The London Borough of Tower Hamlets Superannuation Fund · 2018-09-18 · 2016-2017. Second, higher residential prices and the relaxation of planning controls in 2013 mean that many

This quarterly investment report is provided to you in supplement to your monthly performance report and other monthly investment reporting. It must be read in conjunction with your monthly performance report, which provides full details in a standard reporting format of the performance of your investment. This supplemental reporting is intended to provide you with an overview of portfolio activity during the period and should not be relied upon to make investment decisions or otherwise.

For professional investors only

The London Borough of Tower Hamlets Superannuation Fund

Q2 2018 Investment Report

Schroder Real Estate Capital Partners

Q2/

2018

Schroders

The London Borough of Tower Hamlets Superannuation Fund

In this report

The Team

Overview

Market Summary

Portfolio Analysis

Performance Review

Portfolio Activity

Strategy

Governance

Appendix

Schroders The London Borough of Tower Hamlets Superannuation Fund

The Team

Client Director Client Executive Olivia Docker Tel: 020 7658 3552 [email protected]

Elliot Behan Tel: 020 7658 7056 [email protected]

Real Estate Fund Manager Head of Schroder Real Estate Capital Partners

Real Estate Fund Manager

Patrick Bone Tel: 020 7658 4568 [email protected]

Graeme Rutter Tel: 020 7658 6768 [email protected]

Naomi Green Tel: 020 7658 6274 [email protected]

Q2 2018 Investment Report 3



Overview

Portfolio Objective

To achieve a return of 0.75% pa net of fees over rolling three year periods above the AREF/IPD UK Quarterly Property Funds Indices - All Balanced Funds Weighted Average (benchmark).

Portfolio Valuation

Value at 31 Mar 2018 GBP 155,555,773

Net cash flow GBP -

Value at 30 Jun 2018 GBP 158,982,625

Performance Periods to 30 Jun 2018

Total returns

GBP

3 months

%

12 months

%

3 years

% pa

5 years

% pa

10 years

% pa

Portfolio (gross) 2.2 11.0 8.2 10.4 4.4

Portfolio (net) 2.2 10.8 8.0 10.2 4.2

AREF/IPD UK Quarterly Property Fund Index All Balanced Funds Weighted Average

2.0 9.7 7.6 10.6 4.9

Difference +0.2 +1.1 +0.4 -0.4 -0.7

Breakdown of performance

UK Investments (Gross) 2.2 10.8 8.2 11.3 4.7

European Investments (Gross) 16.5 220.8 47.9 18.6 5.9

Source: Schroders & AREF/IPD UK Quarterly Property Fund Index, 30 June 2018. The portfolio's returns are calculated on the basis that units in open-ended funds are valued at their mid price and closed-ended funds at their NAV price. Figures may be subject to rounding.



Summary

In Q2 there were circa £10.3 million of acquisitions across four funds and circa £2.6 million of sales / returns of capital. The purchases were as follows: Multi-Let Industrial PUT (circa £4.5 million); Schroder Real Estate Real Income Fund (circa £3.1 million); UNITE UK Student Accommodation Fund (circa £2.1 million) and Regional Office Property Unit Trust (circa £530,000).

There was one sale over the quarter, a circa £2.4 million redemption from Standard Life Pooled Pension Property Fund. There was also a capital receipt of circa £200,000 received from the Schroder Real Estate Fund of Funds Continental European Fund I as it moves towards wind down.

Returns are above benchmark over three months (+0.2%), twelve months (+1.1%) and three years (+0.4% per annum). Returns are more disappointing over five years (-0.4% per annum) and ten years (-0.7% per annum) mainly due to the impact of the holdings in continental Europe. The industrial sector is again the strongest driver of recent returns.

Portfolio Strategy

The portfolio sector structure is contributing positively to performance, being underweight relative to benchmark to the retail sector and central London offices, and being overweight to regional offices, industrials and alternatives.

At quarter end there was circa £2.4 million of cash on account, representing 1.5% of portfolio value. There are commitments totalling just under £3.4 million that will be met by the cash on account and a £1.0 million redemption served on Standard Life Pooled Pension Property Fund.



UK Property Market Summary

Schroders forecasts that the UK economy will grow by 1.5% p.a. through 2018-2019. Consumers are expected to benefit from a slight acceleration in wage awards and a slowdown in inflation, while the government is set to increase spending on the health service. Furthermore, the agreement on a post-Brexit transition period should help business confidence, although there is still uncertainty about whether there will be a final trade deal with the EU and, if so, what shape it will take. We expect that the Bank of England will raise base rates to 0.75% in the second half of this year and then gradually tighten to 2% by the end of 2020.

As expected, although average capital values of the UK real estate market continue to increase, there is significant polarisation between the sectors due to both structural and cyclical factors.

Retail values are falling with an increasing number of retailers and restaurant chains falling into insolvency or entering into company voluntary arrangements (CVAs) in order to cut their rent. In addition, a number of profitable retailers have announced store closures. At root, this malaise reflects an oversupply of similar formats (e.g. mid-market Italian restaurants, pound shops) and the success of online retailers, which have lower overheads than conventional retailers and much better insight into their customers. The impact is that retail rents in the majority of locations are likely to fall over the next couple of years.

In contrast, rental growth in the industrial sector accelerated to 5% p.a. in the first half of 2018. This is partly due to retailers investing heavily in their supply chains to fulfil online sales and good demand from Aldi, Lidl and trade-counters (e.g. Screwfix). The other key factor supporting rents is that many older industrial estates have been re-developed for housing in the last decade, leading to a shortage of smaller units, particularly in London and other big cities. Looking ahead, we expect that industrial rental growth will slow to 2-3% p.a. over the next couple of years, because of an increase in the development of large warehouses and because some second-hand space will come back to the market from failed retailers. Moreover, advances in artificial intelligence and predictive ordering should enable occupiers to start using their warehouse space more efficiently.

In the office sector, the fall in vacancy seen in most cities since 2013 has halted, at least temporarily. The main factor has been an increase in new building at a time of modest levels of occupier demand in many markets. However, we do not think that office rents in general are about to fall, for two reasons. First, outside of the City of London, development in most cities has already peaked



and completions over the next two years should be lower than in 2016-2017. Second, higher residential prices and the relaxation of planning controls in 2013 mean that many towns and cities are losing both office and industrial space. Over 14 million square feet of offices in England were converted to residential in 2016/17, equal to the office stock of Newcastle. While office rents in the City of London could fall by 10% through 2018-2020, rents outside London will probably be stable.

Unsurprisingly, the contrasting fortunes of occupier markets are reflected in the investment market. Waning interest from investors meant that retail accounted for only 11% of purchases by value in the first half of 2018, against a ten year average of 22% p.a. Prime shopping centre and retail park yields rose by 0.25-0.35%, according to CBRE. Conversely, strong competition among investors pushed down yields on prime industrial estates by 0.25% in the first half of the year and industrial's share of total purchases by value rose to 16%, from 11% on average in the previous ten years. Prime office yields were flat.

Capital values in the main commercial markets are now moving in opposite directions for the first time in 15 years, demonstrating that there is no such thing as a single UK real estate cycle with regular peaks and troughs. We expect City office and retail capital values will fall by 10-15% between end-2017 and end-2019, whereas industrial and regional office capital values should be stable or potentially increase. Our main focus for diversified portfolios is on industrial / logistics serving large population centres and offices in winning cities such as Bristol, Leeds and Manchester. Certain parts of the London office market benefiting from structural change (e.g. Crossrail stations, Shoreditch) remain attractive. We are also investing opportunistically in certain niche sectors and strategies (e.g. self storage and real estate debt) which should be less correlated with the main commercial markets.



Continental European Property Market Summary

Although economic growth in the eurozone slowed in the first quarter of 2018, the main cause was bad weather and a flu epidemic in northern Europe. Italy and Spain were unaffected. Schroders forecasts that eurozone GDP will grow by 2-2.5% through 2018-2019, its best performance since 2007. Consumer spending should be supported by an increase in employment and rising real wages while the recovery in corporate profits and decline in spare capacity since 2014 should drive higher business investment. Although stronger growth will feed through to faster inflation, Schroders expects it to stay below 2% over the next couple of years, with the result that the European Central Bank (ECB) is unlikely to raise interest rates until 2019 and then only gradually. There are two known unknowns. First, a full blown trade war with the US, which would not only hit the eurozone directly through exports to the US, but also indirectly, assuming weaker growth in China and elsewhere. Second, the governing coalition of far right and far left parties in Italy could unravel, triggering a new sovereign debt crisis.

The strength of the economy is reflected in continental European office markets. The majority of cities saw positive net absorption in the first quarter of 2018 and vacancy rates in Amsterdam, Brussels, the big German cities and Stockholm are at their lowest level in 15 years. Consequently, nearly every European city saw an increase in prime office rents in the year to March 2018 and in several cities the fastest rental growth is now outside the central business district in a tech hub, or area benefiting from new transport. While there is a risk that this upswing in rents will trigger a building boom and self-destruct, in most cities the upturn in office development has so far been in step with demand, adding less than 1% p.a. to total floorspace. We expect that Amsterdam, Berlin, Munich, Oslo and Stockholm will see the biggest increase in average grade office rents over the next three years.

Similarly, the logistics market in continental Europe is seeing strong demand, thanks to the rapid growth in e-commerce, the rising importance of recycling and the recovery in manufacturing. For example, BMW, Robert Bosch and Volkswagen all leased big new warehouses in Germany in the first quarter of 2018. However, while office rental growth is currently running at 5% p.a., logistics rental growth is significantly slower at around 2% p.a. (source CBRE). The difference can probably be explained by the higher level of building in the logistics market in recent years and last-mile logistics units, which tend to be in more supply constrained urban locations, have generally seen faster rental growth than big warehouses. Arguably another factor is that retailers, manufacturers and logistics companies have lower



profit margins and are more cost conscious than the average office occupier.

By contrast, retail real estate markets are polarising as the internet captures most of the growth in sales. The trend is clearest in northern Europe where online sales now account for over 10% of total sales. The average vacancy rate in mid-sized shopping centres in France and Germany has risen to 8-9% from 2-3% ten years ago and structural vacancy has also increased in Benelux and the Nordics. Furthermore, the growth in prime shop rents in Paris and the big German cities appears to have stalled, as the closure of department stores creates vacant space and as some luxury retailers downsize in order to cut costs. The most defensive parts of the market are big shopping centres which dominate their catchment area, and smaller supermarkets. In addition, out of town retail parks are benefiting from the growth of discount retailers (e.g. Action, Deichmann, KiK, Rossmann) who are attracted by the relatively low level of rents.

The continental European investment market remained active in the first quarter of 2018 with €35 billion of transactions, reflecting strong interest from a range of domestic, Chinese, South Korean and US investors. Looking forward, Schroders expects that the yield on German 10-year bonds will rise to 2.5% by 2022. While that will put upward pressure on eurozone real estate yields, we think that the increase in office and logistics yields between end-2019 and end-2022 will be limited to 0.25-0.4%, assuming that the eurozone economy continues to grow and prospects for rental growth remain favourable. The exception could be the retail sector where investors' concerns about online diversion and future rental growth could lead to an earlier and sharper increase in yields.

We forecast total returns of 5-6% p.a. on average investment grade European real estate between end-2017 and end-2022. The main component will be an income return of 4%, while capital value growth should be generated by rental growth. We expect that certain major cities which have diverse economies, a large pool of skilled labour, good infrastructure and are attractive places to live will outperform the wider market. Examples include Amsterdam, Berlin, Hamburg, Frankfurt, Madrid, Munich, Paris, Stockholm and Stuttgart. We also like certain smaller university cities which share many of the same characteristics.



Portfolio Analysis UK Portfolio sector exposure

(including cash held by

underlying property funds)

Open/closed-ended exposure

Fund style exposure

Source: Schroders & AREF/IPD UK Quarterly Property Fund Index, 30 Jun 2018. Totals subject to rounding. Cash includes look through cash in underlying holdings in the top chart.

Standard Retail 12.1%

Shopping Centres 1.4%

Retail Warehouses 12.2%

Central Lon. Offices 3.8%

Rest of UK Offices 17.8%

Industrial 33.2%

Alternatives 12.7%

Cash 6.9%

Open ended 81.4%

Closed ended 17.1%

Cash 1.5%

Core - UK 55.5%

Value Added - UK 42.3%

Value Added - Europe 0.6%

Cash 1.5%



Largest Stock Positions Largest Positions Style % of NAV

at 30 Jun 2018

SCHRODER UK REAL ESTATE FUND Core 12.2

MAYFAIR CAPITAL PROPERTY UNIT TRUST Core 11.5

METRO PROPERTY UNIT TRUST Core 10.6

SCHRODER REAL ESTATE REAL INCOME FUND A UNITS Value-added 10.4

INDUSTRIAL PROPERTY INVESTMENT FUND Value-added 9.6

HERMES PROPERTY UNIT TRUST Core 8.3

BLACKROCK UK PROPERTY FUND Core 8.0

MULTI-LET INDUSTRIAL PROPERTY UNIT TRUST Value-added 7.1

REGIONAL OFFICE PROPERTY UNIT TRUST Value-added 5.5

STANDARD LIFE POOLED PENSION PROPERTY FUND Core 5.0

Full details of holdings can be found in the Appendix.



Performance Review

Returns are above benchmark over three months (+0.2%), twelve months (+1.1%) and three years (+0.4% per annum). Returns are more disappointing over five years (-0.4% per annum) and ten years (-0.7% per annum) mainly due to the impact of the holdings in continental Europe. The industrial sector is again the strongest driver of recent returns.

Returns were above benchmark over the quarter (+0.2%). Cash (-0.1%) detracted from performance, but value add funds (+0.2%), core funds (+0.1%) and holdings in continental Europe (+0.1%) made a positive contribution to returns.

Industrial Property Investment Fund (IPIF) was the strongest contributor to performance in Q1, followed by Multi-Let Industrial Property Unit Trust (Multi-Let), both benefiting from the continued strong performance of multi-let industrial estates. Hercules Unit Trust (HUT) was the weakest contributing fund over three months.

Performance was strongly above benchmark over one year (+1.1%), with the industrial sector making positive contributions through the holdings in IPIF, Multi-Let and Metro Property Unit Trust (Metro - circa 50% exposure to the industrial sector). Schroder Real Estate Fund of Funds – Continental European Fund I (CEF I) also made a strong positive contribution over twelve months. Cash was the weakest contributor, followed by two retail funds, namely HUT and UK Retail Warehouse Fund.

Core funds made a positive (+0.3%) contribution to twelve month returns, but value add funds (+0.9%) and continental Europe (+0.6%) contributed very strongly. Cash detracted from returns by -0.4%.

Three-year performance is improving with returns now above the benchmark by +0.4% per annum. Core-style funds (0.1% per annum), continental Europe (+0.2% per annum) and value add funds (+0.6% per annum) made positive contributions to three year returns. Cash has negatively impacted returns (-0.3% per annum) over the period.

IPIF and Metro have also been the strongest contributing funds over three years. Standard Life Pooled Pension Property Fund (Standard Life) was the weakest fund contributor, followed by Aviva Investors Pensions (Aviva) and HUT.

Five year returns are weaker than more recent periods due to the impact of the holdings in continental Europe, but performance is improving. Performance is below benchmark by -0.4% per annum over five years, over this time period CEF I has diluted returns by -



0.4% per annum. Value add funds (+0.6% per annum) made a very strong contribution to returns, whilst core style funds (-0.1% per annum) and cash (-0.3% per annum) have detracted from relative returns.

As with last quarter, IPIF and Hermes Property Unit Trust were the strongest drivers of positive performance over a five year period. After CEF I and cash, Aviva, HUT and Standard Life were the weakest performers.

Ten year portfolio returns are -0.7% per annum below benchmark. Core style funds (+0.3% per annum) and value add funds (+0.3% per annum) both made positive contributions to performance. Continental Europe has negatively impacted returns by -0.6% per annum, whilst opportunity funds (-0.4%) and cash (-0.2% per annum) have also diluted returns.



Total return by region

Periods to end 30 Jun 2018

Total return attribution

relative to benchmark

top & bottom five

contributors

12 months to 30 Jun 2018



top & bottom five

contributors

3 years to 30 Jun 2018

2.2% 10.8% 8.2% 11.3% 16.5%

220.8%

47.9%

18.6% 2.0% 9.7% 7.6% 10.6%

0%

50%

100%

150%

200%

250%

3 months % 12 months % 3 years p.a. % 5 years p.a. %

UK Continental Europe Benchmark

-0.5%

0.0%

0.5%

1.0%

1.5%IN

DU

STRI

AL P

ROPE

RTY

INVE

STM

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FUN

D

SCH

ROD

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MAY

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CAP

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PRO

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PEN

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LIM

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STAN

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PEN

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FUN

D

UK

RETA

IL W

AREH

OU

SE F

UN

D

HER

CULE

S U

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TRU

ST

Cash

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

IND

UST

RIAL

PRO

PERT

YIN

VEST

MEN

T FU

ND

MET

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ROPE

RTY

UN

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SCH

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POO

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PEN

SIO

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FUN

D

Cash





top & bottom five

contributors

5 years to 30 Jun 2018

Benchmark is AREF/IPD UK Quarterly Property Fund Index All Balanced Funds Weighted Average. Source: Schroders & AREF/IPD UK Quarterly Property Index. Note: Stock and fund style attribution is presented gross of fees. Periods over 12 months are annualised. Totals may be subject to compounding.

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

IND

US

TR

IAL

PR

OP

ER

TY

INV

ES

TM

EN

T F

UN

D

HE

RM

ES

PR

OP

ER

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UN

ITT

RU

ST

CO

LU

MB

US

UK

RE

AL

ES

TA

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UN

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RU

ST

SC

HR

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UK

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TA

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ME

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DP

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UL

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SP

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Ca

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EF

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OP

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NF

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Portfolio Activity

In Q2 there were circa £10.3 million of acquisitions across four funds and circa £2.6 million of sales / returns of capital. The purchases were as follows: Multi-Let Industrial PUT ( circa £4.5 million); Schroder Real Estate Real Income Fund (circa £3.1 million); UNITE UK Student Accommodation Fund (circa £2.1 million) and Regional Office Property Unit Trust (circa £530,000).

There was one sale, a circa £2.4 million redemption from Standard Life Pooled Pension Property Fund. There was also a capital receipt of circa £200,000 received from the Schroder Real Estate Fund of Funds Continental European Fund I as it moves towards wind down.

Purchases Fund Investment GBP

No. of units Entry cost/(discount)

(%) MULTI-LET INDUSTRIAL

PROPERTY UNIT TRUST 1,644,453 1,227.02 3.8

MULTI-LET INDUSTRIAL PROPERTY UNIT TRUST

2,900,000 2,163.86 3.8

REGIONAL OFFICE PROPERTY UNIT TRUST

529,070 489.36 3.8

SCHRODER REAL ESTATE REAL INCOME FUND A UNITS

2,340,100 1,609.15 2.0

SCHRODER REAL ESTATE REAL INCOME FUND A UNITS

740,100 508.92 2.0

UNITE UK STUDENT ACCOMMODATION FUND

2,118,760 1,506,092.00 4.8

Sales Fund Disinvestment GBP

No. of units Realised loss/gain

GBP

SCHRODER REAL ESTATE FUND OF FUNDS - CONTINENTAL EUROPEAN FUND I

199,717 0 0

STANDARD LIFE POOLED PENSION PROPERTY FUND

2,399,999 -30,389.58 972,074

Stock Activity Purchases

3 months to 30 Jun 18

Schroder Real Estate Real Income Fund

Units were acquired in two transactions at the April offer price.

UNITE UK Student Accommodation Fund

Units were acquired on the secondary market at a 4.75% premium to the prevailing valuation.



Sales

Standard Life Pooled Pension Property Fund

Units were redeemed at the prevailing bid price.

Return of capital

Schroder Real Estate Fund of Funds - Continental European Fund I

A capital distribution was received during the quarter reflecting net proceeds received from the sale of assets in underlying funds.

Drawdown

Multi-Let Industrial Property Unit Trust

Funds were drawn to acquire industrial assets in Heston and Gravesend.

Regional Office Property Unit Trust

Funds were drawn to finance forthcoming acquisitions.

Redemptions Outstanding Fund Curr Est. proceeds

No. of units

Date proceeds expected

Notice date

Portfolio Commitments Fund Curr Total commitment

Drawn Balance Latest possible

drawdown

Regional Office Property Unit Trust

GBP 11,895,000 8,496,456 3,398,544 Q3 2018

- - - - - - -



Strategy

The portfolio sector structure is contributing positively to performance, being underweight relative to benchmark to the retail sector and central London offices, and being overweight to regional offices, industrials and alternatives.

Our real estate forecasts suggest a market correction in 2018, but this has not happened to date with the benchmark returning close to 4.0% in H1 2018. It is probable that distress in the retail sector will feed its way into valuations more significantly in the second half of the year.

The industrial sector has been a beneficiary of the growth in online sales at the expense of the traditional high street. Industrials continue to attract keen pricing if assets are brought to market and rental growth is still being seen across the sector. The overweight position in industrials has been the strongest driver of returns over several years.

At quarter end there was circa £2.4 million of cash on account, representing 1.5% of portfolio value. There are commitments totalling just under £3.4 million that will be met by the cash on account and a £1.0 million redemption served on Standard Life Pooled Pension Property Fund.

UK portfolio sector weightings relative to benchmark

Source: Schroders & AREF/IPD UK Quarterly Property Fund Index, 30 Jun 2018.

0.8%

-1.5% -3.1%

-8.7%

1.7%

6.2%

3.7%

1.2%

-10.0%

-5.0%

0.0%

5.0%

10.0%

StandardRetail

ShoppingCentres

RetailWarehouses

Central Lon.Offices

Rest of UKOffices

Industrial Alternatives Cash

Portfolio House View (overweight / underweight sector)



Governance

Investment Date Voting Recommendation

Resolution

None

Sustainability Last quarter we sent a Sustainability Survey to 21 managers on our

investment platform and received replies from 18. We have analysed the responses and split them into three groups:

Group One: Funds in this group have a comprehensive real estate sustainability policy in addition to a wider corporate policy. Their assessment of ESG risks covers all stages of portfolio management from investment selection, acquisition and sale to ongoing asset and property management. They have all set ESG objectives and measurable targets to improve efficiencies, reduce occupational costs, improve tenant satisfaction, manage obsolescence and ultimately improve performance. These funds require committee sign off on sustainability issues for all new investments and provide frequent updates to senior management. 13 funds fall into this group, accounting for 74.7% of SRECaP’s assets under management1.

Group Two: All of our funds perform ESG checks as a necessary part of acquisition due diligence but the funds in this group do not officially document this within a real estate sustainability policy. They are also unlikely to have dedicated resources and procedures in place to monitor ESG risks throughout the period of asset ownership. This group includes five funds accounting for 18.5% of SRECaP’s AUM. The majority of our SRECaP Partnership funds fall into this group because our third party advisers are typically small, niche operators with fewer resources. We will work with our Partners to align their approach with Schroders Real Estate Sustainability Policy.

Group Three: Three funds failed to respond in time, accounting for 6.8% of SRECaP’s AUM. We will continue to chase these funds and include their responses in our next quarterly update.

Over the coming quarters we will continue to publish details of our survey results including some case studies. This quarter, we have delved into more detail on the Energy Performance Certificate (EPC) ratings of assets within the funds following the Minimum Energy Efficiency Standards (MEES) legislation that recently came into force.



From April 2018, the grant of all new leases on commercial assets in England and Wales requires an EPC rating of grade E or above. The chart below shows the average weightings in each grade across the surveyed funds.

Note that exempt assets include Scottish assets where regulations differ. Scottish assets in this category

are fully compliant with Scottish regulations.

93.6% of assets have EPC ratings that are MEES compliant (i.e. graded E or above) and just over 50% are graded C or above. The average weighting in F and G is 4.4% with a range of 0 to 13%. This compares favourably with recent research by JP Morgan that stated 16.7% of commercial buildings in England are rated F or G. Generally, assets that fall in to these latter groups will be improved when leases end or voids occur. Capital expenditure will be required to bring these assets up to the required standard before they can be re-let.

1Excludes cash, listed securities, European holdings and Schroder fund of funds products.



Appendix

Investment Restrictions Parameters Restriction Current status

Max. exposure to any common investment fund (CIS)

30% 12.2%

Max. in Schroder in-house funds (Manager & Adviser)

60% 18.3%

Min. exposure to open-ended funds 45% 82.9%

Max. exposure to opportunity funds 20% 0.0%

Max. exposure to property index certificates

20% 0.0%

Max. exposure to listed property securities 10% 0.0%

Max. exposure to Continental Europe 20% 0.6%

Source: Schroders, to 30 June 2018.

Notes:

Valuation data represents value calculated as at the final business day of the quarter to which this Investment Report relates. Pricing occurs 10 days following quarter end. Accordingly, the above noted column entitled "current status" refers to the quarter end valuation data.

The Investment Management Agreement (as amended from time to time) constitutes the final record of applicable investment restrictions incumbent on Schroder Real Estate Investment Management Limited. In the event of any inconsistency between the Investment Restrictions appearing in this Investment Report and the Investment Management Agreement, the Investment Management Agreement shall prevail.



Appendix

Portfolio Valuation Fund Description Value at 31 Mar 2018

GBP

Value at 30 Jun 2018

GBP

Portfolio Value

% MID and NAV values

BLACKROCK UK PROPERTY FUND

Core 12,597,914 12,738,054 8.0

HERMES PROPERTY UNIT TRUST

Core 12,956,715 13,150,099 8.3

MAYFAIR CAPITAL PROPERTY UNIT TRUST

Core 17,994,787 18,297,684 11.5

METRO PROPERTY UNIT TRUST

Core 16,574,967 16,835,073 10.6

STANDARD LIFE POOLED PENSION PROPERTY FUND

Core 10,270,309 7,904,162 5.0

SCHRODER UK REAL ESTATE FUND

Core 19,086,318 19,349,633 12.2

Sub total Core 89,481,009 88,274,705 55.6

HERCULES UNIT TRUST Value Add 4,876,236 4,583,947 2.9

INDUSTRIAL PROPERTY INVESTMENT FUND

14,446,777 15,239,706 9.6

LOCAL RETAIL FUND 4,583,012 4,593,295 2.9

MULTI-LET INDUSTRIAL PROPERTY UNIT TRUST

Value Add 6,418,208 11,319,163 7.1

REGIONAL OFFICE PROPERTY UNIT TRUST

Value Add 8,070,238 8,669,410 5.5

SCHRODER REAL ESTATE REAL INCOME FUND

Value Add 13,412,594 16,543,923 10.4

UK RETAIL WAREHOUSE FUND

4,454,399 4,270,418 2.7

UNITE UK STUDENT ACCOMMODATION FUND

Value Add 0 2,046,779 1.3

Sub total Value Add 56,261,464 67,266,641 42.4

SCHRODER REAL ESTATE FUND OF FUNDS CONTINENTAL EUROPEAN FUND I

Europe 1,080,159 1,012,660 0.6

Sub total Europe 1,080,159 1,012,660 0.6

EUR CASH Cash 33 34 0.0

GBP CASH Cash 8,733,107 2,428,586 1.5

Sub total Cash 8,733,140 2,428,619 1.5

Total 155,555,773 158,982,625 100.0

Totals may be subject to rounding. Portfolio valuations are calculated on the basis that units in open-ended funds are valued at their mid price and closed-ended funds at their NAV price. Source: Schroders, periods to 30 June 2018. The exchange rate as at 30 June 2018 was £1 to €1.13079.



Appendix

Partnership Fund Transactions

Fund Local Retail Fund

Transaction Type Acquisition

Sector Standard Retail

Address Great Homer Street District Centre, Liverpool

Price £5,100,000 (7.0% Net Initial Yield)

Principal Tenant(s) Costa Ltd, Barnado's, L Rowland & Co, Domino's, Subway

Fund Mayfair Capital PUT



Address Barlow Moor Road, Chorlton, Manchester


Principal Tenant(s) Kentucky Fried Chicken




Address Chester Way, Northwich








Address Hospital Way, Runcorn






Address Stourport Road, Kidderminster


Principal Tenant(s) Kentucky Fried Chicken, Starbucks


Transaction Type Disposal


Address Mead Avenue, Yeovil


Principal Tenant(s) Heritage Automotive

Fund Metro PUT


Sector Regional Offices

Address Douglas House, 40 London Road, Reigate


Principal Tenant(s) Kimberly-Clark Europe



Fund Metro PUT


Sector Regional Offices

Address St George's House, 24 Queens Road, Weybridge


Principal Tenant(s) N/A (Vacant)

Fund Metro PUT


Sector Central London Offices

Address 35 Great Sutton Street, London EC1


Principal Tenant(s) Luminous Reputation Management, Formula One Management, Barworks

Fund Multi-Let Industrial PUT


Sector Industrial

Address Aerodrome Way, Heston


Principal Tenant(s) Interlink, Max Foods, Compac UK, Orange Transgroup

Fund Multi-Let Industrial PUT


Sector Industrial

Address D1, Imperial Business Park, Gravesend


Principal Tenant(s) Euro Car Parts



Appendix

Retail Occupier Update Following a series of recent high-profile administrations and Company Voluntary Agreements (CVAs) in the UK retail sector, we have approached the managers of your underlying holdings to determine your exposure to impacted retailers.

Within our analysis we report your exposure in terms of number of leases and an estimate of the percentage of rental income ‘lost’.

In order to better understand the context of this analysis, it is important to note the distinction between a retailer in administration and one subject to a CVA, as well as the categories of CVAs:

Administration

The process of being in administration involves the court appointing an independent administrator who seizes control of the management of the impacted company. Landlords are unable to take distrain upon assets and Creditors cannot pursue legal action.

Research into administrations suggests that a large majority of companies result in being liquidated or dissolved. For this analysis, we have therefore assumed that all rental income derived from retailers in administration is lost (even though technically they may still be trading).

CVA

In order to avoid going into administration, a company’s directors may propose a CVA. This enables a company to request a compromise or arrangement in satisfaction of its debts. Whilst the CVA is in place, the company’s directors remain in control of the company.

Category A – reserved for the better performing stores. No rental impact but may involve slight changes to lease structure such as moving from quarterly to monthly rents.

Category B – assigned to marginally-underperforming stores. Lease terms to be negotiated including notable rental discounts. There may be a number of rental discount bands including nil rent in Category B.

Category C – unprofitable stores that will cease trading.

In terms of this analysis, the reported ‘Number of Leases’ with ‘Reduced Rent’ includes exposure to Category B and C CVAs (as well as those in administration), with Category A exposure included



within the ‘Total’ figure.

Number of Leases

Retailer Action Total Reduced

Rent

Estimated

% Rental Lost Byron Burger CVA 0 0 0.00%

Carluccio’s CVA 4 4 0.04%

Carpetright CVA 15 5 0.03%

Feather & Black Administration 1 1 0.01%

House of Fraser CVA 0 0 0.00%

Jamie’s Italian CVA 0 0 0.00%

Maplin Administration 12 12 0.08%

Mothercare CVA 9 2 0.01%

New Look CVA 23 14 0.17%

Poundworld Administration 6 6 0.05% Prezzo / Chimichanga CVA 9 5 0.05%

Select CVA 2 2 0.00%

Tinc CVA 0 0 0.00%

Toys-R-Us Administration 6 6 0.07%

Warren Evans Administration 1 1 0.03%

Total 88 58 0.54%

We will provide further updates in future quarterly investment reports if there is a continuation of retailer failures.

Notes Responsible Investment: Schroders Socially Responsible Investment and Corporate Governance policies can be found on our website http://www.schroders.com/global/about-schroders/corporate-responsibility/responsible-investment/. We also publish regular articles on Socially Responsible Investing, which can be found on Schroders Talking Point www.schroders.com/talkingpoint.

Important Information For professional investors and advisors only. This document is not suitable for retail clients. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. © and database right Investment Property Databank Limited and its licensors 2018. All rights reserved. IPD has no liability to any person for any losses, damages, costs or expenses suffered as a result of any use of or reliance on any information which may be attributed to it. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Conduct Authority. Please see our Privacy Policy to learn how we handle personal data (http://www.schroders.com/en/privacy-policy/) For your security, communications may be taped or monitored.

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