Citywire New Model Adviser Retreat

Real Estate – The Forgotten Asset Class?

12/13 September 2013

This communication is intended for investment professionals only and must not be relied on by anyone else

2On the cusp of a cyclical recovery!

Source: IPD

• Valuations have closely correlated with the path of GDP growth

• UK real estate has corrected in line with the fundamentals

• Growth should feed through quickly in the recovery given the current limited supply

• We are predicting a slow growth path

• Risk aversion is reducing and the income outlook improving

• Valuations should improve as the economic outlook improves

UK Real Estate Recovery

3

UK Real Estate Recovery

Healthy yield margin expected to persist

Source: Thomson Reuters Datastream, IPD

• The current margin over the risk free rate is around 350 bps

• There remains a healthy buffer to ensure pricing remains resilient if interest rates trend upwards in the years ahead

• Rental growth would also ensue as the economic recovery gains momentum

4

UK Real Estate Recovery and Outlook

Real estate returns are inextricably linked to the underlying economy

• Inflation adjusted real estate returns are closely correlated to the economic environment

• Occupier confidence is improving and tenants are broadly beginning to look to expansion strategies for the first time since the Financial Crisis

• We anticipate reasonable single digit returns (8% p.a.) for real estate over the next three years

• This translates to real returns of close to 6%

Sources: IPD, Thomson Reuters Datastream, Consensus Economics

5

Rolling Annual Correlation of Listed and Direct Real Estate Returns, 1993-2001

52238729-55-37Rolling 3 yr returns since 2000

41126427-48-34Rolling 3 yr returns since 1995

76203-123639Rolling 3 yr returns since 1988

38256923-25-13Annual returns since 2000

25146025-25-18Annual returns since 1995

509283-8-5Annual returns since 1985

T-Bills (90 day)

%

Equities

%

Direct Real Estate

%

REITs

%

Credit

%

Govt Bonds

%

US Asset Class Correlations to CPI to Q2 2012

• Direct real estate and REITs offer attractive inflation hedging characteristics

• Generally, international leases indexed annually to CPI or other measures of inflation

• Two exceptions:

� Economic weakness/contraction

� Volatile inflation (inefficient supply)

US & European leases provide hedge under ‘controlled inflation’

Sources: Bonds & Credit Barclays Capital, CPI and S&P Bloomberg, NCREIF data from source & REIT data NAREIT from Bloomberg

Inflation hedging characteristics

6

Real Estate Summary

• UK real estate is on the cusp of a long term cyclical recovery

• We anticipate returns of approximately 8% p.a. over the next three years

• Upside risk as the economic recovery gains a more robust foundation

• Income is expected to provide three quarters of the return with capital value appreciation accounting for the remainder of returns

• Global markets provide clear opportunities for diversification given that various markets are at differing stages of the recovery cycle

Cyclical recovery in UK real estate is underway

7

Real Estate House View Q3 2013 - 3 year view

UK EU Canada Americas Asia

Very

Heavy

Regional Shopping Centres (>50k m²) Core West End OfficesGrade A City of London Offices

10.5

Dublin Offices

German Logistics

Brussels Logistics

Stockholm Logistics

German Retail

Munich Offices

Ile De France Logistics

Netherlands Logistics

9.5 Calgary Retail

Edmonton Retail 5.0

Los Angeles WarehouseSeattle CBD OfficeWest LA Office 8

.9

Tokyo OfficesMelbourne IndustrialBrisbane IndustrialSydney IndustrialPerth Industrial China Logistics

10.7

Heavy

Retail Fashion ParksMajor City Prime ShopsGrade B City of London Offices South East IndustrialDistribution Warehouses (London)Midtown London OfficesOther M25 Offices

Helsinki Logistics

Stockholm Retail

Helsinki Retail

Stockholm Offices

Helsinki Offices

Paris CBD Offices

Dublin Out of Town Retail

Brussels Retail

Ottawa IndustrialEdmonton CBD OfficeMontreal Industrial Class BMontreal IndustrialMontreal CBD OfficeEdmonton Industrial

Boston RetailNew York Midtown OfficeLos Angeles Retail

Singapore IndustrialHong Kong Retail Australia prime regional SCMelbourne OfficesSingapore Offices Sydney Offices

Neu

tral Medium Town Prime Shops

Retail Warehouse Bulky GoodsProvincial Industrial District Shop Centres <50k m² M25 West/M4 Offices Distribution Warehouses (ex London)

8.0

Prague Retail

Dublin Logistics

Prague Logistics

Paris Retail

Warsaw CBD Offices

Warsaw Logistics

Brussels CBD Offices

Italy Logistics

Budapest Logistics

Amsterdam CBD Offices

Warsaw Retail

5.1

Montreal RetailOttawa RetailCalgary Industrial Class BCalgary IndustrialEdmonton Industrial Class BToronto IndustrialCalgary CBD OfficeToronto Industrial Class B

3.7

San Francisco CBD OfficeSan Francisco Bay RetailBoston CBD OfficeNew York RetailInland Empire Warehouse

7.2

Seoul IndustrialPerth OfficesBrisbane OfficesChina RetailShanghai OfficesAustralia ResidentialSeoul OfficesSingapore Retail

7.7

Lig

ht

Secondary /Small ShopsProvincial Offices

Netherlands Retail

Madrid CBD Offices

Paris Offices (Ex In/Out Rims)

Italy Retail

Madrid/Barcelona Logistics

Prague Offices

Budapest Retail

Barcelona CBD Offices

Vancouver IndustrialToronto Suburban OfficeVancouver Industrial Class BToronto RetailVancouver CBD OfficeToronto CBD Office

Chicago WarehouseNew Jersey WarehouseEast Bay WarehouseSao Paulo Office

Mumbai OfficesBeijing OfficesHong Kong IndustrialSeoul Retail Delhi OfficesShenzhen Offices

Very

Lig

ht

Secondary Shopping CentresSolus Retail Warehousing 4

.6

Madrid/Barcelona Retail

Budapest Offices

Rome Offices

Portugal Retail

Lisbon Offices

Milan Offices

Portugal Logistics

Madrid North Offices

-0.1

Vancouver RetailCalgary Suburban OfficeOttawa CBD OfficeVancouver Suburban Office

1.6 New York Downtown Office

Washington DC Office 2.7

Guangzhou OfficesHong Kong OfficesChina ResidentialSingapore ResidentialIndia ResidentialHong Kong Residential

-10.4

Figures above reflect forecast % annual total returns over the next 3years. Projected returns are unleveraged, not risk adjusted and do not reflect the inclusion of transaction costs. We do not expect the structure of all our property funds to exactly match the above as there are stock specific, transaction costs and liquidity issues that may work against each fund achieving the ideal structure.

UK Property Fund (PAIF) and Feeder Funds

The new structure and the choices – effective 26.08.13

Feeder Trust

Income & Accumulation

sub-funds

UK Property Fund (a PAIF)

(OEIC)

UK Property Fund

(unit trust)

Investors elect to move to Feeder or PAIF

Property assets & cash

• Corporate investors with >10%*

• Investors unable to access PAIF

• All other investors eligible for gross income:

• SIPPs

• ISAs

• Charities

• Individuals dealing direct with ACD

• Corporates with <10%

* Note: our operational limit is 9% 8

9

UK Property Fund – an overviewV

ery

Heav

yH

eav

yN

eu

tral

Lig

ht

Very

Lig

ht

Regional Shopping Centres

Grade A City Offices

West End Offices8.4%

Fashion Parks

Secondary City Offices

Rest ofSE Offices

Major City Prime Shops

Distribution Warehouse London

South East Industrial

37.1%

Medium Town Prime Shops

Bulky Retail Parks

Dist Warehouse ex London

District Shopping Centres

24.8%

Rest of UK Offices

Rest of UK Industrial17.2%

Secondary Shops

Secondary Shopping Centres

Solus Retail Units

2.6%

Other 9.9%

SLI UK House View (Q3 2013) Sector UKPF June 2013

10.5%

8.0%

4.6%

House View Forecasts

• Fund size – c£475m (cash 10%)

• Average unexpired lease 13.1 years

v’s IPD of 8.9 years

• 63% of Fund’s income rated

low/negligible risk

• 38% income subject to fixed or RPI

increases

• 51% of rent > 10 years (v IPD 32%)

• Forecast distribution yield of c4.5%

for tax exempt investors net of AMC

at 85bps*

A compelling solution for Real Estate investors

* Standard Life Investments for tax-exempt investors via Platform 1 share class.Source: Standard Life Investments, September 2013

10

2013 investment activity

Source: Standard Life Investments August 2013

• Purchased £24.8m (Yields 7% offices; 5% retail)

• Newly developed asset in a prime south east town

• Lower ground & ground floor areas let to Wholefoods (20 year lease, fixed uplift at year 5)

• 3 upper floors of grade A offices to be let quoting £39.50psf

• 2 floors under offer

• Potential capital uplift through letting c.£2m (8%)

Eton Street, Richmond

Prospect Park, Aberdeen

• Purchased Q2 2013

• Off market : highly sought-after sub-market

• £13.3m (7.3% yield ) – new building

• 15 year term – strong tenant covenant

• 3% per annum uplifts compounded 5 yearly

• 8% capital appreciation during 1st 3 months

Appendices

12

UK Real Estate Recovery

Cyclical recovery in capital values underway…

Source: IPD, Thomson Reuters Datastream

• Real estate is a cyclical asset class!

• Pricing has generally stabilised for prime and good secondary assets

• Expectations are for the cyclical recovery in prices to continue

13

UK Real Estate Recovery

On the cusp of a cyclical recovery…

Source: IPD, Thomson Reuters Datastream

• Prices are edging up on a monthly basis at the All Property level

• Poor quality secondary prices continue to fall

• Good secondary asset pricing is stabilising

14

UK Real Estate Recovery

Income is expected to be a key component of future returns…

Source: IPD, Thomson Reuters Datastream

• …

Obtaining Real Estate Diversification

Source: IPD, Global Key Cities Index 2012, Standard Life Investments

Global markets provide diversification opportunities…

Key European Markets Key Global Markets

16

Select Property Fund – Portfolio breakdown

1 SL Green Realty (US) 1.9%

2 Unibail Rodamco (France) 1.8%

3 Prologis Inc (US) 1.4%

4 LXB Retail Properties PLC (UK) 1.3%

5 Simon Property Group Inc (US) 1.2%

6 Yatra Capital Ltd (India) 1.2%

7 Land Securities (UK) 1.1%

8 Hammerson (UK) 1.1%

9 Westfield Group (Australia) 1.0%

10 General Growth Properties Inc (US) 0.9%

TOTAL 13.0%

Top 10 listed holdings

* Cash and Other includes cash and cash-like assets** Other Countries include: Canada and Latin America Source: Standard Life Investments, 31 July 2013

Underlying geographic exposurePoland and Czech Logistics

Australian Offices

Cash and Other*

USA

Scandanavian Retail

Indian Mixed Use Development

Central & Eastern European Retail

UK

India

Europe (Ex-UK)

Hong Kong

Australia

Japan

Other Countries**

China

22.3

19.2

18.8

10.1

8.1

6.2

4.7

4.0

1.8

1.21.1 1.0

1.00.3

0.2

17

Polish Logistics exposure

Source: Standard Life Investments, 31.March 2013

LOGISTIC PARK MYSLOWICE IMYSLOWICE SILESIA, POLAND

Year Built 2008/2009

Ownership 100% freehold

Total (NLA) 43,677 m2

Valuation Metrics

Net operating Income €2,668,000

Initial Yield 9.57%

Reversionary yield 8.27%

Valuation €27,850,000

Value ($/sqm) 598 €/m2

Valuation date 31 March 2013

External Valuer CBRE

Tenancy Statistics

WALE (by Income) 4.5

Occupancy 99%

Major Tenants NLA

InterCars 35%

Partner Tech 30%

18

Australian office exposure

Source: Standard Life Investments, 28 February 2013

55 St George’s Terrace, Perth

Year Built 1982

Grade B+

Ownership 100%

Total (NLA) 8,503 sqm

Typical Floor plate 806 sqm

Car spaces 50

Valuation Metrics

Net operating Income $4.4m

Initial Yield 6.9%

Reversionary yield 8.9%

Valuation $55-$60m

Value ($/sqm) c.$6,900 sqm

Valuation date 28.02.13

External Valuer CBRE

Tenancy Statistics

WALE (by Income) 2 yrs 1 mnths

Occupancy 100%

Major Tenants % NLA

Legal Aid 47%

Commonwealth of Australia 9%

19

Australian office exposure

182 St George’s Terrace, Perth

Refurbished – Fully redeveloped on original shell 2003

Grade B+

Ownership 100%

Total (NLA) 5,341 sqm

Typical Floor plate 540 sqm

Car spaces 28

Valuation Metrics

Net operating Income $3m

Initial Yield 7.5%

Reversionary yield 8.5%

Valuation $35-40m

Value ($/sqm) c.$6,900sqm

Valuation date 28.02.13

External Valuer CBRE

Tenancy Statistics

WALE (by Income) 2 yrs 10 mnths

Occupancy 98%

Major Tenants % NLA

Rio Tinto 20%

Momentum Partners 10%

Source: Standard Life Investments, 28 February 2013

20

Case Study – SL Green

We believe:• Leasing concerns in NYC late in 2012 weighed

on the stock

Focus on Change:

• Research team forecasted increased demand for space

� Emergence of tech and media tenants, improving employment outlook

• Company meetings confirm demand outlook

� Strong demand from potential tenants for “value” price points, bid for NYC office assets by sovereign wealth funds

Non-Consensus insights:

� Trigger – accelerating leasing velocity

Conclusion – The largest overweight in the portfolio

Top contributor to fund performance YTD through June

-10%

-5%

0%

5%

10%

15%

20%

31/01/13 28/02/13 31/03/13 30/04/13 31/05/13

SL Green FTSE EPRA NAREIT US $

Source: Datastream & Standard Life Investments, 30 June 2013

2121

Case Study – Westfield Group

We believe:• WDC has greatest exposure to the recovering

UK/US economies• A$ currency to fall under new RBA language• NAV/earnings will gain as A$ weakens from

record high

Focus on Change: Company meeting reinforces our conviction:� Potential asset sale to WRT; increase in share

buybacks; strong US portfolio momentum� Rational strategy – Brazil JV pullout

Non-consensus insights:� 15% drop in A$ so far already denting online retail

growth� Corroboration: US/UK analysts also confident of outlook

Conclusion – the key stock pick in Australia

We expect WDC to outperform in Australia in medium term

Source: Datastream & Standard Life Investments, 30 June 2013

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

31/01/13 28/02/13 31/03/13 30/04/13 31/05/13

Westfield Group FTSE EPRA NAREIT Australia A$

22

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