How can you evolve your property allocation over time as circumstances change?

1. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
Is Your Property
Allocation Right for You?
Tuesday 19th July 2016

2. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
Post-Brexit Referendum
Property Update

3. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
Post-Brexit Referendum Property Update – What Does the Industry Think?
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• General consensus among managers is that commercial
rental markets are expected to weaken due to
uncertainty.
• Capital Economics revised rental value growth forecasts
for UK property down from 2.9% to 2.4% p.a. over the
next 2 years.
• Many investment managers expect that City and West
End markets will be affected the most.
• Listed market reaction has been sharp (UK REITS fell
15%), although this could be partly due to investors
“bundling” REITS with financials.
• Managers see transactions and letting agreements
discussed before the vote are following through.
• Many expect sharp depreciation of Sterling to make
British property cheaper for outside investors.
• Many expect interest rate cuts/further QE and believe
this will be supportive for property returns.
• Some areas of property are expected to be more
resilient, e.g. long lease investments (vs. other property
types).
Uncertainty
Valuers are uncertain about
June valuations and have
applied heavy caveats to the
June figures.

4. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
UK Pooled Fund Redemption Suspensions
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Funds That Closed to Redemptions
Threadneedle
Property PAIF
Standard Life
Investment UK
Real Estate Fund
(PAIF)
M&G Property
Portfolio
Henderson UK
Property PAIF
Aviva Investors
Property Trust
Funds That Are Open but
Apply Dilution Levy or
Considerable NAV
Discount
L&G UK Property
Fund
*The fund was suspended for redemptions between 6th July and 13th July.
Aberdeen UK
Property Fund*

5. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
UK Pooled Fund Redemption Suspensions
Note that:
• All of the funds mentioned on the previous page are daily traded
• All of these funds have a significant exposure to retail money, not institutional
• Freezing redemptions when outflows rise considerably and when valuations are uncertain is prudent!
So what about institutional money funds?
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Redington’s Top 3
Rated Open-Ended
Property Funds
Open/Closed to
Redemptions?
Redemption
Frequency
Redemption
Requests Since
Referendum?
“Fair Value”
Adjustments
Applied?
Bid/Offer Spreads
on the Fund
Changed?
Fund 1 Open Quarterly <0.5% of NAV No No
Fund 2 Open Quarterly <0.5% of NAV No No
Fund 3 Open Quarterly <0.5% of NAV No No
We are, however, aware of some other institutional funds that:
• Increased bid charge (exit charge) for redeeming investors;
• Triggered gating mechanism or decided to defer redemptions;
• Applied a haircut over the valuation to reflect uncertainty over where property marks at the moment.
That said, we believe that most institutional funds have so far experienced less redemption pressure than retail funds.

6. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
Is Your Property
Allocation Right for You?

7. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
Examples of Available Property Building Blocks
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Value Add/Opportunistic
Property
Balanced Core Property
Long Lease Property Senior CRE Debt
REITS
Mezzanine/Whole
Loan CRE Debt
Fund of Funds
Sector Specific Funds
MBS
Private Rented Sector
Please note that this shows available, rather than currently recommended property asset classes.

8. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
Is Your Scheme in the Opening, Middle or End Game…
88
Opening Game
(RR above Libor +
250bps)
Middle Game
(RR between
Libor + 150bps
and Libor +
250bps)
End Game
(RR Libor +
150bps or less)
RR = Required Return to
reach full funding.
It encompasses: existing
asset allocation, sponsor
contributions, deficit repair
plan
Journey to full funding

9. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
…and What Property Is Appropriate for You?
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Opening Game
Middle Game
End Game
Opportunistic Property
PRS
Balanced Core Property Balanced Core Property
Long Leases
Senior CRE Debt
Long Leases
Senior CRE DebtProperty
Building Blocks
Journey to full funding
Mezzanine CRE Debt Mezzanine CRE Debt
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Higher Risk/
Higher Return
Lower Risk/
Lower Return

10. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
UK Commercial Real Estate Debt
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Senior Debt
Up to 65% LTV
Libor + 2-2.5%
Equity
Mezzanine Debt
Up to 75-85%
LTV
10-12% IRR
Main Advantages Main Disadvantages
Significant downside protection (especially
for senior lending).
Volatile illiquidity premium (e.g. vs.
equivalently rated, equivalent term public
corporate bonds).
Contractual cash flows.
Capital deployment speed can vary
depending on market conditions and the
manager.
Liability matching characteristics if long-
dated and with prepayment protection.
Borrowers pay arrangement fees upfront
and these contribute to the total return.
What is Commercial Real Estate Debt (“CRE Debt”)?
• Private loans collateralised by commercial real estate;
• Market previously dominated by banks but now large number of investment
managers are active in the space;
• It comes in a variety of forms: floating rate (typically 3-7 years) or fixed rate
(typically 10 years+);
• Investors can also chose where they want to be in the capital structure,
effectively tailoring their desired risk/reward profile.
Capital Structure

11. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
UK Long Lease Property
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What is Long Lease Property?
• Commercial property leased for 15+ years;
• Usually, a large proportion of leases in long lease portfolios (65%+) have
contractual inflation uplifts, often capped and floored;
• Nowadays, the choice of sectors is wider than before (e.g. supermarkets, hotels,
leisure, healthcare, student housing);
• Nowadays, a lot of long lease managers engage in forward funded development to
“produce” new assets. These tend to be considerably de-risked transactions,
whereby the manager is not taking construction risk.
Main Advantages Main Disadvantages
Liability matching characteristics (for both
interest rate and inflation risk).
Uncertainty over the terminal value of the
property.
More predictable cash flow profile than
that of a lot of other types of property.
Tenant default risk.
Defensive nature of the investment.

12. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
UK Core/Core+ Balanced Direct Property
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Main Advantages Main Disadvantages
Diversifying source of returns. Capital values can be volatile.
Over long time periods income constitutes
ca. 70% of the total return.
What is Core/Core+ Balanced Direct Property?
• Diversified allocation to “core” = stable, income producing property;
• The “plus” means that the property is actively managed and refurbishments, re-
letting, extensions, etc. will be carried out to add value;
• High levels of occupancy and income generation remain a priority;
• In the UK, over 50% of institutional property allocation tends to be in London and
South East.
41%
31%
19%
2%
7%
Retail Office
Industrial Residential
Other
Source: MSCI/IPD
Data as of March 2016
Sector Breakdown of the UK Quarterly
Property Index

13. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
European Value Add/Opportunistic Property
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Main Advantages Main Disadvantages
Potential for high returns coming both
from beta and alpha.
Higher risk strategy compared to other
types.
Capital efficient way of accessing property
returns.
Very slow speed of capital deployment.
High levels of complexity.
What is Value Add/Opportunistic Property?
• Opportunistic property strategies are leveraged property investments, with a major
focus on increasing capital values through refurbishments, extensions,
redevelopment, re-letting, vacancy reduction and change of use;
• The idea is to acquire the assets at a discount, carry out necessary work to bring
them to institutional quality, stabilise the income by putting in high quality tenants,
and to sell the assets at a considerable premium;
• Opportunistic property strategies typically target in excess of 15% IRR at ca. 65%
portfolio level loan-to-value ratio.

14. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
UK Private Rented Sector
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Main Advantages Main Disadvantages
It takes advantage of the fundamental
imbalance between demand and supply in
the UK residential market.
Sourcing remains challenging.
A differentiated source of property returns.
More regulatory and reputation risk than
for other property sub-asset classes
Exit risk – it is not yet clear how
established this market will be in a few
years.
What is Private Rented Sector (“PRS”)?
• Residential property that is not occupied by the owner but rented out by private
(as opposed to social) landlords.
• It currently represents ca. 19% of the UK residential market.
• Fragmented market dominated by private owners. However, there have been
pressures over the last few years to “institutionalise” this market.
• Forward funded development of new stock (while minimising construction risk)
and renting out the new units out to private tenants.
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
Owner Occupied
Rented privately
Rented from housing associations
Rented from local authorities
Source: ONS
UK Dwelling Stock by Tenure

15. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
What Property Is Appropriate for You?
1515
Opening Game
Middle Game
End Game
Opportunistic Property
PRS
Balanced Core Property Balanced Core Property
Long Leases
Senior CRE Debt
Long Leases
Senior CRE DebtProperty
Building Blocks
Journey to full funding
Mezzanine CRE Debt Mezzanine CRE Debt
23
Higher Risk/
Higher Return
Lower Risk/
Lower Return

16. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
Don’t Forget about Other Considerations!
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Consideration Why is this important?
Overall illiquidity budget
Importance of maintaining sufficient liquidity to satisfy collateral calls,
capital calls and pension payments. Liquidity of both the vehicle and the
underlying assets should be considered.
Overall risk budget
Property risk should be considered in the context of the overall scheme
risk to ensure that the scheme as a whole is not taking excessive risk.
Governance budget
Some strategies are more complex than others – it is important to
ensure that schemes with limited governance budget spend it on
decisions likely to generate most impact.
Maturity of the scheme
This will impact the importance of cash flow generating characteristics of
the assets invested in.
Relative importance of liability matching
characteristics
Some property investments, such as long leases, can provide a liability
hedge. The relevance of this may vary, e.g. depending on the scheme’s
existing hedge ratio.
Aggregate property allocation size
Direct investment requires sizable allocation. Smaller schemes may
need to use pooled funds for implementation.
Attitude towards leverage
Value add/opportunistic strategies tend to be levered. This can be
desirable or not depending on the views of the scheme’s Investment
Committee and the circumstances of the scheme.
Illiquidity premium levels at the point of investment
These tend to be relevant for debt investments. Illiquidity premiums can
vary over time.

17. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
Property in a Liquid Format?
Property is inherently illiquid. However, some investors seek ways of accessing property in a liquid format. Some of the most
popular ways to achieve this are as follows:
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Implementation route Redington Comment
Real Estate Investment Trusts (REITs)
These are permanent capital vehicles listed on a public
exchange. They offer exposure to property risk, however they
also tend to capture some of the equity market volatility and
beta. We have seen some products that invest in a mixture of
REITS, listed infrastructure and public debt (where the
collateral is predominantly property-related) to address this
issue.
Property derivatives
Although this market exists, it is still not large/deep enough
to satisfy the needs of most investors we work with.
Daily liquidity property funds
We advise against using this method, as it results in major
mismatches between the vehicle and the underlying assets,
exposing investors to risk in periods of stress. Daily funds
also tend to suffer from a cash drag.

18. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
What about International Diversification?
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• The decision whether to diversify internationally may
depend on the scheme’s size and governance budget.
In our experience, property allocation tends to be ca.
5% of a scheme’s assets (£50m for £1bn scheme)
and sizes of governance budgets correlate positively
with scheme sizes.
• Diversification decision often has limited impact on
the overall scheme for small to medium schemes.
• Very large schemes and/or schemes with large
governance budgets may consider international
diversification.
• However, implementation can be challenging:
• Not many global funds available
• Direct allocation requires very large investment
size
• Tax and fee implications
• REIT overlays can be an attractive option
although this introduces equity beta and extra
volatility.

19. Private & Confidential Is Your Property Allocation Right For You? 19th July 2016
2-6 Austin Friars, London EC2N 2HD Telephone : +44 (0) 20 7250 3331 www.redington.co.uk
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We do not guarantee every aspect of its accuracy. The
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Contact
Disclaimer
Kate Mijakowska
Vice President
Direct Line: 0207 326 7106
Kate.mijakowska@redington.co.uk