0m to £5m
Total purchases for the year 58,420
Proceeds £’000
Sales 1-3 Salter Row, Pontefract £0 to £5m 175/177 Commercial Road, Portsmouth £0 to £5m Cadogan House, Reading £0 to £5m Tangent Court, Solihull £0 to £5m River Court, Woking £5m to £10m Adare Pressicion Ltd, Kineton Road Industrial Estate, Southam £5m to £10m Cresta House, Luton £5m to £10m River Court, Uxbridge £5m to £10m Bridgefoot House, Radlett £5m to £10m
Total sales for the year 43,784
Purchases for the year include associated acquisition costs, with sales in the year stated net of sales costs. * acquired freehold for £250,000. ^ acquired freehold for £150,000.
42 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Fund Information
Accounting and Distribution dates
XD date
First interim distribution 31 March 2018 Second interim distribution 30 June 2018 Third interim distribution 30 September 2018 Final distribution and year end 31 December 2018
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 5.2% for the year ended 31 December 2018.
Distributions in the year Final First Interim Second Interim Third Interim Distribution 31 March 30 June 30 September 31 December 2018 2018 2018 2018 (p) (p) (p) (p)
Share Class Share Class A income 1.675 2.087 1.551 1.584 Share Class C income 1.675* 2.087* 1.551* 1.584*
* Distribution gross of tax.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 43 AEW UK Core Property Fund
Fund Information (continued)
Performance Record
Highest Lowest Share price Share price Year Share Class (p) (p)
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
* From 1 January 2018 to 31 December 2018. † The E income Share Class holdings were fully converted to Share Class A income holdings in May 2017. ^ Class B Income were fully redeemed at 1 December 2017.
As at 31 December 2018, Class B and Class E are dormant.
Summary of share dealing as at 31 December 2018 A income C income
Opening Shares in Issue 196,121,270.808 15,886,931.890 Shares issued in the year 9,923,147.687 24,041.670 Shares cancelled in the year (3,297,127.865) –
Closing shares in issue 202,747,290.640 15,910,973.560
44 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Fund Information (continued)
NAV (as calculated in accordance with the Prospectus)
NAV NAV of Share Class per share Year Share Class £’000 Shares in issue (p)
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 Share Class E Income holdings were fully converted to Share Class A Income holdings in May 2017. ** The Share 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.
Share dealing Turnover of shares During the year ended 31 December 2018, 9,947,189.357 shares were created and 3,297,127.865 shares were redeemed. 2,649,301 shares were traded on the secondary market in 2018. The brokerage facility for secondary market trades was provided by CBRE Capital Advisors Ltd. There has been no consolidation or sub-division of units during the year.
Subscriptions Eligible Investors may purchase shares in the Fund on a monthly basis on the dealing day, being the last calendar 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 shares in the Fund will be processed at the share 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 shares 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 shares than it has capacity to invest, then the ACD will operate a contractual waiting list.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 45 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 2018, there were subscriptions of £15.94m in the queue which were called in January 2019.
Redemptions Every shareholder is entitled on any dealing day for redemption to redeem its shares 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 shares in the Fund will be processed at the share 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 2018 there were redemptions of £2.69m, in the queue which were redeemed in January 2019.
Deferrals Where the ACD considers it to be in the best interests of the Shareholders, 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 Shareholders to do so. The ACD will review the position every month. The ACD must give Shareholders notice of the deferral no later than seven business days before the relevant dealing day for redemption. The price at which the shares will be redeemed will be the price for redemptions on the dealing day for redemption on which the shares 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 Shares in any or all of the Funds, where, due to exceptional circumstances, it is in the interests of all the Shareholders 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 Shareholders. For further information, please refer to clause 3.13 of the Prospectus. There have been no deferrals or suspensions during the year.
Adjustments to share price In unusual market conditions the ACD in consultation with the Governance Committee, may adjust the share price by a percentage independently reviewed 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 Shareholders by ensuring that shares 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.
46 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Fund Information (continued)
Secondary market In addition to purchasing and selling shares through the ACD, shares 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 shares in issue 32 9.00 1% or greater but less than 2% 5 7.96 2% or greater but less than 4% 5 13.23 4% or greater but less than 8% 6 30.98 8% or greater 2 38.83 Total 50 100.00
Percentage held by largest investor 20.01 Percentage held by top 5 investors 57.14
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.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 47 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 2018:
Year ended 31 December 2018 Total remuneration paid to employees during financial year: a) remuneration, including, where relevant, any carried interest paid by the AIFM; £2,665,423 b) the number of beneficiaries 24
The aggregate amount of remuneration, of the AIFM Remuneration Code Staff, broken down by: a) senior management £809,561 b) members of staff £1,855,862
Fixed Variable Total remuneration remuneration remuneration £ £ £
Senior management 759,561 50,000 809,561 Staff 1,419,441 436,421 1,855,862 Total 2,179,002 486,421 2,665,423
Fixed remuneration comprises basic salaries and variable remuneration comprises bonuses.
Fund Performance Year ended 31 December 2018 %
MSCI/AREF All Balanced Property Fund Index – weighted average 6.5 AEW UK Core Property Fund 9.4
48 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Fund Information (continued)
Year ended 31 December 2018 %
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) 1.44 Real Estate Expense Ratio (‘REER’) (TER + PER) 2.56
Transaction Costs 1.45 Performance Fees 0.25 Portfolio Turnover Ratio 30.10
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 2018:
Year ended 31 December 2018 %
Management Fees 0.70 Performance Fees 0.25 Depositary Fees 0.04 Valuation Fees 0.05 Other variable Fees 0.08
1.12
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 49 AEW UK Core Property Fund
Statement of Total Return for the year ended 31 December 2018
Year ended Year ended 31 December 2018 31 December 2017 Notes £’000 £’000 £’000 £’000
Income Net capital gains 3 9,709 22,629 Revenue 6 22,174 21,349 Expenses: Direct property expenses 7 (4,310) (4,720) Operating expenses 7 (2,924) (2,647) Interest payable and similar charges 8 (271) (372)
Net revenue before taxation 14,669 13,610 Taxation 9 – –
Net revenue after taxation 14,669 13,610
Total return before distributions 24,378 36,239 Distributions 10 (14,669) (13,000) Change in net assets attributable to Shareholders from investment activities 9,709 23,239
Statement of Changes in Net Assets Attributable to Shareholders for the year ended 31 December 2018
Year ended Year ended 31 December 2018 31 December 2017 £’000 £’000 £’000 £’000
Net assets at the start of the year 269,559 243,128
Amounts receivable on creation of shares 13,038 5,272 Less: amounts paid on cancellations of shares (4,289) (2,285) 8,749 2,987 Dilution adjustment 598 205 Change in net assets attributable to Shareholders from investment activities 9,709 23,239
Closing net assets attributable to Shareholders 288,615 269,559
The notes on pages 53 to 73 form an integral part of these Financial Statements.
50 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Balance Sheet as at 31 December 2018
As at As at 31 December 2018 31 December 2017 Note £’000 £’000 £’000 £’000
Assets Fixed assets: Investment properties 11 284,324 230,722
Current assets: Investment properties 11 – 23,950 Debtors 12 4,325 4,893 Cash and bank balances 13 8,088 17,159
Total current assets 12,413 46,002
Total assets 296,737 276,724
Liabilities Long term liabilities Finance lease obligations 15 (1,965) (1,924)
Current liabilities Interest bearing loans and borrowings 14 – – Finance lease obligations 15 (213) (195) Investment liabilities 17 (644) – Distribution payable 17 (3,509) (3,931) Creditors 17 (1,791) (1,115)
Total current liabilities (6,157) (5,241)
Total liabilities (8,122) (7,165)
Net assets attributable to Shareholders 288,615 269,559
The Financial Statements on pages 50 to 73 were approved by the ACD on 30 April 2019 and signed on their behalf by:
On behalf of the ACD
The notes on pages 53 to 73 form an integral part of these Financial Statements.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 51 AEW UK Core Property Fund
Statement of Cash Flows for the year ended 31 December 2018
Year ended Year ended 31 December 2018 31 December 2017 £’000 £’000 £’000 £’000
Total return before distributions for the year 24,378 36,239
Adjustments for: Capital gain on investments (9,709) (22,629) Finance costs 271 372 (Increase)/decrease in debtors (218) 2,448 Increase/(decrease) in creditors 676 (504) Net cash generated from operating activities 15,398 15,926
Cash flows from investing activities Paid for the purchase of investments (58,391) (37,388) Paid on capital expenditure (3,736) (788) Received on sale of investments 43,784 37,504 Net cash used in investing activities (18,343) (672)
Cash flows from financing activities Proceeds from issue of shares 13,038 5,272 Payments on cancellation of shares (4,289) (2,285) Equalisation received 44 25 Dilution adjustment received 598 205 Loan drawdowns 15,500 – Loan repayments (15,500) – Finance costs paid (382) (372) Distribution paid (15,135) (12,224)
Net cash used in financing activities (6,126) (9,379)
Net (decrease)/increase in cash for the year (9,071) 5,875 Cash and cash equivalents at start of the year 17,159 11,284 Cash and cash equivalents at end of the year 8,088 17,159
The notes on pages 53 to 73 form an integral part of these Financial Statements.
52 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Notes to the Financial Statements for the year ended 31 December 2018
1. Accounting policies
1.1 Basis of accounting The Financial Statements have been prepared 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.
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.
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 to 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%.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 53 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
1. Accounting policies (continued)
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.
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
54 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
1. Accounting policies (continued)
1.8 Investment properties (continued) 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 are determined as the difference between net disposal proceeds and the carrying value of the asset. 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. Investment property that is planned to be sold in the next accounting period is recognised as a current asset rather than a non-current asset.
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.
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.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 55 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
1. Accounting policies (continued)
1.14 Creditors 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 recognised valuation techniques. These techniques comprise both the Yield Method and the Discounted Cash Flow Method. In some cases, the fair values are determined based on recent real estate transactions with similar characteristics and location to those of the Fund assets. Any valuation of a property by the Valuation Agent must be undertaken in accordance with the current issue of RICS Valuation – Global Standards January 2017. 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 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.
56 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
2. Risk management policies (continued)
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.
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.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 57 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
2. Risk management policies (continued)
2.3 Credit risk (continued) The table below shows the Fund’s exposure to credit risk:
As at As at 31 December 31 December 2018 2017 £’000 £’000
Debtors (excluding prepayments) 1,750 2,959 Bank and cash 8,088 17,159
Total 9,838 20,118
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.
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.
58 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
3. Net capital gains
Year ended Year ended 31 December 31 December 2018 2017 £’000 £’000
Net proceeds from sales of investment properties during the year 43,784 37,504 Carrying value of investment properties sold during the year (34,778) (31,278)
Gains realised on investment properties during the year 9,006 6,226
Net unrealised valuation gain on investment properties 1,612 16,966 Movement in rent incentive debtor (909) (563) Net capital gains 9,709 22,629
4. Purchases and transaction costs
2018 % of Year ended Year ended principal 31 December 31 December purchase 2018 2017 price £’000 £’000
Purchases excluding transaction costs 54,825 34,860
Agent fees 1.1% 577 349 Taxes 4.8% 2,644 1,630 Other costs 0.7% 374 228
Total purchase transaction costs 6.6% 3,595 2,207
Purchases including transaction costs 58,420 37,067
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 59 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
5. Sales and transaction costs
2018 % of Year ended Year ended principal 31 December 31 December sale 2018 2017 price £’000 £’000
Sales excluding transaction costs 44,250 38,085
Agent fees 0.7% (286) (388) Legal fees 0.4% (179) (176) Other costs 0.0% (1) (17)
Total sale transaction costs 1.1% (466) (581)
Sales including transaction costs 43,784 37,504
6. Revenue
Year ended Year ended 31 December 31 December 2018 2017 £’000 £’000
Rental income 21,658 20,321 Lease surrender income 376 55 Dilapidation income 136 837 Sundry property income 4 136
Total revenue 22,174 21,349
60 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
7. Expenses
Year ended Year ended 31 December 31 December 2018 2017 £’000 £’000
Direct property expenses: Irrecoverable service charge 1,262 1,281 Property legal and professional fee 809 611 Empty rates 579 1,123 Bad debts 357 – Head rent 289 345 Letting fee 280 577 Maintenance expense 207 107 Managing agents fee 157 148 Valuers' fee 136 118 Insurance 102 84 Utility fee 78 157 Marketing fee 53 64 Other property expenses 1 105 Total property expenses 4,310 4,720
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 61 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
7. Expenses (continued)
Year ended Year ended 31 December 31 December 2018 2017 £’000 £’000
Expenses associated to the ACD: Management fee 1,939 1,770 ACD’s performance fee 692 632
Expenses associated to the Depositary: Depositary fee 100 96
Other operating expenses: Sustainability consultancy fees 41 – Auditor's fees 34 27 Subscription fees 31 26 Legal and professional fees 29 13 Tax Agent fee 21 14 Governance committee fee 15 14 VAT Agent fee 11 10 Irrecoverable value added tax – 18 Other operating expenses 11 27 Total operating expenses 2,924 2,647
Total expenses 7,234 7,367
8. Interest payable and similar charges
Year ended Year ended 31 December 31 December 2018 2017 £’000 £’000
Analysis of finance costs Loan arrangement fee 115 181 Loan commitment fee 89 183 Loan interest 60 – Bank charges 7 8
Total finance costs 271 372
62 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
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 2018 2017 £’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 14,669 13,610
Theoretical tax at UK corporation tax rate of 20%* 2,934 2,722 Net property income not taxable (2,934) (2,722)
Total tax charge – –
* The corporation tax rate applicable to PAIF is equivalent to the lower rate of income tax.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 63 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
10. Distributions
Year ended Year ended 31 December 31 December 2018 2017 £’000 £’000
(a) Analysis of distributions First interim 3,557 3,090 Second interim 4,417 2,864 Third interim 3,276 3,185 Fourth interim 3,463 3,886
Total distributions 14,713 13,025
Equalisation received on the issue of shares (44) (25)
Net distribution for the year 14,669 13,000
(b) Reconciliation of net revenue after taxation to distributions Net revenue after taxation 14,669 13,610 Expenses charged to capital* – (610)
Total distributions for the year 14,669 13,000
* Total dilapidation income for 2018 was £136k of which nil was reinvested into property (2017 was £837k of which £610k was reinvested).
64 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
11. Investment properties
Year ended Year ended 31 December 31 December 2018 2017 £’000 £’000
At valuation: At beginning of year at valuation 254,280 230,533 Acquisitions during the year 58,420 37,271 Capital expenditure during the year 4,351 788 Carrying value of properties sold during the year (34,778) (31,278) Net unrealised gain on revaluation 1,612 16,966
Professional valuation 283,885 254,280 Adjustment for rent incentive debtor (1,739) (1,727) Adjustment in respect of minimum payment under head leases separately included as a liability in the Balance Sheet 2,178 2,119 Carrying value at the end of the year 284,324 254,672
Represented as: Investment properties – non current 284,324 230,722 Investment properties – current – 23,950
At end of year 284,324 254,672
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 2018 65 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
11. Investment properties (continued)
The following tables show an analysis of the fair values of financial instruments recognised in the balance sheet:
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
31 December 2017 Level 1 Level 2 Level 3 Total £’000 £’000 £’000 £’000
Assets measured at fair value* Investment properties – – 254,280 254,280
Professional valuation – – 254,280 254,280
* 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.
66 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
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 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%
31 December 2017 Fair Value Valuation Key Unobservable Class £’000 Technique Inputs Range
ERV per sq ft £1.60-£110.00 Investment Property £254,280* Income capitalisation Discount rate 6.12% – 15.67%
* 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 £1,612,000 (2017: £16,966,000) and are presented in the Statement of Total Return under line item ‘net capital gains’. 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.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 67 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
12. Debtors As at As at 31 December 31 December 2018 2017 £’000 £’000
Capital VAT receivable – 131 Capital expenses – 11
Total capital debtors – 142
Rent incentive debtor 1,739 1,727 Rent receivable 1,274 2,272 Prepayments and other debtors 836 192 Held by rent agent 476 560
Total income debtors 4,325 4,751
Total debtors 4,325 4,893
13. Cash and bank balances
As at As at 31 December 31 December 2018 2017 £’000 £’000
Amounts held at bank 8,088 17,159
Total cash and bank balances 8,088 17,159
68 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
14. Interest bearing loans and borrowings
Year ended Year ended 31 December 31 December 2018 2017 £’000 £’000
Unsecured bank loans – –
Loan arrangement fee brought forward 16 192 Additional loan arrangement fee 226 5 Amortised loan arrangement fee for the year (115) (181)
Loan arrangement fee carried forward 127 16
On 9 March 2018, following expiry of the unsecured revolving credit facility with the Royal Bank of Scotland International, the Fund entered into an unsecured revolving credit facility with Lloyds Bank plc. The total commitment is £20m. The duration of the facility is to 17 February 2020. 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 legal costs associated 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 loan issue costs shown above include loan arrangement fees and are included in note 8 on page 62. During the year the Fund had drawn £15,500,000 on the revolving credit loan, and repaid £15,500,000 during the year. Prepaid loan issue costs as at 31 December 2018, £127,000 (2017: £16,000) have accordingly been reflected in prepayments and other debtors detailed in note 12 on page 68.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 69 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
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 2018 2017 £’000 £’000
Within one year 213 195
After one year but not more than five years 657 595 More than five years 1,308 1,329
1,965 1,924
Total 2,178 2,119
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 2018 2017 £’000 £’000
Within one year 20,931 19,469
After one year but not more than five years 48,741 48,097 More than five years 34,448 31,847
83,189 79,944
104,120 99,413
* Excluding leases at peppercorn rents.
70 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
17. Creditors
As at As at 31 December 31 December 2018 2017 £’000 £’000 Investment liabilities Acquisition costs payable 6 – Capital expenditure 615 – Sales costs payable 23 –
Total investment liabilities 644 –
Distribution payable 3,509 3,931
Other creditors Deferred rental income 396 553 Value added tax payable 449 – Accruals and other creditors 946 562
Total other creditors 1,791 1,115
Total creditors 5,944 5,046
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.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 71 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
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 payable to significant parties:
Year ended Year ended 31 December 31 December 2018 2017 £’000 £’000
ACD’s management fee 1,939 1,770 ACD’s performance fee 692 632 Depositary fee 100 96
Total 2,731 2,498
As at 31 December 2018 the following amounts were outstanding due to significant parties:
As at As at 31 December 31 December 2018 2017 £’000 £’000
ACD’s management fee 172 160 ACD’s performance fee 61 57 Depositary fee 9 16
Total 242 233
19. Derivatives
The Fund has no derivatives exposure at 31 December 2018 (2017: £nil).
72 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
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 have advised that the Fund has a strong position going into the arbitration proceedings and accordingly no provision has been recognised as at 31 December 2018. 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 2019, the Fund made a distribution of £3.5m, in respect of the period from 1 October 2018 to 31 December 2018. This was paid to the Shareholders of the Fund as at 31 December 2018.
Property acquisitions There have been no subsequent property acquisitions.
Property sales Since the year end the Fund has completed on the following sales: • 28 January 2019, Wickes Warehouse, Glebe Road, Scunthorpe • 24 January 2019, 34 South Gyle Crescent, Edinburgh • 25 April 2019, Rowland Hill Shopping Centre, Kidderminster
Investor commitment The Fund received £15.9m of investor commitment in December 2018 which was called in January 2019. As at 31 December 2018, there were redemptions in the queue for £2.7m which were redeemed in January 2019.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 73 AEW UK Core Property Fund
Distribution Tables for the year ended 31 December 2018
First Interim Group 1 – shares purchased prior to 31 December 2017 Group 2 – shares purchased on or after 1 January 2018 and on or before 31 March 2018
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Share Class A Income Group 1 1.675 – 1.675 – 1.675 Group 2 0.563 – 0.563 1.112 1.675 Share Class C Income Group 1 1.675 (0.003) 1.672 – 1.672 Group 2 0.515 (0.003) 0.512 1.160 1.672
Second Interim Group 1 – shares purchased prior to 31 March 2018 Group 2 – shares purchased on or after 1 April 2018 and on or before 30 June 2018
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Share Class A Income Group 1 2.087 – 2.087 – 2.087 Group 2 0.757 – 0.757 1.330 2.087 Share Class C Income Group 1 2.087 (0.003) 2.084 – 2.084 Group 2 0.577 (0.003) 0.574 1.510 2.084
74 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Core Property Fund
Distribution Tables (continued) for the year ended 31 December 2018
Third Interim Group 1 – shares purchased prior to 30 June 2018 Group 2 – shares purchased on or after 1 July 2018 and on or before 30 September 2018
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Share Class A Income Group 1 1.551 – 1.551 – 1.551 Group 2 0.562 – 0.562 0.989 1.551 Share Class C Income Group 1 1.551 (0.003) 1.548 – 1.548 Group 2 0.441 (0.003) 0.438 1.110 1.548
Final Interim Group 1 – shares purchased prior to 30 September 2018 Group 2 – shares purchased on or after 1 October 2018 and on or before 31 December 2018
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Share Class A Income Group 1 1.584 – 1.584 – 1.584 Group 2 1.042 – 1.042 0.542 1.584 Share Class C Income Group 1 1.584 (0.003) 1.581 – 1.581 Group 2 0.394 (0.003) 0.391 1.190 1.581
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 75 AEW UK Real Return Fund
Annual Report and Financial Statements for the year ended 31 December 2018 AEW UK Real Return Fund
Fund Manager’s Report
• The AEW UK Real Return Fund (“the Fund”) is a 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 2018, the Fund has 81% of income linked to inflation or with fixed uplifts (50% income must be linked to inflation). The weighted average unexpired lease term (“WAULT”) is 16.8 years. As a matter of policy the Manager will aim to maintain a WAULT of 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 2018 77 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Investment update The Fund portfolio has continued to deliver its performance objectives in terms of total real returns driven by a predictable and sustainable income distribution. The Fund delivered a total return of 10.2% and a total real return (after inflation) of 8.2% for the year ended 31 December 2018. The distribution yield as at 31 December 2018 was 5.3%. The strategy of the Fund has been to continue to build a portfolio well-diversified across the UK, seeking sectors where occupier demand is sustainable and relatively immune from economic cyclicality. The philosophy of the Fund is to focus on the strengths of property as a real asset, concentrating on property fundamentals like location, supply and demand and rental affordability. If the UK economy remains in the doldrums and interest rates stay “lower for longer”, the high level of inflation-linked cash flow being thrown off by the portfolio will continue to be very defensive; if, as the more optimistic economists suggest, the economy resumes its growth phase, then it will be real assets that will respond positively to occupier demand driving rental and capital growth. Over the year we have acquired a further twelve properties across a range of sectors, adding to both the strategic and tactical portfolios including some shorter leased assets which we believe can be incubated until such time as it is sensible to renegotiate the lease terms to boost the portfolio’s WAULT and level of inflation-linked rent. Of the twelve properties acquired, six acquisitions were made this year in the industrial sector, increasing the Fund’s industrial weighting to 13.9% and three car showrooms were also acquired resulting in a weighting of 8.8% as at the year end. We remain neutral on offices (although pricing in Central London, driven largely by overseas money, still does not seem to reflect the risks to performance which Brexit poses to the future of the financial sector) and we continue to avoid all retail other than the new “convenience” concepts that serve immediate demand for “basket shopping” from passing trade. The year saw a further commitment to the social sector with the Fund’s largest acquisition to date: a 351 bed staff accommodation complex serving one of the UK’s largest and most modern regional hospitals, where pricing was substantially below replacement cost and where demand for affordable housing (as part of the hospital infrastructure), is likely to be sustained way beyond the 20 year inflation linked lease secured from the NHS Trust. We have also made our first investment in the nursery school or child day care sector, which offers attractive fundamentals based on the dynamics of demographics, working lifestyle trends and operator consolidation. The Fund NAV increased from £81.3m as at 31 December 2017 to £132.3m as at 31 December 2018. The twelve properties acquired in 2018 were for a purchase price (including costs) totalling £44.4m. The Fund also disposed of one property for £0.2m. This has taken the total number of properties as at 31 December 2018 to 45 properties. Whilst longer leases and inflation-linked rents are still attractive, having built a portfolio with 81% of rents linked to inflation or with fixed uplifts and with a WAULT of over 16 years, we do not need to compete in this area. We know income growth is important to our investors. We continue to estimate in the chart overleaf, the projected yield and distribution profile going forward, based on the current cash flow and reflecting known minimum uplifts and reversionary rental values.
78 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Projected annual distribution growth pro le assuming in ation based on Oxford Economics RPI Forecast Distribution yields 2018 (%)
% % 5.8%** 5.7%** 6.0 pence 5.6%** 6.0 5.9 pence per unit 6.0 5.8 pence 5.4%** per unit 5.3%* 5.3%** per unit 5.6 pence 5.0 5.3% 5.3% 5.5 pence 5.5 pence 5.2% 5.2% 5.5 per unit per unit per unit 4.0 4.2%4.4% 4.2% 4.0% 4.0% 3.5% 3.6% 3.6% 3.6% 5.0 3.0 Yield (%)
2.0 4.5 1.0
December December December December December December Q1 2018 Q2 2018 Q3 2018 Q4 2018 2018 2019 2020 2021 2022 2023 Year AEW UK Real Return Fund MSCI/AREF UK All Balanced Property MSCI/AREF UK Long Income Property Funds - Average Distribution Yield Funds - Average Distribution Yield
Source: * MSCI historic annual yield on NAV as at 31 December 2018. Source: Average distribution yield calculated by AEW using data ** AEW: Projected annual distribution on NAV as at from the MSCI/AREF UK Quarterly Property Fund Index, and 31 December 2018. Calculations do not include rental growth represents an unweighted average of the distribution yields on open market rent reviews. of all Funds listed in the index (excluding Managed Property Funds which do not distribute their income). These projections are subject to change and there is no guarantee With effect from 8 December 2018, the AREF/IPD UK Quarterly Property Fund that forecast returns will be achieved. Index is now known as the MSCI/AREF UK Quarterly Property Fund Index.
AEW UK Real Return Fund – a strong alternative to Core Balanced and Long Lease Funds Playing to the strengths of property as a real asset
PERCEIVED RISK
GROWTH (TOTAL RETURN FOCUSED STRATEGIES) Opportunistic
Value add REAL ASSET STRATEGIES Core funds • Listed core REITS* • Retail core funds* • Institutional core funds* MATCHING (BOND PROXIES) AEW UK Real Return Fund (RRF) • Open-ended • Alternative real estate • Net 4% total real return target Long lease funds • Gross long term income 5% p.a.
Real estate debt funds
Ground lease funds
Income ‘strips’
EXPECTED RETURN
Source: AEW * All typically seeking to outperform the MSCI peer group total return benchmark
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 79 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Since Fund Performance to 3 months 6 months 9 months 1 year 2 year p.a. inception p.a. 31 December 2018 % % % % % %
Total Return1 1.9 4.1 7.4 10.2 9.7 9.1 Income Return2 1.4 2.8 4.2 5.5 5.5 5.5 Total Real Return2 (adjusted for inflation3) 1.4 3.0 5.5 8.2 7.3 6.7 1 MSCI/AREF UK Quarterly Property Fund Index 2 Calculated by AEW. 3 CPIH
Key data as at 31st December 2018
FUND STRUCTURE FCA Regulated Open-ended PAIF
GEOGRAPHYUK
FUND NAV £132.3m 3
PERFORMANCE 4% real total return (net) OBJECTIVE/BENCHMARK 5% p.a. Gross portfolio target OOfficeffice RRetailetail INITIAL PORTFOLIO YIELD 6.0%1 HHotelotel PPubsub s& aRestaurantnd Restaurant 1 REVERSIONARY PORTFOLIO YIELD 6.9% LLeisureeisure WEIGHTED AVERAGE UNEXPIRED LEASE HHealthcareealthcare 1 TERM TO BREAK/EXPIRY (WAULT) 16.8 years/15.7 years SSupportedupporte Livingd Li ving IIndustriandustrlial PERCENTAGE INCOME LINKED CaCarr Showroom Showroom TO INFLATION OR 81%3 RResidesientialdential FIXED UPLIFTS NNurseryurser educay edtionucation
VACANCY 0.0% 1
DISTRIBUTION YIELD 2 (NET OF ALL FEES AND EXPENSES) 5.3%
TOTAL ANNUAL RETURNS NOMINAL 10.2% 2
TOTAL ANNUAL REAL RETURNS INFLATION ADJUSTED 8.2% 3
ANNUAL INCOME RETURN 5.5% 3
LEVERAGE 0% (Long term gearing not permitted)
DEVELOPMENT EXPOSURE Speculative development not permitted
UNIT PRICINGDual price
Source: 1 Knight Frank, 2 AREF/IPD UK Quarterly Fund Index, 3 AEW, 4 Reference benchmark WAULT as at 31 December 2018
80 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Sector weightings as at 31 December 2017 Sector weightings as at 31 December 2018 MSCI categorisation MSCI categorisation
Standard Retail, 24.8% Standard Retail, 25.2% Offices, 3.2% Offices, 2.1% Other Property, 70.3% Industrial, 14.0% Cash, 1.7% Other Property, 54.1% Cash, 4.6%
Industry categorisation Industry categorisation Leisure, 18.2% Care Home, 15.4% Leisure, 29.3% Industrial, 13.9% Care Home, 23.1% Pubs/Restaurants, 12.5% Pubs/Restaurants, 18.9% Residential – Hospital Hotel, 6.7% Accomodation, 10.8% Supported Living, 6.1% Car Showroom, 8.8% Convenience Retail, 5.9% Cash, 4.7% Car Showroom, 5.1% Hotel, 4.5% Office, 3.2% Residential – Supported Living, 4.0% Cash, 1.7% Convenience Retail, 3.9% Office, 2.1% Nursery Education, 1.2%
Source: MSCI/AREF UK Quarterly Property Fund Index. AEW UK Real Return Fund sector weightings ‘based on industry categorisation’ determined by AEW.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 81 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Asset Management report
General Whilst there are no significant initiatives to report this period, we continue to actively asset manage the portfolio, with a number of lease regears anticipated in our “tactical” assets next year. 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. With a significant proportion of the Fund’s income being linked to RPI or fixed uplifts (81% as at 31 December 2018), the Fund’s total income has increased by approximately £95,000 over the course of 2018. 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).We believe 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 environmental, social and governance (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.
82 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Having participated for the first time last year, where the Fund was awarded two Green Stars, the Fund saw the score reduce this year to one Green Star. Good performance was seen in the policy and disclosure aspect where performance was supported through Fund level sustainability reporting. Additionally, the Fund has 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. Despite these strengths, there are reasons why the Fund saw a reduced score, including: • The Fund strategy means that it 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 multi-let 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 in recent the years), the Fund does not score as well as funds with a smaller holding of single let assets. • Points for EPC coverage reduced this year (from 5 to 3) whereas points for green building certification increased from 10 to 12. The Fund is committed to improving ESG performance and GRESB scores, where in line with AEW’s commitment to the broader ESG agenda. We have completed a ‘deep dive’ analysis to identify where and how the Fund can improve scoring for 2019. 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 EPCs below an E rating, which currently represents less than 1% of the Fund by floor area.
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.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 83 AEW UK Real Return Fund
Fund Manager’s Report (continued)
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 2018 AREF Corporate Governance Quality Mark on achieving a high standard of transparency and corporate governance. Part of the AREF Code of Practice sets out 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 Subcommittee 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.
84 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Portfolio Acquisitions in 2018
Units 7A & 7B, Gatehouse Way, Aylesbury Modern steel-portal framed industrial/warehouse units
Property characteristics Investment summary Property type Industrial • Two industrial units on a prominent self-contained site. Property size 38,736 sq ft • Established south east commercial and Property industrial location. purchase date February 2018 Initial yield 6.2% • Securely let with a WAULT of over 10 years off low passing rent of £5.20 psf. Year built 1980s
KIA Doncaster, First Point Business Park, Doncaster Modern, purpose built car showroom
Property characteristics Investment summary Property type Car Showroom • Modern purpose built car show room. Property size 11,397 sq ft • 4.8 years unexpired term. Property • Attractive running yield due to fixed purchase date March 2018 rental increases to 7.2% in 2021. Initial yield 6.8% • Reversionary. Refurbished: 2012
Unit 1, Ferrous Way, Northbank Industrial Park, Irlam Modern prime industrial unit
Property characteristics Investment summary Property type Industrial • Modern detached warehouse. Property size 33,732 sq ft • Well established North West location. Property • Good access to motorway network. purchase date April 2018 • Securely let for 20 years with 5 yearly Initial yield 6.6% RPI-linked rent reviews (collar 0.0% and Year built 1990s cap 4.5 %) off passing rent of £5.25psf.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 85 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Portfolio Acquisitions in 2018 (continued)
Marshall 41, James Way, Milton Keynes Single let industrial unit
Property characteristics Investment summary Property type Industrial • Self-contained warehousing unit. Property size 41,505 sq ft • Well established South East industrial and Property commercial location. purchase date May 2018 • Location benefits from strong Initial yield 6.3% infrastructure links with major motor ways. Year built 2017 • Securely let to an improving covenant for 9.75 years off a low base rent of £5.75 psf.
The Residences, James Cook University Hospital, Middlesbrough Staff accommodation complex serving UK’s largest regional hospitals
Property characteristics Investment summary Property type Residential • 21 purpose built blocks of residential accommodation let to a NHS trust. Property size 117,497 sq ft Property • Occupied by NHS staff, trainee doctors purchase date June 2018 and families of doctors/nurses. Initial yield 5.1% • 20 years unexpired with 5 yearly reviews Year built 1981, 1986, 2002 linked to inflation (1-4% collar and cap). • Social impact investment at a value less than replacement cost.
The Nursery Building, Abbey Meads Village Centre, Swindon Newly developed nursery
Property characteristics Investment summary Property type Childrens’ Day nursery • Positive long term demographics and social trends. Property size 6,135 sq ft • Located in a residential area. Property purchase date July 2018 • 25 years unexpired with reviews linked to inflation (2%-4% collar and cap). Initial yield 6.0% • Attractive yield relative to market. Year built 2018 build/conversion
86 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Portfolio Acquisitions in 2018 (continued)
Unit A, Rudford Industrial Estate, Ford Single let industrial unit
Property characteristics Investment summary Property type Industrial • Located in an established south coast location. Property size 83,124 sq ft • Highly reversionary off rent of Purchase date August 2018 £4.30 psf.– next rent review in 2020 Initial yield 7.4% linked to RPI capped at 3%. Year built 1980s • 16.7 years unexpired lease term. • Limited supply of similar sized industrial units in the area.
Stone Acre Fiat, Sefton Street, Liverpool Strong trading car dealership
Property characteristics Investment summary Property type Car Showroom • Modern, purpose built car showroom in established commercial location. Property size 9,045 sq ft Purchase date August 2018 • 11.25 years unexpired lease term. Initial yield 6.3% • RPI linked rent reviews every 5 years Year built 2004 (1.75%-5% collar and cap). • Rent increasing to over 7% in 2019 and further increase in 2024.
Trident Park Audi, Whitebirk Drive, Blackburn Strong trading car showroom
Property characteristics Investment summary Property type Car Showroom • Modern, purpose built car showroom in established commercial location. Property size 25,251 sq ft • 6.5 years unexpired lease term. Purchase date August 2018 • Sub tenant currently paying a higher Initial yield 6.5% rent than the passing rent from VW. Year built 2004
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 87 AEW UK Real Return Fund
Fund Manager’s Report (continued)
Portfolio Acquisitions in 2018 (continued)
110/111 High Street, Colchester Popular public house in South East market town
Property characteristics Investment summary Property type Public House • Town centre public house. Property size 5,815 sq ft • Strong trading tenant that has been in occupation for a long time. Purchase date September 2018 • 6.5 years until unexpired lease term. Initial yield 6.1% • Tenant trades very well and has recently Year built 1950s invested in refurbishment of the restaurant and bar areas.
Tinsley Industrial Estate, Colefold Road, Sheffield Long let industrial unit
Property characteristics Investment summary Property type Industrial • Established industrial location approximately 2 miles from Sheffield Property size 38,104 sq ft City Centre. Purchase date December 2018 • 20 years to lease expiry and 5 yearly Initial yield 6.5% reviews linked to RPI (1%-4% collar and Year built 1980s cap). • Let off a low initial rent (£4.25 psf).
Stanley Green Industrial Estate, Duke Avenue, Cheadle Long let industrial unit
Property characteristics Investment summary Property type Industrial • Established retail, commercial and industrial area in South Manchester. Property size 27,040 sq ft Purchase date December 2018 • 20 years to lease expiry and 5 yearly reviews linked to RPI (1%-4% collar and Initial yield 7.0% cap). Year built 1980s • Let off a low initial rent (£5.00 psf).
Any opinions expressed are those of the Fund Manager. They should not be viewed as a guarantee of return from an investment in the Fund. The content of the commentary should not be viewed as a recommendation to invest. Past performance is not a guide to the future. Investors should be aware that the value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.
88 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 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 2018 89 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 Limit Actual Parameters Guidelines as at 31 Dec 18 as at 31 Dec 18
% allocation to inflation Minimum 50% of gross passing rent. 50% Applicable linked leases (applicable once the Fund once the Fund reaches AUM reaches AUM of £200m) of £200m Average lease length WAULT must be in excess of the equivalent 7.2 years* Applicable (applicable once the Fund measure from the reference benchmark. once the Fund reaches AUM of £200m) reaches AUM of £200m. Diversification limits Unconstrained but as a guideline no 15% Applicable more than 15% of NAV invested in any once the Fund one segment, with segment defined but reaches AUM not limited to the segments within the of £200m 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). Investment in property Not permitted. 0% 0% development (speculative complete demolition and reconstruction without a tenant)
90 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Investment Guidelines (continued)
Guideline Limit Actual Parameters Guidelines as at 31 Dec 18 as at 31 Dec 18
Investment in pre-let Maximum 20% of NAV (will not apply until 20% Applicable development the Fund reaches £200m). once the Fund reaches AUM of £200m Investment in a single asset Maximum 10% of the gross asset value 10% Applicable calculated at the time of investment (will once the Fund not apply until the Fund reaches £200m) reaches AUM with the target that single assets should not of £200m. exceed 5% of gross asset value at the time of acquisition. Investment in unoccupied Maximum 10% of the Estimated Rental Value 10% 0% and non-income producing (‘ERV’) of the existing portfolio at any one assets time. Therefore the purchase of an additional asset (which itself should not have more than 20% void ERV), will be governed by the void existing in the portfolio at the time of purchase. Investment in Collective The Fund may only invest in structures Investment Schemes owning a single property or portfolio, 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 on The ACD does not intend to spend any more 5% 0% refurbishment 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 maximum 5% 20% 0% 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 2018 91 AEW UK Real Return Fund
Investment Guidelines (continued)
Guideline Limit Actual Parameters Guidelines as at 31 Dec 18 as at 31 Dec 18
Derivatives Maximum 25% of the NAV can be invested 25% 0% 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 10 holdings The ACD will aim to maintain the percentage 45.8%* Applicable as a percentage of total value of the top 10 holdings of the Fund once the Fund portfolio below the comparable figure for the IPD reaches AUM benchmark (will not apply until the Fund of £200m. reaches £200m). Investments in AEW UK CIS Maximum 10% of NAV. Fees payable to AEW 10% 0% and/or AEW UK listed entries UK in the investment vehicle will be rebated back for the benefit of investors in the Fund Borrowing The ACD will borrow only up to 10% of the 10% 0% NAV and in the form of revolving credit facility only. Cash Not more than 10% of the net asset value 10% 4.7% 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 2018.
92 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 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 2018. 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 2018, 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 2018, (the measurement date), was £125,910,000 (One Hundred and Twenty Five Million, Nine Hundred and Ten Thousand Pounds). We confirm that the valuations stated in this report have been undertaken by us as qualified valuers, in accordance RICS Valuation – Global Standards 2017, incorporating the International Valuations Standards, and RICS Professional Standards UK January 2014 (revised April 2015). 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 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 2018 93 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. 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.
94 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Report of the Valuer (continued)
We confirm “the signatory” of this report, Mathew Cripps FRICS and Alex Burgoyne MRICS, have been responsible for this instruction since 31 December 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 2018 95 AEW UK Real Return Fund
Portfolio Statement as at 31 December 2018
Investment Properties Number of Market Value Net Assets properties £’000 %
Sector Leisure 4 24,125 18 Care Home 3 20,350 15 Residential (supported living, hospital accommodation) 3 19,550 15 Industrial 6 18,390 14 Pub / Restaurants 17 16,540 13 Car Showroom 4 11,600 9 Hotel 1 5,900 4 Convenience Retail 5 5,155 4 Office 1 2,750 2 Nursery Education 1 1,550 1
Total Portfolio of Investments 45 125,910 95 Other Assets and Liabilities 6,372 5
Total Portfolio of Investments 45 132,282 100
Market value
Leisure Cinema and Restaurants, Denmark 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
Care Homes Holmes Court & Holmes House, Kenilworth Road, South Wigston £2.5m to £5m Ashlands & St Georges, Ratcliffe Road, Leicester £5m to £10m Larkland House, London Road, Ascot £5m to £10m
96 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Portfolio Statement (continued) as at 31 December 2018
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 Unit 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, 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 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 2018 97 AEW UK Real Return Fund
Portfolio Statement (continued) as at 31 December 2018
Market value Car Showroom KIA Doncaster, First Point Business Park, 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
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
Nursery Education The Nursery Building, Abbey Meads Village Centre, Swindon £0 to £2.5m
98 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Summary of Material Portfolio Changes for the year ended 31 December 2018
Purchases and sales for the year Cost £’000
Purchases The Residences, James Cook University Hospital, Middlesbrough £10m to £15m Stanley Green Industrial Estate, Duke Avenue, Cheadle £0 to £2.5m Tinsley Industrial Estate, Coleford Road, Sheffield £0 to £2.5m Unit 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, Milton Keynes £2.5m to £5m Unit A, Rudford Industrial Estate, Manchester £2.5m to £5m 110/111 High Street, Colchester £0 to £2.5m KIA Doncaster, First Point Business Park, Doncaster £0 to £2.5m Stoneacre Fiat, Sefton Street, Liverpool £0 to £2.5m Trident Park Audi, Whitebrik Drive, Blackburn £2.5m to £5m The Nursery Building, Abbey Meads Village Centre, Swindon £0 to £2.5m
Total purchases for the year 44,401
Proceeds £’000
Sales Pub/Restaurant £0 to £2.5m
Total sales for the year 238
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 2018 99 AEW UK Real Return Fund
Fund Information
Accounting and Distribution dates
XD date
First interim distribution 31 March 2018 Second interim distribution 30 June 2018 Third interim distribution 30 September 2018 Final distribution and year end 31 December 2018
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 5.3% for the year ended 31 December 2018.
Distributions in the year Final First Interim Second Interim Third Interim Distribution 31 March 30 June 30 September 31 December 2018 2018 2018 2018 (p) (p) (p) (p)
Share Class Share Class A income 1.311 1.346 1.411 1.410 Share Class C income# 1.311* 1.346* 1.411* 1.410*
* Distribution gross of tax.
100 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Fund Information (continued)
Performance Record Highest Share price Lowest Share price Offer basis Bid basis Offer basis Bid basis Year Share Class (p) (p) (p) (p)
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 1 January 2018 to 31 December 2018. † From 1 January 2017 to 31 December 2017. * From 5 February 2016 to 31 December 2016. # From 14 July 2016 to 31 December 2016.
Summary of share dealing as at 31 December 2018 A income C income
Opening Shares in Issue 79,765,295.294 2,347,431.726 Shares issued in the year 44,826,858.124 1,004,107.713
Closing shares in issue 124,592,153.418 3,351,539.439
NAV (as calculated in accordance with the Prospectus)
NAV NAV of Share Class per share Year Share Class £’000 Shares in issue (p)
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 1 January 2018 to 31 December 2018. † From 1 January 2017 to 31 December 2017. * 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 2018 101 AEW UK Real Return Fund
Fund Information (continued)
Share dealing Turnover of shares During the year ended 31 December 2018, 44,826,858.124 Class A shares and 1,004,107.713 Class C shares were created. Nil shares were redeemed and Nil shares were transferred. There has been no consolidation or sub-division of units during the year.
Subscriptions Eligible Investors may purchase shares in the Fund on a monthly basis on the dealing day, being the last calendar 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 shares in the Fund will be processed at the share 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 shares 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 shares 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 2018, there were subscriptions of £9.75m in the queue.
Redemptions Every shareholder is entitled on any dealing day for redemption to redeem its shares 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 shares in the Fund will be processed at the share 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 2018, there were no redemptions in the queue.
Deferrals Where the ACD considers it to be in the best interests of the Shareholders, 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 Shareholders to do so. The ACD will review the position every month. The ACD must give Shareholders notice of the deferral no later than seven business days before the relevant dealing day for redemption. The price at which the shares will be redeemed will be the price for redemptions on the dealing day for redemption on which the shares are actually redeemed.
102 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 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 Shares in any or all of the Funds, where, due to exceptional circumstances, it is in the interests of all the Shareholders 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 Shareholders. For further information, please refer to clause 3.13 of the Prospectus. There have been no deferrals or suspensions during the year.
Adjustments to share price In unusual market conditions the ACD in consultation with the Pricing Sub-Committee, may adjust the share price by a percentage independently reviewed 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 Shareholders by ensuring that shares 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 shares through the ACD, shares 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 shares in issue 6 0.88 1% or greater but less than 2% – – 2% or greater but less than 4% 2 6.53 4% or greater but less than 8% 2 10.83 8% or greater 6 81.76 Total 16 100.00
Percentage held by largest investor 18.93 Percentage held by top 5 investors 72.08
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 103 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 theyear to 31 December 2018:
Year ended 31 December 2018 Total remuneration paid to employees during financial year: a) remuneration, including, where relevant, any carried interest paid by the AIFM; £2,665,423 b) the number of beneficiaries 24
The aggregate amount of remuneration, of the AIFM Remuneration Code Staff, broken down by: a) senior management £809,561 b) members of staff £1,855,862
Fixed Variable Total remuneration remuneration remuneration £ £ £
Senior management 759,561 50,000 809,561 Staff 1,419,441 436,421 1,855,862 Total 2,179,002 486,421 2,665,423
Fixed remuneration comprises basic salaries and variable remuneration comprises bonuses.
104 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Fund Information (continued)
Fund Performance Year ended 31 December 2018 %
Total Expense Ratio for the accounting year Fund Management Fees 0.75 Fund Operating Expenses 0.21 Total Expense Ratio (‘TER’) 0.96
Property Expense Ratio (‘PER’) (excludes items in TER) 0.23 Real Estate Expense Ratio (‘REER’) (TER + PER) 1.19
Transaction Costs 2.3 Portfolio Turnover Ratio (4.7)
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 2018:
Year ended 31 December 2018 %
Management Fees 0.75 Depositary Fees 0.05 Valuation Fees 0.05 Other variable Fees 0.11
0.96
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 105 AEW UK Real Return Fund
Statement of Total Return for the year ended 31 December 2018
Year ended Year ended 31 December 2018 31 December 2017 Notes £’000 £’000 £’000 £’000
Income Net capital gains 3 1,194 333 Revenue 6 7,067 4,162 Expenses: Direct property expenses 7 (301) (175) Operating expenses 7 (996) (616) Interest payable and similar charges 8 (2) (1)
Net revenue before taxation 5,768 3,370 Taxation 9 – –
Net revenue after taxation 5,768 3,370
Total return before distributions 6,962 3,703 Distributions 10 (5,768) (3,370) Change in net assets attributable to Shareholders from investment activities 1,194 333
Statement of Changes in Net Assets Attributable to Shareholders for the year ended 31 December 2018
Year ended Year ended 31 December 2018 31 December 2017 £’000 £’000 £’000 £’000
Net assets at the start of the year 81,331 53,176 Amounts receivable on creation of shares 46,564 25,979 Dilution adjustment 3,193 1,843
49,757 27,822 Change in net assets attributable to Shareholders from investment activities 1,194 333
Closing net assets attributable to Shareholders 132,282 81,331
The notes on pages 109 to 126 form an integral part of these Financial Statements.
106 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Balance Sheet as at 31 December 2018
As at As at 31 December 2018 31 December 2017 Note £’000 £’000 £’000 £’000
Assets Fixed assets: Investment properties 11 126,487 81,085 Current assets: Debtors 12 859 410 Cash and bank balances 13 9,205 3,383
Total current assets 10,064 3,793
Total assets 136,551 84,878
Long term liabilities Finance lease obligations 14 (972) (996)
Current liabilities Finance lease obligations 14 (73) (72) Investment liabilities 16 (32) (87) Distribution payable 16 (1,812) (1,098) Other creditors 16 (1,380) (1,294)
Total current liabilities (3,297) (2,551)
Total liabilities (4,269) (3,547)
Net assets attributable to Shareholders 132,282 81,331
The Financial Statements on pages 106 to 126 were approved by the ACD on 30 April 2019 and signed on their behalf by:
On behalf of the ACD
The notes on pages 109 to 126 form an integral part of these Financial Statements.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 107 AEW UK Real Return Fund
Statement of Cash Flows for the year ended 31 December 2018
Year ended Year ended 31 December 2018 31 December 2017
£’000 £’000 £’000 £’000
Total return before distributions for the year 6,962 3,703
Adjustments for: Capital gain on investments (1,194) (333) Finance costs 2 1 (Increase)/decrease in debtors (424) 297 Increase in creditors 86 1,102
Net cash generated from operating activities 5,432 4,780
Cash flows from investing activities Paid for the purchase of investment properties (44,456) (26,715) Development expenditure on properties under construction – (3,901) Paid on capital expenditure (93) (51) Received on sale of investment 238 –
Net cash used in investing activities (44,311) (30,667)
Cash flows from financing activities Proceeds from issue of shares 46,564 25,979 Equalisation received 331 98 Dilution adjustment received 3,193 1,843 Distribution paid (5,385) (3,072) Finance costs paid (2) (1)
Net cash generated from financing activities 44,701 24,847
Net increase/(decrease) in cash for the year 5,822 (1,050) Cash and cash equivalents at start of year 3,383 4,433
Cash and cash equivalents at end of year 9,205 3,383
The notes on pages 109 to 126 form an integral part of these Financial Statements.
108 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Notes to the Financial Statements for the year ended 31 December 2018
1. Accounting policies
1.1 Basis of accounting The Financial Statements have been prepared 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. 1.2 Revenue Rent receivable comprises rental income on investment properties for the period, 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. The value of resulting accrued rental income is deducted from the carrying value of the respective investment property. 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 to 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%.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 109 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
1. Accounting policies (continued)
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.
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 period 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
110 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
1. Accounting policies (continued)
1.8 Investment properties (continued) 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 period of retirement or disposal. Gains or losses on the disposal of investment property are determined as the difference between net disposal proceeds and the carrying value of the asset. Investment properties under construction is measured at fair value if the fair value is considered to be reliably determinable. Investment properties under construction for which the fair value cannot be determined reliably, but for which the Fund expects that the fair value of the property will be reliably determinable when construction is completed, are measured at cost less impairment until the fair value becomes determinable or construction is completed whichever is earlier. No depreciation is charged in respect of freehold or leasehold investment properties with more than 20 years remaining on the lease. 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 Cash and cash equivalents Cash and cash equivalents include cash in hand and deposits held at banks. Cash is stated at its face value.
1.10 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.
1.11 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.
1.12 Creditors Creditors are stated at their transaction value. Amounts received in respect of future periods are included within creditors as deferred income.
1.13 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.
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 111 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
1. Accounting policies (continued)
1.13 Significant estimation techniques (continued) The fair value of investment property is determined by independent real estate valuation experts using recognised valuation techniques. These techniques comprise both the Yield Method and the Discounted Cash Flow Method. In some cases, the fair values are determined based on recent real estate transactions with similar characteristics and location to those of the Fund assets. Any valuation of a property by the Valuation Agent must be undertaken in accordance with the current issue of RICS Valuation – Global Standards January 2017. 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. 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 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.
112 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
2. Risk management policies (continued)
2.2 Real Estate risk (continued) 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.
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 2018 2017 £’000 £’000
Debtors (excluding prepayments) 298 69 Bank and cash 9,205 3,383
Total 9,503 3,452
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 113 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
2. Risk management policies (continued)
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 Fund maintains close investor relationships in order to gauge redemption requirements.
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 IPD) 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.
114 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
3. Net capital gains
Year ended Year ended 31 December 31 December 2018 2017 £’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 1,431 490 Adjustment for rent incentive debtor (175) (157) Net capital gains 1,194 333 4. Purchases and transaction costs
2018 % of Year ended Year ended principal 31 December 31 December purchase 2018 2017 price £’000 £’000
Purchases excluding transaction costs 41,912 25,110
Agent fees 1.0% 419 271 Taxes 4.2% 1,754 1,157 Other costs 0.7% 316 177
Total purchase transaction costs 5.9% 2,489 1,605
Purchases including transaction costs 44,401 26,715
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 115 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
5. Sales and transaction costs
2018 % of Year ended Year ended principal 31 December 31 December sale 2018 2017 price £’000 £’000
Sales excluding transaction costs 250 –
Agent fees 2.4% (6) – Legal fees 2.4% (6) –
Total sale transaction costs 4.8% (12) –
Sales including transaction costs 238 –
6. Revenue
Year ended Year ended 31 December 31 December 2018 2017 £’000 £’000
Rental income 7,066 4,091 Development interest – 61 Sundry property income 1 10
Total revenue 7,067 4,162
116 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
7. Expenses
Year ended Year ended 31 December 31 December 2018 2017 £’000 £’000
Direct property expenses: Head Rent 80 80 Property legal and professional fee 78 24 Valuers' fees 54 31 Agents' fees 49 26 Abortive costs 17 1 Insurance 16 7 Other property expenses 7 6 Direct property expenses 301 175
Expenses associated to the ACD: Management fee 781 453
Expenses associated to the Depositary: Depositary fee 51 45
Other operating expenses: MSCI subscription fees* 57 – Auditor's fees 27 36 Legal & professional fees 22 12 Tax agent fee 19 12 Sustainability consultancy fees 12 11 AREF membership fees 8 8 VAT agent fee 8 4 Governance committee fee 6 6 Printing & publication cost 5 10 Irrecoverable VAT – 15
Other costs: Set-up costs – 4
Total operating expenses 996 616 Total expenses 1,297 791
* includes subscription fees of £37,000 relating to 2017
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 117 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
8. Interest payable and similar charges
Year ended Year ended 31 December 31 December 2018 2017 £’000 £’000
Bank charges 2 1
Total finance costs 2 1
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 2018 2017 £’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 5,768 3,370
Theoretical tax at UK corporation tax rate of 20%* 1,154 674 Net property income not taxable (1,154) (674)
Total tax charge – –
* The corporation tax rate applicable to PAIF is equivalent to the lower rate of income tax.
118 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
10. Distributions
Year ended Year ended 31 December 31 December 2018 2017 £’000 £’000
(a) Analysis of distributions First interim 1,159 702 Second interim 1,442 809 Third interim 1,694 865 Final interim 1,804 1,092
Total distributions 6,099 3,468
Equalisation received on the issue of shares (331) (98)
Net distribution for the year 5,768 3,370
(b) Reconciliation of net revenue after taxation to distributions Net revenue after taxation 5,768 3,370
Total distributions for the year 5,768 3,370 11. Investment properties
Investment properties Total Year ended 31 December 2018 £’000 £’000
At valuation: At beginning of year at valuation 80,285 80,285 Acquisitions during the year 44,401 44,401 Capital expenditure 93 93 Carrying value of properties sold during the year (300) (300) Net unrealised capital gain 1,431 1,431 Professional valuation 125,910 125,910 Adjustment for rent incentive debtor (468) (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 126,487 126,487
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 119 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
11. Investment properties (continued)
Properties under Investment development properties Total Year ended 31 December 2017 £’000 £’000 £’000
At valuation: At beginning of year at valuation 1,075 48,053 49,128 Acquisitions during the year – 26,715 26,715 Acquisition of properties under construction 3,901 51 3,952 Transfer between properties under construction and investment properties (4,976) 4,976 – Net unrealised gain on revaluation – 490 490 Professional valuation – 80,285 80,285 Adjustment for rent incentive debtor – (268) (268) Adjustment in respect of minimum payments under head leases separately included as a liability in the Balance Sheet – 1,068 1,068 Carrying value at the end of the year – 81,085 81,085
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 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
120 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
11. Investment properties (continued)
31 December 2017 Level 1 Level 2 Level 3 Total £’000 £’000 £’000 £’000
Assets measured at fair value* Investment properties – – 80,285 80,285
Professional valuation – – 80,285 80,285
* 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. 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 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%
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 121 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
11. Investment properties (continued)
31 December 2017
Fair Value Valuation Key Unobservable Class £’000 Technique Inputs Range
ERV per sq ft £7.00-£29.25 Investment Property £80,285* Income capitalisation Discount rate 5.81% to 9.81%
* 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 £1,431,000 (2017: £490,000) and are presented in the Statement of Total Return under line item ‘Net capital gains’. 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. 12. Debtors
As at As at 31 December 31 December 2018 2017 £’000 £’000
Capital VAT receivable 119 13
Total capital debtors 119 13
Rent incentive debtor 468 268 Rent receivable 179 56 Prepayments and other debtors 93 73
Total income debtors 740 397
Total debtors 859 410
122 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
13. Cash and bank balances
As at As at 31 December 31 December 2018 2017 £’000 £’000
Amounts held at bank 9,205 3,383
Total cash and bank balances 9,205 3,383
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 2018 2017 £’000 £’000
Within one year 73 72
After one year but not more than five years 243 240 More than five years 729 756
972 996
Total 1,045 1,068
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 123 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
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 2 to 29 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 2018 2017 £’000 £’000
Within one year 8,112 5,579
After one year but not more than five years 31,745 22,034 More than five years 86,481 67,703
118,226 89,737
Total 126,338 95,316
* The above analysis excludes any fixed minimum increments which reflects the expected general inflation. 16. Creditors
As at As at 31 December 31 December 2018 2017 £’000 £’000
Investment liabilities Acquisition costs payable 32 87
Total investment liabilities 32 87
Distribution payable 1,812 1,098
Other creditors Deferred income 1,204 1,030 Accruals and other creditors 176 264
Total other creditors 1,380 1,294
Total creditors 3,224 2,479
124 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
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. During the year the following fees were payable to significant parties.
Year ended Year ended 31 December 31 December 2018 2017 £’000 £’000
ACD’s management fee 781 453 Depositary fee 51 45
Total 832 498
As at 31 December 2018 the following amounts were outstanding due to significant parties.
As at As at 31 December 31 December 2018 2017 £’000 £’000
ACD’s management fee 85 49 Depositary fee 12 8
Total 97 57
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 125 AEW UK Real Return Fund
Notes to the Financial Statements (continued) for the year ended 31 December 2018
18. Derivatives
The Fund has no derivative exposure at 31 December 2018 (2017: £nil). 19. Reconcili ation of Net Assets per the financial statements to the Net Asset Value (‘NAV’) previously reported
As at As at 31 December 31 December 2018 2017 £’000 £’000
NAV previously reported 132,467 81,331 Unrealised rent incentive adjustment (185) –
Net assets as reported per the Balance Sheet* 132,282 81,331
* Balance Sheet as reported on page 107. 20. Subsequent events
Distribution On 28 February 2019, the Fund made a distribution of £1.8m, in respect of the period from 1 October 2018 to 31 December 2018. This was paid to the Shareholders of the Fund as at 31 December 2018.
Property transactions There have been no subsequent property acquisitions or sales.
Investor commitment At 31 December 2018, there were subscription of £9.75m in the queue of which £3.5m was called in March 2019. There were no redemptions in the queue as at 31 December 2018.
126 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 AEW UK Real Return Fund
Distribution Tables for the year ended 31 December 2018
First Interim Group 1 – shares purchased prior to 31 December 2017 Group 2 – shares purchased on or after 1 January 2018 and on or before 31 March 2018
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Share Class A Income Group 1 1.311 – 1.311 – 1.311 Group 2 0.667 – 0.667 0.644 1.311 Share Class C Income Group 1 1.311 (0.003) 1.308 – 1.308 Group 2 – – – – –
Second Interim Group 1 – shares purchased prior to 31 March 2018 Group 2 – shares purchased on or after 1 April 2018 and on or before 30 June 2018
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Share Class A Income Group 1 1.346 – 1.346 – 1.346 Group 2 0.388 – 0.388 0.958 1.346 Share Class C Income Group 1 1.346 (0.003) 1.343 – 1.343 Group 2 – – – – –
Third Interim Group 1 – shares purchased prior to 30 June 2018 Group 2 – shares purchased on or after 1 July 2018 and on or before 30 September 2018
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Share Class A Income Group 1 1.411 – 1.411 – 1.411 Group 2 0.852 – 0.852 0.559 1.411 Share Class C Income Group 1 1.411 (0.002) 1.409 – 1.409 Group 2 0.925 (0.002) 0.923 0.486 1.409
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 127 AEW UK Real Return Fund
Distribution Tables (continued) for the year ended 31 December 2018
Final Distribution Group 1 – shares purchased prior to 30 September 2018 Group 2 – shares purchased on or after 1 October 2018 and on or before 31 December 2018
Gross Income Net Distribution Revenue tax revenue Equalisation paid (p) (p) (p) (p) (p)
Share Class A Income Group 1 1.410 – 1.410 – 1.410 Group 2 0.915 – 0.915 0.495 1.410 Share Class C Income Group 1 1.410 (0.003) 1.407 – 1.407 Group 2 – – – – –
Equalisation Equalisation applies only to shares purchased during the distribution period (Group 2 shares). It represents the accrued revenue included in the purchase price of the shares. 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 shares for Capital Gains Tax purposes.
128 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 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
Governance Committee Members For: AEW UK Real Return Fund Refer to Governance Report of pages 10 and 13. Workman LLP Alliance House Registrar and Transfer Agent 12 Caxton Street Link Fund Administrators Limited London The Registry SW1H 0QS 34 Beckenham Road Custodian Beckenham Kent The Bank of New York Mellon (International) Ltd BR3 4TU One Canada Square London Fund Administrator E14 5AL Link Alternative Fund Administrators Limited Solicitors The Registry 34 Beckenham Road For properties in England and Wales: Beckenham Mischon de Reya LLP Kent Summit House BR3 4TU 12 Red Lion Square London Auditor WC1R 4QD KPMG LLP CMS Cameron McKenna Nabarro Olswang LLP 15 Canada Square 78 Cannon Street London London E14 5GL EC4N 6AF Valuers Pinsent Masons LLP Knight Frank LLP 1 Park Row 55 Baker Street Leeds London LS1 5AB W1U 8AN For properties in Scotland Legal Advisers Brodies LLP Eversheds LLP 15 Atholl Crescent One Wood Street Edinburgh London EH3 8HA EC2V 7WS
AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2018 129 United Kingdom 33 Jermyn Street London SW1Y 6DN
+44 20 7016 4845 www.aewuk.co.uk
France 8-12 rue des Pirogues de Bercy 75012 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 9334 www.aew.com 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 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 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) 288.6 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 1.3 1.3 0.9 0.7 Year-to-date 9.4 7.4 6.5 5.5 12 months 9.4 7.4 6.5 5.5 3 years+ 10.0 7.2 6.4 5.8 5 years+ 13.2 10.3 9.7 9.1 10 years+ - 7.5 7.3 7.2 Note: * Weighted average returns + Annualized Source: MSCI/AREF UK Quarterly Property Fund Index (Sponsored by Property Match) 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 2.0 7.83 7.04 5.66 Standard retail – Rest of UK 11.0 3.77 3.88 3.94 Shopping centres 1.8 1.81 2.61 7.97 Retail warehouses 9.3 13.85 14.23 13.85 All UK retail 24.2 27.26 27.76 31.42 City offices 0.0 3.49 3.42 3.27 West End offices 0.0 7.58 8.59 7.28 Rest of South East offices 7.0 11.89 11.20 7.75 Rest of UK offices 6.0 5.70 5.74 4.77 All UK offices 13.0 28.66 28.96 23.08 South East industrial 0.0 19.17 19.01 15.24 Rest of UK industrial 38.9 9.90 9.77 8.03 All UK industrial 38.9 29.06 28.78 23.27 Other UK properties 21.5 10.82 9.46 18.24 Cash 2.4 4.19 5.05 4.00 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 66 283.9 100.0 Joint and indirect holdings 0 0.0 0.0 Listed investments 0 0.0 0.0 Total 66 283.9 100.0 Source: AEW
Largest direct investments by lot size & percentage of total portfolio Valuation % of total Property Location Sector (GBPm) portfolio Spectrum Swindon Industrial 15-20 5-10
Hengrove Leisure Park Bristol Other property 10-15 0-5
Wakefield 41 Wakefield Industrial 10-15 0-5
Kingston Upon Pryzm Other property 10-15 0-5 Thames
London East Leisure Park Dagenham Other property 10-15 0-5 Warehouse Crewe Industrial 10-15 0-5
36-42 Old Christchurch Road Bournemouth Standard retail 5-10 0-5
Lincoln's Inn, Anglo Office High Wycombe Other offices 5-10 0-5
730 Aztec West Bristol Other offices 5-10 0-5 Grazebrook Industrial Park Dudley Industrial 5-10 0-5 10 largest investments as % of portfolio 108.4 38.2 Source: AEW Direct portfolio structure by lot-size bands Number of Valuation % of total Value band (GBPm) assets (GBPm) portfolio 0 -2.5 22 37.7 13.3 2.5 - 5 30 112.5 39.6 5-10 7 47.6 16.7 10-25 7 86.2 30.3 25 - 50 0 0.0 0.0 50 - 100 0 0.0 0.0 100-150 0 0.0 0.0 Over 150 0 0.0 0.0 Total 66 283.9 100.0 Average lot size 4.3 Source: AEW
Property Yield Voids as % of ERV Net initial yield 6.79% Investments 10.85% Nominal equivalent yield 7.85% Developments 0.00% True equivalent yield 8.24% Total 10.85% Net reversionary yield 7.98% Source: Knight Frank
Rental income & ERV by type of property
Rental income Estimated % rental value %
Standard retail 16.1 13.7 Retail warehousing 8.9 9.6 Shopping centres 3.5 4.2 Central London offices 0.0 0.0 Other offices 10.3 13.3 Industrial 40.0 40.9 Other 21.2 18.3 Overall 100.0 100.0 Source: AEW
Comparison of rents passing and ERV by type of property*
Pre-lets & rent- Development Reversionary Net reversionary Sector Rent passing % Other voids % Over rented % ERV % free periods % voids % potential % potential %
Standard retail 102.7 2.3 0.0 12.9 -19.2 1.3 -17.9 100.0 Retail warehousing 81.2 2.3 0.0 19.8 -7.4 4.0 -3.4 100.0 Shopping centres 73.8 0.0 0.0 23.7 -12.8 15.3 2.5 100.0 Central London offices ------Other offices 67.3 2.7 0.0 24.4 -1.3 6.9 5.5 100.0 Industrial 85.4 5.4 0.0 2.0 -3.2 10.4 7.2 100.0 Other 101.2 0.0 0.0 11.6 -22.0 9.2 -12.8 100.0 Overall 87.4 3.1 0.0 10.8 -9.4 8.1 -1.3 100.0 *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 0.5 15 years or greater, but less than 20 5.0 10 years or greater, but less than 15 6.3 5 years or greater, but less than 10 15.0 Less than 5 years 73.2 Source: AEW
Joint and Indirect property holdings Est. % of total Holdings Sector Joint/Indirect Vehicle Type Ownership % Valuation portfolio ------Source: AEW
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) (%)
- - - 0 0 ------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 The contribution of major tenants to rental income Tenant % BestwayLtd 4.4 The DelticGroup Ltd 4.3 Cooper Tire & Rubber Company Europe Ltd 4.1 J E Beale Plc 4.0 VueEntertainment Ltd 3.5 Integrated Third Party Logistics Ltd 2.6 New Look Retailers Ltd 2.4 George Wilson Industries Ltd 2.3 Cine-UK Ltd 2.2 David Lloyd Leisure Ltd 2.2 Three largest tenants' contribution to rental income 12.8 Five largest tenants' contribution to rental income 20.3 Ten largest tenants' contribution to rental income 32.0 Source: AEW
Balance sheet/gearing Indirect Listed Direct holdings Joint holdings Total investments investments Balance sheet (GBPm) Properties at valuation 283.9 0.0 0.0 0.0 283.9 Listed investments 0.0 0.0 0.0 0.0 0.0 Debt 0.0 0.0 0.0 0.0 0.0 Cash 6.9 0.0 0.0 0.0 6.9 Other net assets/liabilities -2.2 0.0 0.0 0.0 -2.2 Total net assets 288.6 0.0 0.0 0.0 288.6 Gearing (%) Net debt (cash)/properties -2.4 - - - -2.4 Net debt (cash)/equity -2.4 - - - -2.4 Source: AEW
Quarterly data per unit As at 30-Sep-17 31-Dec-17 31-Mar-18 30-Jun-18 30-Sep-18 31-Dec-18 Bid (GBP) ------Offer (GBP) 1.331 1.358 1.374 1.399 1.408 1.410 Mid (GBP) ------Bid/offer spread ------Net asset value (GBP) 1.246 1.272 1.286 1.310 1.318 1.320 Quarterly distribution (GBP) 0.0150 0.0183 0.0167 0.0209 0.0155 0.0158 Yield 4.7% 4.8% 5.0% 5.4% 5.4% 5.2% Source: AEW
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.
Unit holder analysis Number of unitholders Total % held Less than 1% of units in issue 32 9.0 1% or greater but less than 2% 5 8.0 2% or greater but less than 4% 5 13.2 4% or greater but less than 8% 6 31.0 Greater than 8.0% 2 38.8 Total 50 100.0 Major investors Largest holder 1 20.0 Three largest holders 3 46.6 Five largest holders 5 57.1 Ten largest holders 10 76.2 Internal/external investors Internal 3 0.5 External 47 99.5 Source: AEW
Liquidity Year to Year to Year to Year to Dec Year to Dec 2017 Period Dec 2014 Dec 2015 Dec 2016 2018 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
Units issued during period 78,861,286 35,988,327 19,012,340 4,218,577 9,947,189
Units redeemed during period - -171,892 -2,502,897 -1,740,886 -3,297,128
Units in issue at end of period 157,204,632 193,021,067 209,530,510 212,008,201 218,658,263
Unit transfers Matched bargains 50,849,766 15,164,063 2,649,301 Matched bargains %* - - 24.27% 7.15% 1.21% * as % of units in issue at the end of the period Source: AEW 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) 132.5 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 1.9 1.7 0.9 0.7 Year-to-date 10.2 7.0 6.5 5.5 12 months 10.2 7.0 6.5 5.5 3 years+ - 7.5 6.4 5.8 5 years+ - 8.1 9.7 9.1 10 years+ - - 7.3 7.2 Note: * Weighted average returns (Annualized) Source: MSCI/AREF UK Quarterly Property Fund Index (Sponsored by Property Match) ** Target 4% pa total real return
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*** 10.0 9.35 7.04 5.66 Standard retail – Rest of UK*** 15.2 9.80 3.88 3.94 Shopping centres 0.0 0.91 2.61 7.97 Retail warehouses 0.0 2.93 14.23 13.85 All UK retail 25.2 22.98 27.76 31.42 City offices 0.0 4.19 3.42 3.27 West End offices 0.0 2.20 8.59 7.28 Rest of South East offices 0.0 5.50 11.20 7.75 Rest of UK offices 2.1 8.56 5.74 4.77 All UK offices 2.1 20.45 28.96 23.08 South East industrial 8.7 2.09 19.01 15.24 Rest of UK industrial 5.3 6.15 9.77 8.03 All UK industrial 13.9 8.25 28.78 23.27 Other UK properties 54.1 46.26 9.46 18.24 Cash 4.7 2.07 5.05 4.00 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 45 125.9 100.0 Joint and indirect holdings 0 0.0 0.0 Listed investments 0 0.0 0.0 Total 45 125.9 100.0 Source: AEW
Largest direct investments by lot size & percentage of total portfolio
Property Location Sector Valuation (GBPm) % of total portfolio
The Residences Middlesbrough Other property 10-15 10-15 Larkland House Care Centre Ascot Other property 5-10 5-10 Ashlands Mews And St Georges Leicester Other property 5-10 5-10 Cross Point Coventry Other property 5-10 5-10 The Point Borehamwood Other property 5-10 5-10 Travelodge Hotel West Bromwich Other property 5-10 5-10 Ten Pin Bowling Nottingham Other property 5-10 5-10 Jablite, Unit A, Arundel Industrial 2.5-5 2.5-5 Holmes Court And Holmes House Wigston Other property 2.5-5 2.5-5 Cinema And Restaurants Altrincham Other property 2.5-5 2.5-5 10 largest investments as % of portfolio 69.4 55.1 Source: AEW
Direct portfolio structure by lot-size bands Number of Valuation Value band (GBPm) % of total portfolio assets (GBPm) 0 -2.5 28 33.0 26.2 2.5 - 5 10 37.3 29.6 5-10 6 41.3 32.8 10-25 1 14.3 11.4 25 - 50 - - - 50 - 100 - - - 100-150 - - - Over 150 - - - Total 45 125.9 100.0 Average lot size 2.8 Source: AEW Property Yield Voids as % of ERV Net initial yield 5.99% Investments 0.00% Nominal equivalent yield 6.64% Developments 0.00% True equivalent yield 6.92% Total 0.00% Net reversionary yield 6.90% Source: Knight Frank Source: Knight Frank
Rental income & ERV by type of property Rental income Estimated rental value % % Standard retail 27.2 29.2 Retail warehousing 0.0 0.0 Shopping centres 0.0 0.0 Central London offices 0.0 0.0 Other offices 2.7 2.6 Industrial 13.4 15.9 Other 56.7 52.3 Overall 100.0 100.0 Source: AEW
Comparison of rents passing and ERV by type of property*
Pre-lets & rent- Development Reversionary Net reversionary Sector Rent passing % Other voids % Over rented % ERV % free periods % voids % potential % potential %
Standard retail 88.3 0.0 0.0 0.0 -2.3 14.0 11.7 100.0 Retail warehousing ------Shopping centres ------Central London offices ------Other offices 100.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0 Industrial 80.0 0.0 0.0 0.0 0.0 20.0 20.0 100.0 Other 102.9 2.2 0.0 0.0 -7.1 2.1 -5.1 100.0 Overall 94.9 1.1 0.0 0.0 -4.4 8.3 3.9 100.0 Source: AEW * 75% of income linked to inflation (including 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 21.2 15 years or greater, but less than 20 36.0 10 years or greater, but less than 15 13.2 5 years or greater, but less than 10 18.2 Less than 5 years 11.5 Source: AEW * WAULT to break 15.7 years Joint and Indirect property holdings
Holdings Sector Joint/Indirect Vehicle Type Ownership % Valuation Est. % of total portfolio
------Source: AEW
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
The contribution of major tenants to rental income Tenant % Prime Life Ltd 10.4 Ten Pin Limited 10.0 South Tees NHS Trust 9.2 Volkswagen Group UK Limited 6.8 Care UK Community Partnerships Ltd 5.7 JabliteLimited 4.4 Travelodge Hotels Ltd 4.1 Barclay & Mathieson Ltd 3.7 BuzzGroup Ltd 3.6 Tesco Stores Limited 3.0 Three largest tenants' contribution to rental income 29.6 Five largest tenants' contribution to rental income 42.1 Ten largest tenants' contribution to rental income 60.9 Source: AEW Balance sheet/gearing Indirect Listed Direct holdings Joint holdings Total investments investments Balance sheet (GBPm) Properties at valuation 125.9 0.0 0.0 0.0 125.9 Listed investments 0.0 0.0 0.0 0.0 0.0 Debt 0.0 0.0 0.0 0.0 0.0 Cash 6.2 0.0 0.0 0.0 6.2 Other net assets/liabilities 0.4 0.0 0.0 0.0 0.4 Total net assets 132.5 0.0 0.0 0.0 132.5 Gearing (%) Net debt (cash)/properties -4.9 - - - -4.9 Net debt (cash)/equity -4.7 - - - -4.7 Source: AEW
Quarterly data per unit As at 30-Sep-17 31-Dec-17 31-Mar-18 30-Jun-18 30-Sep-18 31-Dec-18 Bid (GBp) 0.971 0.976 0.989 1.006 1.014 1.020 Offer (GBp) 1.053 1.058 1.072 1.091 1.100 1.106 Bid/offer spread 7.8% 7.8% 7.8% 7.8% 7.8% 7.8% Net asset value (GBp) 0.986 0.991 1.004 1.022 1.030 1.035 Quarterly distribution (GBp) 0.0131 0.0133 0.0131 0.0135 0.0141 0.0141 Yield 5.3% 5.3% 5.3% 5.2% 5.2% 5.3% 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.
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 0.9 1% or greater but less than 2% 0 0.0 2% or greater but less than 4% 2 6.5 4% or greater but less than 8% 2 10.8 Greater than 8.0% 6 81.8 Total 16 100.0 Major investors Largest holder 1 18.9 Three largest holders 3 48.8 Five largest holders 5 72.1 Ten largest holders 10 99.1 Internal/external investors Internal 6 3.3 External 10 96.7 Source: AEW
Liquidity Year to Year to Year to Period Dec 2016 Dec 2017 Dec 2018 Issues and redemptions Units in issue as at start of period - 55,537,227 82,112,727 Units issued during period 55,537,227 26,575,500 45,830,966 Units redeemed during period - - - Units in issue at end of period 55,537,227 82,112,727 127,943,693 Unit transfers Matched bargains - - - Matched bargains %* - - - * as % of units in issue at the end of the period Source: AEW