INVESTMENT PANEL MEETING MARCH...

INVESTMENT PANEL

MEETING

MARCH 2011

TEESSIDE PENSION

FUND

PROPERTY PORTFOLIO

Investment Panel Meeting March 2011 2

ContentContentContentContentssss 1.01.01.01.0 ECONOMIC REVIEWECONOMIC REVIEWECONOMIC REVIEWECONOMIC REVIEW ................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................3333

2.0 2.0 2.0 2.0 PROPERTY MARKET OVERVIEWPROPERTY MARKET OVERVIEWPROPERTY MARKET OVERVIEWPROPERTY MARKET OVERVIEW ................................................................................................................................................................................................................................................................................................................................................................................................................................................4444

3.0 3.0 3.0 3.0 PORTFOLIO VALUATION AND SECTOR SPLITPORTFOLIO VALUATION AND SECTOR SPLITPORTFOLIO VALUATION AND SECTOR SPLITPORTFOLIO VALUATION AND SECTOR SPLIT ................................................................................................................................................................................................................................................................................................................................................................8888

4.0 4.0 4.0 4.0 COLLECTION STATISTICSCOLLECTION STATISTICSCOLLECTION STATISTICSCOLLECTION STATISTICS ................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................8888

4.1 Rent Collection .........................................................................................................................................8 4.2 Insurance Collection ................................................................................................................................8 4.3 Service Charge Collection .......................................................................................................................8

5.0 5.0 5.0 5.0 LEASE ACTIVITYLEASE ACTIVITYLEASE ACTIVITYLEASE ACTIVITY............................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................9999

6.0 6.0 6.0 6.0 NEW LETTINGSNEW LETTINGSNEW LETTINGSNEW LETTINGS .................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... 10101010

7.0 7.0 7.0 7.0 VOIDSVOIDSVOIDSVOIDS ................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................ 10101010

8.0 8.0 8.0 8.0 PROPERTY MANAGEMENTPROPERTY MANAGEMENTPROPERTY MANAGEMENTPROPERTY MANAGEMENT ........................................................................................................................................................................................................................................................................................................................................................................................................................................................................ 11111111

9.09.09.09.0 FUND OBJECTIVESFUND OBJECTIVESFUND OBJECTIVESFUND OBJECTIVES................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................ 13131313

10.010.010.010.0 STRATEGYSTRATEGYSTRATEGYSTRATEGY.................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... 13131313

11.011.011.011.0 TRANSACTIONS TRANSACTIONS TRANSACTIONS TRANSACTIONS –––– Acquisitions & Disposals Acquisitions & Disposals Acquisitions & Disposals Acquisitions & Disposals........................................................................................................................................................................................................................................................................................................................................................ 13131313


1.01.01.01.0 ECONOMIC REVIEWECONOMIC REVIEWECONOMIC REVIEWECONOMIC REVIEW

FinanceFinanceFinanceFinance

• UK Base Rate held at record low of 0.5%. • The Bank asset purchase program remains at £200 billion.

Economic ViewEconomic ViewEconomic ViewEconomic View

• The FTSE 100 index remains volatile at 6,052 (09 February 2011). This compares to 5,161 at the same date last year.

• In December inflation RPIX (excluding mortgage interest payments) was 4.7% and CPI was 3.7%.

• Average Earnings growth (including bonuses) at 2.1% in the year to November.

• In December, retail sales growth increased 2.0% on an annual basis (volume seasonally adjusted).

• House prices fell by 3% in December, as the market continued to slow.

• Unemployment now at 7.9% of the workforce.

• GDP decreased by 0.5% in Q4 2010 compared with an increase of 0.7% in the previous quarter.

• Brent crude spot at $100.

SentimentSentimentSentimentSentiment

The continued improvement in the economic data, both for the UK and internationally, coupled with increased hawkishness from the MPC, suggests that interest rates will rise later in 2011.


2222.0 .0 .0 .0 PROPERTY MARKET OVERVIEWPROPERTY MARKET OVERVIEWPROPERTY MARKET OVERVIEWPROPERTY MARKET OVERVIEW

Property Market ReviewProperty Market ReviewProperty Market ReviewProperty Market Review

The total return from UK property in 2010 was 14.5%, the strongest it has been in four years. Annual capital growth was 6.9%, although much of this was delivered in the first half of the year. Transaction levels were buoyant and increased 40% compared with 2009 as investors continued to be attracted to assets with strong income characteristics, driving yields lower and values higher in particular for prime, London stock. Anecdotal evidence suggests that all capital growth seen in 2010 was focussed on prime stock with secondary seeing no recovery in prices.

Source: CB Richard Ellis Ltd

Despite the recovery in capital values in the year, once again the main contributor to property returns was income, reflecting an average of 7.1%.

Income has been the principal provider of property returns over the last 10 years, delivering a consistent return of 6.6% per annum over this period.


Annualised Investment Returns

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

One year Three years Five years Ten years

Time

To

tal

Re

turn

Property Equities Gilts

Source: IPD Monthly Index

InInInInvestment Marketvestment Marketvestment Marketvestment Market

UK commercial property is again becoming an attractive source of income. Real estate yields can now deliver returns more than five percentage points higher than inflation-protected bonds.

The lack of debt in the market is undoubtedly holding back prices. New net lending to commercial property continues to be negative as banks seek to shrink their outstanding loan book exposure to the sector. However in a historical context, commercial property debt is still high, and credit is both expensive and difficult to obtain; but if it can be accessed, there is a strong probability that yields would compress. The threat of banks unloading some of their debt remains although thus far the indications have been that lenders are happy to renegotiate loan agreements and what stock has come to the market has been absorbed with little disruption. It would seem that the banks are gearing up to off load more property in 2011 but also to work with partners to extract value from failed loans. Certainly, banks will be selective on loan renewals and prime property is therefore unlikely to fall significantly in terms of capital value. Quality property remains in demand from occupiers who have seen rental values fall over the last two years. A slight up turn in demand and the lack of any meaningful development over the last three years, is creating the potential for positive rental growth. This is particularly evident in the London office markets where double digit rental growth is being forecast.


Occupier MarketOccupier MarketOccupier MarketOccupier Market All property rental values remain steady, with December seeing 0.6% growth and for the year to date a return of 7.1%. Looking ahead, we do not expect all property rental values to fall and anticipate a recovery in some sectors during 2011. Retail vacancy rates edged down in H2 2010, but with consumer spending likely to decline this year and empty retail properties proving harder to re-let than ever before, this is not expected to prevent retail rental values from sliding lower in 2011. Indeed, the impacts of fiscal policy will have an effect on consumer spending power, estimated to contract by around 0.5% over the year, and this is most likely to affect the retail sector where rental levels could drift lower both this year and next. During 2010 the fall in retail warehouse rents certainly slowed, as demand continued to outweigh supply, and it is anticipated that rental growth over the short term will be fractionally stronger compared to that seen by standard shops and shopping centres.

All industrial rental levels continue to decline, albeit at a slow pace, and recent occupier activity is leading to better interest in good quality prime, and the better secondary units. However, whilst this may well be the experience for some landlords, on average, with the overhang of available space still large and GDP growth likely to remain below trend, it is expected that industrial rental growth will remain weak this year. Speculative development in the sector is very low and, when demand recovers, that should result in faster rental value growth than otherwise would have been the case. Sentiment in the office market remains two-tiered. The divergence between growth in the Central London markets and the rest of the county is likely to increase in the short term, with rental values anticipated to continue to rise in Central London for the remainder of the year, but fall in markets outside the capital before beginning to recover in 2011. This is consistent with the experience that rental growth takes time to filter out from London to the regions.


OutlookOutlookOutlookOutlook

Generally we remain of the view that values will hold up in 2011 and trend towards a flat capital performance, with positive returns coming from income at around 6% for the year. In 2012 we anticipate the improvement in prime rental values will lead to modest capital growth and total returns will be approximately 8.5%.

Forecast Returns

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Derivative

Curve

IPF Capital

Economics

PMA LVAM

Source

To

tal R

etu

rn

2011 2012

Source: Forecasts, Winter 2011

Focus should remain on quality in terms of real estate and tenant covenant and above all, keep a close eye on future income streams.


3333.0 .0 .0 .0 PORTFOLIO VALUATIONPORTFOLIO VALUATIONPORTFOLIO VALUATIONPORTFOLIO VALUATION AND SECTOR SPLI AND SECTOR SPLI AND SECTOR SPLI AND SECTOR SPLITTTT The value of the Fund’s property portfolio as at 31st December 2010 was £98,580,000. The table below shows an analysis of the composition of the Fund:-

IIIInvestment nvestment nvestment nvestment TypeTypeTypeType

ValueValueValueValue (£)(£)(£)(£)

Sector Split Sector Split Sector Split Sector Split (%)(%)(%)(%)

Net Rent Net Rent Net Rent Net Rent (£ p.a)(£ p.a)(£ p.a)(£ p.a)

Nos. of Nos. of Nos. of Nos. of HoldingsHoldingsHoldingsHoldings

Average Lot Average Lot Average Lot Average Lot Size (£)Size (£)Size (£)Size (£)

Retail 18,135,000 18 1,309,400 11 1,648,636

Retail Warehouse

18,825,000 19 1,281,213 5 3,765,000

Supermarket 11,500,000 12 547,441 1 11,500,000

Car Showroom 7,250,000 7 402,150 1 7,250,000

Leisure 4,625,000 5 354,715 1 4,625,000

Office 13,350,000 14 1,203,096 5 2,670,000

Industrial 24,895,000 25 2,067,367 9 2,766,111

TOTALTOTALTOTALTOTAL 99998888,,,,585858580000,000,000,000,000 100100100100 7,165,387,165,387,165,387,165,382222 33333333 2,2,2,2,987,273987,273987,273987,273

4444.0 .0 .0 .0 COLLECTIONCOLLECTIONCOLLECTIONCOLLECTION STATISTICS STATISTICS STATISTICS STATISTICS

4444.1 .1 .1 .1 Rent CoRent CoRent CoRent Collectionllectionllectionllection

As at 4 February 2011, 97.5% of the rent demanded during the current quarter to be paid by 24 March 2011 had been collected. This includes rent, following the agreement of the new lease to Sportsdirect.com Retail Ltd at Unit 1 St Ann’s Road, Harrow, of £7,960.85 which was demanded on 02/02/11 :-

PropertyPropertyPropertyProperty

TenantTenantTenantTenant Rent ArrearsRent ArrearsRent ArrearsRent Arrears ReasonReasonReasonReason

123 Old Brompton Road

7 x Ground Rent £875 One of the residential leaseholders is in arrears of ground rent. We suspect the leaseholder is offshore and continue to chase.

6 Eastgate Row South, Chester

Paul Costello Collections Ltd

£22,500 Tenant paid half rent for current quarter. Tenant in administration.

TOTALTOTALTOTALTOTAL £23,375£23,375£23,375£23,375

4444.2 .2 .2 .2 Insurance CollectionInsurance CollectionInsurance CollectionInsurance Collection

Mercedes Benz Retail Group UK Ltd owe a small amount of insurance of £832.70 following the Fund’s purchase of the property.

4444.3 .3 .3 .3 Service Charge CollectionService Charge CollectionService Charge CollectionService Charge Collection

All on account service charges due from leaseholders are paid fully up to date on the commercial premises. Esporta Health & Fitness Ltd in Guildford owe a service charge recharge from the estate management company of £4,408.03 demanded on 05/01/11, together with additional VAT payable due to the rate change. We are chasing payment and have been advised that this will be made shortly.


Balancing service charges for Bromford Central were raised on 04/02/11. A small overspend totalling £2,570 gross is being recovered from the tenants. Balancing service charges for the 2009 service charge year for the sold property Sovereign House, Manchester have previously been issued. One of the former tenants, The Hay Group Management Ltd, owe £35,105 gross and are querying the balances requested, raised in part by the previous property managers. The relatively high recharge is due to a very low fixed on account service charge set in the former lease. We continue to negotiate with the tenant and will make a recommendation in due course.

4444.4 .4 .4 .4 OtherOtherOtherOther

Burton / Dorothy Perkins Ltd remain liable for half the amount of the arbitrator’s fee for last year’s rent review of which their share is £5,227.16. This will be paid shortly.

5555.0 .0 .0 .0 LEASE ACTIVITYLEASE ACTIVITYLEASE ACTIVITYLEASE ACTIVITY

We set out below the current lease activity across the portfolio which includes lease expiries/renewals, breaks and rent reviews:-

PropertyPropertyPropertyProperty TenantTenantTenantTenant EventEventEventEvent DateDateDateDate ERVERVERVERV CommentsCommentsCommentsComments

Dorchester – Dorchester Retail Park

DSG Retail Ltd RR 24 Jun 10 £168,000 Negotiations completed. Being documented at £170,000 pa.

Dorchester – Dorchester Retail Park

Halfords Ltd RR 24 Jun 10 £147,493 Completed. Completed. Completed. Completed. Agreed and documented at £147,493 pa.

Taunton – 61 East Street

Wilkinson Hardware Stores

Ltd

RR 31 Oct 10 £97,000 In negotiations with tenant.

London – 17-23 Gloucester Road

Partridges of Sloane Street Ltd

RR 25 Dec 10 £143,000 In negotiations with tenant.

Harrow - St. Ann’s Road Sportsdirect.com Retail Ltd

LR 29 Jan 11 £90,000 Completed. Completed. Completed. Completed. A new 10 year lease agreed and documented at £45,000 in year one, rising to £90,000 from year two.

Newcastle – Melbourne House

Secretary of State for

Communities and Local Government

RR 01 Feb 11

£107,000 Reviewing, however evidence suggests that the property is over rented.

Swansea – 8 Union Street

Shoe Zone Ltd RR 25 Mar 11 £68,000 Reviewing, however evidence suggests that the property is over rented.

London – 123 Old Brompton Road

Institute of Cancer Research

B 17 Feb 13 £313,000 In negotiations with tenant.

Key: LE= Lease Expiry, LR= Lease Renewal, B= Lease Break, RR= Rent Review, A= Administration.


6666.0 .0 .0 .0 NEW LETTINGSNEW LETTINGSNEW LETTINGSNEW LETTINGS

There have been no new lettings during the quarter.

7777.0 .0 .0 .0 VOIDSVOIDSVOIDSVOIDS

We set out below the current void properties across the portfolio:-

PropertyPropertyPropertyProperty UnitUnitUnitUnit ERVERVERVERV CommentCommentCommentCommentssss

Birmingham – 57/63 Church Street 1st Floor £51,750

Remedial works on behalf of the former tenant, following settlement of the dilapidations claim in the sum of £55,000 have been completed. New letting agents have been appointed to market the unit.

Newcastle – Melbourne House

Gnd £104,000

Remedial works to be undertaken on behalf of the former tenant following settlement of the dilapidations claim.

Reading – 1-3 Acre Road

C £55,500 Marketing.

TOTAL:TOTAL:TOTAL:TOTAL:

££££211211211211,250,250,250,250


8888.0 .0 .0 .0 PROPERTY MANAGEMENTPROPERTY MANAGEMENTPROPERTY MANAGEMENTPROPERTY MANAGEMENT

We have identified the following initiatives and set out below our progress to date:-

Property Comments

6 Eastgate Row South / 8 Eastgate Street, Chester

Paul Costelloe Collections Ltd went into administration on 28/01/11 and we currently wait to hear of the administrator’s plans for the unit. We are investigating liability for lease responsibility under privity of contract, given that the lease was originally granted to The Jaeger Company’s Shops Ltd. The ground floor of the unit is underlet to Country Casuals Ltd and there is a legal mechanism to have the under-rent paid directly to the Fund on the next quarter day if necessary.

32-36 St Ann’s Road, Harrow

We previously advised that the tenant of Unit 1 served notice to terminate the held over lease on 29/01/11. We are pleased to advise that negotiations are now concluded with a new 10 year lease granted to Sportsdirect.com Retail Ltd from 30/01/11 at an initial rent of £45,000 in year one, rising to £90,000 from year two. The lease contains an upward only rent review at year five and a tenant only break at the review date, subject to six months written notice and a penalty payment of £15,000.

3 Market Place, Loughborough

The leaseholder, Barclays Bank Plc, has applied for landlord’s consent for alterations which are necessary for a major refurbishment of the bank. The works have been approved and will be documented by the Fund’s solicitors.


Property Comments

57/63 Church Street, Birmingham

Refurbishment works are completed to the vacant first floor and the floor is being marketed to find a new tenant.

Bromford Central, Birmingham

St Gobain Building Distribution Ltd have applied for a change of use of Unit 1 to a green issues training facility and for associated fit-out works which will require a licence for alterations. The Fund’s solicitors are preparing the necessary documentation.

Unit 5, Acre Road, Reading

The leaseholder ESP.CO.UK Ltd is progressing well with the refurbishment works agreed under the terms of the new lease. These are being carried out to an extremely high standard and are expected to be completed by the end of February. The leaseholder is a niche provider of unique airport security equipment.


9999.0.0.0.0 FUND OBJECTIVESFUND OBJECTIVESFUND OBJECTIVESFUND OBJECTIVES

The primary objectives of the Fund are:

• To maintain and protect income across the portfolio.

• To seek to tactically increase the Fund’s weighting to direct UK property as appropriate.

10101010.0.0.0.0 SSSSTRATEGYTRATEGYTRATEGYTRATEGY

Our philosophy is to create property portfolios which will deliver long term performance, but to take short term tactical positions to deliver out performance against specific benchmarks. At the heart of our decision making lies our market knowledge and our ability to identify intrinsically good value. We believe that each holding must justify its position within the portfolio. In order to increase rental income across the portfolio, over the quarter we have completed one rent review and one lease renewal, as well as progressing lease negotiations with a further four tenants. Sector RecommendationsSector RecommendationsSector RecommendationsSector Recommendations

At the appropriate time the Fund should seek to address its low exposure to quality high street retail and consider RPI index linked leases across alternative sectors. The Fund should also consider the disposal of assets projected to underperform.

11111111.0.0.0.0 TTTTRANSACTIONSRANSACTIONSRANSACTIONSRANSACTIONS –––– Acquisitions & Disposal Acquisitions & Disposal Acquisitions & Disposal Acquisitions & Disposalssss

During the quarter terms were agreed on the following:-

TransactionTransactionTransactionTransaction PropertyPropertyPropertyProperty DescriptionDescriptionDescriptionDescription PricePricePricePrice StatusStatusStatusStatus

Acquisition Mercedes-Benz, Langston Road, Loughton, Essex

Car Showroom £7,250,000 Acquired 2nd December

2010

PropertyPropertyPropertyProperty CoCoCoCommentsmmentsmmentsmments

The freehold acquisition of this single-let car showroom investment was completed on 2 December 2010 at £7,250,000 (equating to 5.25% NIY rising to a minimum of 5.93% in 2013 and 6.71% in 2018). The property comprises a prime freehold modern car showroom and service centre prominently situated in Loughton close to the M11 motorway (Junction 5) which provides excellent communications links for both Greater London and the South-East. The property was developed in 2007, in conjunction with Mercedes-Benz, to provide a new modern highly specified purpose


PropertyPropertyPropertyProperty CoCoCoCommentsmmentsmmentsmments

Mercedes-Benz, Langston Road, Loughton, Essex

built car showroom and service centre with separate valet workshop. The total floor area extends to a gross internal area of 25,198 sq ft overall or 23,131 sq ft excluding the storage mezzanine and the valet workshop. The property is situated on a site of approximately 1.79 acres with a site cover ratio of approximately 32%. The property is let to Mercedes-Benz Retail Group UK Limited (D&B 4A3) guaranteed by Mercedes-Benz UK Limited (D&B 5A1) for a term of 25 years from 3rd June 2008 until 2nd June 2033 (in excess of 22 years unexpired). The lease includes upwards only rent reviews at five yearly intervals. The 2013 and 2018 rent reviews are to the higher of Open Market Value or 2.55% compound per annum. These minimum uplifts at the first two rent reviews guarantee rental growth whilst the open market review offers some protection against inflation. The total current rent is £402,150 per annum which equates to £15.96 per sq ft overall or £17.39 per sq ft excluding the storage mezzanine and valet workshop. In summary, this purchase provides the opportunity for the Fund to gain exposure to the car showroom sector. This modern highly specified freehold property is let to an established tenant in a strategic location. The property provides secure bedrock income in terms of tenant covenant and unexpired term at an attractive lot size. In view of the current market this investment should be viewed as a strategic longer term hold.


Important information Important information Important information Important information LV= Asset Management Limited (LVAM) is authorised and regulated by the Financial Services Authority, and is a member of the Investment Managers’ Association. LVAM is a wholly-owned subsidiary of Liverpool Victoria Friendly Society Limited, registered in England No. 3287943. Registered address is County Gates, Bournemouth BH1 2NF. Tel: 01202 292333. LV= and Liverpool Victoria are registered trade marks of Liverpool Victoria Friendly Society Limited and LV= and LV= Liverpool Victoria are trading styles of the Liverpool Victoria group of companies. The information contained herein constitutes LVAM’s understanding of the situation at the date of the presentation, which is subject to change and does not constitute advice. LVAM and its staff are not responsible for an individual’s understanding or use of the information.

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