teesside pension fund investment panel meeting...

TEESSIDE PENSION FUND

INVESTMENT PANEL MEETING

PROPERTY PORTFOLIO

17TH SEPTEMBER 2008

CONTENTS

1 EXECUTIVE SUMMARY.............................................................................................................3

1.1 Valuation........................................................................................................................................................... 3 1.2 Activity in Quarter Ending 30 June 2008................................................................................................... 3 1.3 Performance in the Period Ending 30 June 2008 ..................................................................................... 3 1.4 Market Prospects for the UK ...................................................................................................................... 3 1.5 Strategy Update .............................................................................................................................................. 4

2 PORTFOLIO VALUATION........................................................................................................5

3 ACTIVITY .....................................................................................................................................5

3.1 Transactions..................................................................................................................................................... 5 3.3 Asset Management ......................................................................................................................................... 5 3.3 Rent Reviews................................................................................................................................................... 7 3.4 Lease Expiries and Breaks............................................................................................................................. 9

4 PERFORMANCE ........................................................................................................................13

5 MARKET CONTEXT.................................................................................................................14

5.1 Economic Review ......................................................................................................................................... 14 5.2 Property Market Review............................................................................................................................. 14 5.2 Market Prospects for the UK .................................................................................................................... 16

6 STRATEGY UPDATE................................................................................................................17

6.1 Summary of Strategy Reported to the Last Meeting............................................................................. 17 6.2 Asset Allocation and Investment Timing ................................................................................................. 17 6.3 Portfolio Structure ....................................................................................................................................... 17 6.4 Updated Business Plan................................................................................................................................. 19

APPENDIX I – SCHEDULE OF CURRENT HOLDINGS...................................................................20

APPENDIX 2 – ECONOMIC OUTLOOK ............................................................................................21

INVESTMENT PANEL MEETING 2008 3

COMMERCIAL PORTFOLIO

1 EXECUTIVE SUMMARY

1.1 Valuation The portfolio comprises of 32 properties let on 50 tenancies and has been valued at £89,725,000 as at 30th June 2008. The current net income receivable by the Fund stands at £5,453,604 per annum representing an income yield of 5.63%. The total estimated rental value is £6,459,303 reflecting an equivalent yield of 6.41%. 1.2 Activity in Quarter Ending 30 June 2008 There have been no acquisitions or disposals during the quarter ending 30 June 2008. 1.3 Performance in the Period Ending 30 June 2008 The Fund’s property portfolio returned -1.4% for the quarter to 30th June 2008 compared to the IPD Quarterly Universe of -2.9%. For the year ending 30th June 2008 the Fund returned -9.9% compared to the IPD Quarterly Universe of -13.7% and over three years to 30th June 2008 the Fund returned 7.0% compared to the IPD Quarterly Universe which returned 5.8%. 1.4 Market Prospects for the UK The property market downturn has now entered a second phase, with the effects of the credit crunch filtering through into the broader economy and weakening occupier demand. Even though much of the bad news has already been priced into the market, we expect a further increase in yields due to worsening rental growth expectations. We are confident that in terms of falling capital values the worst is behind us, but without the stimulus of lower interest rates and robust economic growth, the recovery will take longer than previously expected.

CWI Forecast of All Property Returns 2008-2012

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Income return capital growth Total Return Long term average TR

Source: IPD, CWI


1.5 Strategy Update Portfolio Structure

To consider new investment into the UK direct property as the market cycle bottom turning point.

To enhance performance with reference to our property market forecasts we recommend reducing exposure to retail warehousing and growing exposure to industrials with good underlying land values.

Investment Activity

Invest in opportunities that will achieve the Fund’s long term target return objectives.

Monitor the performance of the Fund’s existing assets and dispose of those projected to under-perform.

Explore Asset Enhancement Opportunities

To let vacant properties and raise the average lease length through asset management initiatives to enhance income security and protect value.

o To finalise the letting Unit C, Acre Road, Reading and secure tenants on the remaining vacant properties at Croydon and Sutton.

o Additional value can be created through letting re-gearing of the leases at Melbourne House, Newcastle and others (short leases).

o Pursue the surrender and re-letting initiative at St Ann’s Road, Harrow and Loscoe Close, Normanton.

o Pursue the removal of the break option at Albert Reach, Bristol.


2 PORTFOLIO VALUATION

The value of the Fund’s property portfolio as at 30th June 2008 was £89,725,000. Table 1 shows an analysis of the composition of the fund:-

Table 1 – Analysis of Portfolio by Value as at 30th June 2008

Investment Type Value Net Rent p.a Number of Holdings

Average Lot Size

Retail £23,365,000 £1,346,400 12 £1,947,083 Retail Warehouse £13,810,000 £889,978 4 £3,452,500 Leisure £5,695,000 £306,000 1 £5,659,000 Office £25,815,000 £1,666,310 6 £4,032,500 Industrial £21,040,000 £1,244,916 9 £2,337,778 Total £89,725,000 £5,453,604 32 £2,803,906 3 ACTIVITY 3.1 Transactions During the quarter to 30th June 2008 there were no acquisitions or disposals. 3.3 Asset Management We have identified four key initiatives and set out in table 3 below is our progress to date:- Table 3 - Asset Management Initiatives

Property Sector Activity Status

Harrow 36 St Ann’s Road

Retail Lease re-gear Draft Heads of Terms have been circulated

Bristol Albert Road, Albert Reach

Industrial Lease re-gearings/removal of break

Draft Heads of Terms have been circulated and negotiations in progress

Normanton Unit D1, Loscoe Close

Industrial Lease surrender/re-letting to sub-tenant

In discussion with the tenant and sub-tenant. Heads of Terms agreed subject to dilapidations agreement

Newcastle Melbourne House,

Office Lease re-gearings Negotiations in progress

36 St Ann’s Road, Harrow

The current lease expires in October 2009, we have approached the tenant Sportswift Ltd to see if they would consider re-gearing their lease. Draft Heads of Terms have been circulated based on a new 10 year term at a rent of £120,000 pa with a 6 month rent free period. Our current ERV is £114,000. The Heads of Terms are subject to formal approval.


Albert Road, Albert Reach, Bristol

This property is let to BSS Group Plc on a lease expiring in November 2020, there is a tenants only break in December 2010. The tenant uses the premises for both trade counter and storage, and we understand it is one of their best performing outlets. Given BSS’s desire to remain we have approached them with an offer of 6 months rent free in exchange for the removal of their break, with costs split 50/50. The benefit would be the increase from 2 to 12 years term certain and the resulting increase in capital value. The tenant has responded to our proposal with a counter offer and negotiations are underway.

Unit D1 Loscoe Close, Normanton

This property is let to A&E Karner Ltd on a term expiring in September 2014 on a rent of £80,000 per annum. A&E Karner have sublet to Acorn Web Offset Limited at a rent of £88,000 per annum on a co-terminus lease. Heads of terms have been agreed, subject to formal Fund approval and Head Tenant’s agreement to dilapidations, for a lease surrender and the simultaneous granting of a new lease direct to Acorn Web. The proposed terms are for a new 10 year lease with tenants only break in year 7 and an initial rent of £88,000 in return for a 4 month rent

free period. The Fund will benefit from an increased term certain, increased rent and stronger covenant. Melbourne House, Newcastle

This property is multi-let to four tenants with three of the leases expiring between August and November 2009. We have approached MWH UK with a view to taking an early surrender and granting a new lease. MWH would preferably like to remain in the building whilst taking additional space, which would require one of the other tenants to vacate. We are using this opportunity to open negotiations with the other tenants with a view to accommodating MWH requirements as far as possible, whilst respecting the other tenants right to renew. GVA Lamb & Edge have been instructed to undertake the negotiations.


3.3 Rent Reviews There are 9 rent reviews which are either active or due in the next 12 months:-

Table 4 – Rent Reviews

Chester – 6 Eastgate Row South & 8 Eastgate Street

The tenant’s rent review surveyor has agreed to a rent of £150,000 per annum, £2,500 short of the reported ERV. This is due to a number of factors including the units layout, conflicting comparable evidence and the fact that the tenant has been trying to sublet for 12 months. Agreeing at this level limits the risk of a reduced or nil increase should we proceed to Third Party. Fund approval has been given to settle at this level.

Rent reviews Address Tenant Date ERV Comments

Chester, 6 Eastgate Row South & 8 Eastgate Street

Paul Costelloe Collections Limited

15/05/07 £152,500 Rent review agreed and being documented at £150,000 pa.

London, 163 Old Brompton Road

Institute of Cancer Research 17/02/08 £345,500 Rent review memoranda

documented at £350,000 pa.

Loughborough, 3 Market Place

Barclays Bank Plc 24/06/08 £59,100 Rent review memoranda documented at £61,250 pa.

Croydon, Units 6/7 Endeavour Way

Leader Trucks Limited 10/08/08 £63,500 In negotiation.

Scarborough, 97/98 Westborough

Waterstones Booksellers Ltd 18/09/08 £127,000

Notice has been served on the tenant. First meeting with tenants surveyor scheduled start of September.

Kettering, Telford Way Sealed Air Ltd 19/11/08 £121,000

Surveyors report received waiting for additional evidence prior to instigating proceedings.

Birmingham, Ground Floor, 57/63 Church Street

Chase de Vere Financial Services Plc

12/02/09 £53,500 Recommendation for appointment of surveyor to be issued.

Edinburgh 20 Coates Crescent

Northern Rock Plc 28/02/09 £55,000 Recommendation for appointment of surveyor to be issued.

Guildford Queen Elizabeth Park

Esporta Health & Fitness Ltd 04/04/09 £354,715

Recommendation for appointment of surveyor to be issued.


London – 163 Old Brompton Road This mixed use property is let on a long leasehold basis to 24 residential tenants with offices occupied by Institute of Cancer Research on the ground and lower ground floor. Following negotiations the February 2008 review has been agreed and documented. The previous rent was £320,000 per annum and this has been increased by approximately 9.5% to £350,000 per annum, £5,500 ahead of expectation.

Loughborough – 3 Market Place

This property is let to Barclays Bank until June 2023. Agreement has been reached and the new rent documented at £61,250 per annum. This rent reflects an uplift of 13.95% and is greater than the previously reported ERV of £59,100 per annum.

Croydon – Units 6/7 Endeavour Way

The units are let under one lease to Leader Trucks Ltd for a 15 year term expiring in August 2018, the passing rent of £51,800 per annum equates to circa £6.25 psf. A rent review surveyor has been instructed on the August 2008 rent review and negotiations have commenced. The rent review is set against a breakdown of similar size units vacant and to let in the terrace, where the quoting rent is £7.50 psf.

Scarborough – 97/98 Westborough The property is let to Waterstones Booksellers for a term of 15 years from 18th September 1998 at a current rent of £115,000 per annum (£81.50 ITZA). We have received the rent review report from Cushman & Wakefield which states an ERV of £117,750 per annum (£82.00 ITZA). Notice to trigger the review has been served, although no


revised rent has been proposed. An initial meeting with the tenants surveyor is scheduled for the start of September. Kettering – Telford Way

The property is let to Sealed Air Ltd on a 15 year term from 19th November 2003 at an annual rent of £110,000 equating to £3.63 psf. We have instructed James White of King Sturge and received his initial report. The stated ERV is £113,500 per annum, £3.75 psf. There are a number of units on the same industrial estate which could provide supporting evidence, most notably another Sealed Air unit where the award from the Arbitrator is due. Consequently we have delayed serving notice, and this will be reviewed again in September.

3.4 Lease Expiries and Breaks There are five lease expiries and two break dates in the next 15 months and these are set out in table 5 below:- Table 5 – Lease Expiries and Breaks

Lease Expiries Address Tenant Date ERV Comments Units 4 & 5 Therapia Lane Croydon

Wilgrove Express Ltd

29/09/08 (Break)

£62,600 The tenant has operated the break and is vacating the units.

Ground Floor Sovereign House Manchester

Clearwater Corporate Finance Ltd

17/10/08 (Break)

£52,500 The tenant has operated the break clause. However a new lease on flexible terms has provisionally been agreed.

First Floor Sovereign House Manchester

The Hay Group Management Ltd

24/06/09 £75,000 Lease expiry. We expect that The Hay Group will vacate.

Ground Floor Melbourne House Newcastle

Rehab UK 29/08/09 £116,000 Lease expiry. Tenant may wish to renew, also potential to let to MWH.

36 Stnn’s Road, Harrow

Sportswift Ltd 03/10/09 £114,000 New lease discussions underway.

Part Second Floor Melbourne House Newcastle

Prometric Thompson Learning

28/11/09 £44,500 Lease expiry. Forms part of negotiations with MWH.

Part 2nd & 3rd Floor Melbourne House Newcastle

MWH UK Ltd 29/08/09 £202,000 Negotiations progressing.


Units 4 & 5, Therapia Lane, Croydon The tenant has operated the break clause and are in the process of vacating the premises. A schedule of dilapidations has been prepared and served on the outgoing tenant. We have instructed Stiles Harold Williams and King Sturge to market the units in parallel with their existing instruction to let units 1&2.

Grd Floor, Sovereign House, Manchester

The tenant, Clearwater Corporate Finance Ltd, originally operated their break option, however given the current economic conditions they have put the relocation on hold and requested a new lease. Heads of Terms have been agreed at the passing rent for a two year term with tenants breaks in months 12 and 18, all other lease conditions to remain the same. Solicitors have been instructed and the draft lease is currently being circulated.

Following Fund’s approval we have instructed building surveyors to tender for the refurbishment of

the common parts. The cost will be substantially be recovered through the service charge. This will assist in marketing any vacant space should The Hay Group vacate on expiry of their lease.

Melbourne House, Newcastle

All of the leases, with the exception of one, expire within two months of each other. One of the tenants MWH UK have indicated they would prefer to stay if additional space in the building can be found. We have instructed GVA Lamb & Edge to act on the lease renewals.


3.5 Lettings

There is currently one letting to a new tenant in solicitors hands.

Reading – Units C, 1-3 Acre Road

Following the lease expiry on 8th November 2007 the property has been split into three parts. We have agreed terms for the letting of Unit C with Aston Green Limited, a wholly owned subsidiary of Synter Group Limited, on a new lease at a rent of £66,650 per annum (£9.00 per sq ft) and solicitors have been instructed. The draft lease is agreed, the only outstanding point is permission from Reading Borough Council (RBC), the freeholder. This will be granted once RBC are satisfied that the proposed use complies with the property’s current use class.

3.6 Existing Vacancies

There are currently 6 vacant properties in the portfolio: Sutton – 188 High Street

The proposed letting to Submania (t/a Subway) proved aborted because their proposed franchisee, withdrew. Terms have been agreed for a temporary letting to a fireworks retailer which would run for 6 months until February 2009. This will increase security at the premises and also improve the marketability to aid securing a long term tenancy. Interest has also been received from a betting shop although they would anticipate taking occupation after the Christmas period.

Birmingham – Fourth Floor, 57/63 Church Street This suite is currently being refurbished prior to commencement of marketing campaign. Tenders have now been received and we are evaluating the cost breakdowns for any potential cost savings. Letting agents have been instructed and a marketing budget has been agreed. A brochure and particulars will be produced following completion of the refurbishment works in order to maximise attractiveness of the suite and aid marketability.


Units 1 & 2, Therapia Lane, Croydon We have recently appointed new joint letting agents to market these units and units 4 & 5 which will be vacated at the end of September. There have since been a number of viewings and new enquiries, the quoting rent is £7.50. The dilapidations settlement has been agreed with the former tenant at £117,500.

Reading – Units B & Unit 5, Acre Road

These units are currently being marketed by local letting agents Sharps Commercial. There has recently been some renewed interest received from Storage King in respect of leasing both Unit B and Unit 5. Terms were previously agreed with Storage King for Unit 5 back in 2007 although the company pulled out of those negotiations to fund expansion elsewhere.


4 PERFORMANCE Fund performance is calculated by the WM Company on an annual basis. In addition, Cushman & Wakefield Investors undertakes performance analysis of the direct property portfolio on a quarterly basis. For the quarter ending 30th June 2008, our analysis indicates that the Fund’s return for the 3 months was -1.4% as compared with the IPD Quarterly Index benchmark of -2.9%. For the year ending 30th June 2008 the Fund returned -9.9% compared to the IPD Quarterly Universe of -13.7% and over three years period the Fund returned 7.0% compared to the IPD Quarterly Universe which returned 5.8%.

Figure 1 – Property Performance Relative to the IPD Quarterly Universe

-2.9%

7.0%5.8%

-13.7%

-9.9%

-1.4%

-21.0%

-18.0%

-15.0%

-12.0%

-9.0%

-6.0%

-3.0%

0.0%

3.0%

6.0%

9.0%

Teesside IPD Benchmark Teesside IPD Benchmark Teesside IPD Benchmark

3 Month 12 Month 3 Year

Income Return Capital Grow th


5 MARKET CONTEXT 5.1 Economic Review The effects of the credit crunch are still permeating through all areas of the economy. With banks taking emergency measures to reduce their loan books and boost their capital ratios, the availability of credit has been dramatically reduced. UK GDP growth slowed to 0.0% in the second quarter of 2008 from 0.3% in the previous quarter. The Bank of England amongst others are forecasting a significant downturn in growth in 2008. Consensus in June was for GDP growth of 1.7% this year (This now looks optimistic, with annual growth unlikely to be much greater than 1%). Further comment on the economy is set out in appendix 3.

5.2 Property Market Review The property market downturn has now entered a second phase, with the effects of the credit crunch filtering through into the broader economy and weakening occupier demand. As anticipated, there have been a substantial number of redundancies announced in the City, and this reduction in headcount is likely to spread into other parts of the economy. Property valuations have already been marked down significantly, with average yields, as recorded by the IPD Monthly Index, out by between 100bp and 175bp. This dramatic outward yield shift has caused rolling twelve month property returns, as measured by the IPD Monthly Index, to fall to minus 14.9% in June, down from a peak of 21.6% in July 2006. This is illustrated in figure 2:-

Figure 2 - Property Returns Measured by the IPD Monthly Index

-20

-15

-10

-5

0

5

10

15

20

25

Jun-06 Dec-06 Jun-07 Dec-07 Jun-08

Perfo

rman

ce %

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Equi

vale

nt Y

ield

%

Total Return Rental Value Growth Equivalent Yield Source: IPD Monthly Index

The rate of this decline had slowed considerably in recent months, with rolling 3 month total returns to May at -2% compared to -8.5% in December. However the impact of occupational markets is likely to increase the rate of decline in the short term, a trend which is already reflected in the return of -2.7% for the 3 months to June.


Agents report that investment yields have also moved out rapidly, with further outward pressure in most sectors. Approximate prime yields for the best properties in each market are set out in table 6: Table 6 – Prime Investment Yields

Jun 07 Dec 07 Jun 08 High Street Retail 4.00% 4.25% 5.50%Retail Warehouses 3.75% 5.00% 5.75%Industrial 4.75% 5.50% 6.25%Central London Offices 3.75% 4.75% 4.75%Regional City Offices 4.50% 6.00% 6.25%

Source: Cushman and Wakefield While this sharp outward yield shift has reopened the gap between property yields and long dated gilts, the volume of investment has dropped dramatically as the cost of borrowing has risen sharply (However, it’s worth noting that since the end of June five year swaps have come down by almost 100bp, reflecting market expectations that the next movement in the base rate will be down). Investment transactions totalled approximately £5bn in Q2 2008, a decline of over 70% from a year earlier. The IPD Monthly Index has recorded net disinvestment in each of the last nine months, as illustrated in figure 3:- Figure 3 - Net Investment and the cost of borrowing

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Nov06

Dec06

Jan07

Feb07

Mar07

Apr07

May07

Jun07

Jul07

Aug07

Sep07

Oct07

Nov07

Dec07

Jan08

Feb08

Mar08

Apr08

May08

Jun08

Net

In

vest

men

ts

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

5 ye

ar s

wap

rat

e

Net Investments as % of Benchmark Value5 yr swap

Source: IPD, Bloomberg


5.2 Market Prospects for the UK The outlook for the market has worsened over the last month as it has become clear that the broader occupier market will not escape the effects of the credit crunch. Demand for space has declined across most sectors as expansion plans have been put on hold. This decline in demand is coinciding in some cases with a significant increase in supply, notably in City Offices and Shopping Centres. Even though much of the bad news has already been priced into the market, we expect a further gradual increase in yields due to worsening rental growth expectations. We are confident that in terms of falling capital values the worst is behind us, but without the stimulus of lower interest rates and swift return to economic growth, the recovery will take longer than previously expected. A summary of our forecasts for the UK property market over the next five years in the context of returns over the last five years is illustrated in figure 4.

Figure 4 – CWI Forecast of All Property Returns 2008-2012

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Income return capital growth Total Return Long term average TR

Source: IPD, CWI

The risks remain on the downside as we continue to base our forecasts on a significant economic slowdown rather than a prolonged recession. The major downside risk is that a sharp rise in unemployment, combined with a continued decline in the housing market, results in rapid increases in bad debt and widespread repossessions. This would result in greater rental declines than we are currently expecting, particularly in the retail sector. However, it’s worth noting that employment remains at historically high levels despite recent job losses.


6 STRATEGY UPDATE 6.1 Summary of Strategy Reported to the Last Meeting

1. With a weakening in the economic outlook we are focusing on securing lettings in respect of vacant space in the portfolio. Where appropriate we have been reviewing the appointment of letting agents.

2. We also continue to drive active asset management initiatives including Newcastle (Melbourne House), Normanton (Loscoe Close) and Bristol (Albert Road).

3. The investment market has seen a reduced level of activity and asset prices have declined further. We continue to monitor the market to determine the optimum time to instigate the sale of the retail assets targeted for disposal.

4. We continue to identify new investment opportunities in the UK with particular focus on markets in south east England, where there is tight supply and prospects for rental growth.

6.2 Asset Allocation and Investment Timing Our forecast outlook for the UK market has changed since we last reported and we anticipate that the bottom of the cycle is likely to be in the final quarter of 2008 or the first half of 2009. The expected recovery from the downturn is also expected to be slower than previously expected with property returns reaching their long term level in 2010/2011. We are happy to provide further advice on the timing of further investment into the property market. 6.3 Portfolio Structure We have introduced optimisation software to assist us in forming a our view of the ideal structure of a UK property portfolio over the short term and the long term. The outcome of this quantitative analysis is shown in table 7. The long term view is based on using history as a proxy for the future. We have analysed the performance of the major segments of the Property Benchmark to determine the optimum portfolio structure based on return relative to volatility of return. The optimum portfolio is the point at which no more return can be added without increasing the risk to a greater extent than the performance gained. The short term optimisation has then been run using our five year forecast and historic volatility to show a tactical view on the short term structure of the portfolio to seek enhanced performance. The recommendations for short and long term activity shown in the final columns are governed by the extent of the variance of the portfolio from the optimised structure. A ‘buy’ or a ‘sell’ recommendation is a suggested shift of more than 5%, which cannot be achieved without trading a property in or out of the portfolio. Marginal shifts of more than 2.5% may be achieved by asset management, whilst minor variance of less than 2.5% may not warrant any major material action.


Table 7 – Review of Portfolio Structure Using Performance Optimisation Techniques

2 years 10 years

St Retail - South East 5.4% 16.0% 11.5% 14.4% Reduce HoldSt Retail - Rest of UK 6.6% 10.0% 5.2% 0.0% Reduce SellShopping Centres 14.7% 0.0% 8.0% 23.3% Buy BuyRetail Warehouses 19.2% 15.4% 9.6% 9.6% Sell Sell

Total Retail 45.9% 41.4% 34.3% 47.3% Sell Buy

Office - City 8.2% 0.0% 0.0% 0.0% Hold HoldOffice - Mid Town & West End 10.5% 0.0% 4.5% 18.7% Increase BuyOffice - Rest of South East 9.9% 16.2% 16.0% 5.2% Hold SellOffice - Rest of UK 5.8% 17.7% 14.0% 0.0% Reduce Sell

Total Offices 34.5% 33.9% 34.5% 23.9% Hold Sell

Industrial - South East 8.9% 5.1% 17.4% 18.5% Buy BuyIndustrial - Rest of UK 6.6% 13.2% 5.6% 3.6% Sell Sell

Total Industrial 15.5% 18.3% 23.0% 22.1% Increase Increase

Other Property 4.1% 6.3% 8.2% 6.7% Hold Hold

Overseas Property 0.0% 0.0% 0.0% 0.0% Hold Hold

IPD Notes 0.0% 0.0% 0.0% 0.0% Hold Hold

Asset Allocation 0.0% 0.0% 0.0% 0.0%

Target StructureRecommendationIPD Qtrly

IndexStructure

Current Portfolio

Tactical2 Yrs View

Strategic10 Yrs View

The key investment themes that can be drawn from this exercise are as follows:

• Whilst the overall exposure to town centre retail is balanced with the short term tactical

view (combining the unit shop and shopping centre sub-categories), the model indicates that it would be beneficial to reduce exposure to the Retail Warehouse sector where ongoing prospects are poor.

• The exposure to the office market is broadly in line with the our house view with no

exposure to the City of London Market and an emphasis on South East and regional office markets where supply and demand are more balanced.

• To increase exposure to industrial property with an emphasis on the south east or other

location where the underlying land value in the investment is a significant element of the value.

• The Fund’s leisure holding is classified within Other Property and is a recommended

hold. We also see value in sectors of the market that benefit from demographic changes.

• The model considers only UK market sectors and does not take any positive or negative asset allocation to the portfolio into consideration.


6.4 Updated Business Plan Portfolio Structure

To consider new investment into the UK direct property as the market cycle bottom turning point.

To enhance performance with reference to our property market forecasts we recommend reducing exposure to retail warehousing and growing exposure to industrials with good underlying land values.

Investment Activity

To invest in opportunities that will achieve the Fund’s long term target return objectives.

To monitor the performance of the Fund’s existing assets and dispose of those projected to under-perform.

Explore Asset Enhancement Opportunities

To let vacant properties and raise the average lease length through asset management initiatives to enhance income security and protect value.

o To finalise the letting Unit C, Acre Road, Reading and secure tenants on the remaining vacant properties at Croydon and Sutton.

o Additional value can be created through letting re-gearing of the leases at Melbourne House, Newcastle and others (short leases).

o Pursue the surrender and re-letting initiative at St Ann’s Road, Harrow and Loscoe Close, Normanton.

o Pursue the removal of the break option at Albert Reach, Bristol.


APPENDIX I – SCHEDULE OF CURRENT HOLDINGS

Capital Value (Sales) Purchases

Capital Value Like for Like Fund

03/08 £ £ 06/08 Capital Change Weight Property

£ £ % %

Offices Church Street, Birmingham 3,500,000 3,360,000 -4.0% 3.74% Coates Crescent, Edinburgh 1,675,000 1,625,000 -3.0% 1.81% Old Brompton Road, London 6,500,000 6,500,000 0.0% 7.24% Queen Street, Manchester 4,875,000 4,520,000 -7.3% 5.04%

Melbourne House, Newcastle 6,550,000 6,385,000 -2.5% 7.12% Station Road, Sunbury 3,500,000 3,425,000 -2.1% 3.82% TOTAL OFFICES 26,600,000 25,815,000 -3.0% 28.77%

High Street Retail Silver Street, Bedford 1,725,000 1,630,000 -5.5% 1.82% Sheep Street, Bicester 1,225,000 1,225,000 0.0% 1.37%

Eastgate Row & Eastgate Street, Chester 2,625,000 2,520,000 -4.0% 2.81% St Ann's Road, Harrow 5,500,000 4,935,000 -10.3% 5.50% Gloucester Road, London 4,475,000 4,410,000 -1.5% 4.92% Market Place, Loughborough 1,075,000 1,055,000 -1.9% 1.18% Market Place, Pontefract 790,000 790,000 0.0% 0.88% Westborough, Scarborough 1,900,000 1,850,000 -2.6% 2.06%

Market Place, St Albans 1,350,000 1,280,000 -5.2% 1.43% High Street, Sutton 900,000 900,000 0.0% 1.00% Union Street, Swansea 1,175,000 1,170,000 -0.4% 1.30% East Street, Taunton 1,600,000 1,600,000 0.0% 1.78% TOTAL RETAIL 24,340,000 23,365,000 -4.0% 26.04%

Retail Warehouse

Sealand Road, Chester 3,000,000 2,935,000 -2.2% 3.27% Clarendon Way, Colchester 5,600,000 5,600,000 0.0% 6.24% Ringwood Road, Poole 3,575,000 3,300,000 -7.7% 3.68% Foregate Street, Stafford 2,025,000 1,975,000 -2.5% 2.20% TOTAL RETAIL WAREHOUSE 14,200,000 13,810,000 -2.7% 15.39%

Industrial

Albert Reach, Bristol 3,050,000 2,860,000 -6.2% 3.19% Therapia Lane. Croydon 2,875,000 2,825,000 -1.7% 3.15% Invincible Road, Farnborough 1,750,000 1,750,000 0.0% 1.95% Telford Way, Kettering 1,525,000 1,475,000 -3.3% 1.64% Loscoe Close, Normanton 1,075,000 1,040,000 -3.3% 1.16% Victoria Business Park, Nottingham 2,400,000 2,475,000 3.1% 2.76%

Acre Road, Reading 4,700,000 4,615,000 -1.8% 5.14% Kinneton Ind Est, Southam 1,325,000 1,325,000 0.0% 1.48% Albans Road, Stafford 2,800,000 2,675,000 -4.5% 2.98% TOTAL INDUSTRIAL 21,500,000 21,040,000 -2.1% 23.45%

Leisure

Queen Elizabeth Park, Guildford 5,700,000 5,695,000 -0.1% 6.35%

TOTAL LEISURE

TOTAL PROPERTY HOLDINGS 92,340,000 89,725,000 -2.8% 100.00%

Note :The 03/08 valuation figures set out for the property assets are by reference to the independent valuations undertaken by Cushman & Wakefield as at 30th March 2008.


APPENDIX 2 – ECONOMIC OUTLOOK

Overview • The effects of the credit crunch are still permeating through all areas of the economy. With

banks taking emergency measures to reduce their loan books and boost their capital ratios, the availability of credit has been dramatically reduced.

• UK GDP growth slowed to (a downwardly revised) 0.0% in the first quarter of 2008, down from 0.3% in the previous quarter. The Bank of England is forecasting broadly flat growth in the short term. Consensus is for continued weakness in 2009.

• The Bank of England monetary policy committee have reduced the base rate three times since December. There is uncertainty over the future direction of the bank rate with the MPC currently split three ways.

• Consumer price inflation - the Government’s target measure – has reached 4.4%, over double the target rate. Although the major causes of inflation are international, the rapid rise significantly reduces the scope for looser monetary policy.

• One crumb of comfort for the MPC is that secondary round effects of inflation have yet to feed through to wage increases. Average earnings growth (including bonuses), rose by 3.4% in the year to June 08, down from 4.0% in March.

• Although UK unemployment has risen marginally to 5.4%, and is expected to rise further in the short term, it remains at a historically low level.

• By some measures house prices have now fallen by more than 10% year-on-year. Home repossessions are on the increase, with the CML forecasting a total of 45,000 in 2008, up from 27,100 last year.

UK Downside Risks • Economic conditions raise the threat of “stagflation”, with high inflation limiting the

potential for lower interest rates to stimulate growth. However, this is only likely with much higher levels of unemployment.

• Despite recent falls, the price of oil remains almost 50% up from a year ago. This situation is pushing up inflation globally.

• Although most economists still expect a period of stagnation rather than an outright recession, the latter remains a possibility with consumer confidence at record lows and many companies planning to cut back on staffing levels.

UK Upside Potential • With China reducing subsidies, and demand from western economies moderating, the price

of oil may well continue to fall. With most metals and other commodities also off peak levels, global inflation is likely to ease in 2009.

• With sterling considerably weaker on a trade weighted basis, the outlook for UK exports is more benign. Although, in contrast high energy prices have pushed up costs.

• With weaker growth now a greater concern than high inflation, central banks may decide to reduce interest rates before the end of the year.

teesside pension fund investment panel meeting...

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