aew uk real estate fund/media/files/a/aew-uk...net cash generated from financing activities 6,054...

Unaudited Half Yearly Report and Financial Statements for the period ended 30 June 2020

AEW UK Core Property FundAEW UK Real Return Fund

AEW UK Real Estate Fund

AEW UK – Winner, UK Property Manager of the YearPension Investment Provider Awards

2019

AEW UK Real Estate Fund • Half Yearly Report and Financial Statements • 30 June 2020

Statement of Authorised Status of the Scheme 1

Basis of Reporting 1

Statement concerning the debts of the Company 1

Managing Director’s report 2-7

AEW UK Core Property FundFund Manager’s Report 9-18 Fund Objective 19 Investment Benchmark 19 Investment Policy 19 Investment Strategy 19 Investment Guidelines 20 Report of the Valuer 21-25 Portfolio Statement 26-28 Summary of Material Portfolio Changes 29 Fund Information 30-36 Statement of Total Return 37 Statement of Changes in Net Assets Attributable to Unitholders 37 Balance Sheet 38 Statement of Cash Flows 39 Notes to the Financial Statements 40-58 Distribution Tables 59

AEW Real Return FundFund Manager’s Report 61-70 Fund Objective 71 Reference Benchmark 71 Investment Policy 71 Investment Strategy 72 Investment Guidelines 72-74 Report of the Valuer 75-77 Portfolio Statement 78-80 Summary of Material Portfolio Changes 81 Fund Information 82-87 Statement of Total Return 88 Statement of Changes in Net Assets Attributable to Unitholders 88 Balance Sheet 89 Statement of Cash Flows 90 Notes to the Financial Statements 91-108 Distribution Tables 109

Depositary, ACD & Advisers 110

Contents

1AEW UK Real Estate Fund • Half Yearly Report and Financial Statements • 30 June 2020

Statement of Authorised Status of the SchemeThe AEW UK Real Estate Fund (the ‘Company’) is an open-ended investment company which is a Property Authorised Investment Fund (‘PAIF’) registered in England and Wales under registered number IC000974.

The Company is a Qualified Investor Scheme (‘QIS’) that is open to Eligible Investors as defined in the Collective Investments Schemes sourcebook (the ‘COLL Rules’) issued by the FCA. The Company is incorporated in England and Wales and is authorised by the FCA.

Basis of ReportingThe Company is structured as an umbrella Company and has two sub-funds in issue, the AEW UK Core Property Fund and the AEW UK Real Return Fund.

Statement concerning the debts of the CompanyThe Company is an Investment Company with Variable Capital (‘ICVC’).

Unitholders of the ICVC are not liable for the debts of the ICVC.

Risk WarningInvestors should be aware that there are risks inherent in the holding of investments.

The Net Asset Value (NAV) as at 30 June 2020 is subject to material uncertainty following the Standing Independent Valuer’s determination of material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic.

Past performance is no guide to the future. The value of units, and any income from them, can go down as well as up, particularly in the short term, meaning that an investment may not be returned in full.

The tax treatment of the Fund may change and such changes cannot be foreseen.

Where regular investments are made with the intention of achieving a specific capital sum in the future, this will normally be subject to maintaining a specified level of investment.

For further information, please refer to the Fund’s prospectus and the risk management policies in the notes to the financial statements.


2 AEW UK Real Estate Fund • Half Yearly Report and Financial Statements • 30 June 2020

Managing Director’s report

AEW UK was established as a joint venture between AEW in Europe and the AEW UK Management Team1, to focus on UK real estate. The AEW UK team has been providing solutions for institutional investors for over 20 years and has developed a range of funds and segregated accounts to meet their differing needs, from value add strategies to traditional core style total return and a real return strategy. The management team have worked together for an average of 18 years and are 50% equity owners in the business. This ownership over investment process and decision-making, helps deliver a consistent approach through different cycles.

The AEW UK Core Property Fund was launched in Q1 2012, and is an open-end fund with a diversified, multi sector portfolio of commercial property assets throughout the UK. The Fund is the top performing fund in the MSCI/AREF UK Quarterly Property Fund Index – All Balanced Property Fund Index over seven and eight years with an annualised total return of 10.6% and 10.5% respectively as at 30 June 2020.

In 2014 we launched the AEW UK South East Office Fund, a value add strategy focused on delivering enhanced returns from the South East office market. During the year ended 31 December 2018, as part of the disposal strategy, the Fund sold the whole portfolio to a single investor and distributed the majority of the proceeds to investors. The Fund generated a net IRR of 11.8%.

For defined contribution pension schemes and the increasing amount of Private Wealth money now classified as Retail, the AEW UK REIT was launched in May 2015, to effectively replicate the Core Fund strategy in a listed company, as an alternative to daily dealing open ended retail funds.

At the start of 2016 the AEW UK Real Return Fund was launched largely as a secure income solution for the increasing number of defined benefit schemes needing higher yielding real returns to match their cash flow liabilities and help scheme sponsors plug any deficit in funding that may exist.

AEW UK operates a number of separate account mandates, tailoring the respective strategies to satisfy the investment characteristics and returns required by the underlying investor.

AEW2 is one of the world’s largest real estate asset managers. As at 30 June 2020, AEW has €70.2 billion in assets under management, with over €33.6bn managed in Europe. The chart on page 5 shows how the business is split in terms of assets under management across North America, Europe and Asia. The second chart on page 6 shows the assets under management breakdown by sector and vehicles for AEW Europe. Both charts show data as at 30 June 2020.

1 AEW UK Management Team comprises Richard Tanner, Rachel McIsaac and Nick Winsley.2 AEW is a group of companies which includes AEW SA and its subsidiaries as well as affiliated company AEW Capital Management, L.P. in North

America and its subsidiaries. AEW SA, together with its subsidiaries AEW Europe LLP. AEW Sarl and AEW Ciloger and a joint venture with AEW UK Investment Management LLP, is a European real estate investment manager with headquarter offices in Paris and London. AEW SA is owned by Natixis Investment Managers and La Banque Postale and AEW Capital Management is owned by Natixis Investment Managers. Natixis Investment Managers is an international asset management group based in Paris, France, that is principally owned by Natixis, a French investment banking and financial services firm. Natixis is principally owned by BPCE, France’s second largest banking group.



Managing Director’s report (continued)


UK PlatformAEW SA and the AEW UK Management Team have created a joint venture vehicle, AEW UK Investment Management LLP, which is the Authorised Corporate Director (ACD) and the Authorised Fund Manager (the “Manager”) of the AEW UK Real Estate Fund. Its board members for the year were:

Richard Tanner Managing Director, AEW UKRachel McIsaac Managing Director, AEW UKLouise Staniforth Managing Director, AEW UKJeff Furber Chairman, AEW Capital ManagementRob Wilkinson Chief Executive Officer, AEW Europe LLPRussell Jewell Managing Director, AEW Europe LLPAlan Botterill Independent Non-ExecutiveAlex Wilson Independent Non-Executive

As a joint venture company with a large global, multi boutique, asset manager, it benefits from the global strength and resource and access to investors you might expect, together with the true autonomy and culture of an employee owned business. Ownership is spread through our staff partners and consultants.

AEW UK: Funds and Separate AccountsAssets under management and capital raised

Total Assets Under Management

£1.7bnInstitutional Funds

£649mSeparate Accounts

£1.0bn

EXPECTEDRISK

EXPECTED RETURN/VOLITILITY

Source: AEW UK. CPF and RRF on GAV basis as at 30 June 2020

AEW UK Core Property Fund• Open-ended• Diversified• GAV £298m• Distribution yield 4.8%

AEW UK Real Return Fund• Open-ended• Alternative real estate• GAV £146m• Distribution yield 4.8%

AEW UK South East Office Fund (Value Add 1)• Closed-ended• Portfolio sold October 2018• IRR of 11.8%

AEW UK REIT• Listed on LSE• Diversified• GAV £205m• Dividend yield 8p/share p.a.

RISK FREERATE

AEW Logistics UK• Build to core• Separate Account• Cornerstone investor c€290m

AEW UK Urban Real Estate Fund (Value Add 2)� Closed-ended, value add� 6 year life� Target IRR 12%




2

AEW UK BoardJeff FurberChairman

AEW Capital Management

Rob WilkinsonChief Executive Officer

AEW Europe LLP

Russell JewellManaging DirectorAEW Europe LLP

Richard TannerManaging Director

AEW UK

Rachel McIsaacManaging Director

AEW UK

Louise Staniforth Managing Director

AEW UK

AEW UK Management Committee Richard Tanner 1

Managing DirectorAEW UK

Rachel McIsaac1


Nick Winsley 1


Louise Staniforth Managing Director

AEW UK

Rob WilkinsonChief Executive Officer

AEW Europe LLP

Russell JewellManaging DirectorAEW Europe LLP

Vanessa Roux-CollettGeneral Council AEW Europe LLP

Investment & Portfolio Management

Richard TannerPortfolio Manager, Core

Nick WinsleyPortfolio Manager, Logistics

Ian Mason Portfolio Manager, Real

ReturnAlex Short

Portfolio Manager, REIT

Laura ElkinExecutive Director

Spencer CorkinDirector

Ed LongDirector

Fund Operations & Risk ManagementLouise StaniforthManaging Director

Jon SaxtonExecutive Director

Anish ShahDirector

Tom HoustonAssociate

Sam ArcherAssociate

Francesca HawkinsAnalyst

Client Management & Capital Raising

Kari ClarkeAssociate Director

Nicki GladstoneMarketing &

Communications Consultant

Olivia BalogunInvestor Relations Assistant

AEW UK

Asset Management

Rachel McIsaacManaging Director

Charles RoyleExecutive Director

Executive Michael Shears

Director

Henry ButtDirector

Richard DunlingAssociate Director

Ross BurnsAssociate Director

Warren MeechAssociate Director

Millie Grant AM administrator

ConsultantsJames Hyslop 1

External Consultant

Andrew Strang 1External Consultant

George HenshilwoodIndependent Chairman of Governance Committees

Admin

Gemma FranklinPA to Richard Tanner

Independent Non-Executive Directors

Alan BotterillAEW UK

Alex WilsonAEW UK

THE AEW EUROPE PLATFORM

INVESTMENTPORTFOLIO & ASSET

FUND OPERATIONS RESEARCH INVESTOR

RELATIONSLEGAL & COMPLANCE

HR & CORPORATE IT & SUPPORT

AEW UK Organisational Structure

1 Evergreen Member LLP shareholderAs at 30 June 2020




North America, Europe and Asia Pacific

Focused on the Future of Real Estate 1

AEWNORTH AMERICA, EUROPE AND ASIA PACIFIC

Over 30 years’ real estate

investment management

experience

One of the largest real

estate investment

managers in the world

with €70.2bn in assets

under management

Over 700 staff located in

15 offices across North

America, Europe and Asia

Pacific

Broad experience across

all major real estate

markets and investment

strategies

Research driven approach

to investment strategy and

underwriting

€33.2bnAUM

€33.6bnAUM

€3.4bnAUM

NORTH AMERICA• 295 staff• 2 offices

BostonLos Angeles

EUROPE• 400 staff• 12 offices

ParisLondonDüsseldorfFrankfurt

LuxembourgMilanMadridPragueWarsaw

ASIA PACIFIC• 38 staff• 4 offices

SingaporeHong KongSydneyTokyo

Figures as at 30 June 2020. Total AEW Global AUM includes $41.9 billion in assets managed by AEW Capital Management and its affiliates, of this $465 million in advisory/subadvisory securities wrap accounts for which AEW Capital Management provides only a model portfolio.

Part of Natixis Investment

Managers




European Platform

Focused on the Future of Real Estate 2

AEWEUROPEAN PLATFORM

18.9

26.628.4

31.433.0 33.6

0

4

8

12

16

20

24

28

32

36

2015 2016 2017 2018 2019 Q2 2020

ASSETS UNDER MANAGEMENT

PROPERTY BY SECTOR

Office 41%

Retail 31%

Logistics 13%

Residential 8%

Other 7%

Figures as at 30 June 2020. AUM includes €673mn in European REIT Securities managed by AEW Capital Management. Sector and vehicle breakdowns do not include European REIT securities AUM.

Paris279 staff

London61 staff

Milan9 staff

Warsaw6 staff

Frankfurt19 staff

Prague3 staff

Luxembourg11 staff

Antwerp2 staff

Düsseldorf23 staff

Madrid4 staff

Amsterdam2 staff

Munich1 staff

PROPERTY BY VEHICLE

Separate Accounts 46%

Funds 42%

Club Deals 12%

€bn




Market Outlook

It should not come as a shock to anyone that the impact of COVID-19 on the UK economy has been severe. Measures implemented by the UK government intended to help navigate the COVID-19 (coronavirus) pandemic, including social distancing policies, travel restrictions, temporary supply chain shutdowns and a hiatus in non-essential business activity, have resulted in severe economic consequences.

On 12 August 2020, upon release of Office for National Statistics (ONS) data on UK GDP, the UK economy was officially declared to be in a technical recession after recording two consecutive quarters of negative economic growth. UK GDP fell by 20.4% in Q2 2020 (April to June), following a 2.2% decline in Q1 (January to March) 2020. Monthly gross domestic product (GDP) grew by 8.7% in June 2020, following growth of 2.4% in May 2020. Despite this, the level of output did not fully recover from the record falls seen across March and April 2020, and has reduced by 17.2% compared with February 2020, before the full impact of the coronavirus (COVID-19) pandemic.

Economic activity has recovered strongly from the lockdown, as one might expect given that many businesses are effectively no longer banned from trading. The possibility of a “V” shaped recovery is dependent upon the effectiveness of the Chancellor’s fiscal stimulus as much as our collective response to Boris Johnson’s plea for us all to return to work, balanced against the risk of a second COVID spike. In essence, a V-shaped recovery would mean UK GDP hits a pre-pandemic level just as quickly as it nosedived away from it. There is also the added uncertainty of an unknown outcome to the next round of Brexit talks scheduled for completion by the end of the year.

The physical property investment market has now re-opened for business albeit somewhat hesitantly for all but the sectors in demand, in particular logistics and “investment grade” long lease. Having applied Market Uncertainty Clauses (MUC) to valuations at the start of lockdown, valuers seem to be removing MUC sooner rather than later, across whole sectors or types of investment.

The stresses and strains of the occupier markets are well publicised, with all non-essential retail, leisure and hospitality forced to close, although many businesses in the construction and manufacturing sectors have also been affected as factories have shut and supply chains been disrupted.

Government has been swift to impose a moratorium preventing landlords from taking any action for non-payment of rent and in June the Government published a new Code of Practice to encourage commercial tenants and landlords to work together to protect viable businesses. It encourages tenants to continue to pay their rent in full if they are in a position to do so and advises that others should pay what they can, whilst acknowledging that landlords should provide support to businesses if they too are able to do so. Whilst we support the spirit of the Code, our view is that it is made harder for landlords to support smaller, more vulnerable businesses, when some well financed major corporates with the ability to pay their rent are using CVAs to engineer restructures that are targeted at landlords rather than shareholders or bondholders.

Richard Tanner Managing Director, AEW UK


AEW UK Core Property Fund


Fund Manager’s Report

• The AEW UK Core Property Fund (‘the Fund’) is an open-end fund with a diversified, multi sector portfolio of commercial property assets throughout the UK.

• The investment objective of this Fund is to provide a return from capital appreciation and income over the longer term and to deliver, over time, outperformance of the benchmark. The benchmark being the UK All Balanced Property Funds Index.

• The Fund seeks to achieve superior investment returns through relatively high income returns, strong stock selection, seeking well located mispriced assets with strong tenant demand, and active management of all assets.

• Investment guidelines adopted to control risks and maintain focus on key objectives such as zero permitted long term debt, voids, cash holdings, and measure sector allocations against benchmark.

• The Fund has no current exposure to Central London offices.

• The Fund is open to investment by pension funds, charities, SIPPS, insurance companies and other approved investors eligible to invest in a qualified investor scheme (QIS).




Fund Manager’s Report (continued)

The impact of COVID-19 on the Fund

As the dust settles for now on the COVID-19 pandemic, we are seeing something of a relief rally in the markets. That said, as employees come off furlough, we expect the number of job losses and indeed CVA’s to remain elevated for some time. This will feed through to increased vacancies for a period, no doubt, whilst we work through our various business plans.

During 2020 we have sold and put under offer for sale, a few properties at very close to pre COVID-19 pricing. Meanwhile valuer momentum is still very negative, as in previous shock markets, for our value orientated assets, reversing, for now, our ranking in the benchmark in the shorter term. With a shorter lease profile, this is to be expected. That said, we continue to progress some very significant asset management initiatives that, as before, should feed through to improved performance in the future.

With over 25 years of managing core funds through a number of downturns, most importantly our capital base has remained stable, which frees the management team up to exploit the relative value opportunities that this market shock will generate. We wish to thank the Pricing Sub-Committee for their swift action and helpful recommendations in ensuring the Fund remained open for dealing.

Our overweight to warehouse and numerous alternative use possibilities in the portfolio are already providing attractive liquidity for reinvestment. The recent changes to the planning use classes order should be positive for many of our retail and leisure assets.

Similar to the March Quarter, rent collection has been both lower and slower than a normal quarter in June, primarily in the retail and leisure sectors. The collection rates are not too dissimilar between the two quarters, of which the June quarter at the time of writing is over 70%, which is not far off the March quarter at 79%.

However our objective is to deliver a strategy over the longer term to maximise total returns and hence is some cases we are trading short term rent concessions for longer leases or landlord flexibility.

The Standing Independent Valuer has determined material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic. As at 31 August 2020, 45.2% of the Fund’s portfolio valuation which includes all of its assets that do not sit within the industrial and office sectors, is subject to material valuation uncertainty. Whilst RICS Leaders Forum has announced lifting on Material Uncertainty Clauses, the clause will still apply to certain assets valued with reference to trading potential, particularly in the leisure and hospitality sectors.

In unusual market conditions, to protect the interest of investors, the prospectus provides a mechanism for the ACD to i) Adjust the Fair Value of the Pricing or, ii) Defer Redemptions or iii) Suspend the Fund. As at 31 March 2020, following the Standing Independent Valuer’s determination of material valuation uncertainty, a Fair Value Pricing adjustment was applied to the Fund, being; Offer price less 14% for the 1 April dealing date, Bid less 15% for the 1 May dealing date, Offer less 12% for the 1 June dealing date, Offer less 10% for the 1 July dealing date, Offer less 8% for the 1 August dealing date, and Offer less 7% for the 1 September dealing date.


Performance

%


UK All Balanced Property Fund Index

3 months 1 year 3 years 5 years 8.25 years p.a. (Since inception)

7 years

Fund performance to 30 June 2020

10

2

-2

-4

-6

0

6

4

8

12

-2.0%

-4.1%

-6.0%

-2.6%

4.6%3.4%

6.7%

4.6%

10.6%

6.6%

10.6%

7.6%

* Source: MSCI/AREF UK Quarterly Property Fund Index

2

4

6

8

10

12

%

Historic true equivalent yield since inception (%)

MSCI/AREF UK All Balanced Property Funds Index - True Equivalent Yield(weighted average)

31 December2012

31 December2013

31 December2014

31 December2015

31 December2016

31 December 2018

31 December 2019

30 June2020

31 December 2017

AEW UK Core Property Fund - True Equivalent Yield

10.0%

6.9%

11.1%

6.8%

9.5%

5.6%

9.2%

5.3%

9.1%

5.4%

8.1%

5.6%6.2%

5.8%

8.2%

5.8%

8.4% 8.4%

Source: Knight Frank

Portfolio statistics

Source: AEW

50

100

150

200

250

300

£m

Historic Net Asset Value Trend since inception (£m)


31 Dec2014

31 Dec2013

31 Dec2015

31 Dec2016

31 Dec2017

31 Dec2019

31 Dec2018

30 June2020

78.1

174.2

225.4243.1

269.6288.6

301.8 277.5

350






Sector allocation (% of portfolio valuation and cash)

31 December 2019

Offices, Rest of South East and UK 11.8%City Offices, 0.0%West-end Offices, 0.0%Standard Retail, 10.5%Industrials, 45.0%Retail Warehouses, 7.0%Other, 20.8%Shopping Centres, 1.4%Cash, 3.5%

30 June 2020

Offices, Rest of South East and UK 11.0%City Offices, 0.0%West-end Offices, 0.0%Standard Retail, 13.2%Industrials, 46.3%Retail Warehouses, 6.3%Other, 19.0%Shopping Centres, 1.3%Cash, 2.9%

Geographical allocation (% of portfolio valuation)

31 December 2019

South West, 20.7%West Midlands, 19.0%North West, 16.6%South East, 11.2%Yorkshire and Humberside, 9.1%Rest of London, 9.0%Eastern, 5.9%Scotland, 4.2%Wales, 2.6%North East, 1.7%

30 June 2020

South West, 23.2%West Midlands, 17.6%North West, 16.8%South East, 10.4%Yorkshire and Humberside, 10.4%Rest of London, 7.6%Eastern, 5.4%Scotland, 4.7%Wales, 2.3%North East, 1.6%

Source: AEW Source: AEW Source: Knight Frank

20

60

80

40

100

10

50

70

30

90

%

31 December 2019

Occupancyrate as % of rental value

Vacancy rate as % of rental value

Occupancy/vacancy rate

30 June2020

140

180

220

160

200

240

320

300

260

280

31 December 2019

Number of tenancies

30 June2020

52

54

56

58

70

60

66

68

64

62

30 June2020

Number of properties

31 December 2019

64

66290

280

12.2

87.8

13.0

87.0


Asset Management reportRent collection

Our focus has been on putting arrangements in place for the recovery of the arrears from March & June. Similar to the March Quarter, rent collection has been both lower and slower than a normal quarter in June, primarily in the retail and leisure sectors. The collection rates are not too dissimilar between the two quarters, of which the June quarter at the time of writing is over 70%, which is not far off the March quarter at 79%. However our objective is to a deliver a strategy over the longer term to maximise total returns and hence is some cases we are trading short term rent concessions for longer leases or landlord flexibility.

General

The Asset Management team is focused on preserving and generating new income and driving capital growth predominantly through new lettings, refurbishments and lease re-structuring. Below is a summary of the major asset management initiatives implemented in 2020:

Kayley Industrial Estate, Ashton Under Lyne

We have completed the letting of unit 3B, the last remaining large unit on the estate, on a 5 year lease at £60,000 p.a.

Unit A, Weston Road Crewe

We have settled the October 2019 open market rent review at £800,000 pa (£4.55 psf), representing a £53,480 p.a. increase. The ERV on purchase was £4.25 psf.

Bloxwich Lane Industrial Estate, Walsall

Bestway Wholesale Ltd has signed a new 15 year FRI lease with tenant break options in years 5 and 10. In renewing this lease we have secured a further 5 years of income to a good tenant at an increased rent of £342,927 p.a./£4.50 psf, equating to a £92,927 p.a. increase. Only 3 months’ rent free was given.

Lochend Industrial Estate, Edinburgh

Com Dev Europa Ltd has completed a 10 year lease renewal with a further option to extend in year 5. The commencing rent is £290,000 p.a./£5.61 psf with 5 yearly RPI reviews (capped at 3%) and is 65%/£115,000 p.a. above ERV. No rent free incentive was given. This transaction completed on 1st May and more than doubled the value of the asset.

The Kursaal, Southend

During Q2 2020 we completed the surrender of a lease to All London Clubs Limited trading as Rendezvous Casinos for a premium of £1,281,150. The premium reflects an equivalent of 3.25 years rent and aligns with the wider asset strategy to obtain vacant possession for alternative use.




AEW UK’s Approach to Socially Responsible InvestingEnvironmental, Social & Governance (‘ESG’)

We believe that ESG should be the key principles of AEW’s approach to Responsible Property Investing (RPI) and that a sustainable and socially responsible approach to real estate investment management both protects and enhances the value of our clients’ assets, now and in the future.

We are fully aware of the impact of our activities on environmental and social issues both from our own business and our investment, asset management and development activities. To this end we are committed to implementing a comprehensive Socially Responsible Investment (SRI) policy. By doing so we expect to meet our stakeholders’ expectations, whether they are clients, tenants, providers, employees, or any other individuals with whom we interact.

Our policy is aligned with the international climate agreement signed in Paris in December 2015 as climate change is a major challenge for humanity that poses important risks and creates opportunities for the real estate industry. The real estate sector in Europe accounts for some 40% of total energy consumption and about 25% of greenhouse gases (GHG) emissions.

Over the coming years we believe that both occupiers and investors will increasingly focus on the way in which ESG issues are managed. In turn, this is expected to impact on building obsolescence, lettability, rates of lease renewals and ultimately the rental and capital values for individual assets if ESG issues are ignored. However, our fiduciary duty to investors must always come first in all investment decision-making. We continue to engage with clients wherever possible to educate on the importance of ESG. Where we feel it is important to do so and costs can be justified in terms of performance objectives, or are required to comply with UK legislation, we will seek to incorporate or adopt best practice; usually this is done with little support from tenants who by and large remain reluctant to commit to ESG in a similar way.

Environment and sustainability

1) Global Real Estate Sustainability Benchmark (‘GRESB’)

The Fund has again submitted to GRESB, the Global Real Estate Sustainability Benchmark. GRESB is an investor driven organisation assessing the sustainability performance of real estate portfolios.

GRESB scores overall performance through two Dimensions:

1. Implementation and Measurement – actions and programmes that have been initiated by the Fund.

2. Management and Policy – relating to policies and processes that set out the Fund’s intent for managing sustainability issues.

This year the Fund saw an improvement in its GRESB score (from 58 in 2018 to 65 in 2019). The Fund achieved a GRESB rating of two stars and was also awarded the additional ‘green star’ status.

Performance was supported through the Fund producing a sustainability disclosure report and having established an Environmental Management System (EMS) and Data Management System (DMS). The DMS enables effective tracking of environmental performance data, including a process for managing EPC coverage, ratings and associated risks. Currently the Fund has full EPC coverage.




Despite the strengths, there are reasons why the Fund is below the GRESB peer average, including:

• The Fund has a high percentage of single let assets where the tenant has sole responsibility for the operation and management of the property, as opposed to assets where the Fund is responsible for managing an estate via a service charge. As so much of the GRESB score relates to data coverage, which has increased over the years, the Fund does not score as well as funds with a smaller holding of single let assets.

• The nature of assets typically acquired do not have a green building certificate. New office buildings in Central London usually have such certificates.

The Fund is committed to improving ESG performance and GRESB scores, where in line with AEW’s commitment to its ESG agenda. We have completed a ‘deep dive’ analysis to identify where and how the Fund can improve scoring. This has involved a targeted approach towards implementing tenant engagement initiatives as well as more detailed analysis on the coverage of asset level initiatives, such as audits and efficiency measures. Results from this analysis shall be used to inform our future ESG strategy.

2) Minimum Energy Efficiency Standards (MEES)

AEW UK are committed to ensuring compliance with MEES regulations, which came into effect from April 2018, requiring all new lettings to have a minimum ‘E’ rated EPC, unless listed buildings. The Fund currently has full EPC coverage.

The Fund undertook a gap analysis to identify any risks where EPCs did not meet minimum standards, these were then re-assessed and action plans created.

The Fund has action plans in place to mitigate EPC below E, which currently represents 3% of the portfolio by floor area.

3) Portfolio Greenhouse Gas Emissions

The Fund has followed UK Government environmental reporting guidelines and used UK Government 2018 greenhouse gas reporting conversion factors for company reporting to identify and report relevant GHG emissions over which it has Operational Control for the year ending 31 December 2019.

GHG emissions have been reported against the following ‘Scopes’, as defined by the GHG Protocol and where relevant:

• Scope 1: Direct emissions from owned vehicles, controlled boilers and fugitive emissions from air conditioning systems under landlord control.

• Scope 2: Indirect emissions from electricity purchased by AEW UK Core Property Fund and consumed within real estate assets owned by the company.

The Fund’s energy use and GHG emissions statements for the year ending 31 December 2019 are reported in the tables below. These set out the energy use/emissions, like-for-like1 and an intensity value per sector and for the entity overall. The approach taken follows guidance provided by the GHG Reporting Guidelines (BEIS, 2018) and INREV Sustainability Reporting Guidelines 2016.1 Like for like excludes assets that were purchased, sold or under refurbishment during the two years reported.




AEW UK Core Property Fund Greenhouse Gas Emissions Statement for the year ending 31 December 2019

Absolute Energy Usage (tCO2)

Like For Like (tCO2)

Like For Like Intensity (kgCO2)

Sector Energy Source 2018 2019 2018 2019 Change 2018 2019 Change

OfficeScope 1 – Gas 69,585 54,943 12,364 11,419 -8%

16 16 1%Scope 2 – Electricity 64,195 343,079 133,250 135,754 2%

Retail, Shopping Centre

Scope 1 – Gas 12 N/A N/A N/A N/A12 10 -17%

Scope 2 – Electricity 63,527 33,382 21,238 15,888 -25%

LeisureScope 1 – Gas N/A N/A N/A N/A N/A

N/A N/A N/AScope 2 – Electricity 199,035 536,086 N/A N/A N/A

Industrial, Business Parks

Scope 1 – Gas 15,438 21,365 N/A N/A N/AN/A N/A N/A

Scope 2 – Electricity 385,590 381,212 N/A N/A N/A

TotalScope 1 – Gas 85,034 76,309 12,364 11,419 -8%

N/A N/A N/AScope 2 – Electricity 1,012,348 1,293,759 154,487 151,642 -2%

AEW UK Core Property Fund Energy Statement for the year ending 31 December 2019

Absolute Energy Usage (kWh)

Like For Like/Degree Day Adj Usage

(kWh)

Like For Like/Degree Day Adj

Intensity


Office

Gas 378,486 298,848 67,248 62,110 -8%

59 65 10%Electricity 1,286,591 1,342,249 470,730 531,118 13%

Total 1,665,077 1,641,097 537,978 593,228 10%

Retail, Shopping Centre

Gas 64 N/A N/A N/A N/A

66 55 -17%Electricity 224,422 130,602 75,027 62,160 -17%

Total 224,486 130,602 75,027 62,160 -17%

Leisure

Gas N/A N/A N/A N/A N/A

N/A N/A N/AElectricity 703,131 2,097,363 N/A N/A N/A

Total 703,131 2,097,363 N/A N/A N/A

Industrial, Business Parks

Gas 83,969 116,211 N/A N/A N/A

N/A N/A N/AElectricity 1,362,171 1,491,440 N/A N/A N/A

Total 1,446,140 1,607,652 N/A N/A N/A

Total

Gas 462,519 415,059 67,248 62,110 -8%

N/A N/A N/AElectricity 3,576,315 5,061,655 545,756 593,278 9%

Total 4,038,834 5,476,714 613,004 655,388 7%




4) Carbon Emissions Target

The Fund is actively managing its carbon footprint and seeks to improve efficiency measures where it is able to influence the outcome. For example, we look to incorporate energy efficiency into refurbishments or at sites where we have management control. We consider all property types where there is a positive business case to do so. Quick wins are progressed where possible and larger capital expenditure projects are reviewed as part of an asset’s annual business plan. The Fund has set a target of reducing absolute GHG emissions by 15% by 2030 based on a 2018 baseline and we perceive the positive actions we take regarding improving our assets will support us to achieve this target. We would therefore expect on a like for like basis there to be a trend of reducing emissions over the near future. It is however important to note that changes in Fund composition as we buy and sell assets will impact absolute emission figures. Currently we collect landlord consumption data on a bi-annual basis from our property managers, which enables us to track our emissions and review progress easily. Furthermore, we are continuing to engage with tenants regarding tenant procured consumption data, so we can better understand emissions relevant to their actions.

Governance

The Fund is a member of the Association of Real Estate Funds (AREF). The aim of the AREF Code of Practice is to achieve high standards of transparency across the unlisted sector and promote consistency of reporting to allow investors to compare different funds. The Fund completes the MSCI/AREF Pooled Property Questionnaire each quarter, which is made available to all investors and which forms the basis of its entry in MSCI/AREF Property Fund Vision handbook. The Fund was awarded the 2019 AREF Corporate Governance Quality Mark on achieving a high standard of transparency and corporate governance.

Part of the AREF Code of Practice sets on the requirements for oversight by supervisory or advisory committees. The Annual Report and Financial Statements set out the report of the Fund’s Independent Governance committee. When AEW UK launched its first authorised fund in 2013 we wanted to reflect the lessons learnt by the property fund industry in dealing with investor communications and liquidity management at the time of the Global Financial Crisis. As such the constitution of the Governance Committee and Pricing Sub-Committee reflects its independence from the manager, with an independent Chair, majority representation by investors and Terms of Reference will allows the Manager to be held to account. We believe that such transparent governance is not only best practice but also extremely rare amongst our peers.

Investors in AEW UK Core Property Fund are invited to join AREF in the Investor Member category. This is free of charge. Much of what AREF is striving to achieve is ultimately for the benefit of the underlying investors in the funds that make up its membership. So, AREF not only represents the interests of its member funds and those firms that advise and support them, but also the end-investors. AREF is proactively reaching out to professional investors and/or their advisers, looking for their engagement to help set AREF’s agenda. For further information, please visit www.aref.org.uk or email [email protected].




Portfolio Acquisitions in 2020

56-64 Broadmead & 41-45 Merchant Square, Bristol

Investment summary• Located in immediate vicinity of a major

mixed-use development pipeline

• Fully let to national and international occupiers providing an attractive 8.1% NIY

• £6,700,000 (£303 per sq ft)

3-11 Fairfax Street & 15-18 Nelson Street, Bristol

Investment summary• The location has been identified as a major

regeneration area and the site has significant development potential

• Providing an attractive 8.5% NIY

• £2,250,000 (£71 per sq ft)

Soho Studios, 47-49 Merchant Square, Bristol

Investment summary• Comprehensively refurbished, multi-let

office led investment

• In the immediate vicinity of a major mixed-use development pipeline

• Fully let with 6 years WAULT to break, providing an attractive 7.1% NIY

• £3,300,000 (£349 per sq ft)




Fund ObjectiveThe investment objective of the Fund is to provide a return from capital appreciation and income over the longer term and to deliver, over-time, outperformance against the Benchmark.

Investment BenchmarkThe Fund is benchmarked against the All Balanced Property Funds Index, MSCI/AREF UK Pooled Property Fund Indices – weighted average.

Investment PolicyThe Fund is diversified geographically in the United Kingdom and across property sectors. The Fund mainly invests in office properties, retail warehouses, shopping centres, traditional industrial properties, other leisure properties, and unit shops.

The ACD will manage the Fund with reference to the real estate sector allocation of the benchmark mentioned above.

Whilst not a core part of the Fund’s investment policy, the ACD reserves the right to make investments which the ACD considers appropriate, including investments in derivative products, whether traded under the rules of a recognised or designated investment exchange or not. The ACD may also use them for hedging or efficient portfolio management purposes.

It may invest through other collective investment vehicles or other investment vehicles, but only in limited circumstances. These are where direct investment in the underlying property is not possible or is impractical, for instance because a property would otherwise be too large for the portfolio, or not available in any other form. In such instances, the ACD would consult with and take into consideration the recommendations of the Governance Committee.

The ACD will keep the investment policy under regular review, in conjunction with the Governance Committee, so that, if there are changes in market conditions or other relevant factors, the strategy can be adapted accordingly whilst retaining the broad objectives. If changes occur, investors will be promptly notified in writing and no later than within 60 days.

The ACD’s Responsible Property Investment Statement is published on the ACD’s website (www.aewuk.co.uk) and is available on request.

Investment StrategyThe Fund will look for and capitalise on market inefficiencies with reference to the investment risk profile set by its benchmark. The investment process is very stock focused and draws upon our strong active asset management capabilities.

As a value investor, the Fund will look to buy attractively priced and/or good quality real estate at the margins of prime locations aiming to provide good risk adjusted returns over the long term.



Investment Guidelines

Parameters Investment GuidelinesGuideline Limit as at 30 June 20

Actual as at 30 June 20

Benchmark allocation The Fund will measure allocations of the gross asset value for the Fund against each of the following sectors:• ‘Business space’ (combining office

and industrial classifications)• Retail (combining retail, shopping

centres and retail warehouse classifications)

• OtherThe Fund will be limited to the MSCI/AREF UK Quarterly All Balanced Fund Property Fund Index exposure, plus or minus 20%In addition, the Fund will retain not less than 25% exposure to the ‘South East’ of the UK

41-81%

2-42%

0-31%

>=25%

57.3%

20.7%

19.0%

23.4%South East

exposure forecast to be >25% upon

completion of property sales

under offer

Investment in unoccupied and non-income producing assets (i.e. vacant assets)

15% of Estimated Rental Value (20% at time of purchase)

15% 13.0%

Cash Subject to liquidity requirements, not more than 10% of the Net Asset Value of a Fund will be held in cash at any one time

10% 3.1%

Investment in a single investment 15% of gross asset value calculated at the date of investment

15% 7.3%

Investment in Collective Investment Schemes 10% of NAV (restricted to 15% maximum) 10% 0%

Investment in property development (speculative complete demolition and reconstruction without a tenant)

10% of NAV 10% 0%

Borrowing ACD may borrow only up to 10% of the NAV and in the form of a revolving credit facility

10% 3.6%



BNY Mellon Trust & Depositary (UK) Limited

As depositary of the AEW UK Core Property Fund (sub fund of AEW UK Real Estate Fund).

AEW UK Core Property Fund – Valuation date 30 June 2020

In accordance with your instructions, dated 12 January 2012 and July 2013, we now report to you formally, as The Standing Independent Valuer to AEW UK, our opinion of the Fair Values of the Fund’s direct property assets (“Immovables”), as at 30 June 2020, for accounting and performance monitoring purposes.

Our valuations reflect usual deductions in respect of purchaser’s costs and, in particular, full liability for UK Stamp Duty as applicable at the valuation date.

We are of the opinion that the aggregate of the Fair Values of the freehold, heritable, long leasehold and short leasehold interests in the 66 Immovables held in the scheme and described in the attached schedule, as at 30 June 2020 (the measurement date), was £282,215,000 (Two Hundred and Eighty Two Million, Two Hundred and Fifteen Thousand Pounds).

Material valuation uncertainty due to Novel Coronavirus (COVID–19)

The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a “Global Pandemic” on the 11th March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries. In the UK, market activity is being impacted in most sectors. Except where clearly identified within this report as at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement. Our valuations are therefore reported on the basis of ‘material valuation uncertainty’ per VPGA 10 of the RICS Valuation – Global Standards. Consequently, less certainty – and a higher degree of caution – should be attached to our valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of this property under frequent review.

For the avoidance of doubt, the inclusion of the ‘material valuation uncertainty’ declaration above does not mean that the valuation cannot be relied upon. Rather, the phrase is used in order to be clear and transparent with all parties, in a professional manner that – in the current extraordinary circumstances – less certainty can be attached to the valuation than would otherwise be the case. The material uncertainty clause is to serve as a precaution and does not invalidate the valuation.

Any properties within this report where we do not consider that this Material Valuation Uncertainty clause applies, these have been identified, and highlighted in yellow, within the list of individual property valuations at Appendix 1.

Our valuation as at 30 June 2020 has been undertaken by us as qualified valuers and in accordance with the current editions of RICS Valuation - Global Standards, which incorporate the International Valuation Standards, and the RICS UK National Supplement. References to the “Red Book” refer to either or both of these documents, as applicable.

Report of the Valuer



The properties have been valued on the basis of Fair Value in accordance with the RICS Valuation – Professional Standards VPS4 (7.1) Fair Value and VPGA1 Valuations for Inclusion in Financial Statements, which adopt the definition of Fair Value used by the International Accounting Standards Board:

“ The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.”

We confirm that the valuations reported for properties located in the UK conform to the definition of Fair Value and furthermore they are expressed net of transaction costs. The Valuer’s opinion of Fair Value was primarily derived using recent market transactions on arm’s length terms, where available.

We have assumed there to be good and marketable titles to the properties.

The properties have been valued individually and not as part of a portfolio. Disposal as a portfolio, or by other prudent lotting, may result in either a premium or discount, depending upon market conditions. Our report does not seek to address this.

We have made oral enquiries where appropriate and have taken account, insofar as we are aware, of unusual outgoings, planning proposals and onerous restrictions or local authority intentions which affect the properties. However, this information has been provided to us on the basis that it should not be relied upon.

We have been supplied with details of tenure and tenancies and have valued on the basis that there are no undisclosed matters which would affect our valuation.

AEW UK have also supplied floor areas which we have been instructed to rely upon. The adoption of IPMS (International Property Measurement Standards), for the office sector, became mandatory with effect from 1 January 2016 for all RICS members replacing NIA (Net Internal Area) as set out under the current Code of Measurement Practice (Sixth Edition). It has been agreed with you that until the new definition of measurement has been adopted by the leasing market, rental analysis for the office sector will continue to be shown on a net internal area basis. As or when buildings are re-measured, we will present our analysis on a dual basis, namely IPMS and NIA.

No allowance has been made in our valuation for expenses of realisation or for taxation which may arise in the event of a disposal and our valuations are expressed exclusive of any VAT that may become chargeable.

The properties have been inspected during the last 12 months. We have not undertaken any building surveys or environmental audits and are therefore unable to report that the properties are free of any structural fault, rot, infestation or defects of any other nature, including inherent weaknesses due to the use in construction of materials now suspect.

No tests were carried out on any of the technical services. However, we have reflected any apparent wants of repair in our opinion of value as appropriate.

Minimum Energy Efficiency Standards are the standards set out by the Government for let properties in England and Wales. Buildings that have an EPC rating of F & G must be brought up to standard before they are let subject to some conditions, exemptions and relief. This commenced from 1 April 2018 for all new lettings and they apply to all continuing lettings from 1 April 2020 for domestic buildings and from 2023 for non-domestic buildings.

For Scottish properties, the Assessment of Energy Performance of Non-Domestic Buildings (Scotland) Regulations 2016 came into force in Scotland in 2016 and does not incorporate a “ban” on new lettings. Owners are encouraged to carry out improvements, or improve efficiency through monitoring emissions from a building via creating an Action Plan. The Action Plan procedure will apply to the sale or letting of larger buildings, with a floor area >1,000 sqm. This only applies to buildings that are subject to a new sale or lease and buildings constructed to building standards applicable from March 2002, or otherwise meeting those standards, are exempt.

Report of the Valuer (continued)



We have consequently taken into account any capital expenditure that is required where energy efficiency standards need improving.

We have assumed, except where we have been informed to the contrary, there to be no adverse ground or soil conditions or environmental contamination which would affect the present or future use of the properties and that the load bearing qualities of the site of each property are sufficient to support the buildings constructed or to be constructed thereon.

Ambi-Rad Unit, Fens Pool Avenue, Brierley Hill

In respect of the Ambi-Rad Unit, Fens Pool Avenue, Brierley Hill we have had sight of a report prepared by Waterman Energy, Environment & Design Limited, dated February 2012. The property is located on a former landfill site, which was used to contain waste from the former Round Oak Steel Works.

The property’s proximity to an area considered to have high environmental sensitivity, and the presence of a Secondary A aquifer beneath the site, have resulted in the report concluding that the property represents a medium risk of incurring contaminated land liabilities. The report recommends further investigations are made in this regard, specifically in relation to groundwater studies.

Our valuation makes no allowance for any liabilities which may arise from these investigations, and we have assumed that the present or future use of the property is not affected. Should it, however, be established subsequently that contamination exists at the property or on any neighbouring land, or that the property has been or is being put to a contaminative use, this might reduce the value now reported.

This property has high voltage overhead transmission lines that cross the yard to the rear of the property. The possible effects of electric and magnetic fields have been the subject of occasional media coverage, with the result that, where there is high-voltage electrical supply equipment close to the property, there is a risk that public perception may affect marketability.

Nabarro LLP have made enquiries of The Coal Authority with regard to disused mineshafts located beneath this property. The search confirms details of the capping procedures adopted for two out of the three shafts. It is considered that any ground movement from these coal workings should now have ceased, and the property is not in the likely zone of influence for any present underground coal working. However, all mines and minerals rights under, or affecting the property still vest with the Coal Authority. We have assumed that the load bearing qualities of the site of the property is sufficient to support the building constructed thereon.

Centre 27, Birstal, Leeds

In respect of the Centre 27, Birstal, Leeds we have had sight of a The Phase 1 desk top Environment Assessment summary, prepared by Delta Simons Consultants Ltd, dated 3 November 2014, which notes that the site is underlain by a coal seam which may have been worked, with a possible adit in the north- eastern corner. Furthermore, the report states that the boundary of the Nab Land Refuse Tip extends to the south eastern part of the subject site and it is believed to have been the cause of the historic subsidence issues in regards to parts of the site. In its former configuration, the coal mining legacy and the fact that part of the south eastern site overlies a former land fill site was considered a low risk. However, should the site be redeveloped in the future, Delta Simons recommended that a full and detailed ground investigation of the site be commissioned before any works were undertaken.




New Hall Street, Stoke On Trent

The Phase 1 desk top Environment Assessment summary states that according to a Coal Authority Non- Residential Mining Report, the site is in the likely zone of influence from workings in 15 seams of coal at 40 to 1,100 metres depth last worked in 1980. It notes that there are 3 mine entries on or within 20 metres of the site, of which one is a shaft beneath the building. Delta Simon have reviewed the Coal Authority Non- Residential Mining Report and have concluded that the risk of subsidence to the building in its current configuration as being small and the likelihood of the subject building being damaged as a consequence of that subsidence as being very small. In the unlikely event that coal mining subsidence damage does occur, they note that the property owner can rely on the provisions of the Coal Mining Subsidence Act 1991 to have the damage remedied by the Coal Authority.

Globe Square Industrial Estate, Dukinfield, Manchester

The phase 1 Desk Top Environment Assessment summary prepared by Delta-Simons Environmental Consultants Ltd, undated, and a Stage 1 Contamination Assessment for Urban Regen Ltd, dated 26 January 2015, produced by Smith Grant, have both noted that soil, ground water contamination and ground gas were discovered at the site. Smith Grant noted the presence of asbestos cements on one location and that solvents were also present on the site.

In its current configuration and existing use, Delta Simmons have concluded that the potential contamination on the site represents a low to medium risk. However, should the site be redeveloped in the future, the council would likely insist on remedial works and or the removal of the contamination from the site as part of the planning consent for the redevelopment. Delta Simmons have advised that the remedial costs, should the site be redeveloped, would range from £30,000 from £300,000 depending the severity of the contamination discovered.

Requirement of Financial Services Regulations

We confirm that at the date of this Valuation Report we satisfy the requirements of an Appropriate Valuer as set out in COLL 5.6.18R (7) and the requirement of a Standing Independent Valuer as set out in COLL 5.6.20R (2) of the Collective Investment Scheme Sourcebook published by the Financial Conduct Authority as part of its Handbook of Rules made under the Financial Services and Markets Act 2000 (“COLL”).

Compliance and Independence

In addition to The AEW UK Core Property Fund, Knight Frank LLP is also retained by AEW UK to value the following funds:

i) The Pavilion Property Trustees Limited (Jersey) and Pavilion Trustees Limited (Jersey) c/o AEW Europe.

ii) AEW UK Real Return Fund.

iii) AEW UK REIT PLC.

We confirm that Knight Frank LLP meets the requirements of the Fund as an external valuer in the role of Standing Independent Valuer, having been appointed in July 2013, as defined by the RICS Valuation – Professional Standards and regulations made by the Financial Conduct Authority. We valued the property within the Fund before this date under different contracts before the Fund converted to a PAIF.

For the avoidance of doubt, our role is limited to providing property valuations for assets held by the Fund, in accordance with the Red Book. We are your valuation advisors and are not acting as “External Valuers” as defined by The Alternative Investment Fund Managers Regulations 2013 and Directive 2011/61/EU or as valuers of the Fund itself. The valuation function for the Fund and the setting of the net asset value of the Fund remains with you and/or your duly appointed External Valuers.




We recognise and support the RICS Rules of Conduct and have established procedures for identifying any conflicts of interest. We confirm that in relation to Knight Frank LLP’s preceding financial year the proportion of total fees paid by AEW UK to the total fee income of Knight Frank LLP was less than 5%.

In compliance with UKVS 4.2 of the RICS Valuation Standards, where, in respect of any Immovable acquired in the 12 months preceding the date of valuation (as detailed below) Knight Frank received an introductory fee or negotiated the purchase on behalf of AEW UK, the instruction to undertake the valuation has been accepted only once another firm unconnected with Knight Frank LLP, at the time of, or, since the transaction was agreed, provided a valuation of that Immovable for the Fund.

In accordance with VPS3 of the Red Book, the valuers, on behalf of Knight Frank LLP, with the responsibility for this report are Matthew Cripps FRICS Registered Valuer and Justin Partridge MRICS Registered Valuer. Parts of this valuation have been undertaken by additional valuers as listed on our file. We confirm that the valuer and additional valuers meet the requirements of the Red Book, having sufficient current knowledge of the particular market and the skills and understanding to undertake the valuation competently.

We confirm “the signatories” of this Report, Matthew Cripps and Justin Partridge have been responsible for this instruction since 12 January 2012 and 3 March 2014 respectively. No valuations were provided prior to the start of the current relationship.

Our report is subject to our General Terms of Business for valuations, a copy of which is included in this report. In accordance with our standard practice, we must state that this valuation report is for the use only of the party to whom it is addressed and no responsibility is accepted to any third party for the whole or any part of its contents.

If our opinion of value is disclosed to persons other than the addressees of our report, the basis of valuation should be stated. Neither the whole or any part of the valuation report nor any reference thereto may be included in any published document, circular or statement nor published in any way whatsoever whether in hard copy or electronically (including on any web-site) without our prior written approval of the form and context in which it may appear.

Yours faithfully,

Matthew Cripps FRICS Justin Partridge MRICSPartner, Valuation & Advisory Associate, Valuation & AdvisoryFor and on behalf of Knight Frank LLP For and on behalf of Knight Frank LLP




Portfolio Statementas at 30 June 2020

Investment Properties


Market Value £’000

Net Assets %

Sector

Industrial 25 134,610 48

Leisure/Other 11 55,225 20

Offices 9 32,055 12

Retail:

– Standard Retail 11 38,375 14

– Retail Warehouses 9 18,250 7

– Shopping Centres 1 3,700 1

Total Portfolio of Investments 66 282,215 102

Other Assets and Liabilities – (4,746) (2)

Total Portfolio 66 277,469 100

Market value

Industrial

Block L, Peartree Business Park, Dudley £0 to £5m

Chainbridge Road, Blaydon on Tyne £0 to £5m

Unit 1 & 2, Royds Lane, Lower Wortley £0 to £5m

Booker, Park Farm, Folkestone £0 to £5m

Unit 62-85 Blackpole Trading Estate, Worcester £0 to £5m

Phase I & II Billington Road, Rossendale Industrial, Burnley £0 to £5m

Units F & G, Blackpole Trading Estate, Worcester £0 to £5m

Globe Square Industrial Estate, Dukinfield £0 to £5m

Puma Distribution Unit, Batley £0 to £5m

Whitehall Trading Estate, Bristol £0 to £5m

HP Chemie Pelzer (UK). Ltd, Speke Hall Avenue, Speke £0 to £5m

Unit 15C, Blackpole Trading Estate, Worcester £0 to £5m

MESL Microwave, 1 Queen Anne Drive, Newbridge £0 to £5m

Blochairn Industrial Estate, Glasgow £0 to £5m

Units 8, 9 & 10, Bloxwich Lane, Walsall £0 to £5m

The Bear, Ditchfield Road, Widnes £0 to £5m



Market value

Industrial (continued)

Ambi-Rad Unit, Willows Industrial Estate, Brierly Hill £0 to £5m

George Wilson Industries, Aldermans Green Industrial Estate, Coventry £0 to £5m

Oak Furniture Land, Cheney Manor, Swindon £5m to £10m

Grazebrook Industrial Park, Dudley £5m to £10m

Units 1, 2 & 4, Jamage Industrial Estate, Stoke on Trent £5m to £10m

Warehouse, Weston Road, Crewe £10m to £15m

Spectrum, Mead Way, Swindon £10m to £15m

Kayley Industrial Estate, Ashton £15m to £20m

Wakefield 41, Grandstand Road, Wakefield £20m to £25m

Leisure/Other

Ryde Arena, Ryde £0 to £5m

Travelodge, Thurrock £0 to £5m

233 High Street, Uxbridge £0 to £5m

Centre 27, Birstall £0 to £5m

Planet Ice, Milton Keynes £0 to £5m

Monkspath Leisure Park, Solihull £0 to £5m

Caesar's Palace, Skimpot Road, Luton £0 to £5m

The Kursaal, Southend on Sea £0 to £5m

London East Leisure Park, Dagenham £5m to £10m

Pryzm, Kingston Upon Thames £5m to £10m

Hengrove Leisure Park, Hengrove Way, Bristol £10m to £15m

Offices

Buchanan Gate, Glasgow £0 to £5m

32 South Gyle Crescent, Edinburgh £0 to £5m

Units 6 & 8 Century Court, Rickmansworth £0 to £5m

Tangent House, Reading £0 to £5m

Dakota House, Colnbrook £0 to £5m

Norseman and Westcott House, South Queensferry £0 to £5m

Intec Business Park, Basingstoke £5m to £10m

Anglo Office Park and Lincoln Inn Office Village, High Wycombe £5m to £10m

730 Aztec West, Bristol £5m to £10m

Portfolio Statement (continued)as at 30 June 2020



Market value

Retail

– Standard Retail

69 Above Bar Street, Southampton £0 to £5m

91/101 Lower Precinct, Coventry £0 to £5m

46-48 Dudley Street, Wolverhampton £0 to £5m

24-32 Bond Street & 59-65 Horsefair, Bristol £0 to £5m

55-63 Cornwall Street, 50 New George Street and 131-147 Armada Way, Plymouth £0 to £5m

3-11 Fairfax Street & 15-18 Nelson Street, Bristol £0 to £5m

18/20 St. Mary’s Square, Swansea £0 to £5m

Imperial Arcade, Brighton £0 to £5m

21-25 Bold Street, Liverpool £0 to £5m

36-42 Old Christchurch Road, Bournemouth £5m to £10m

Broadmead and Merchant, Bristol (combined with Merchant and Soho) £5m to £10m

– Retail Warehouse

589-613 Hagley Road, West Quinton £0 to £5m

Poundstretcher & HSS, Wallgate, Wigan £0 to £5m

Magnet Limited, Pontrack Lane, Stockton on Tees £0 to £5m

Chaffinch Retail Park, Castletown £0 to £5m

School Brow Retail Park, Warrington £0 to £5m

Go Outdoors, New Hall Street, Stoke on Trent £0 to £5m

New Street Retail Park, Ashford £0 to £5m

Jerome Retail Park, Walsall £0 to £5m

St Davids Retail Park, Swansea £0 to £5m

– Shopping Centres

The Rivergate Shopping Centre, Peterborough £0 to £5m




Purchases and sales for the period

Cost £’000

Purchases

3-11 Fairfax Street & 15-18 Nelson Street, Bristol £0 to £5m

Soho Studios, 47-49 Merchant Square, Bristol £0 to £5m

56-64 Broadmead & 41-45 Merchant Square, Bristol £5m to £10m

Total purchases for the period 13,694

Proceeds £’000

Sales

Upper Floors, 21-25 Bold Street, Liverpool 565

Total sales for the period 565

Purchases for the period include associated acquisitions costs, with sales in the period stated net of sales costs.

Summary of Material Portfolio Changesfor the half year ended 30 June 2020



Fund Information

Accounting and Distribution dates

XD date

First interim distribution 31 March 2020

Second interim distribution and half year end 30 June 2020

Third interim distribution 30 September 2020

Final distribution and year end 31 December 2020

Payment of distributions of income will normally be made within two months of the above XD dates, although the ACD reserves the right to pay at a later date but not later than four months as permitted by the Regulations. Income will be automatically reinvested unless instructions are given for payment. Income will be reinvested on the next dealing date following payment of distribution.

The Fund has a distribution yield of 4.8% as at 30 June 2020.

Distributions in the period

First Interim 31 March

2020 (p)

Second Interim 30 June

2020 (p)

Unit Class

Unit Class A income 1.286 1.070

Unit Class C income* 1.286 1.070

* Distribution gross of tax.



Performance Record

Year Unit Class

Highest Unit price

(p)

Lowest Unit price

(p)

30 June 2020 * A income 141.84 112.39

30 June 2020 * C income 141.84 112.39

31 December 2019 A income 143.57 131.7131 December 2019 C income 143.57 131.71

31 December 2018 A income 142.26 136.20

31 December 2018 C income 142.26 136.20

31 December 2017 A income 135.79 124.86

31 December 2017 B income ^ 135.63 124.86

31 December 2017 C income 135.79 124.86

31 December 2017 E income † 127.54 124.96

* From 1 January 2020 to 30 June 2020.† The E income Unit Class holdings were fully converted to Unit Class A income holdings in May 2017.^ Class B Income were fully redeemed at 1 December 2017.

As at 30 June 2020, Class B and Class E are dormant.

Summary of unit dealing as at 30 June 2020

A income C income

Opening Units in Issue 202,324,937.985 26,152,891.233

Units issued in the period 2,660,345.983 6,953.606

Units cancelled in the period – –

Units converted in the period (1,333,969.890) 1,333,969.890

Closing units in issue 203,651,314.078 27,493,814.729

Fund Information (continued)



NAV (as calculated in accordance with the Prospectus)

Year Unit Class

NAV of Unit Class

£’000 Units in issue

NAV per unit

(p)

30 June 2020 A income 244,464 203,651,314.078 120.0430 June 2020 C income 33,005 27,493,814.729 120.04

31 December 2019 A income 267,234 202,324,937.985 132.0831 December 2019 C income 34,543 26,152,891.233 132.08


31 December 2017 A income 249,360 196,121,270.808 127.1531 December 2017** B income – – –31 December 2017 C income 20,199 15,886,913.890 127.1531 December 2017* E income – – –

* The Unit Class E income holdings were fully converted to Unit Class A income holdings in May 2017.** The Unit Class B income holdings were fully redeemed in December 2017.

NAV represents a standard NAV as calculated in accordance with AREF’s Fund Pricing Recommendation. The NAV as at 30 June 2020 is subject to material uncertainty following the Standing Independent Valuer’s determination of material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic.

Unit dealing

Turnover of units

During the six month period to 30 June 2020, 2,667,299.589 units were created, zero units were redeemed. 1,333,969.890 units were converted from A class units to C class units.

The brokerage facility for secondary market trades was provided by CBRE Capital Advisors Ltd. There has been trading on the secondary market amounting to 1,832,529 units during the period.

Subscriptions

Eligible Investors may purchase units in the Fund on a monthly basis on the dealing day, being the last calendar day in each calendar month, provided the subscription request has been made before the cut-off point for the Fund and the ACD is in receipt of cleared funds on the dealing date. The cut-off point for the Fund is the close of business on the business day 14 days before the dealing date.

Valid applications to purchase units in the Fund will be processed at the unit price calculated at the next valuation point following receipt of the application, except in the case where dealing in the Fund has been deferred or suspended. The valuation point for the Fund is 11pm on the last calendar day of each month.

The ACD will only issue units where it can do so without breaching its cash holding guidelines and there are sufficient prospective investments available to absorb the subscription monies. If there are more applications to subscribe for units than it has capacity to invest, then the ACD will operate a contractual waiting list.

Each prospective application to subscribe will be satisfied in full or partially at the first dealing day for subscription at which the Fund has capacity. The subscription will remain at the top of the contractual waiting list until the application is fully satisfied. Each application will be retained and satisfied in strictly chronological order.




The ACD will give 12 business days notice for the drawdown of funds before the dealing day for subscription, so that prospective subscribers can ensure that the ACD receives cleared funds in time.

As at 30 June 2020, there were no subscriptions in queue.

Redemptions

Every unitholder is entitled on any dealing day for redemption to redeem its units subject to the limitations on redemption. Valid redemption requests may be made to the ACD on any business day but must be received by the redemption cut-off point, being the close of business on the business day one month before the dealing date.

Valid instructions to the ACD to redeem units in the Fund will be processed at the unit price calculated at the next valuation point following receipt of the instruction, except in the case where dealing in the Fund has been deferred or suspended. The valuation point for the Fund is 11pm on the last calendar day of each month.

As at 30 June 2020, there was a redemption of £2.6m in the queue which were redeemed on the 1st July 2020 dealing date.

Deferrals

Where the ACD considers it to be in the best interests of the Unitholders, the ACD may in consultation with the Governance Committee defer redemptions on a dealing day to any one of the subsequent six dealing days for redemption. A redemption will be deferred to the dealing day for redemption when the Fund has sufficient liquidity to enable it to meet the redemption, providing it is in the best interests of the Unitholders to do so. The ACD will review the position every month.

The ACD must give Unitholders notice of the deferral no later than two business days before the relevant dealing day for redemption. The price at which the units will be redeemed will be the price for redemptions on the dealing day for redemption on which the units are actually redeemed.

Suspension

The ACD may, with the prior agreement of the Depositary, and must without delay if the Depositary so requires, temporarily suspend the issue, cancellation, sale and redemption of Units in any or all of the Funds, where, due to exceptional circumstances, it is in the interests of all the Unitholders in the relevant Fund or Funds. Suspension will cease as soon as practicable after the exceptional circumstances leading to the suspension have ceased but the ACD and the Depositary will formally review the suspension at least every 28 days and will inform the FCA of the review and any change to the information given to Unitholders. For further information, please refer to clause 3.13 of the Prospectus. During the period, the Fund had deferred a redemption request for £6.8m which was due for the 1 May 2020 dealing date. The redemption was subsequently withdrawn with no redemptions due for the 1st June 2020 dealing date. There was no suspension of dealings during the period.

Adjustments to unit price

In unusual market conditions the ACD in consultation with the Governance Committee, may adjust the unit price by a percentage independently reviewed by the Governance Committee to reflect the value of the assets in such circumstances based on information received from the MSCI, the Valuers and other material information which the ACD may think fit. This is to protect the interests of all Unitholders by ensuring that units are issued at a fair value. Prospective investors have the right to withdraw their applications for subscriptions or redemptions upon notification by the ACD of the price adjustment.

Secondary market

In addition to purchasing and selling units through the ACD, units are able to be traded between parties using third party brokerage facilitates available in the market with the ACD able to assist with contacts if required.




Investor analysis

Number of investors

Total Percentage holding (%)

Ownership band

Less than 1% of units in issue 34 8.77

1% or greater but less than 2% 8 12.47



8% or greater 2 38.07

Total 54 100.00

Percentage held by largest investor 19.14

Percentage held by top 5 investors 55.03

Treatment of certain investors

The ACD has and will continue to enter into agreements with certain investors who may receive preferential treatment. These investors include (i) those investors that are investing sufficiently large amounts either initially or are anticipated to do so over time and (ii) Cornerstone investors that provide seed capital and take the initial risk in the early stage of the Fund. As a result, the terms and conditions of certain investor’s investment in the Fund may differ to those of other investors. Side letters are available on request. These side letters contain details of any ‘key person’ provisions.

Remuneration

The AIFM has adopted a Remuneration Policy which accords with the principles established by AIFMD.

AIFMD Remuneration Code Staff includes the members of the AIFM’s Management Committee, those performing Control Functions, Department Heads, Risk Takers and other members of staff that exert material influence on the AIFM’s risk profile or the AIFs it manages.

Staff are remunerated in accordance with the key principles of the firm’s remuneration policy, which include (1) promoting sound risk management; (2) supporting sustainable business plans; (3) remuneration being linked to non-financial criteria for Control Function staff; (4) incentivise staff performance over longer periods of time; (5) award guaranteed variable remuneration only in exceptional circumstances; and (6) having an appropriate balance between fixed and variable remuneration.




As required under section ‘Fund 3.3.5.R(5)’ of the Investment Fund Sourcebook, the following information is provided in respect of remuneration paid by the AIFM to its staff for the 6 months period to 30 June 2020:

Six months to 30 June 2020

Total remuneration paid to employees

a) remuneration, including, where relevant, any carried interest paid by the AIFM; £1,752,688

b) the number of beneficiaries 24

The aggregate amount of remuneration of the AIFM Remuneration Code staff, broken down by

a) senior management £426,400

b) members of staff £1,326,288

Fixed remuneration

£

Variable remuneration

£

Total remuneration

£

Senior management 336,400 90,000 426,400

Staff 790,288 536,000 1,326,288

Total 1,126,688 626,000 1,752,688

Fixed remuneration comprises of basic salaries and variable remuneration comprises of bonuses.




Period ended 30 June 2020

%

Total Expense Ratio for the accounting period

Fund Management Fees 0.70

Fund Operating Expenses 0.44

Total Expense Ratio (‘TER’) 1.14

Property Expense Ratio (‘PER’) (excludes items in TER) 3.73

Real Estate Expense Ratio (‘REER’) (TER + PER) 4.87

Transaction Costs 0.31

Performance Fees 0.25

Portfolio Turnover Ratio 3.74

The TER represents the total annualised expenses of the Fund, excluding transaction costs, interest payable and expenses of a capital nature expressed as a percentage of the average net assets during the accounting period.

The Portfolio Turnover Ratio indicates how much of the turnover in the portfolio has been driven by investment and withdrawals from the Fund. This represents the purchases and sales less subscriptions and redemptions expressed as a percentage of the average net assets during the accounting year.

The following table analyses the operating costs incurred by the Fund for the period ended 30 June 2020:


%

Management Fees 0.70

Performance Fees 0.25

Depositary Fees 0.04

Valuation Fees 0.05

Other variable Fees 0.10

1.14






Notes £’000 £’000 £’000 £’000

IncomeNet capital (losses)/gains 3 (27,682) 2,383Revenue 6 12,549 11,955Expenses

Direct property expenses 7 (5,382) (1,766)

Operating expenses 7 (1,612) (1,643)

Interest payable and similar charges 8 (139) (106)

Net revenue before taxation 5,416 8,440Taxation 9 – –

Net revenue after taxation 5,416 8,440

Total return before distributions (22,266) 10,823Distributions 10 (5,416) (8,440)Change in net assets attributable to unitholders from investment activities (27,682) 2,383

Statement of Changes in Net Assets Attributable to Unitholdersfor the half year ended 30 June 2020



£’000 £’000 £’000 £’000

Net assets at the start of the period 301,777 288,615

Amounts receivable on creation of units 3,408 16,664 Less: amounts paid on cancellations of units – (7,085)

3,408 9,579Dilution adjustment (34) 967Change in net assets attributable to unitholders from investment activities (27,682) 2,383

Closing net assets attributable to unitholders 277,469 301,544

The notes on pages 40 to 58 form an integral part of these Financial Statements.

Statement of Total Returnfor the half year ended 30 June 2020



As at 30 June 2020

As at 31 December 2019

Note £’000 £’000 £’000 £’000

Assets

Fixed assets:

Investment properties 11 280,721 293,164

Current assets:

Debtors 12 10,054 10,589

Cash and bank balances 13 8,749 11,378

Total current assets 18,803 21,967

Total assets 299,524 315,131

Long term liabilities

Finance lease obligations 15 (1,779) (1,779)

Current liabilities

Interest bearing loans and borrowings 14 (10,000) –

Finance lease obligations 15 (182) (182)

Investment liabilities 17 (70) (108)

Distribution payable 17 (2,556) (4,309)

Creditors 17 (7,468) (6,976)

Total current liabilities (20,276) (11,575)

Total liabilities (22,055) (13,354)

Net assets attributable to unitholders 277,469 301,777

The Financial Statements on pages 37 to 58 were approved by the ACD on 17 September 2020 and signed on their behalf by:

On behalf of the ACD


Balance Sheetas at 30 June 2020



Statement of Cash Flowsfor the half year ended 30 June 2020



£’000 £’000 £’000 £’000

Total return before distribution for the period (22,266) 10,823

Adjustments for:

Capital losses/(gains) on investments 27,682 (2,383)

Finance costs 139 106

Decrease/(increase) in income debtors 549 (5,041)

Increase in income creditors 491 4,025

Net cash generated from operating activities 6,595 7,530

Cash flows from investing activities

Paid for the purchase of investments (13,678) –

Paid on capital expenditure (2,149) (2,704)

Received on sale of investments 549 4,694

Net cash (used)/generated in investing activities (15,278) 1,990

Cash flows from financing activities

Proceeds from issue of units 3,408 16,664

Payments on cancellation of units – (7,085)

Net equalisation received/(paid) 11 (35)

Net dilution adjustment (paid)/received (34) 967

Credit facility drawndown 20,000 –

Credit facility repaid (10,000) –

Finance cost paid (151) (106)

Distribution paid (7,180) (8,153)

Net cash generated from financing activities 6,054 2,252

Net (decrease)/increase in cash for the period (2,629) 11,772

Cash and cash equivalents at start of period 11,378 8,088

Cash and cash equivalents at end of period 8,749 19,860




1. Accounting policies

1.1 Basis of accounting

The Financial Statements have been prepared on a going concern basis, under the historical cost basis, as modified by the revaluation of investments, and in accordance with the applicable United Kingdom Accounting Standards, including FRS 102 ‘The Financial Reporting Standard’ and the Prospectus. The Financial Statements are also prepared in accordance with the Statement of Recommended Practice (‘SORP’) issued by the Investment Association in May 2014.

The ACD has considered the impact of the COVID-19 global pandemic, which has resulted in unprecedented risks and significant levels of volatility on real assets. The main risks resulting from COVID-19 for the Fund is in respect of the impact on property valuations, liquidity and tenant defaults.

The ACD has performed sensitivity analysis on the Funds cash flow forecasts under plausible downside scenarios and the Fund would remain liquid and have a positive cash balance after deducting the liabilities, commitments and expenses over the next 12 months. The ACD is satisfied that it is appropriate to continue to adopt the going concern basis in preparing these financial statements and, after due consideration, the ACD considers that the Fund is able to continue for the foreseeable future and at least twelve months from the date of this report.

In order to protect the interests of continuing holders, the ACD may, at its discretion and in consultation with the Governance Committee, defer redemptions monthly for up to six months from the Valuation Date to which the redemption request relates.

In exceptional circumstances, the ACD may, with the approval from the Depositary, decide to suspend both subscriptions and redemptions of units for up to six months. The ACD will review the position every 28 days.

On the basis that the ACD can defer redemptions, and suspend the Fund, the accounts have continued to be prepared under the going concern basis.

Following receipt of a redemption request for £6.8m for the 1 May 2020 dealing day, the ACD had taken the decision to defer redemptions in the Fund for at least one month. The redemption was subsequently withdrawn with no redemptions due for the 1st June 2020 dealing date.

1.2 Revenue

Rental income is recognised on an invoice basis. Invoices are raised by the property manager, usually quarterly in advance, and the income is deferred to the relevant period through the duration of the invoice quarter.

Rent receivable comprises rental income on investment properties for the year, exclusive of service charges receivable. Provision is made when there is objective evidence that the Fund will not be able to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote.

Lease incentives including rent free periods and payments to tenants are allocated to the Statement of Total Return on a straight-line basis over the lease term, or if in place prior to 1 January 2017, the period up to the first rent review date if shorter. The value of resulting accrued rental income is deducted from the carrying value of the respective investment property.

Any dilapidation is recognised as income when received.

Notes to the Financial Statementsfor the half year ended 30 June 2020



1. Accounting policies (continued)

1.3 Expenses

All expenses, except for those relating to the purchase and sale of investments, stamp duty land tax and property development costs are charged against revenue. Costs incurred in the improvement of the portfolio which, in the opinion of the ACD, are not of a capital nature are charged against revenue.

Irrecoverable running costs directly attributable to specific properties within the Fund’s portfolio are charged to the Statement of Total Return as other property expenses.

1.4 Allocation of income and expenses to multiple unit classes

Any revenue or expenses not directly attributable to a particular unit class will normally be allocated pro-rata to the net assets of the relevant unit class.

1.5 Taxation

A PAIF is chargeable to corporation tax, but the regime enables a PAIF to manage itself in such a way that it should be able to ensure that the point of taxation is not with the Fund, but rather all income flows through to the investors who will then be charged tax at the appropriate rates for property income, savings income and dividend income respectively.

Under PAIF tax rules, net income is streamed as follows: net income from the property investment business; UK dividends; and net income from the residual business. Expenses which are not directly attributable to any stream should be apportioned between the streams on a reasonable basis.

Net income from the property investment business is exempt from tax in the PAIF. UK dividend income is also not subject to tax in the PAIF. The net income from the residual business is only subject to Corporation tax in the PAIF to the extent that the income has not been distributed to investors.

Corporation tax is provided on taxable revenue, after the deduction of allowable expenses.

The corporation tax rate applicable to PAIF is equivalent to the lower rate of income tax of 20%.

1.6 Distribution policy

Net revenue after taxation, as disclosed in the Financial Statements, after adjustment for items of a capital nature and deduction of income tax, is distributable to Unitholders.

Interim distributions may be made at the ACD’s discretion and the balance of revenue is distributed in accordance with the regulations.

Distributions which have remained unclaimed by Unitholders for more than six years are credited to the capital assets of the Fund.

1.7 Equalisation

Equalisation only applies to units purchased during the distribution period (group 2 units). It is the average amount of revenue included in the purchase price of all group 2 units that is refunded to holders of these units as a return of capital. Being capital, it is not liable to income tax but must be deducted from the cost of units for capital gains tax purposes.

Notes to the Financial Statements (continued)for the half year ended 30 June 2020




1.8 Investment properties

Investment property comprises completed property and property under construction or re-development held to earn rentals or for capital appreciation or both.

Investment property transactions are considered to have taken place where, by the end of accounting period, there is a legally binding, unconditional and irrevocable contract.

Investment property is measured initially at cost including transaction costs. Transaction costs include transfer taxes, professional fees for legal services, agent’s fee and initial leasing commissions to bring the property to the condition necessary for it to be capable of operating. The carrying amount also includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met.

Subsequent to initial recognition, investment property is stated at fair value. Gains or losses arising from changes in the fair values are included in the Statement of Total Return in the period when they arise.

Investment properties are valued by the Standing Independent Valuer on the basis of a full valuation with physical inspection at least once a year. Any valuation of an Immovable by the Standing Independent Valuer must be undertaken in accordance with the current issue of RICS Valuation – Global Standards January 2020, or in the case of overseas immovables, on an appropriate basis, but guided by the FCA Rules.

For the purposes of these Financial Statements, in order to avoid ‘double accounting’, the assessed fair value is:

– reduced by the carrying amount of any accrued income resulting from the spreading of lease incentives; and

– increased by the carrying amount of leasehold obligations.

Investment property is derecognised when it has been disposed of or permanently withdrawn from use and no future economic benefit is expected after its disposal or withdrawal. Any gains or losses on the retirement or disposal of investment property are recognised in the Statement of Total Return in the year of retirement or disposal. Gains or losses on the disposal of investment property are determined as the difference between net disposal proceeds and the carrying value of the asset.

For leasehold properties that are classified as investment properties, the associated leasehold obligations are accounted for as finance lease obligations. Properties held under operating leases are accounted for as investment properties.

1.9 Dilution levyIn the PAIF a dilution levy will be reflected in the calculation of the unit price and will reflect the associated property acquisition and disposal costs. The levy may vary from time to time to reflect matters such as changes in stamp tax or any other applicable taxes and fees.

In unusual market conditions, the price may also be further adjusted by a percentage, in consultation with the Pricing Sub-Committee, to reflect the value of the assets in such circumstances based on information received from MSCI, standing independent valuers and any other material information as the ACD may see fit.





1.10 Cash and cash equivalentsCash and cash equivalents include cash in hand and deposits held at banks. Cash is stated at its face value.

1.11 DebtorsAmounts due but not received are included within debtors which are stated at transaction value less provision/write off of doubtful debts. Provision is made where there is objective evidence that the Fund will not be able to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote.

1.12 Interest bearing loans and liabilitiesAll bank borrowings are initially recognised at transaction value net of attributable transaction costs. After initial recognition, all bank borrowings are measured at amortised cost using the effective interest method.

1.13 Finance leasesFinance leases are capitalised at the lease’s commencement at the lower of the fair value of the property and the present value of the minimum lease payments. The present value of the corresponding rental obligations are included as liabilities.

1.14 Creditors

Deferred rental income relates to income that has been invoiced in advance to the tenant but relates to future periods.

Creditors are stated at their transaction value. Amounts received in respect of future periods are included within creditors as deferred income.

1.15 Significant estimation techniques

The preparation of the Fund’s Financial Statements requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future years.

The fair value of investment property is determined by independent real estate valuation experts using RICS Valuation – Professional Standards VPS4 (7.1) Fair Value and VPGA1 Valuations for Inclusion in Financial Statements, which adopt the definition of Fair Value used by the International Accounting Standards Board: “The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.” The Valuer’s opinion of Fair Value was primarily derived using recent market transactions on arm’s length terms, where available and assumes there to be good and marketable titles to the properties.




2. Risk management policiesThe Fund’s activities expose it to a variety of financial risks: market risk, credit risk, liquidity risk and further risks inherent to investing in investment property.

The Fund’s objective in managing risk is the creation and protection of unitholder value. Risk is inherent in the Fund’s activities, but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls.

The Depositary on the recommendation of the ACD has appointed a Governance Committee with an independent chair, paid for by the Fund, with responsibility to oversee the aspects of risk control.

The principal risk facing the Fund in the management of its portfolio are as follows:

2.1 Market price risk

Market price risk is the risk that future values of investments in direct property and related property investments will fluctuate due to changes in market prices. To manage market price risk, the Fund diversifies its portfolio geographically in the United Kingdom and across property sectors.

The disciplined approach to the purchase, sale and the management of assets ensures that the value is maintained to its maximum potential. Prior to any property acquisition or sale, detailed research is undertaken to assess expected future cash flow. The Investment Management Committee (‘IMC’) meets fortnightly and reserves the ultimate decision with regards to investments purchases or sales. In order to monitor property valuation fluctuations, the ACD meet with independent external valuer on a quarterly basis. The valuer provides a property portfolio valuation monthly, so any movements in the value can be accounted for in a timely manner and reflected in the NAV every month.

2.2 Real Estate risk

The Fund is exposed to the following risks specific to its investments in investment property:

Property investments are illiquid assets and can be difficult to sell, especially if local market conditions are poor. Illiquidity may also result from the absence of an established market for investments, as well as legal or contractual restrictions on resale of such investments. In addition, property valuation is inherently subjective due to the individual characteristics of each property, and thus, coupled with illiquidity in the markets, makes the valuation in the scheme property difficult and inexact.

No assurances can be given that the valuations of properties will be reflected in the actual sale prices even where such sales occur shortly after the relevant valuation date.

There is no guarantee that the Fund will be able to acquire a sufficient number of suitable properties which will enable a Fund to achieve its investment objective through its investment policy. Having excess uninvested cash and a larger number of units in issue may affect a Fund’s ability to achieve its investment objective. In order to avoid holding excess cash the ACD exercises control over subscriptions into the fund by sending capital call to investors only when there are suitable investments opportunities. In the event where direct investments in the underlying property is not possible or impractical, the Fund may invest up to 10% of its NAV into Collective Investment Schemes.

There can be no assurance that the Fund will undertake to acquire any particular site or that it will be able to complete such acquisition if it is undertaken.




2. Risk management policies (continued)

2.2 Real Estate risk (continued)

There can be no certainty regarding the future performance of any of the properties acquired for the Fund. The value of any property can go down as well as up. Property and property-related assets are inherently subjective as regards value due to the individual nature of each property. As a result, valuations are subject to uncertainty.

Real property investments are subject to varying degrees of risk. The yields available from investments in real estate depend on the amount of income generated and expenses incurred from such investments.

There are additional risks in vacant, redevelopment and refurbishment situations although these are not prospective investments for the Fund.

2.3 Credit risk

Credit risk is the risk that the counterparty (to a financial instrument) or tenant (of a property) will cause a financial loss to the Fund by failing to meet a commitment it has entered into with the Fund.

It is the Fund’s policy to enter into financial instruments with reputable counterparties. The ACD closely monitors the creditworthiness of the Fund’s counterparties (e.g. Depositary, banks and tenants) by regularly reviewing their credit ratings, Financial Statements and press releases on a regular basis. All cash deposits are placed with an approved counterparty, Bank of New York Mellon, London Branch.

In respect of property investments, in the event of a default by a tenant, the Fund will suffer a rental shortfall and additional costs concerning re-letting the property. The ACD monitors tenant arrears in order to anticipate and minimise the impact of defaults by occupational tenants.

The table below shows the Fund’s exposure to credit risk:

As at 30 June

2020 £’000

As at 31 December

2019 £’000

Debtors (excluding prepayments and rent incentive debtor) 6,216 7,054

Bank and cash 8,749 11,378

Total 14,965 18,432

2.4 Liquidity risk

Liquidity risk is the risk that the Fund will encounter difficulty in realising assets to meet its financial commitments.

The Fund is exposed to liquidity risk from the requirement to meet cash redemptions on its redeemable units.

Property investment is relatively illiquid compared to many classes of asset and in order to manage liquidity the ACD follows the following strategies: the Fund is intended for long-term investors who can accept the risks associated with liquidity; redemptions are restricted to the monthly dealing; and a proportion of the investments of the Fund are kept in more liquid assets.





2.4 Liquidity risk (continued)

In order to protect the interests of continuing holders, the ACD may, at its discretion and in consultation with the Governance Committee, defer redemptions for up to six months from the Valuation Date to which the redemption request relates.

In exceptional circumstances, the ACD may, with the approval from the Depositary decide to suspend both subscriptions and redemptions of units. The ACD will review the position every month.

The Fund invests primarily in investment property. The Fund’s policy is to maintain sufficient cash and cash equivalents to meet normal operating requirements and expected redemption requests. The ACD maintains close investor relationships in order to gauge redemption requirements.

2.5 Political/Economic risk

Political and macroeconomic events present risks to the real estate and financial markets that affect the Fund and the business of our tenants. The level of uncertainty that such events bring has been highlighted in recent times, most pertinently as a result of the EU referendum vote (Brexit) in June 2016. The arrangements that would be put in place between the UK and the EU following Brexit could impact the health of the UK economy, make it more difficult for the Fund to raise capital and/or increase the regulatory compliance burden on the Fund.

2.6 Coronavirus risk

The full impact of COVID-19 on real assets has yet to become clear, however under these circumstances, liquidity conditions and credit risks need to be closely monitored. The below summaries the risks faced by the Fund in context of the rapidly evolving Coronavirus situation:

Real Estate Risk – The Standing Independent Valuer has determined material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic. As at 30 June 2020, 52.3% of the Fund’s portfolio valuation which includes all of its assets that do not sit within the industrial sector, is subject to material valuation uncertainty. The like for like valuation fall from 1 January 2020 to 30 June 2020 is (8%).

Liquidity risk – As disclosed above, in unusual market conditions, to protect the interest of investors, the prospectus provides a mechanism for the ACD to i) Adjust the Fair Value of the Pricing or, ii) Defer Redemptions or iii) Suspend the Fund. As at 31 March 2020, following the Standing Independent Valuer’s determination of material valuation uncertainty, a Fair Value Pricing adjustment was applied to the Fund, being; Offer price less 14% for the 1 April dealing date, Bid less 15% for the 1 May dealing date, Offer less 12% for the 1 June dealing date, Offer less 10% for the 1 July dealing date, Offer less 8% for the 1 August dealing date, and Offer less 7% for the 1 September dealing date.

Following receipt of a redemption request for £6.8m for the 1 May 2020 dealing day, the ACD had taken the decision to defer redemptions in the Fund. The redemption request was subsequently withdrawn and deferral period ended for the 1 June dealing date. The Fund had then received a redemption request of £2.6m which was redeemed on the 1 July 2020 dealing date.

Counterparty Risk – Low rent collection will compromise the Fund’s ability to pay quarterly distributions. The Fund currently had sufficient cash reserves to continue paying distributions and meet the running costs for the foreseeable future. Many tenants will be dependent on government support to survive.





2.6 Coronavirus risk (continued)

As a Fund judged on total return, the ACD is not pursuing just maximum rent collection but is in many cases exploring asset management opportunities that might be mutually beneficial for the Fund and its tenants.

Market Risk – Interest Rates – Although the Fund is not leveraged, an upward trend in interest rates may impact the interest rate being applied to any drawn loans from the Fund’s £20m revolving credit facility. The interest rate on any drawn loan amounts drawn is equal to Libor plus margin.

3. Net capital gains


£’000


£’000

Net proceeds from sales of investments during the period 565 4,686

Carrying value of investments sold during the period (825) (4,899)

Loss realised on investments during the period (260) (213)

Net unrealised capital (losses)/gains on investment properties (27,240) 3,321

Movement in rent free debtor (182) (725)

Net capital (losses)/gains (27,682) 2,383

4. Purchases and transaction costs

% of principal

purchase price


£’000


£’000

Purchases excluding transaction costs 12,833 –

Commissions 1.8% 228 –

Taxes 4.7% 600 –

Other costs 0.3% 33 7*

Total purchase transaction costs 6.8% 861 7

Purchases including transaction costs 13,694 7

* Legal and professional fees associated with purchases completed in 2018.




5. Sales and transaction costs

2020 % of principal

sale price


£’000


£’000

Sales excluding transaction costs 575 4,800

Agent fees 1.5% (9) (85)

Legal fees 0.2% (1) (29)

Total sales transaction costs 1.7%* (10) (114)

Sales including transaction costs 565 4,686

* In addition to the costs represented above, there were other sales costs incurred in the period on sales that were not finalised in the period and therefore they have been withheld in order to give a true view of the percentage of transaction costs.

6. Revenue


£’000


£’000

Rental income 12,467 11,767

Dilapidation income 57 54

Sundry property income 25 4

Lease surrender income – 130

Total revenue 12,549 11,955




7. Expenses


£’000


£’000

Direct property expenses:Bad debt 3,234 123Property legal and professional fees 677 495Irrecoverable service charge 448 457Empty rates 325 (14)*Maintenance 213 84Letting fees 136 252Head Rent 121 138Insurance 104 18Utility fees 71 38Managing agents fees 42 75Marketing fees 11 27Abortive fees – 73

Total property expenses 5,382 1,766


£’000


£’000

Expenses associated to the ACD:Management fees 1,025 1,041ACD’s performance fees 368 374

Expenses associated to the Depositary:Depositary fees 52 52

Other operating expenses:Valuer’s fees 72 70Auditors’ fees 18 20Membership fees 17 17Legal fees 15 15Governance committee fees 7 7Other operating expenses 38 47

Total operating expenses 1,612 1,643

Total expenses 6,994 3,409

* Empty rates includes refunds given in the period of £453,000.




8. Interest payable and similar charges


£’000


£’000

Analysis of finance costs

Loan interest 81 –

Loan arrangement fees 31 57

Loan commitment fees 24 46

Bank charges 3 3

Total finance costs 139 106

9. TaxationUnder PAIF tax rules, net income is streamed as follows: net income from the property investment business; UK dividend income and net income from the residual business. Expenses which are not directly attributable to any stream should be apportioned between the streams on a reasonable basis.

Net income from the property investment business is exempt from tax in the PAIF. UK dividend income is also not subject to tax in the PAIF. The net income from the residual business is only subject to Corporation tax in the PAIF to the extent that income has not been distributed to investors.


£’000


£’000

(a) Analysis of tax charge for the period

UK corporation tax – –

Total tax charge – –

(b) Factors affecting the tax charge for the period

Net income before taxation 5,416 8,440

Theoretical tax at UK corporation tax rate of 20%* 1,083 1,688

Net property income not taxable (1,083) (1,688)


* The corporation tax rate applicable to PAIF is equivalent to the lower rate of income tax.




10. Distributions


£’000


£’000

(a) Analysis of distributions

First interim 2,953 4,753

Second interim 2,474 3,652

Total distributions 5,427 8,405

Equalisation (received)/paid on the issue of units (11) 35

Net distribution for the period 5,416 8,440

(b) Reconciliation of net revenue after taxation to distribution


5,416 8,440

11. Investment properties

Period ended 30 June

2020 £’000

Year ended 31 December

2019 £’000

At valuation:

At beginning of period at valuation 294,475 283,885

Acquisitions during the period 13,710 15,874

Capital expenditure during the period 2,095 2,940

Carrying value of properties sold during the period (825) (8,517)

Net unrealised (loss)/gain on revaluation (27,240) 293

Professional valuation 282,215 294,475

Adjustment for rent incentive debtor (3,455) (3,272)

Adjustment in respect of minimum payment under head leases separately included as a liability on the Balance Sheet 1,961 1,961

Carrying value at the end of the period 280,721 293,164




11. Investment properties (continued)Fair value

Valuation of investment property is performed by Knight Frank LLP, an accredited external valuer with recognised and relevant professional qualifications and recent experience of the location and category of the investment property being valued.

The valuation of the Company’s investment property at fair value is determined by the external valuer on the basis of market value in accordance with the internationally accepted RICS Valuation – Global Standards January 2020.

The determination of the fair value of investment property requires the use of estimates such as future cash flows from assets (such as lettings, tenants’ profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those assets.

The Standing Independent Valuer has determined material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic. As at 30 June 2020, 52.3% of the Fund’s portfolio valuation which includes all of its assets that do not sit within the industrial sector, is subject to material valuation uncertainty. The like for like valuation fall from 1 January 2020 to 30 June 2020 is (8%).

The following tables show an analysis of the fair values of financial instruments recognised in the balance sheet:

30 June 2020

Level 1 £’000

Level 2 £’000

Level 3 £’000

Total £’000

Assets measured at fair value*

Investment properties – – 282,215 282,215

Professional valuation – – 282,215 282,215

* before adjustments for carrying value of leasehold obligations and rent free debtors.

Explanation of the fair value hierarchy:

Level 1 – Quoted prices for an identical instrument in active markets;

Level 2 – Prices of a recent transactions for an identical instruments;

Level 3 – Valuation techniques using observable market data; and

Sensitivity analysis to significant changes in unobservable inputs within Level 3 of the hierarchy.

The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity’s portfolios of investment property are:

1) Estimated Rental Value (‘ERV’)

2) Rental growth

3) Long term vacancy rate

4) Discount rate/yield




11. Investment properties (continued)Increase (decrease) in the ERV (per sq ft p.a.) and rental growth p.a. in isolation would result in a higher (lower) fair value measurement. Increase (decrease) in the long term vacancy rate and discount rate (and exit or yield) in isolation would result in a lower (higher) fair value measurement.

The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the portfolio of investment property are:

30 June 2020

ClassFair Value £’000

Valuation Technique

Key Unobservable Inputs Range

Investment Property £282,215* Income capitalisationERV per sq ft Discount rate

£1.00 – £118.65 5.25% – 12.24%

31 December 2019


Valuation Technique



£1.00 – £118.65 4.00% – 12.48%

* before adjustments for carrying value of lease hold obligations and rent free debtors.

Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy amount to net unrealised loss of £27,240,000 (30 June 2019: gain of £3,321,000) and are presented in Note 3.The carrying amount of the assets and liabilities, detailed within the Balance Sheet is considered to be the same as their fair value.

There have been no transfers between Level 1 and Level 2 during any of the periods nor have there been any transfers in or out of Level 3.




12. Debtors

As at 30 June

2020 £’000

As at 31 December

2019 £’000

Rent receivable 8,694 5,866

Bad debt provision (3,381) –*

Rent incentive debtor 3,455 3,272

Held by rent agent 903 1,188

Prepayments and other debtors 383 263

Total debtors 10,054 10,589

* Prior period bad debt provisions were included in the other creditors balance in Note 17.

13. Cash and bank balances

As at 30 June

2020 £’000

As at 31 December

2019 £’000

Amounts held at bank 8,749 11,378

Total cash and bank balances 8,749 11,378

14. Interest bearing loans and borrowings

As at 30 June

2020 £’000

As at 31 December

2019 £’000

Unsecured bank loans 10,000 –

Loan arrangement fee brought forward 113 127

Additional loan arrangement fee 15 82

Amortised loan arrangement fee for the period (31) (96)

Total credit facility payable 10,097 113

On 9 March 2018, the Fund entered into an unsecured revolving credit facility with Lloyds Bank plc. The total commitment is £20m.




The rate of interest is LIBOR plus a Margin of 1.20% per annum, and a commitment fee at a rate of 0.48% per annum on that Lender’s available commitment. An arrangement fee of £150,000 was paid on 7 March 2018 as well as legal costs associated of £61,000. There is also an annual monitoring fee of £15,000 payable in advance on each anniversary of the date of the Agreement.

The facility was due to expire in February 2020 but has been extended for an additional 2 year term with effect from August 2019. The margin on the facility has increased from 1.2% to 1.3% with the non-utilisation fee increasing from 0.48% to 0.52%.

The loan issue costs shown above include loan arrangement fees and are detailed in note 8 on page 50.

Prepaid loan issue costs as at 30 June 2020, £97,000 (31 December 2019: £113,000) have accordingly been reflected in prepayments and other debtors detailed in note 12 on page 54.

15. Finance lease obligationsFinance leases are capitalised at the lease’s commencement at the lower of the fair value of the property and the present value of the minimum lease payments. The present value of the corresponding rental obligations are included as liabilities.

The following table analyses the minimum lease payments under non-cancellable finance leases for each of the following periods:

As at 30 June

2020 £’000

As at 31 December

2019 £’000

Within one year 182 182

After one year but not more than five years 571 571

Later than five years 1,208 1,208

1,779 1,779

Total 1,961 1,961




16. Guarantees and commitments

Operating lease commitments – as lessor

The Fund has entered into commercial property leases on its investment property portfolio. These non-cancellable leases have a remaining term of up to 21 years.*

Future minimum rentals receivable under non-cancellable operating leases are as follows:

As at 30 June

2020 £’000

As at 31 December

2019 £’000

Within one year 20,782 21,714

After one year but not more than five years 47,527 48,729

More than five years 39,981 34,335

87,508 83,064

Total 108,290 104,778

* Excluding leases at peppercorn rents.

17. CreditorsAs at

30 June 2020

£’000

As at 31 December

2019 £’000

Investment liabilities

Acquisition costs payable 41 108

Capital expenditure 17 –

Sales costs payable 12 –

Total 70 108

Distribution payable 2,556 4,309

Other creditors

Deferred rental income 4,392 4,228

Accruals and other creditors 782 1,499

VAT payable 2,294 1,249

Total other creditors 7,468 6,976

Total creditors 10,094 11,393




18. Transactions with significant partiesThe following are considered by the ACD to be significant parties of the Fund.

• The Depositary in accordance with the PAIF Instrument

• The ACD in accordance with the PAIF Instrument

The Depositary is entitled to receive a fee based on the sliding scale as shown below, subject to a minimum fee of £45,000 per annum:

Rate (% pa)

Net Asset Value

£0 – £100,000,000 0.05

£100,000,001 – £250,000,000 0.03

£250,000,001 – £500,000,000 0.02

£500,000,001 and above 0.01

The ACD is (in addition to reasonable out of pocket expenses) entitled to receive a fee at a rate of 0.70% per year of the NAV of the Fund.

In addition to the annual management charge, the ACD is entitled to a performance fee of 0.0625% of the NAV in each quarter, if the Fund is ranked in the top ten funds of the All Balanced Property Funds Index, MSCI/AREF UK Pooled Property Fund Indices – weighted average over a three year rolling period and if the return is positive.

During the period the following fees were payable to significant parties:


2020 £’000


2019 £’000

ACD’s management fee 1,025 1,041

ACD’s performance fee 368 374

Depositary fee 52 52

Total 1,444 1,467

The following amounts were outstanding due to significant parties.

As at 30 June

2020 £’000

As at 31 December

2019 £’000

ACD’s management fee 161 534

ACD’s performance fee 58 189

Depositary 17 18

Total 236 741




19. Contingent liabilityThe Fund may from time to time be involved in legal or arbitration proceedings incidental to its operation. As at 30 June 2020, there is no contingent liability to report.

20. Subsequent events

Distribution

On 28 August 2020, the Fund made a distribution of £2.5m, in respect of the period from 1 April 2020 to 30 June 2020. This was paid to the Unitholders of the Fund as at 30 June 2020.

Property acquisitions

Since the period end the Fund has completed on the following acquisitions:

• 44-46 The Horsefair, Bristol

Property sales

Since the period end the Fund has completed on the following sales:

• Wakefield 41, Grandstand Road, Wakefield

• 730 Aztec West, Bristol




Distribution Tablesfor the half year ended 30 June 2020

First Interim

Group 1 – units purchased prior to 31 December 2019

Group 2 – units purchased on or after 1 January 2020 and on or before 31 March 2020

Gross Revenue

(p)

Income tax (p)

Net revenue

(p)Equalisation

(p)

Distribution paid

(p)

Unit Class A Income Group 1 1.286 – 1.286 – 1.286

Group 2 0.767 – 0.767 0.519 1.286

Unit Class C Income Group 1 1.286 (0.002) 1.284 – 1.284

Group 2 0.376 (0.002) 0.374 0.910 1.284

Second Interim

Group 1 – units purchased prior to 31 March 2020

Group 2 – units purchased on or after 1 April 2020 and on or before 30 June 2020

Gross Revenue

(p)

Income tax (p)

Net revenue

(p)Equalisation

(p)

Distribution paid

(p)


Group 2 0.775 – 0.775 0.295 1.070


Group 2 0.220 (0.002) 0.218 0.850 1.068

Equalisation

Equalisation applies only to units purchased during the distribution period (Group 2 units). It represents the accrued revenue included in the purchase price of the units. After averaging it is returned with the distribution as a capital repayment. It is not liable to Income Tax but must be deducted from the cost of the units for Capital Gains Tax purposes.



AEW UK Real Return Fund


• The AEW UK Real Return Fund (“the Fund”) is a secure income strategy focused on inflation-linked cash flows to align the real benefits of property with the needs of long term savers.

• Portfolio aims to provide better longer term inflation protection and capital preservation, targeting a 4% real total return (net of fees and expenses).

• Long term gross income targeted at 5% p.a. The Fund achieves this through exposure to a diversified universe of all sectors, both traditional and alternatives such as healthcare, leisure, car parks and student housing etc. throughout the UK.

• Alternative sectors are attractive as they provide access to occupiers who prefer longer leases and inflation linked income streams.

• As at 30 June 2020, the Fund has 83% of income linked to inflation or with fixed uplifts (50% income must be linked to inflation). The weighted average unexpired lease term (“WAULT”) is 17.0 years. As a matter of policy the Manager will aim to maintain a WAULT of greater than 15 years in support of the overall objectives of the Fund.

• Constraints adopted to control risks and maintain focus on key objectives, such as zero permitted debt and speculative development, voids, stock concentration and sector diversification.

• It is a core property strategy, but has attracted capital from bond and indexed linked allocations as an alternative to long lease funds.


Fund Manager’s Report


The impact of COVID 19 on the FundWhilst the RRF portfolio has a relatively large exposure to the leisure and hospitality sectors, our operators all have plans to re-open at the earliest opportunity (Government rules permitting) which includes cinemas, Ten-Pin bowling and hotels. All of our pubs are now open for business as are our nursery schools. This compares with, say, the office sector which has been relatively immune from the short term shock of the lockdown, but where doubts over future occupier demand from changing working practices could linger for many months to come and have a far greater and longer term impact on capital values, similar to the impact on the retail sector as shopping patterns have changed.

Rent collection for the June quarter, as at end of August, is at 68% of rents due to be paid. This is an improvement and partly reflects the confidence of some of our industrial occupiers who can see signs of recovery as lockdown eases. Our focus has been on putting arrangements in place for the recovery of the arrears from March & June. We continue to work with our tenants across all of our portfolios to find solutions that ease the short term pressures on their businesses and achieve the longer term objectives of our investors. We are supporting those without the ability to pay rent but also pursuing a landlord’s legal rights to recover rents from those with the ability to pay but who are choosing not to do so.

The Standing Independent Valuer has determined material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic. As at 31 August 2020, 42.6% of the Fund’s portfolio valuation, which includes all of its assets that do not sit within the industrial, convenience retail, healthcare, office and residential (hospital accommodation and supported living) sectors, is subject to material uncertainty. Whilst RICS Leaders Forum has announced lifting on Material Uncertainty Clauses, the clause will still apply to certain assets valued with reference to trading potential, particularly in the leisure and hospitality sectors.

In unusual market conditions, to protect the interest of investors, the prospectus provides a mechanism for the ACD to i) Adjust the Fair Value of the Pricing or, ii) Defer Redemptions or iii) Suspend the Fund. Following receipt of a redemption request for circa £7.4m for the 1 May 2020 dealing day, the ACD temporarily suspended all dealing in the above Fund with effect from 23 April 2020. The ACD aims to lift the suspension as soon as confidence returns to the market and there is more certainty regarding asset valuations for the Real Return Fund, taking into account the best interests of investors.

The PortfolioOne of the strengths of the RRF portfolio has been its diversification of 49 properties across 11 distinct segments. As the Fund is not constrained to a standard MSCI performance benchmark, the portfolio has avoided concentrations in the three traditional sectors of Shops, Offices and Industrial and is broadly diversified to the consumer, social need and the rest of the economy.

Whilst consumer activity has been badly hit by lockdown we still have conviction that the UK consumer will remain a major driving force of the economy and will want to start consuming again as soon as possible (Oxford Economics report exceptionally strong growth in retail sales in June, as non-essential retailers reopened after lockdown). Spending on UK “experience” should be the beneficiary of this as leisure and hospitality start to open up again, at the continued expense of physical retail. Car sales have also started to recover as showrooms were able to open on 1st June although, interestingly, more so in private (consumer) sales than business.

We expect occupier demand for logistics and Last Mile Delivery solutions to continue to be strong and whilst we question whether current pricing for large distribution units is sustainable with increasing supply, we expect demand for traditional industrial units to remain stable, providing a durable source of income and modest rental growth, as occupiers are priced out of logistics locations and the supply of affordable manufacturing and business units is squeezed.

We believe the long term demand fundamentals of the broader Care sector remain robust; the sector will emerge stronger as there is now a greater understanding of the role it plays and the effect of many years of continual Government under-funding. So too the many forms of sheltered or supported housing for the vulnerable members of society, be they young, old or homeless, where the chronic shortage of social provision has been brought sharply into focus.




RRF’s exposure to City centres, seen very much as the vital engine of the UK’s economic recovery, is limited and therefore not exposed to the many questions to be answered about how and where we choose to live and work. From our own experience, having reopened the AEW office for voluntary return in June, central London and the City remain very subdued suggesting that we are preferring to take the risk of Corona on Bournemouth beach rather than on the journey back to office working.

PerformanceNot surprisingly, the shock of the pandemic has disrupted the Fund’s ability to deliver its return objectives relative to inflation over the short term. The absolute return objective does not afford the luxury of performing relative to a falling market, nevertheless it is interesting to note the volatility of total returns across all 46 funds in the MSCI/AREF UK PFI which range from +1% to -22% over the quarter. Valuations traditionally lag such market shocks so it is hard to tell from just one quarter’s numbers who are the winners and losers over the longer term. It is clear, however, that just about all strategies have been impacted by COVID-19 with some of the most secure income streams perhaps having the furthest to fall in value if the wave of legitimised CVAs is adopted by more companies with a Blue Chip reputation.

Fund Performance to 30 June 2020

3 months %

6 months %

9 months %

1 year %

2 years p.a. %

3 years p.a. %

4.25 years Since

inception p.a. %

Total Return1 -2.5 -2.7 -0.7 0.8 3.6 5.9 6.6

Income Return1 0.7 2.0 3.3 4.7 5.0 5.1 5.2

Total Return1 (adjusted for inflation2) -2.6 -2.9 -1.0 0.0 2.2 4.2 4.7

Source: 1 MSCI/AREF UK Quarterly Property Fund Index. 2 CPIH






Real estate still plays a role in optimising portfoliosA new language of cash flow matching options to meet investor needs

Source: AEW * All typically seeking to outperform the MSCI peer group total return benchmark

EXPECTED RETURN

PERCEIVED RISK

MATCHING (BOND PROXIES)

GROWTH (TOTAL RETURN FOCUSED

STRATEGIES)

Opportunistic

Value add

Core funds • Listed core REITS* • Retail core funds* • Institutional core funds*

AEW UK Real Return Fund (RRF) • Open-ended • Alternative real estate • Net 4% total real return target • Gross long term income 5% p.a. Long lease funds

Real estate debt funds

Ground lease funds

Income ‘strips’

REAL ASSET STRATEGIES

STRUCTURE FCA Regulated Open-ended PAIF

GEOGRAPHY UK

NAV £141.9m

NUMBER OF PROPERTIES 49

TOTAL RETURN 0.0% p.a. real (net of fees expenses) 2 0.8% nominal 1

DISTRIBUTION YIELD 4.8% on current NAV price

TRIPLE NET INITIAL YIELD (p.a.) 6.0%3

TRUE EQUIVALENT YIELD (p.a.)

REVERSIONARY YIELD (p.a.) 7.5%

PERCENTAGE INCOME LINKED TO INFLATION (INCLUDING FIXED UPLIFTS) 83%

17.0 years

16.1 years

VOIDS

Nil

Source: 1 MSCI /AREF UK All Balanced Property Fund Index 2 AEW 3 Knight Frank (After deductions of void costs and rent free)

WEIGHTED AVERAGE UNEXPIRED LEASE TERM TO EXPIRY (WAULT)

WEIGHTED AVERAGE UNEXPIREDLEASE TERM TO BREAK (WAULT)

6.8%3

OfficeConvenience RetailHotelPubs and RestaurantsLeisureIndustrialCare HomeCar ShowroomResidential – Supported Living

Nursery EducationResidential – Hospital Accomodation

Key data as at 30 June 2020




Sector weightings as at 31 December 2019 Sector weightings as at 30 June 2020(% of portfolio valuation and cash) (% of portfolio valuation and cash)

Care Home, 22.2%Leisure, 16.7%Industrial, 12.3%Pubs/Restaurants, 11.2%Residential - Hospital Accommodation, 9.6%Car Showroom, 7.5%Residential - Supported Living, 4.2%Hotel, 4.0%Nursery Education, 3.8%Cash, 3.3%Convenience Retail, 3.2%Office, 2.0%

Standard Retail, 22.7%Offices, 2.0%Industrial, 12.5%Other Property, 59.6%Cash, 3.2%

Industry categorisationIndustry categorisation

MSCI categorisation MSCI categorisation

Standard Retail, 21.4%Offices, 2.0%Industrial, 11.0%Other Property, 61.8%Cash, 3.8%

Care Home, 23.3%Leisure, 15.3%Industrial, 11.0%Pubs/Restaurants, 10.9%Residential - Hospital Accommodation, 11.2%Car Showroom, 7.3%Residential - Supported Living, 4.4%Hotel, 3.5%Nursery Education, 4.0%Cash, 3.7%Convenience Retail, 3.4%Office, 2.0%

Source: AREF/MSCI UK Quarterly Property Fund Index, AEW UK Real Return Fund sector weightings ‘based on industry categorisation’ determined by AEW.




Asset Management report

Rent collection

Rent collection for the June quarter, as at end of August, is at 68% of rents due to be paid. This is an improvement and partly reflects the confidence of some of our industrial occupiers who can see signs of recovery as lockdown eases. Our focus has been on putting arrangements in place for the recovery of the arrears from March & June. We continue to work with our tenants across all of our portfolios to find solutions that ease the short term pressures on their businesses and achieve the longer term objectives of our investors. We are supporting those without the ability to pay rent but also pursuing a landlord’s legal rights to recover rents from those with the ability to pay but who are choosing not to do so.

General

We continue to actively asset manage the portfolio, with a number of lease regears completed and anticipated in our “tactical” assets over the coming months. This re-emphasises active asset management as being central to the Real Return Fund investment process, as it should be for any Core property strategy focussed on capital preservation and growth.

Rudford Industrial Estate, Ford

• Completed a 9 year reversionary lease with 5 yearly RPI reviews (1.5% & 3%) at a rent of £350,000 p.a. (£4.21 psf).

• Schedule of Condition has also been dropped and replaced with a FRI lease.

• Lease extended to 25 years.

Starbucks, Coventry

• Completed the construction of a drive-thru coffee pod.

• Let to Starbucks on a 15 year FRI lease with 5 yearly RPI reviews (0% & 4%).

• Improves the overall leisure offering on the park.


Slug & Lettuce, Colchester

• Tenant invested considerably in the property through refurbishment.

• Agreed a 15 year reversion to Stonegate, a stronger covenant.

• Alignment of Tenant and Landlord interests by increasing the lease term.

Any opinions expressed are those of the Fund Manager. They should not be viewed as a guarantee of return from an investment in the Fund. The content of the commentary should not be viewed as a recommendation to invest. Past performance is not a guide to the future. Investors should be aware that the value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

AEW UK’s Approach to Socially Responsible Investing

Environmental, Social & Governance

We believe that ESG should be the key principles of AEW’s approach to Responsible Property Investing (RPI) and that a sustainable and socially responsible approach to real estate investment management both protects and enhances the value of our clients’ assets, now and in the future.

We are fully aware of the impact of our activities on environmental and social issues both from our own business and our investment, asset management and development activities. To this end we are committed to implementing a comprehensive Socially Responsible Investment (SRI) policy. By doing so we expect to meet our stakeholders’ expectations, whether they are clients, tenants, providers, employees, or any other individuals with whom we interact.

Our policy is aligned with the international climate agreement signed in Paris in December 2015 as climate change is a major challenge for humanity that poses important risks and creates opportunities for the real estate industry. The real estate sector in Europe accounts for some 40% of total energy consumption and about 25% of greenhouse gases (GHG) emissions.

Over the coming years we believe that both occupiers and investors will increasingly focus on the way in which environmental, social and governance (ESG) issues are managed. In turn, this is expected to impact on building obsolescence, lettability, rates of lease renewals and ultimately the rental and capital values for individual assets if ESG issues are ignored. However, our fiduciary duty to investors must always come first in all investment decision-making. We continue to engage with clients wherever possible to educate on the importance of ESG. Where we feel it is important to do so and costs can be justified in terms of performance objectives, or are required to comply with UK legislation, we will seek to incorporate or adopt best practice; usually this is done with little support from tenants who by and large remain reluctant to commit to ESG in a similar way.




Environment and sustainability

1) Global Real Estate Sustainability Benchmark (GRESB)

The Fund has again submitted to GRESB, the Global Real Estate Sustainability Benchmark. GRESB is an investor driven organisation assessing the sustainability performance of real estate portfolios.

GRESB scores overall performance through two Dimensions:

1. Implementation and Measurement – actions and programmes that have been initiated by the Fund.

2. Management and Policy – relating to policies and processes that set out the Fund’s intent for managing sustainability issues.

This year the Fund saw a notable improvement in its GRESB score (from 50 in 2018 to 63 in 2019). The Fund achieved a GRESB rating of two stars and was also awarded the additional ‘green star’ status.

The Fund is committed to improving ESG performance and GRESB scores, where in line with AEW’s commitment to the broader ESG agenda. We completed a ‘deep dive’ analysis to identify where and how the Fund can improve scoring. This has involved a targeted approach towards implementing tenant engagement initiatives as well as more detailed analysis on the coverage of asset level initiatives, such as audits and efficiency measures. Results from this analysis shall be used to inform our future ESG strategy.

2) Minimum Energy Efficiency Standards (MEES)

AEW UK are committed to ensuring compliance with MEES regulations, which came into effect from April 2018, requiring all new lettings to have a minimum ‘E’ rated EPC, unless listed buildings.

The Fund undertook a gap analysis to identify any risks where EPCs did not meet minimum standards, these were then re-assessed and action plans created.

The Fund has action plans in place to mitigate EPCs below an E rating, which currently represents less than 1% of the fund by floor area.

3) Portfolio Greenhouse Gas Emissions

The Fund has followed UK Government environmental reporting guidelines and used UK Government 2018 greenhouse gas reporting conversion factors for company reporting to identify and report relevant GHG emissions over which it has Operational Control for the year ending 31 December 2019.

GHG emissions have been reported against the following ‘Scopes’, as defined by the GHG Protocol and where relevant:

• Scope 1: Direct emissions from owned vehicles, controlled boilers and fugitive emissions from air conditioning systems under landlord control.

• Scope 2: Indirect emissions from electricity purchased by the Fund and consumed within real estate assets owned by the Fund.

• Scope 3: Indirect emissions from electricity and gas purchased / consumed within the Fund assets, by tenants, where the tenant is counterparty to the energy supply.

The AEW UK Real Return Fund Energy Use and GHG Emissions Statements for the year ending 31 December 2019 are reported in the tables below. These set out the energy use/emissions, like-for-like1 and an intensity value2 per sector and for the entity overall. The approach taken follows guidance provided by the GHG Reporting Guidelines (BEIS, 2018) and INREV Sustainability Reporting Guidelines 2016.

1 Like for like excludes assets that were purchased, sold or under refurbishment during the two years reported.2 Leisure intensity value is calculated on a kWh/common area m2.




AEW UK Real Return Fund Greenhouse Gas Emissions Statement for the year ending 31 December 2019

Absolute Energy Usage (tCO2e)

Like For Like (tCO2e)

Like For Like Intensity (kgCO2e)


Leisure

Scope 1 – Gas N/A N/A N/A N/A N/A

8.64 6.75 -22%Scope 2 – Electricity 25 19 25 19 -22%

Total 25 19 25 19 -22%

AEW UK Real Return Fund Energy Statement for the year ending 31 December 2019

Absolute Energy Usage (kWh)

Like For Like Usage (kWh)

Like For LikeIntensity


Leisure

Gas N/A N/A N/A N/A N/A

31 26 -13%Electricity 87,898 76,084 87,898 76,084 -13%

Total 87,898 76,084 87,898 76,084 -13%

4) Carbon Emissions Target

The Fund is actively managing its carbon footprint and seeks to improve efficiency measures where it is able to influence the outcome. For example, we look to incorporate energy efficiency into refurbishments or at sites where we have management control. We consider all property types where there is a positive business case to do so. Quick wins are progressed where possible and larger capital expenditure projects are reviewed as part of an asset’s annual business plan. The Fund has set a target of reducing absolute GHG emissions by 15% by 2030 based on a 2018 baseline and we perceive the positive actions we take regarding improving our assets will support us to achieve this target. We would therefore expect on a like for like basis there to be a trend of reducing emissions over the near future. It is however important to note that changes in fund composition as we buy and sell assets will impact absolute emission figures. Currently we collect landlord consumption data on a bi-annual basis from our property managers, which enables us to track our emissions and review progress easily. Furthermore, we are continuing to engage with tenants regarding tenant procured consumption data, so we can better understand emissions relevant to their actions.






Social Responsibility

The Fund`s Alternative strategy supports social “impact” investing where we believe it prudent to do so. In addition to the care home and supported living investments acquired in earlier years, the sale and lease back of the NHS Residences makes an impact on the funding of a major NHS Trust. The lease back arrangement provides the Fund with secure inflation-linked income for 20 years, but both Fund and Trust anticipate that the demand for this vital part of the hospital`s social infrastructure will be sustained for far longer than the lease term. As at 30 June 2020 the Fund’s exposure to the social sector is over 40%. This confirms our belief that where we can identify sustainable occupier’s needs, the Fund’s objectives can be achieved alongside delivering a meaningful social impact.

Governance

The Fund is a member of the Association of Real Estate Funds (AREF). The aim of the AREF Code of Practice is to achieve high standards of transparency across the unlisted sector and promote consistency of reporting to allow investors to compare different funds. The Fund completes the MSCI/AREF Pooled Property Questionnaire each quarter, which is made available to all investors and which forms the basis of its entry in MSCI/AREF Property Fund Vision handbook. The Fund was awarded the 2019 AREF Corporate Governance Quality Mark on achieving a high standard of transparency and corporate governance.

Part of the AREF Code of Practice sets on the requirements for oversight by supervisory or advisory committees. The Annual Report and Financial Statements set out the report of the Fund’s Independent Governance committee. When AEW UK launched its first authorised fund in 2013 we wanted to reflect the lessons learnt by the property fund industry in dealing with investor communications and liquidity management at the time of the GFC. As such the constitution of the Governance Committee and Pricing Sub-Committee reflects its independence from the manager, with an independent Chair, majority representation by investors and Terms of Reference will allows the Manager to be held to account. We believe that such transparent Governance is not only best practice but also extremely rare amongst our peers.

Investors in AEW UK Real Return Fund are invited to join AREF in the Investor Member category. This is free of charge. Much of what AREF is striving to achieve is ultimately for the benefit of the underlying investors in the funds that make up its membership. So, AREF not only represents the interests of its member funds and those firms that advise and support them, but also the end-investors. AREF is proactively reaching out to professional investors and/or their advisers, looking for their engagement to help set AREF’s agenda. For further information, please visit www.aref.org.uk or email [email protected].


Fund ObjectiveIt is intended that the AEW UK Real Return Fund be a PAIF at all times and its investment objective is to:

1. carry on a Property Investment Business; and

2. to manage cash raised from investors for investment in the Property Investment Business as further described below.

The AEW UK Real Return Fund is intended to provide a total real return over the longer term of inflation (as measured by CPIH) +4%, net of all fees and expenses.

Reference BenchmarkThe Fund is not managed to an investment benchmark. It has a “Reference Benchmark” for risk control purposes which is the All Balanced Property Funds Index (MSCI/AREF UK Quarterly Property Fund Index) but the Fund does not aim to track or outperform that benchmark and investment will not be constrained by the sector and geographic weightings of the reference benchmark.

Investment PolicyThe AEW UK Real Return Fund will be diversified across all real estate sectors including alternative real estate sectors.

Whilst not a core part of the AEW UK Real Return Fund’s investment policy, the ACD reserves the right to make investments which the ACD considers appropriate, including investments in derivative products, whether traded under the rules of a recognised or designated investment exchange or not. The ACD may also use them for hedging or efficient portfolio management purposes.

It may invest through other Collective Investment Schemes or other investment vehicles, but only in limited circumstances. These are where direct investment in the underlying property is not possible or is impractical, for instance because a property would otherwise be too large for the portfolio, or not available in any other form. In such instances, the ACD shall consult with and take into consideration the recommendations of the Governance Committee.

The ACD will keep the investment policy under regular review, in consultation with the Governance Committee, so that, if there are changes in market conditions or other relevant factors, the policy can be adapted accordingly whilst retaining the broad objectives. If changes occur, investors shall be notified promptly in writing and within no more than 60 days.



Investment StrategyBy aiming to deliver a 4% per annum total real return, the ACD seeks to offer a total return objective that provides a stable measure to allow investors to better allocate property against their known liabilities. In order to achieve this the strategy will:

(a) be focused on income and growth;

(b) offer greater diversification and therefore lower volatility by investing in a far wider investible universe, that embraces the many “alternative” sectors of the UK economy rather than being constrained by the sector and geographic weightings of the Reference Benchmark; and

(c) by combining (a) and (b) above, the aim is to optimise the benefits of property and avoid traditional risks like speculative development, to build a portfolio that should provide better longer term inflation protection and capital preservation when compared with the Reference Benchmark.

Investment GuidelinesParameters Investment Guidelines Guideline Limit Actual Comments

% allocation to inflation linked leases (applicable once the Fund reaches AUM of £200m)

Minimum 50% of gross passing rent. 50% 80% Applicable once the Fund reaches AUM of £200m.

Excludes fixed uplifts of 3%.

Average lease length (applicable once the Fund reaches AUM of £200m)

WAULT must be in excess of the equivalent measure from the reference benchmark.

Expiry/Break 8.6 years/ 7.2 years

Expiry/Break 17.0 years/ 16.1 years

Applicable once the Fund reaches AUM of £200m.

Diversification limits Unconstrained but as a guideline no more than 15% of NAV invested in any one segment, with segment defined but not limited to the segments within the PPFI (excluding Other and Cash) plus student accommodation, education, healthcare, hotels, other leisure, residential, energy, waste, data centres other social infrastructure (e.g. Municipal buildings) as may exist or be defined from time to time (will not apply until the Fund reaches £200m).

15% Refer page 65 Sector

Weightings

Applicable once the Fund reaches AUM of £200m

Investment in property development (speculative complete demolition and reconstruction without a tenant)

Not permitted. 0% 0%

Investment in pre-let development

Maximum 20% of NAV (will not apply until the Fund reaches £200m)

20% 0% Applicable once the Fund reaches AUM of £200m



Parameters Investment Guidelines Guideline Limit Actual Comments

Investment in a single asset

Maximum 10% of the gross asset value calculated at the time of investment (will not apply until the Fund reaches £200m) with the target that single assets should not exceed 5% of gross asset value at the time of acquisition

10% 11.6% Applicable once the Fund reaches AUM of £200m. Actual % will reduce as the Fund purchases more property assets

Investment in unoccupied and non-income producing assets (i.e. vacant assets)

Maximum 10% of the Estimated Rental Value of the existing portfolio at any one time. Therefore the purchase of an additional asset (which itself should not have more than 20% void ERV), will be governed by the void existing in the portfolio at the time of purchase

10% 0%

Investment in Collective Investment Schemes

The Fund may only invest in structures owning a single property or portfolio, where direct investment in the underlying property or portfolio is not possible or is impractical, for instance because a property would otherwise be too large for the portfolio, or not available in any other form

0%

Planned expenditure on refurbishment

The ACD does not intend to spend any more than 5% of NAV in any rolling 12 month period on (a) the refurbishment of previously occupied space within the existing portfolio or (b) the refurbishment of new properties acquired with vacant units

5% 0%

Investment in REITs Maximum 20% of NAV with a maximum 5% of NAV in any one REIT, and will be used to capture tactical benefits from specialist portfolios and to enhance diversification

20% 0%

Derivatives Maximum 25% of the NAV can be invested in derivative products. Investment in derivatives will be for strategic investment purposes as well as for the purposes of efficient portfolio management and hedging. The value of any derivative product for the purposes of this limitation will be the notional value of the derivative not the capital invested. Long and short positions may be taken in derivatives, to the extent permitted by the COLL Sourcebook

25% 0%

Investment Guidelines (continued)



Investment Guidelines (continued)


Parameters Investment Guidelines Guideline Limit Actual Comments

Value of the top 10 holdings as a percentage of total portfolio

The ACD will aim to maintain the percentage value of the top 10 holdings of the Fund below the comparable figure for the MSCI benchmark (will not apply until the Fund reaches £200m)

49.1% 52.8% Applicable once the Fund reaches AUM of £200m

Benchmark figure as at 31 March 2020

Investments in AEW UK CIS and/or AEW UK listed entries

Maximum 10% of NAV. Fees payable to AEW UK in the investment vehicle will be rebated back for the benefit of investors in the Fund

10% 0%

Borrowing The ACD will borrow only up to 10% of the NAV and in the form of revolving credit facility only

10% 0%

Cash Not more than 10% of the net asset value may be held in uncommitted cash at any one time where that cash is from the issue of new units in the Fund. Cash may exceed 10% of NAV in the short term to meet liquidity requirements. Cash may exceed 10% where the cash is from the proceeds of sales made where the cash is then held as part of the investment strategy and/or for efficient portfolio management, including being held as collateral for Financial Instruments which may be used from time to time

10% 3.7% Cash balances under 10% of NAV throughout Q2 2020


BNY Mellon Trust & Depositary (UK) Limited

As depositary of the AEW UK Real Return Fund (sub fund of AEW UK Real Estate Fund).

AEW UK Real Return Fund – Valuation date 30 June 2020

In accordance with your instructions, dated 4 February 2016, we now report to you formally, as External Valuers, our opinion of the Fair Values of the direct property assets held by the AEW UK Real Return Fund, as at 30 June 2020, for financial reporting under FRS102. Our report is subject to our General Terms of Business for Valuations, a copy of which is included in this report at Appendix 4.

We are of the opinion that the aggregate of the Fair Values of the freehold and leasehold interests in the properties valued by Knight Frank LLP and described in Appendix 1, as at 30 June 2020, (the measurement date), was £136,665,000 (One Hundred and Thirty Six Million, Six Hundred and Sixty Five Thousand Pounds).

Since our previous valuation, the fund has not purchased or disposed of any properties.

The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a ‘Global Pandemic’ on the 11th March 2020, has impacted many aspects of daily life and the global economy – with some real estate markets experiencing significantly lower levels of transactional activity and liquidity. As at the valuation date, in the case of those properties not expressly highlighted in an Appendix of this report, there is a shortage of market evidence for comparison purposes, to inform opinions of value. Our valuation of these properties is therefore reported as being subject to ‘material valuation uncertainty’ as set out in VPS 3 and VPGA 10 of the RICS Valuation – Global Standards. Consequently, less certainty – and a higher degree of caution – should be attached to our valuation than would normally be the case.

For the avoidance of doubt, the inclusion of the ‘material valuation uncertainty’ declaration above does not mean that the valuation cannot be relied upon. Rather, the declaration has been included to ensure transparency of the fact that – in the current extraordinary circumstances – less certainty can be attached to the valuation than would otherwise be the case. The material valuation uncertainty clause is to serve as a precaution and does not invalidate the valuation. Given the unknown future impact that COVID-19 might have on the real estate market and the difficulty in differentiating between short term impacts and long-term structural changes, we recommend that you keep the valuations* contained within this report under frequent review.

Any properties within this report where we do not consider that this Material Valuation Uncertainty clause applies, have been identified within the list of individual property valuations at Appendix 1.

We confirm that the valuations stated in this report have been undertaken in accordance with the current editions of RICS Valuation - Global Standards, effective from the 31 January 2020, which incorporate the International Valuation Standards, and the RICS UK National Supplement. References to the “Red Book” refer to either or both of these documents, as applicable. As required by the Red Book, some key matters relating to this instruction are set out below.

The properties have also been valued on the basis of Fair Value in accordance with the RICS Valuation – Global Standards VPS4 (7.1) Fair Value and VPGA1 Valuations for Inclusion in Financial Statements, which adopt the definition of Fair Value used by the International Accounting Standards Board:

“ The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.”

We confirm that the valuations reported for properties located in the UK conform to the definition of Fair Value and furthermore they are expressed net of transaction costs. The Valuer’s opinion of Fair Value was primarily derived using recent market transactions on arm’s length terms, where available.

Report of the Valuer




We have assumed there to be good and marketable titles to the properties. The properties have been valued individually, not as part of a portfolio. We have made oral enquiries where appropriate and have taken account, insofar as we are aware, of unusual outgoings, planning proposals and onerous restrictions or local authority intentions which affect the properties. However, this information has been provided to us on the basis that it should not be relied upon.

We have been supplied with details of tenure and tenancies and have valued on the basis that there are no undisclosed matters which would affect our valuation.

AEW has also supplied floor areas which we have been instructed to rely upon. The adoption of IPMS (International Property Measurement Standards), for the office sector, became mandatory with effect from 1 January 2016 for all RICS members replacing NIA (Net Internal Area) as set out under the current Code of Measurement Practice (Sixth Edition). It has been agreed with you that until the new definition of measurement has been adopted by the leasing market, rental analysis for the office sector will continue to be shown on a net internal area basis. As or when buildings are re-measured, we will present our analysis on a dual basis, namely IPMS and NIA.

No allowance has been made in our valuation for expenses of realisation or for taxation which may arise in the event of a disposal and our valuations are expressed exclusive of any VAT that may become chargeable.

The majority of the properties have been inspected. A number of the properties as detailed in appendix 3 of this report are due to be re-inspected for this valuation under our rolling inspection programme, which we have not been able to undertake for this valuation due to the current COVID-19 Government restrictions. In the absence of our re-inspection, we made enquiries of the fund manager as to whether they are aware of any issues which might impact upon our valuation, which should be brought to our attention. The fund manager has confirmed that they are not aware of any such matters and our valuation therefore assumes no physical changes at the property since our previous inspection.

We have not undertaken any building surveys or environmental audits and are therefore unable to report that the properties are free of any structural fault, rot, infestation or defects of any other nature, including inherent weaknesses due to the use in construction of materials now suspect. No tests were carried out on any of the technical services. However, we have reflected any apparent wants of repair in our opinion of value as appropriate.

We have assumed that all of the required licences and consents are in place, without materially adverse conditions, at each of the respective properties, in order for each of them to operate.

We have assumed, except where we have been informed to the contrary, there to be no adverse ground or soil conditions or environmental contamination which would affect the present or future use of the properties and that the load bearing qualities of the site of each property are sufficient to support the buildings constructed or to be constructed thereon.

Our valuation makes no allowance for any liabilities which may arise from these investigations, and we have assumed that the present or future use of the property is not affected. Should it, however, be established subsequently that contamination exists at the property or on any neighbouring land, or that the property has been or is being put to a contaminative use, this might reduce the value now reported.

Minimum Energy Efficiency Standards are the standards set out by the Government for let properties in England and Wales. Buildings that have an EPC rating of F & G must be brought up to standard before they are let subject to some conditions, exemptions and relief. This commenced from 1 April 2018 for all new lettings and they apply to all continuing lettings from 1 April 2020 for domestic buildings and from 2023 for non-domestic buildings.

For Scottish properties, the Assessment of Energy Performance of Non-Domestic Buildings (Scotland) Regulations 2016 came into force in Scotland in 2016 and does not incorporate a “ban” on new lettings. Owners are encouraged to carry out improvements, or improve efficiency through monitoring emissions from a building via creating an Action Plan. The Action Plan procedure will apply to the sale or letting of larger buildings, with a floor area >1,000 sqm.





This only applies to buildings that are subject to a new sale or lease and buildings constructed to building standards applicable from March 2002, or otherwise meeting those standards, are exempt.

Where F and G ratings occur we have taken them into account.

In addition to The AEW UK Real Return Fund, Knight Frank LLP is also retained by AEW UK to value the following funds:

i) The Pavilion Property Trustees Limited (Jersey) and Pavilion Trustees Limited (Jersey) c/o AEW Europe.

ii) AEW UK Core Property Fund.

iii) AEW UK REIT PLC.

We confirm that Knight Frank LLP meets the requirements of the Fund as an external valuer in the role of Standing Independent Valuer, having been appointed in February 2016, as defined by the RICS Valuation – Global Standards and regulations made by the Financial Conduct Authority.

For the avoidance of doubt, our role is limited to providing property valuations for assets held by the Fund, in accordance with the Red Book. We are your valuation advisors and are not acting as “External Valuers” as defined by The Alternative Investment Fund Managers Regulations 2013 and Directive 2011/61/EU or as valuers of the Fund itself. The valuation function for the Fund and the setting of the net asset value of the Fund remains with you and/or your duly appointed External Valuers.

The valuer, on behalf of Knight Frank LLP, with the responsibility for this report is Mathew Cripps FRICS Registered Valuer and Alex Burgoyne MRICS, Registered Valuer. Parts of the valuation have been undertaken by additional valuers. We confirm that the valuer and additional valuers collectively meet the requirements of the current RICS Valuation – Global Standards – UK National Supplement having sufficient current knowledge of the particular market and the skills and understanding to undertake the valuation competently.

We confirm “the signatory” of this report, Mathew Cripps FRICS and Alex Burgoyne MRICS, have been responsible for this instruction since 31 October 2018. We confirm that in relation to Knight Frank’s preceding financial year, the total fees paid by AEW UK, as a percentage of the total fee income of Knight Frank, was less than 5%. Finally, we recognise and support the RICS Rules of Conduct and have procedures for identifying conflicts of interest.

In accordance with our standard practice, we must state that this valuation report is for the use only of the party to whom it is addressed and no responsibility is accepted to any third party for the whole or any part of its contents. If our opinion of value is disclosed to persons other than the addressees of our report, the basis of valuation should be stated. Neither the whole or any part of the valuation report nor any reference thereto may be included in any published document, circular or statement nor published in any way whatsoever whether in hard copy or electronically (including on any web-site) without our prior written approval of the form and context in which it may appear.

Yours faithfully,

Matthew Cripps FRICS Alex Burgoyne MRICSRICS Registered Valuer RICS Registered ValuerPartner, Valuation & Advisory Partner, Valuation & AdvisoryFor and on behalf of Knight Frank LLP For and on behalf of Knight Frank LLP


Portfolio Statementas at 30 June 2020

Investment Properties


Market Value £’000

Net Assets

Sector

Care Homes 5 32,860 23

Residential (supported living, hospital accommodation) 3 22,200 16

Leisure 4 21,900 15

Industrial 6 15,600 11

Pubs/Restaurants 17 15,400 11

Car Showroom 4 10,395 7

Nursery Education 3 5,670 4

Hotel 1 5,000 4

Convenience Retail 5 4,840 3

Office 1 2,800 2


Other Assets and Liabilities 5,194 4


Market value

Care Homes

Birch Green Care Home, Skelmersdale £2.5m to £5m

Holmes Court & Holmes House, Kenilworth Road, South Wigston £2.5m to £5m

Ashlands & St Georges, Ratcliffe Road, Leicester £5m to £10m

Larkland House, London Road, Ascot £5m to £10m

Springhill Care Centre, Fairfield Street, Accrington £10m to £15m

Residential

– Hospital Accommodation

The Residences, James Cook University Hospital, Middlesbrough £15m to £20m

– Supported Living

Hestia House, 22 Old Walsall Road, Birmingham £2.5m to £5m

Bentley Court, Victoria Street, Bolton £2.5m to £5m



Market value

Leisure

Cinema and Restaurants, Denmarkek Street, Altrincham £2.5m to £5m

Clifton Boulevard, Redfield Way, Nottingham £5m to £10m

The Point, Borehamwood, Shenley Road £5m to £10m

Cross Point, Oliver Way, Coventry £5m to £10m

Industrial

Stanley Green Industrial Estate, Duke Avenue, Cheadle £0 to £2.5m

Tinsley Industrial Estate, Coleford Road, Sheffield £0 to £2.5m

Unit 1, Ferrous Way, North Bank Industrial Park, Irlam £0 to £2.5m

Unit A, Rudford Industrial Estate, Ford £2.5m to £5m

Marshall 41, James Way, Denbigh West, Milton Keynes £2.5m to £5m

Units 7A & 7B, Gatehouse Way, Aylesbury £2.5m to £5m

Pubs/Restaurants

Bugle Inn, 24 St Martins Street, Brighton £0 to £2.5m

Greyhound, 2 High Street, Stockbridge £0 to £2.5m

Abbots Mitre, Village Street, Stockbridge £0 to £2.5m

Churchill Arms, Paxford, Chipping Camden £0 to £2.5m

The Royal Oak, Oaklands Lane, Midhurst £0 to £2.5m

White Horse Hotel, 2 The Square, Storrington £0 to £2.5m

The Jubilee Inn, Main Road, Flax Bourton £0 to £2.5m

Craft Beer, Uppernorth Street, Brighton £0 to £2.5m

The Goudhurst Inn, Cranbrook Road, Goudhurst £0 to £2.5m

Cricket Inn, Penny Lane, Totley £0 to £2.5m

Thomas Tripp, 10 Wick Lane, Christchurch £0 to £2.5m

Woodbridge Inn, Ironbridge, Telford £0 to £2.5m

Tickled Trout, Lower Road, West Farleigh £0 to £2.5m

Slug & Lettuce, 110/111 High Street, Colchester £0 to £2.5m

New Pear Tree Inn, Crannock Road, Wolverhampton £0 to £2.5m

The Hare & Hounds, 75 London Road, Brighton £0 to £2.5m

White Hart, Chapel Green, Crowborough £0 to £2.5m





Market value

Car Showroom

KIA Doncaster, Bullrush Grove, Doncaster £0 to £2.5m

Stonacre Fiat, Sefton Street, Liverpool £0 to £2.5m

Trident Park Audi, Whitebrik Drive, Blackburn £2.5m to £5m

Audi Car Showroom, Wheatley Road, Doncaster £2.5m to £5m

Nursery

The Nursery Building, Elstree Way, Abbey Meads Village Centre, Swindon £0 to £2.5m

Happy Days, Lyde Green, Bristol £0 to £2.5m

Kido Day Nursery, Camden, London £0 to £2.5m

Hotel

Travelodge Hotel, Providence Place, West Bromwich £5m to £10m

Convenience Retail

Tesco Express, 4 Eaton Green, Luton £0 to £2.5m

Tesco Express, 1 Canterbury Road, Sittingborne £0 to £2.5m

Tesco Express, Westbury Hill, Westbury on Trym £0 to £2.5m

Tesco Express, 80 Cove Road, Farnborough £0 to £2.5m

The Co-operative, 205 Fairmile Road, Christchurch £0 to £2.5m

Office

Regeneration House, Gorsey Lane, Coleshill £2.5m to £5m



Purchases and sales for the period

Purchases

There were no property acquisitions during the period.

Sales

There were no property sales during the period.

Summary of Material Portfolio Changesfor the half year ended 30 June 2020




Accounting and Distribution dates

XD date

First interim distribution 31 March 2020

Second interim distribution 30 June 2020

Third interim distribution 30 September 2020

Final distribution and year end 31 December 2020

Payment of distributions of income will normally be made within two months of the above XD dates, although the ACD reserves the right to pay at a later date but not later than four months as permitted by the Regulations. Income will be automatically paid out unless instructions are given for reinvestment. Income will be reinvested on the next dealing date following payment of distribution.

The Fund has a distribution yield of 4.8% as at 30 June 2020.

Distributions in the period

First Interim 31 March

2020 (p)

Second Interim 30 June

2020 (p)

Unit Class

Unit Class A income 1.334 0.717

Unit Class C income* 1.334 0.717

* Distribution gross of tax.

Fund Information


Performance RecordHighest Unit price Lowest Unit price

Year Unit ClassOffer basis

(p)Bid basis

(p)Offer basis

(p)Bid basis

(p)

30 June 2020* A income 112.37 103.63 109.65 101.1230 June 2020* C income 112.37 103.63 109.65 101.12

31 December 2019 A income 112.03 103.32 110.25 101.6831 December 2019 C income 112.03 103.32 110.25 101.68



* The Fund suspended dealings effective as of 23rd April 2020 and consequently no Offer/Bid share price has been calculated for subsequent valuation points.

Summary of unit dealing as at 30 June 2020A income C income

Opening units in Issue 136,682,454.209 5,891,416.659

Units issued in the period 241,278.206 –

Units cancelled in the period – –

Closing units in issue 136,923,732.415 5,891,416.659

NAV (as calculated in accordance with the Prospectus)

Year Unit Class

NAV of Unit Class

£’000 Units in issue

NAV per unit

(p)

30 June 2019 A income 136,007 136,923,732.415 99.3330 June 2019 C income 5,852 5,891,416.659 99.33




NAV represents a standard NAV as calculated in accordance with AREF’s Fund Pricing Recommendation.The NAV as at 30 June 2020 is subject to material uncertainty following the Standing Independent Valuer’s determination of material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic.




Unit dealing

Turnover of units

During the period ended 30 June 2020, 241,278.206 units were created. Zero units were redeemed and Nil units were transferred.

There has been no consolidation or sub-division of units during the period.

Subscriptions

Eligible Investors may purchase units in the Fund on a monthly basis on the dealing day, being the last calendar day in each calendar month, provided the subscription request has been made before the cut-off point for the Fund and the ACD is in receipt of cleared funds on the dealing date. The cut-off point for the Fund is the close of business on the business day 14 days before the dealing date.

Valid applications to purchase units in the Fund will be processed at the unit price calculated at the next valuation point following receipt of the application, except in the case where dealing in the Fund has been deferred or suspended. The valuation point for the Fund is 11pm on the last calendar day of each month.

The ACD will only issue units where it can do so without breaching its cash holding guidelines and there are sufficient prospective investments available to absorb the subscription monies. If there are more applications to subscribe for units than it has capacity to invest, then the ACD will operate a contractual waiting list.

Each prospective application to subscribe will be satisfied in full or partially at the first dealing day for subscription at which the Fund has capacity. The subscription will remain at the top of the contractual waiting list until the application is fully satisfied. Each application will be retained and satisfied in strictly chronological order.

The ACD will give 12 business days notice for the drawdown of funds before the dealing day for subscription, so that prospective subscribers can ensure that the ACD receives cleared funds in time.

As at 30 June 2020, there were subscriptions of £9.5m in queue.

Redemptions

Every unitholder is entitled on any dealing day for redemption to redeem its units subject to the limitations on redemption. Valid redemption requests may be made to the ACD on any business day but must be received by the redemption cut-off point, being the close of business on the business day one month before the dealing date.

Valid instructions to the ACD to redeem units in the Fund will be processed at the unit price calculated at the next valuation point following receipt of the instruction, except in the case where dealing in the Fund has been deferred or suspended. The valuation point for the Fund is 11pm on the last calendar day of each month.

As at 30 June 2020, there were redemptions of £7.4m in queue.

Deferrals

Where the ACD considers it to be in the best interests of the Unitholders, the ACD may in consultation with the Governance Committee defer redemptions on a dealing day to any one of the subsequent six dealing days for redemption. A redemption will be deferred to the dealing day for redemption when the Fund has sufficient liquidity to enable it to meet the redemption, providing it is in the best interests of the Unitholders to do so. The ACD will review the position every month.

The ACD must give Unitholders notice of the deferral no later than two business days before the relevant dealing day for redemption. The price at which the units will be redeemed will be the price for redemptions on the dealing day for redemption on which the units are actually redeemed.




Suspension

The ACD may, with the prior agreement of the Depositary, and must without delay if the Depositary so requires, temporarily suspend the issue, cancellation, sale and redemption of Units in any or all of the Funds, where, due to exceptional circumstances, it is in the interests of all the Unitholders in the relevant Fund or Funds. Suspension will cease as soon as practicable after the exceptional circumstances leading to the suspension have ceased but the ACD and the Depositary will formally review the suspension at least every 28 days and will inform the FCA of the review and any change to the information given to Unitholders. For further information, please refer to clause 3.13 of the Prospectus. As at 31 March 2020, the Standing Independent Valuer has determined material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic. Following receipt of a redemption request for circa £7.4m for the 1 May 2020 dealing day, the ACD temporarily suspended all dealing in the above Fund with effect from Thursday 23 April 2020. The ACD aims to lift the suspension as soon as confidence returns to the market and there is more certainty regarding asset valuations for the Real Return Fund, taking into account the best interests of investors.

Adjustments to unit price

In unusual market conditions the ACD in consultation with the Pricing Sub-Committee, may adjust the unit price by a percentage independently reviewed by the Pricing Sub-Committee to reflect the value of the assets in such circumstances based on information received from MSCI, the Valuers and other material information and redeemed which the ACD may think fit. This is to protect the interests of all Unitholders by ensuring that units are issued and redeemed at a fair value. Prospective investors have the right to withdraw their applications for subscriptions or redemptions upon notification by the ACD of the price adjustment.

Secondary market

In addition to purchasing and selling units through the ACD, units are able to be traded between parties using third party brokerage facilitates available in the market with the ACD able to assist with contacts if required.

Investor analysis

Number of investors

Total Percentage holding (%)

Ownership band





8% or greater 7 84.99

Total 17 100.00

Percentage held by largest investor 16.96

Percentage held by top 5 investors 65.90




Treatment of certain investors

The ACD has and will continue to enter into agreements with certain investors who may receive preferential treatment. These investors include (i) those investors that are investing sufficiently large amounts either initially or are anticipated to do so over time and (ii) Cornerstone investors that provide seed capital and take the initial risk in the early stage of the Fund. As a result, the terms and conditions of certain investor’s investment in the Fund may differ to those of other investors. Side letters are available on request. These side letters contain details of any ‘key person’ provisions.

Remuneration

The AIFM has adopted a Remuneration Policy which accords with the principles established by AIFMD.

AIFMD Remuneration Code Staff includes the members of the AIFM’s Management Committee, those performing Control Functions, Department Heads, Risk Takers and other members of staff that exert material influence on the AIFM’s risk profile or the AIFs it manages.

Staff are remunerated in accordance with the key principles of the firm’s remuneration policy, which include (1) promoting sound risk management; (2) supporting sustainable business plans; (3) remuneration being linked to non-financial criteria for Control Function staff; (4) incentivise staff performance over longer periods of time; (5) award guaranteed variable remuneration only in exceptional circumstances; and (6) having an appropriate balance between fixed and variable remuneration.

As required under section ‘Fund 3.3.5.R(5)’ of the Investment Fund Sourcebook, the following information is provided in respect of remuneration paid by the AIFM to its staff for the 6 months period to 30 June 2020:

Six months to 30 June 2020

Total remuneration paid to employees

a) remuneration, including, where relevant, any carried interest paid by the AIFM; £1,752,688

b) the number of beneficiaries 24

The aggregate amount of remuneration of the AIFM Remuneration Code staff, broken down by

a) senior management £426,400

b) members of staff £1,326,288

Fixed remuneration

£

Variable remuneration

£

Total remuneration

£

Senior management 336,400 90,000 426,400

Staff 790,288 536,000 1,326,288

Total 1,126,688 626,000 1,752,688

Fixed remuneration comprises of basic salaries and variable remuneration comprises of bonuses.





%

Total Expense Ratio for the accounting period

Fund Management Fees 0.75

Fund Operating Expenses 0.20

Total Expense Ratio (‘TER’) 0.95

Property Expense Ratio (‘PER’) (excludes items in TER) 1.76

Real Estate Expense Ratio (‘REER’) (TER + PER) 2.71

Transaction Costs –

Portfolio Turnover Ratio (0.18)

The TER represents the total annualised expenses of the Fund, excluding transaction costs, interest payable and expenses of a capital nature expressed as a percentage of the average net assets during the accounting period.

The Portfolio Turnover Ratio indicates how much of the turnover in the portfolio has been driven by investment and withdrawals from the Fund. This represents the purchases and sales less subscriptions and redemptions expressed as a percentage of the average net assets during the accounting year.

The following table analyses the operating costs incurred by the Fund for the period ended 30 June 2020:


%

Management Fees 0.75

Depositary Fees 0.05

Valuation Fees 0.05

Other variable Fees 0.10

0.95






Notes £’000 £’000 £’000 £’000

IncomeNet capital (losses)/gains 3 (6,876) (1,057)Revenue 5 4,871 4,271Expenses

Direct property expenses 6 (1,264) (156)Operating expenses 6 (679) (616)Finance costs (1) –

Net revenue before taxation 2,927 3,499Taxation 7 – –


Total return before distributions (3,949) 2,442Distributions 8 (2,927) (3,499)Change in net assets attributable to unitholders from investment activities (6,876) (1,057)

Statement of Changes in Net Assets Attributable to Unitholdersfor the half year ended 30 June 2020



£’000 £’000 £’000 £’000

Net assets at the start of the period 148,466 132,282

Amounts receivable on creation of units 252 15,897

Less: amounts paid on cancellations of units – (3,469)

252 12,428Dilution adjustment 17 853Change in net assets attributable to unitholders from investment activities (6,876) (1,057)

Closing net assets attributable to unitholders 141,859 144,506


Statement of Total Returnfor the half year ended 30 June 2020



As at 30 June 2020

As at 31 December 2019

Note £’000 £’000 £’000 £’000

Assets

Fixed assets:

Investment properties 9 136,928 143,787

Current assets

Debtors 10 3,701 2,959

Cash and bank balances 11 6,425 7,220

Total current assets 10,126 10,179

Total assets 147,054 153,966

Long term liabilities


Current liabilities


Investment liabilities 14 (13) (32)

Distribution payable 14 (1,039) (1,926)

Other creditors 14 (3,098) (2,497)

Total current liabilities (4,223) (4,528)

Total liabilities (5,195) (550)

Net assets attributable to unitholders 141,859 148,466

The Financial Statements on pages 88 to 108 were approved by the ACD on 17 September 2020 and signed on their behalf by:

On behalf of the ACD


Balance Sheetas at 30 June 2020



Statement of Cash Flowsfor the half year ended 30 June 2020



£’000 £’000 £’000 £’000

Total return before distribution for the period (3,949) 2,442

Adjustments for:

Capital loss on investments 6,876 1,057

Finance costs 1 –

(Increase) in income debtors (2,564) (308)

Increase/(decrease) in income creditors 2,410 (680)

New cash generated from operating activities 2,774 2,511

Cash flows from investing activities

Paid for the purchase of investments (19) (12,027)

Paid on capital expenditure (4) (40)

Net cash used in investing activities (23) (12,067)

Cash flows from financing activities

Proceeds from issue of units 252 12,428

Equalisation received 2 55

Dilution adjustment received 17 853

Distribution paid (3,816) (3,534)

Finance costs paid (1) –

Net cash (used in)/generated from financing activities (3,546) 9,802

Net (decrease)/increase in cash for the period (795) 246

Cash and cash equivalents at start of period 7,220 9,205

Cash and cash equivalents at end of period 6,425 9,451




1. Accounting policies

1.1 Basis of accountingThe Financial Statements have been prepared on a going concern basis, under the historical cost basis, as modified by the revaluation of investments, and in accordance with the applicable United Kingdom Accounting Standards, including FRS 102 ‘The Financial Reporting Standard’ and the prospectus. The Financial Statements are also prepared in accordance with the Statement of Recommended Practice (‘SORP’) issued by the Investment Association in May 2014.

The ACD has considered the impact of the COVID-19 global pandemic, which has resulted in unprecedented risks and significant levels of volatility on real assets. The main risks resulting from COVID-19 for the Fund is in respect of the impact on property valuations, liquidity and tenant defaults. The ACD has performed sensitivity analysis on the Funds cash flow forecasts under plausible downside scenarios and the Fund would remain liquid and have a positive cash balance after deducting the liabilities, commitments and expenses over the next 12 months. The ACD is satisfied that it is appropriate to continue to adopt the going concern basis in preparing these financial statements and, after due consideration, the ACD considers that the Fund is able to continue for the foreseeable future and at least twelve months from the date of this report.

In order to protect the interests of continuing holders, the ACD may, at its discretion and in consultation with the Governance Committee, defer redemptions monthly for up to six months from the Valuation Date to which the redemption request relates.

In exceptional circumstances, the ACD may, with the approval from the Depositary, decide to suspend both subscriptions and redemptions of units. The ACD will review the position every 28 days.

On the basis that the ACD can defer redemptions, and suspend the Fund, the accounts have continued to be prepared under the going concern basis.

Following receipt of a redemption request for circa £7.4m for the 1 May 2020 dealing day, the ACD temporarily suspended all dealing in the above Fund with effect from Thursday 23 April 2020. The ACD aims to lift the suspension as soon as confidence returns to the market and there is more certainty regarding asset valuations for the Real Return Fund, taking into account the best interests of investors.

1.2 RevenueRent receivable comprises rental income on investment properties for the period, exclusive of service charges receivable. Provision is made when there is objective evidence that the Fund will not be able to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote.

Lease incentives including rent free periods and payments to tenants are allocated to the Statement of Total Return on a straight-line basis over the lease term, or if in place prior to 1 January 2017, the period up to the first rent review date if shorter. The value of resulting accrued rental income is deducted from the carrying value of the respective investment property.

Any insurance or service charge rebates are recognised within other income.

1.3 ExpensesAll expenses, except for those relating to the purchase and sale of investments, stamp duty land tax and property development costs are charged against revenue. Costs incurred in the improvement of the portfolio which, in the opinion of the ACD, are not of a capital nature are charged against revenue.

Notes to the Financial Statementsfor the half year ended 30 June 2020




1.3 Expenses (continued)Irrecoverable running costs directly attributable to specific properties within the Fund’s portfolio are charged to the Statement of Total Return as other property expenses.

1.4 Allocation of income and expenses to multiple unit classesAny revenue or expenses not directly attributable to a particular unit class will normally be allocated pro-rata to the net assets of the relevant unit class.

1.5 TaxationA PAIF is chargeable to corporation tax, but the regime enables a PAIF to manage itself in such a way that it should be able to ensure that the point of taxation is not with the Fund, but rather all income flows through to the investors who will then be charged to tax at the appropriate rates for property income, savings income and dividend income respectively.

Under PAIF tax rules, net income is streamed as follows: net income from the property investment business; UK dividends; and net income from the residual business. Expenses which are not directly attributable to any stream should be apportioned between the streams on a reasonable basis.

Net income from the property investment business is exempt from tax in the PAIF. UK dividend income is also not subject to tax in the PAIF. The net income from the residual business is only subject to Corporation tax in the PAIF to the extent that the income has not been distributed to investors.

Corporation tax is provided on taxable revenue, after the deduction of allowable expenses.

The corporation tax rate applicable to PAIF is equivalent to the lower rate of income tax of 20%.

1.6 Distribution policy

Net revenue after taxation, as disclosed in the Financial Statements, after adjustment for items of a capital nature and deduction of income tax, is distributable to Unitholders.

Interim distributions may be made at the ACD’s discretion and the balance of revenue is distributed in accordance with the regulations.

Distributions which have remained unclaimed by Unitholders for more than six years are credited to the capital assets of the Fund.

1.7 Equalisation

Equalisation only applies to units purchased during the distribution period (group 2 units). It is the average amount of revenue included in the purchase price of all group 2 units that is refunded to holders of these units as a return of capital. Being capital, it is not liable to income tax but must be deducted from the cost of units for capital gains tax purposes.

1.8 Investment properties

Investment property comprises completed property and property under construction or re-development held to earn rentals or for capital appreciation or both.

Investment property transactions are considered to have taken place where, by the end of accounting period, there is a legally binding, unconditional and irrevocable contract.





1.8 Investment properties (continued)

Investment property is measured initially at cost including transaction costs. Transaction costs include transfer taxes, professional fees for legal services, agent’s fee and initial leasing commissions to bring the property to the condition necessary for it to be capable of operating. The carrying amount also includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met.

Subsequent to initial recognition, investment property is stated at fair value. Gains or losses arising from changes in the fair values are included in the Statement of Total Return in the period when they arise.

Investment properties are valued by the Standing Independent Valuer on the basis of a full valuation with physical inspection at least once a year. Any valuation of an Immovable by the Standing Independent Valuer must be undertaken in accordance with the current issue of RICS Valuation – Global Standards January 2020, or in the case of overseas immovables, on an appropriate basis, but guided by the FCA Rules.

For the purposes of these Financial Statements, in order to avoid ‘double accounting’, the assessed fair value is:

– reduced by the carrying amount of any accrued income resulting from the spreading of lease incentives; and

– increased by the carrying amount of leasehold obligations

Investment property is derecognised when it has been disposed of or permanently withdrawn from use and no future economic benefit is expected after its disposal or withdrawal. Any gains or losses on the retirement or disposal of investment property are recognised in the Statement of Total Return in the period of retirement or disposal. Gains or losses on the disposal of investment property are determined as the difference between net disposal proceeds and the carrying value of the asset.

For leasehold properties that are classified as investment properties, the associated leasehold obligations are accounted for as finance lease obligations. Properties held under operating leases are accounted for as investment properties.

1.9 Dilution levy

In the PAIF a dilution levy will be reflected in the calculation of the unit price and will reflect the associated property acquisition and disposal costs. The levy may vary from time to time to reflect matters such as changes in stamp tax or any other applicable taxes and fees.

In unusual market conditions, the price may also be further adjusted by a percentage, in consultation with the Pricing Sub-Committee, to reflect the value of the assets in such circumstances based on information received from MSCI, standing independent valuers and any other material information as the ACD may see fit.

1.10 Cash and cash equivalents

Cash and cash equivalents include cash in hand and deposits held at banks. Cash is stated at its face value.





1.11 Debtors

Amounts due but not received are included within debtors which are stated at transaction value less provision/write off of doubtful debts. Provision is made where there is objective evidence that the Fund will not be able to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote.

1.12 Finance leases

Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the property and the present value of the minimum lease payments. The present value of the corresponding rental obligations are included as liabilities.

1.13 Creditors

Deferred rental income relates to income that has been invoiced in advance to the tenant but relates to future periods.

Creditors are stated at their transaction value. Amounts received in respect of future periods are included within creditors as deferred income.

1.14 Significant estimation techniques

The preparation of the Fund’s Financial Statements requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future years.

The fair value of investment property is determined by independent real estate valuation experts using RICS Valuation – Professional Standards VPS4 (7.1) Fair Value and VPGA1 Valuations for Inclusion in Financial Statements, which adopt the definition of Fair Value used by the International Accounting Standards Board: “The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.” The Valuer’s opinion of Fair Value was primarily derived using recent market transactions on arm’s length terms, where available and assumes there to be good and marketable titles to the properties.

2. Risk management policiesThe Fund’s activities expose it to a variety of financial risks: market risk, credit risk, liquidity risk and further risks inherent to investing in investment property.

The Fund’s objective in managing risk is the creation and protection of unitholder value. Risk is inherent in the Fund’s activities, but it is managed through a process of ongoing identification, measurement and monitoring, subject to risks limits and other controls.

The Depositary on the recommendation of the ACD has appointed a Governance Committee with an independent chair, paid for by the Fund, with responsibility to oversee the aspects of risk control.




2. Risk management policies (continued)The principal risks facing the Fund in the management of its portfolio are as follows:

2.1 Market price risk

Market price risk is the risk that future values of investments in direct property and related property investments will fluctuate due to changes in market prices. To manage market price risk, the Fund diversifies its portfolio geographically in the United Kingdom and across property sectors.

The disciplined approach to the purchase, sale and assets’ management ensures that the value is maintained to its maximum potential. Prior to any property acquisition or sale, detailed research is undertaken to assess expected future cash flow. The Investment Management Committee (‘IMC’) meets fortnightly and reserves the ultimate decision with regards to investments purchases or sales. In order to monitor property valuation fluctuations, the ACD meet with independent external valuer on a regular basis. The valuer provides a property portfolio valuation monthly, so any movements in the value can be accounted for in a timely manner and reflected in the NAV every month.

2.2 Real Estate risk

The Fund is exposed to the following risks specific to its investments in investment property:

Property investments are illiquid assets and can be difficult to sell, especially if local market conditions are poor. Illiquidity may also result from the absence of an established market for investments, as well as legal or contractual restrictions on resale of such investments. In addition, property valuation is inherently subjective due to the individual characteristics of each property, and thus, coupled with illiquidity in the markets, makes the valuation in the scheme property difficult and inexact.

No assurances can be given that the valuations of properties will be reflected in the actual sale prices even where such sales occur shortly after the relevant valuation date.

There is no guarantee that the Fund will be able to acquire a sufficient number of suitable properties which will enable a Fund to achieve its investment objective through its investment policy. Having excess uninvested cash and a larger number of units in issue may affect a Fund’s ability to achieve its investment objective. In order to avoid holding excess cash the ACD exercises control over subscriptions into the fund by sending capital call to investors only when there are suitable investments opportunities. In the event where direct investments in the underlying property is not possible or impractical, the Fund may invest up to 10% of its NAV into Collective Investment Schemes.

There can be no assurance that the Fund will undertake to acquire any particular site or that it will be able to complete such acquisition if it is undertaken.

There can be no certainty regarding the future performance of any of the properties acquired for the Fund. The value of any property can go down as well as up. Property and property-related assets are inherently subjective as regards value due to the individual nature of each property. As a result, valuations are subject to uncertainty.

Real property investments are subject to varying degrees of risk. The yields available from investments in real estate depend on the amount of income generated and expenses incurred from such investments.

There are additional risks in vacant, part vacant, redevelopment and refurbishment situations although these are not prospective investments for the Fund.





2.3 Credit risk

Credit risk is the risk that the counterparty (to a financial instrument) or tenant (of a property) will cause a financial loss to the Fund by failing to meet a commitment it has entered into with the Fund.

It is the Fund’s policy to enter into financial instruments with reputable counterparties. The ACD closely monitors the creditworthiness of the Fund’s counterparties (e.g. Depositary, banks and tenants) by regularly reviewing their credit ratings, Financial Statements and press releases on a regular basis. All cash deposits are placed with an approved counterparty, Bank of New York Mellon, London Branch.

In respect of property investments, in the event of a default by a tenant, the Fund will suffer a rental shortfall and additional costs concerning re-letting the property. The ACD monitors tenant arrears in order to anticipate and minimise the impact of defaults by occupational tenants.

The table below shows the Fund’s exposure to credit risk:

As at 30 June

2020 £’000

As at 31 December

2019 £’000

Debtors (excluding prepayments and rent incentive debtor) 2,192 2,229

Bank and cash 6,425 7,220

Total 8,617 9,449

2.4 Liquidity risk

Liquidity risk is the risk that the Fund will encounter difficulty in realising assets to meet its financial commitments.

The Fund is exposed to liquidity risk from the requirement to meet cash redemptions on its redeemable units.

Property investment is relatively illiquid compared to many classes of asset and in order to manage liquidity the ACD follows the following strategies: the Fund is intended for long-term investors who can accept the risks associated with liquidity; redemptions are restricted to the monthly dealing; and a proportion of the investments of the Fund are kept in more liquid assets.

In order to protect the interests of continuing holders, the ACD may, at its discretion and in consultation with the Governance Committee, defer redemptions for up to six months from the Valuation Date to which the redemption request relates.

In exceptional circumstances, the ACD may, with the approval from the Depositary decide to suspend both subscriptions and redemptions of units for up to six months. The ACD will review the position every month.

The Fund invests primarily in investment property. The Fund’s policy is to maintain sufficient cash and cash equivalents to meet normal operating requirements and expected redemption requests. The Fund maintains close investor relationships in order to gauge redemption requirements.





2.5 Inflation risk

The performance objective is to deliver a total return of 4% per annum, net of fees and expenses and adjusted for, or after removing the effect of, inflation. Whilst the annualised returns for property have averaged just over 5% pa above inflation for the last 30 years (source MSCI) this has included periods of high inflation when property’s performance has not kept pace with inflation. If such inflationary conditions occur again it is likely that there will be periods when the AEW UK Real Return Fund does not achieve its performance objective. To mitigate the inflation risk, the AEW UK Real Return Fund has an Investment guideline to allocate a minimum of 50% of gross income inflation linked leases.

2.6 Political/Economic risk

Political and macroeconomic events present risks to the real estate and financial markets that affect the Fund and the business of our tenants. The level of uncertainty that such events bring has been highlighted in recent times, most pertinently as a result of the EU referendum vote (Brexit) in June 2016. The arrangements that would be put in place between the UK and the EU following Brexit could impact the health of the UK economy, make it more difficult for the Fund to raise capital and/or increase the regulatory compliance burden on the Fund.

2.7 Coronavirus risk

The full impact of COVID-19 on real assets has yet to become clear, however under these circumstances, liquidity conditions and credit risks need to be closely monitored. The below summaries the risks faced by the Fund in context of the rapidly evolving Coronavirus situation:

Real Estate Risk – As at 31 March 2020, the Standing Independent Valuer has determined material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic. The like for like property valuation movement in the Real Return Fund for H1 2020 was a fall of (4.6%). As at 30 June, 68.8% of the Fund’s portfolio valuation, which includes all of its assets that do not sit within the industrial, convenience retail and residential (hospital accommodation and supported living) sectors, is subject to material uncertainty.

Liquidity risk – As mentioned above, in unusual market conditions, to protect the interest of investors, the prospectus provides a mechanism for the ACD to i) Adjust the Fair Value of the Pricing or, ii) Defer Redemptions or iii) Suspend the Fund. Following receipt of a redemption request for circa £7.4m for the 1 May 2020 dealing day, the ACD temporarily suspended all dealing in the above Fund with effect from 23 April 2020.

Counterparty Risk – Low rent collection will compromise the Fund’s ability to pay quarterly distributions. The Fund currently had sufficient cash reserves to continue paying distributions and meet the running costs for the foreseeable future. Many tenants will be dependent on government support to survive. The ACD is not pursuing just maximum rent collection but is in many cases exploring asset management opportunities that might be mutually beneficial for the Fund and its tenants.




3. Net capital (losses)/gainsPeriod ended

30 June 2020

£’000


2019 £’000

Net unrealised capital (losses)/gains on investment properties (6,786) (922)

Adjustment for rent free debtor (90) (135)

Net capital (losses)/gains on investment properties (6,876) (1,057)

4. Purchases and transaction costs

% of purchase price


2020 £’000


2019 £’000

Purchases excluding transaction costs – 11,482

Commissions 0.0% – 120

Taxes 0.0% – 542

Other costs 0.0% – 99

Total purchase transaction costs 0.0% – 761

Purchases including transaction costs – 12,243

5. RevenuePeriod ended

30 June 2020

£’000


2019 £’000

Rental income 4,863 4,263

Sundry property income 8 8

Total revenue 4,871 4,271




6. ExpensesPeriod ended

30 June 2020

£’000


2019 £’000

Direct property expenses:Bad debt 1,115 –Property legal and professional fees 55 32Head rent 41 41Managing agents fees 24 20Service charges 12 18Letting fees 8 24Property miscellaneous fees 5 –Insurance 4 4Abortive costs – 17

Direct property expenses 1,264 156

Expenses associated to the ACD:Management fees 548 495

Expenses associated to the Depositary:Depositary fees 32 30

Other operating expenses:Valuers fees 35 32MSCI subscription fees 15 13Auditors’ fees 14 15Other operating expenses 14 9Governance committee fees 7 4Tax agent fees 6 5Legal & professional fees 5 10Printing & publication fees 3 3

Total operating expenses 679 616

Total expenses 1,943 772




7. TaxationUnder PAIF tax rules, net income is streamed as follows: net income from the property investment business; UK dividend income and net income from the residual business. Expenses which are not directly attributable to any stream should be apportioned between the streams on a reasonable basis.

Net income from the property investment business is exempt from tax in the PAIF. UK dividend income is also not subject to tax in the PAIF. The net income from the residual business is only subject to Corporation tax in the PAIF to the extent that income has not been distributed to investors.


2020 £’000


2019 £’000

(a) Analysis of tax charge for the period

UK corporation tax – –


(b) Factors affecting the tax charge for the period

Net income before taxation 2,927 3,499

Theoretical tax at UK corporation tax rate of 20%* 585 700

Net property income not taxable (585) (700)


* The corporation tax rate applicable to a PAIF is equivalent to the lower rate of income tax.




8. DistributionsPeriod ended

30 June 2020

£’000


2019 £’000

(a) Analysis of distributions

First interim 1,905 1,722

Second interim 1,024 1,832

Total distributions 2,929 3,554

Equalisation received on the issue of units (2) (55)

Net Distribution for the period 2,927 3,499

(b) Reconciliation of net revenue after taxation to distributions


Total distributions for the period 2,927 3,499




9. Investment properties


2020 £’000

Year ended 31 December

2019 £’000

At valuation:

At beginning of period at valuation 143,435 125,910

Acquisition costs – 16,620

Capital expenditure 16 639

Net unrealised capital (loss)/gain (6,786) 266

Professional valuation 136,665 143,435

Adjustment for rent incentive debtor (782) (693)

Adjustment in respect of minimum payment under head leases separately included as a liability as the Balance Sheet 1,045 1,045

Carrying value at the end of the period 136,928 143,787

Fair value

Valuation of investment property is performed by Knight Frank LLP, an accredited external valuer with recognised and relevant professional qualifications and recent experience of the location and category of the investment property being valued.

The valuation of the Company’s investment property at fair value is determined by the external valuer on the basis of market value in accordance with the internationally accepted RICS Valuation – Global Standards January 2020.

The determination of the fair value of investment property requires the use of estimates such as future cash flows from assets (such as lettings, tenants’ profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those assets.

As at 31 March 2020, the Standing Independent Valuer has determined material valuation uncertainty as per VPS 3 and VGPA 10 of the RICS Red Book Global, due to the unprecedented set of circumstances surrounding the COVID-19 Global Pandemic. The like for like property valuation movement in the Real Return Fund for H1 2020 was a fall of (4.6%). As at 30 June, 68.8% of the Fund’s portfolio valuation, which includes all of its assets that do not sit within the industrial, convenience retail and residential (hospital accommodation and supported living) sectors, is subject to material uncertainty.




9. Investment properties (continued)The following tables show an analysis of the fair values of financial instruments recognised in the balance sheet:

30 June 2020

Level 1 £’000

Level 2 £’000

Level 3 £’000

Total £’000

Assets measured at fair value*

Investment properties – – 136,665 136,665

Professional valuation – – 136,665 136,665

* before adjustment for carrying value of head leases and rent incentives.

Explanation of the fair value hierarchy:

Level 1 – Quoted prices for an identical instrument in active markets;

Level 2 – Prices of a recent transactions for an identical instruments;

Level 3 – Valuation techniques using observable market data; and

Sensitivity analysis to significant changes in unobservable inputs within Level 3 of the hierarchy

The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity’s portfolios of investment property are:

1) Estimated Rental Value (‘ERV’)

2) Rental growth

3) Long term vacancy rate

4) Discount rate/yield

Increase (decrease) in the ERV (per sq ft p.a.) and rental growth p.a. in isolation would result in a higher (lower) fair value measurement. Increase (decrease) in the long term vacancy rate and discount rate (and exit or yield) in isolation would result in a lower (higher) fair value measurement.

The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the portfolio of investment property are:

30 June 2020


Valuation Technique



£4.21 – £37.50 4.69% – 9.36%




9. Investment properties (continued)31 December 2019


Valuation Technique



£4.21 – £37.50 5.22% – 10.43%

* before adjustments for carrying value of leasehold obligations and rent incentive debts.

Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy amount to a net loss of £6,786,000 (30 June 2019: loss of £922,000) and are presented in Note 3.

The carrying amount of the assets and liabilities, detailed within the balance sheet, except for investment properties, is considered to be the same as their fair value.

There have been no transfers between Level 1 and Level 2 during any of the periods nor have there been any transfers in or out of Level 3.

10. Debtors

As at 30 June

2020 £’000

As at 31 December

2019 £’000

Capital VAT receivable – 35

– 35

Rent incentive debtor 782 693

Agent float account 103 83

Rent receivable 3,204 2,111

Bad debt provision (1,115) –

Prepayments and other debtors 727 37

Total income debtors 3,701 2,924

Total debtors 3,701 2,959




11. Cash and bank balances

As at 30 June

2020 £’000

As at 31 December

2019 £’000

Amounts held at bank 6,425 7,220

Total cash and bank balances 6,425 7,220

12. Finance lease obligationsFinance leases are capitalised at the lease’s commencement at the lower of the fair value of the property and the present value of the minimum lease payments. The present value of the corresponding rental obligations are included as liabilities.

The following table analyses the minimum lease payments under non-cancellable finance leases for each of the following periods:

As at 30 June

2020 £’000

As at 31 December

2019 £’000

Within one year 73 73

After one year but not more than five years 243 243

More than five years 729 729

972 972

Total 1,045 1,045




13. Guarantees and commitmentsOperating lease commitments – as lessor

The Fund has entered into commercial property leases on its investment property portfolio. These non-cancellable leases have a remaining term of up to 30 years.

Future minimum rentals receivable under non-cancellable operating leases as at 30 June 2020 are as follows:

As at 30 June

2020 £’000

As at 31 December

2019 £’000

Within one year 8,427 9,363

After one year but not more than five years 30,953 35,743

More than five years 89,488 108,325

120,441 144,068

Total 128,868 153,431

14. Creditors

As at 30 June

2020 £’000

As at 31 December

2019 £’000

Investment liabilities

Capital expenditure 13 32

Total investment liabilities 13 32

Distribution payable 1,039 1,926

Other creditors

Deferred income 2,059 2,099

Accruals and other creditors 1,039 398

Total other creditors 3,098 2,497

Total creditors 4,150 4,455




15. Transactions with significant partiesThe following are considered by the ACD to be significant parties of the Fund.

• The Depositary in accordance with the PAIF Instrument

• The ACD in accordance with the PAIF Instrument

The Depositary is entitled to receive a fee based on sliding scale as shown below, subject to a minimum fee of £45,000 per annum.

Rate (% pa)

Net Asset Value

£0 – £100,000,000 0.05

£100,000,001 – £250,000,000 0.03

£250,000,001 – £500,000,000 0.02

£500,000,001 and above 0.01

The ACD is (in addition to reasonable out of pocket expenses) entitled to receive a fee at a rate of 0.75% per year of the NAV of the Fund.

During the period the following fees were payable to significant parties.


2020 £’000


2019 £’000


Depositary fee 32 30

Total 580 525

The following amounts were outstanding due to significant parties.

As at 30 June

2020 £’000

As at 31 December

2019 £’000


Depositary 11 11

Total 99 106






16. Subsequent events

Distribution

On 28 August 2020, the Fund made a distribution of £1.0m, in respect of the period from 1 April 2020 to 30 June 2020. This was paid to the Unitholders of the Fund as at 30 June 2020.


Distribution Tablesfor the half year ended 30 June 2020

First Interim

Group 1 – units purchased prior to 31 December 2019

Group 2 – units purchased on or after 1 January 2020 and on or before 31 March 2020

Gross Revenue

(p)

Income tax (p)

Net revenue

(p)Equalisation

(p)

Distribution paid

(p)


Group 2 0.391 – 0.391 0.943 1.334


Group 2 1.334 (0.003) 1.331 – 1.331

Second Interim

Group 1 – units purchased prior to 31 March 2020

Group 2 – units purchased on or after 1 April 2020 and on or before 30 June 2020

Gross Revenue

(p)

Income tax (p)

Net revenue

(p)Equalisation

(p)

Distribution paid

(p)


Group 2 0.717 – 0.717 – 0.717


Group 2 0.717 (0.001) 0.716 – 0.716

Equalisation

Equalisation applies only to units purchased during the distribution period (Group 2 units). It represents the accrued revenue included in the purchase price of the units. After averaging it is returned with the distribution as a capital repayment. It is not liable to Income Tax but must be deducted from the cost of the units for Capital Gains Tax purposes.



Depositary, ACD & Advisers

DepositaryThe Bank of New York Mellon (International) Ltd One Canada Square London E14 5AL

ACDAEW UK Investment Management LLP 33 Jermyn Street London SW1Y 6DN

Registrar and Transfer AgentLink Fund Administrators Limited 6th Floor 65 Gresham Street London EC2V 7NQ

Fund AdministratorLink Alternative Fund Administrators Limited The Registry 34 Beckenham Road Beckenham Kent BR3 4TU

AuditorKPMG LLP 15 Canada Square London E14 5GL

ValuersKnight Frank LLP 55 Baker Street London W1U 8AN

Legal AdvisersEversheds Sutherland One Wood Street London EC2V 7WS

Managing AgentsFor: AEW UK Core Property Fund

Mapp (Property Management) Limited 180 Great Portland Street London W1W 5QZ

Mayfield Asset and Property Management Ltd 36-38 Wigmore Street London W1U 2RU

For: AEW UK Real Return FundWorkman LLP Alliance House 12 Caxton Street London SW1H 0QS

CustodianThe Bank of New York Mellon (International) Ltd One Canada Square London E14 5AL

SolicitorsFor properties in England and Wales:

Mischon de Reya LLP Summit House 12 Red Lion Square London WC1R 4QD

CMS Cameron McKenna Nabarro Olswang LLP 78 Cannon Street London EC4N 6AF

Pinsent Masons LLP 1 Park Row Leeds LS1 5AB

For properties in Scotland:Brodies LLP 15 Atholl Crescent Edinburgh EH3 8HA

United Kingdom33 Jermyn StreetLondonSW1Y 6DN

+44 20 7016 4800www.aewuk.co.uk

France22 rue du Docteur Lancereaux75008 ParisFrance

+33 1 78 40 92 00www.aew.com

United States of AmericaTwo Seaport LaneBoston MA 02210United States

+1 617 261 9000www.aew.com

MSCI/AREF PROPERTY FUND VISION

Jun 2020


INVESTMENT POLICY AND OBJECTIVES

INVESTOR CONSTITUENCY


UK

March 2012

Open-ended

31 December

277.5

Source: AEW

Management/professional advisors

Trust Manager

Source: AEW

Investment rates of return, %

Other balanced

funds

All balanced

fundsAll funds

3 months -2.0 -2.0 -2.3

Year-to-date -3.3 -3.3 -4.0

12 months -2.5 -2.6 -3.9

3 years+ 3.8 3.4 2.4

5 years+ 5.2 4.6 3.9

10 years+ 6.9 6.6 6.3

Note: * Weighted average returns + Annualized

Source: MSCI/AREF UK Quarterly Property Fund Index

4.6

6.7

-

The AEW UK Core Property Fund will look for and capitalize on market inefficiencies with reference to the investment risk profile set by its

benchmark. The investment process is very stock focused and draws upon our strong active asset management capabilities. As a value

investor, the AEW UK Core Property Fund will look to buy attractively priced and/or good quality real estate at the margins of prime locations

aiming to provide good risk adjusted returns over the long term.

The Fund is open to investment by pension funds, charities, insurance companies and other approved capital gain tax exempt investors.

Property Authorised Investment Fund

-7.4

Fund details


-6.0

The AEW UK Core Property Fund is a core balanced fund targeting value investment opportunities. It comprises a property portfolio diversified

geographically in the UK and across all property sectors. Its investment objective is to provide a return from income and capital appreciation

over the long term, and to out-perform its benchmark (the MSCI/AREF UK Quarterly Property Fund Index) over three-year rolling periods.

NAV (GBPm)

KPMG

Property investment manager

Portfolio Manager

MSCI/AREF UK Quarterly Property Fund Index*

Type of fund

Residence

Launch date

Year-end

Trustee

Auditors

Richard Tanner

BNY Mellon Trust & Depositary

Open/closed-ended

AEW UK

AEW UK

-4.1

MSCI.COM


Jun 2020

Property investment restrictions

Maximum development exposure 10%

Maximum speculative development exposure 10%

Maximum lot-size holding as a standing investment 15%

Maximum lot-size holding permitted at purchase 15%

Maximum exposure to limited partnerships *

Maximum exposure to joint ventures *

Maximum exposure to closed and open-ended property unit trusts *

Note: *None specified

Source: AEW

Portfolio distribution %

AEW UK CORE

PROPERTY

FUND*

Other balanced

funds

All balanced

fundsAll funds

Standard retail – South East 1.6 6.86 6.09 5.30

Standard retail – Rest of UK 11.6 2.61 2.85 3.46

Shopping centres 1.3 1.16 1.74 5.80

Retail warehouses 6.3 11.60 11.13 9.83

All UK retail 20.7 22.23 21.81 24.39

City offices 0.0 4.22 3.79 3.22

West End offices 0.0 7.61 8.54 7.71

Rest of South East offices 6.1 11.56 10.93 7.71

Rest of UK offices 4.9 6.31 5.92 5.11

All UK offices 11.0 29.71 29.19 23.76

South East industrial 0.7 20.33 20.86 16.69

Rest of UK industrial 45.6 10.92 10.68 8.64

All UK industrial 46.3 31.25 31.54 25.33

Other UK properties 19.0 11.53 10.63 21.67

Cash 3.0 5.28 6.83 4.85

Overall 100.0 100.0 100.0 100.0

Sources: *AEW ** MSCI/AREF UK Quarterly Property Fund Index

Property ownership structure

Number of assets Valuation (GBPm)% of total

portfolio

Direct holdings 66 282.2 100.0

Joint and indirect holdings 0 0.0 0.0

Listed investments 0 0.0 0.0

Total 66 282.2 100.0

Source: AEW

MSCI/AREF UK Quarterly Property Fund Index**

MSCI.COM


Jun 2020

Largest direct investments by lot size & percentage of total portfolio

Property LocationValuation

(GBPm)

% of total

portfolio

EDDIE STOBART WAKEFIELD 20-25 5-10%

KAYLEY INDUSTRIAL ESTATEASHTON-

UNDER-LYNE15-20 5-10%

SPECTRUM SWINDON 10-15 0-5%

THE OLD TEA FACTORY CREWE 10-15 0-5%

HENGROVE LEISURE PARK BRISTOL 10-15 0-5%

56-64 BROADMEAD & SOHO STUDIOS BRISTOL 5-10 0-5%

OCEANAKINGSTON

UPON THAMES5-10 0-5%

LONDON EAST LEISURE PARK DAGENHAM 5-10 0-5%

BUILDING 730 AZTEC WEST BRISTOL 5-10 0-5%

36-42 OLD CHRISTCHURCH ROADBOURNEMOUT

H5-10 0-5%

10 largest investments as % of portfolio 118.2 41.9

Source: AEW

Direct portfolio structure by lot-size bands

Value band (GBPm)Number of

assets

Valuation

(GBPm)

% of total

portfolio

0 -2.5 26 39.8 14.1

2.5 - 5 26 98.4 34.9

5-10 9 70.9 25.1

10-25 5 73.2 25.9

25 - 50 - - -

50 - 100 - - -

100-150 - - -

Over 150 - - -

Total 66 282.2 100.0

Average lot size 4.3

Source: AEW

Net initial yield 6.80% Investments 12.97%

Nominal equivalent yield 8.30% Developments 0.00%

True equivalent yield 8.40% Total 12.97%

Net reversionary yield 8.20%

Source: Knight Frank

Rental income & ERV by type of property

Rental income

%

Estimated

rental value %

Standard retail 15.1 14.4

Retail warehousing 6.6 7.5

Shopping centres 1.7 2.3

Central London offices 0.0 0.0

Other offices 12.4 12.7

Industrial 43.5 45.3

Other 20.7 17.8

Overall 100.0 100.0

Source: AEW

Industrial

Industrial

Industrial

Industrial

Property Yield Voids as % of ERV

Leisure

Office

Retail Other

Retail Other

Leisure

Leisure Park (whole or part)

Sector

MSCI.COM


Jun 2020

Over Renting and Reversionary Potential, % Rent Passing

SectorRent Passing, GBP

Millions

Rent Free , %

Rent Passing

Development

vacancy, %

Rent Passing

Investment

vacancy, %

Rent Passing

Over rented,%

Rent Passing

Reversionary

potential,% Rent

Passing

Reversionary

potential Net of

Over renting,%

Rent Passing

Market

Value,% Rent

Passing

Standard retail 3.5 2.8 0.0 3.7 -16.2 20.6 4.4 110.9

Retail warehousing 1.5 6.2 0.0 22.5 -7.3 11.4 4.1 132.9

Shopping centres 0.4 0.0 0.0 31.0 -18.4 47.6 29.2 160.2

Central London offices 0.0 - 0.0 - - - - -

Other offices 2.9 2.0 0.0 15.4 -1.2 3.4 2.2 119.6

Industrial 10.0 3.6 0.0 16.5 -3.6 5.3 1.6 121.8

Other 4.8 1.9 0.0 16.2 -24.5 6.5 -17.9 100.2

Overall 23.0 3.1 0.0 15.0 -10.0 8.7 -1.3 116.8

*Comprising the ERV of developments in progress or contracted which have not been pre-let

Source: AEW

Listed Investments

% of Issue held

Valuation

(GBPm)

Est. % of total

portfolio

- - - -

- - - -

- - - -

- - - -

- - - -

- - -

The unexpired term of leases

Years

20 years or greater

15 years or greater, but less than 20



Less than 5 years

Source: AEW

Joint and Indirect property holdings

Holdings Sector Joint/Indirect Vehicle Type Ownership %Est. % of total

portfolio

- - - - - -

- - - - - -

- - - - - -

- - - - - -

- - - - - -

- - - - - -

Source: AEW

-

-

-

21.1

-

-

66.5

% of rent passing

0.5

Valuation

-

4.7

7.2

MSCI.COM


Jun 2020

Debt analysis

Amount drawn

(GBPm)Average rate (%)

Average

unexpired term

(years)

Amount drawn

(GBPm)

Rate above

LIBOR (incl

expenses)

(%)

Off balance

sheet debt

(GBPm)+

- - - - - -

- - - - - -

- - - - - -

- - - - - -

- - - - - -

Source: AEW

Development exposure*

Not yet started In progress+ All developments

Cost to

complete

schemes in

progress+

GBPm - - - -

% of all directly held properties* - - - -

* Includes joint ventures in which the Fund has an interest of 50% or more

Source: AEW

Valuations/performance monitors/affiliations

Frequency of valuation

Valuers

Portfolio performance monitored by MSCI

Constituent of MSCI/AREF UK Quarterly Property Fund Index

Member of the Association of Real Estate Funds

Source: AEW

Restrictions on holdings of cash/borrowings

Maximum total gearing permitted

Cash holdings (maximum)

Cash holdings (minimum)

Source: AEW

Note: Long term gearing not permited

Capital value of developments

10%

*

Monthly

Knight Frank

Yes

Yes

Full member

10%

Fixed rate borrowings Variable rate borrowings

MSCI.COM


Jun 2020

The contribution of major tenants to rental income

Tenant %

INTEGRATED THIRD PARTY LOGISTICS LIMITED 5.4

THE DELTIC GROUP LIMITED 4.3

COOPER TIRE & RUBBER COMPANY EUROPE LTD 4.1

VUE ENTERTAINMENT LTD 3.5

BESTWAY LIMITED 3.5

WHITECROFT LIGHTING LTD 2.7

CINE-UK LTD 2.6

NEW LOOK RETAILERS LTD 2.4

GEORGE WILSON INDUSTRIES LTD 2.3

DAVID LLOYD LEISURE LIMITED 2.2

Three largest tenants' contribution to rental income 13.8

Five largest tenants' contribution to rental income 20.8

Ten largest tenants' contribution to rental income 33.1

Source: AEW

Balance sheet/gearing

Direct holdings Joint holdingsIndirect

investments

Listed

investmentsTotal

Balance sheet (GBPm)

Properties at valuation 282.2 0.0 0.0 0.0 282.2

Listed investments 0.0 0.0 0.0 0.0 0.0

Debt -10.0 0.0 0.0 0.0 -10.0

Cash 8.6 0.0 0.0 0.0 8.6

Other net assets/liabilities -3.3 0.0 0.0 0.0 -3.3

Total net assets 277.5 0.0 0.0 0.0 277.5

Gearing (%)

Net debt (cash)/properties 0.5 - - - 0.5

Net debt (cash)/equity 0.5 - - - 0.5

Source: AEW

Quarterly data per unit

As at 31-Mar-19 30-Jun-19 30-Sep-19 31-Dec-19 31-Mar-20 30-Jun-20

Bid (GBP) - - - - - -

Offer (GBP) 1.415 1.426 1.421 1.411 1.161 1.154

Mid (GBP) - - - - - -

Bid/offer spread - - - - - -

Net asset value (GBP) 1.325 1.335 1.331 1.321 1.263 1.200

Quarterly distribution (GBP) 0.0211 0.0162 0.0155 0.0185 0.0129 0.0107

Yield 5.5% 5.1% 5.2% 5.4% 5.0% 4.8%

Source: AEW

MSCI.COM


Jun 2020

Unit pricing

Distributions

Minimum investment/disinvestment

Creation, transfer and realisation of units

Redemptions

Taxation

Capital Gains Tax

Income Tax

Charges

Annual Fee

Initial charge

Performance Fee

Leverage

The Fund may only borrow up to 10% of the NAV and in the form of a revolving credit facility. Leverage may take the form of temporary cash

borrowings, financial derivative instruments and reinvestment of cash allocated in the context of securities lending.

The Fund qualifies as a PAIF for tax purposes. Accordingly, the income generated by their Property Investment Business will be exempt from

tax.

Distributions are declared on a quarterly basis and paid within two months of the end of the quarter during which they were earned

A minimum initial investment of £100,000, although the Manager may approve smaller holdings

The Fund is not subject to capital gains tax.

No initial charge is levied by the Trust Manager on investors acquiring units in the Fund

Units may be redeemed on written notice to be received by the Manager at least one month prior to the next Dealing Day for Redemptions

which is the first business day in each calendar month. At its discretion and in consultation with the Governance Committee, the Manager may

defer redemptions for up to six months.

The Fund Manager is entitled to an annual fee (payable quarterly) equivalent to 0.70% pa of the Net Asset Value of the Fund, plus VAT.

The Property Investment Manager may earn a performance fee of 0.25% p.a. (plus VAT) of NAV if the Fund is ranked above the weighted

average performance the top ten funds within the All Balanced Funds component of the MSCI/AREF UK Quarterly Property Fund Index over

three year rolling periods (providing its return over the period is positive).

Units may be issued by the Depositary on the direction of the Manager on giving notice at least 14 business days ahead of the next Dealing Day

for Subscriptions which is the first business day in each calendar month.

The Fund’s NAV and the single (bid/offer) price of its units are calculated on the date of the monthly revaluation of the portfolio as at the last day of each month

MSCI.COM


Jun 2020

Unit holder analysis

Number of unitholders Total % held





Greater than 8.0% 2 38.1

Total 53 100.0

Major investors

Largest holder 1 19.1

Three largest holders 3 45.5

Five largest holders 5 55.0

Ten largest holders 10 74.2

Internal/external investors

Internal 3 0.4

External 50 99.6

Source: AEW

Liquidity

PeriodYear to

Dec 2015

Year to

Dec 2016Year to Dec 2017 Year to Dec 2018

Year to

Dec 2019

Year to

Dec 2020

Issues and redemptions

157,204,632 193,021,067 209,530,510 212,008,201 218,658,263 228,477,828

Units issued during period 35988327 19,012,340 4,218,577 9,947,189 15,302,013 2,667,300

Units redeemed during period -171892 -2502897 -1,740,886 -3,297,128 -5,482,448 0

Units in issue at end of period 193,021,067 209,530,510 212,008,201 218,658,263 228,477,828 231,145,127

Unit transfers

Matched bargains 50849766 15164063.44 2,649,301 1,338,285 1,832,529

Matched bargains %* - 0.2427 0.071525834 1.21% 0.59% 0.79%

* as % of units in issue at the end of the period

Source: AEW

Units in issue as at start of period

MSCI.COM


Jun 2020


INVESTMENT POLICY AND OBJECTIVES


UK

Q1 2016

Open-ended

N/A

31 December

141.9

Source: AEW

Management/professional advisors

Manager

Auditors

Source: AEW

Investment rates of return, %

Long income FundsAll balanced

fundsAll funds

3 months -0.7 -2.0 -2.3

Year-to-date -0.1 -3.3 -4.0

12 months 2.6 -2.6 -3.9

3 years+ 5.8 3.4 2.4

5 years+ 6.3 4.6 3.9

10 years+ 6.6 6.3

Note: * Weighted average returns (Annualized)

Source: MSCI/AREF UK Quarterly Property Fund Index

** Target 4% pa total real return

The AEW UK Real Return Fund (“the Fund”) strategy is to align the real benefits of property with the needs of long-term savers. It aims to deliver better risk

adjusted liability focused returns, with inflation-linked cash flow and income growth central to strategy. The Fund has a total real return performance target

and will access a wider UK investible universe of traditional and alternative sectors such as healthcare, leisure, car parks, social infrastructure and student

housing, aiming to generate greater diversification and lower volatility.

NAV (GBPm)

Type of fund

Residence

Launch date

Year-end

The Fund is open to investment by UK and Overseas Corporate Pension Funds, Local Authorities, Charities, SIPPS, UK and Overseas Corporates and Wealth

Managers.

Property Authorised Investment Fund

Fund details

Open/closed-ended

Earliest date of winding up

0.8

5.9

-

AEW UK

AEW UK

KPMG

Investment Advisor

Fund Manager


-2.5

-2.7

MSCI/AREF UK Quarterly Property Fund Index*

Depository

Ian Mason

BNY Mellon Trust & Depositary

-

MSCI.COM


Jun 2020

Property investment restrictions

Maximum development exposure

Maximum speculative development exposure

Maximum lot-size holding as a standing investment

Maximum lot-size holding permitted at purchase

Maximum exposure to limited partnerships

Maximum exposure to joint ventures

Maximum exposure to closed and open-ended property unit trusts

Note: *None specified

Source: AEW

Portfolio distribution %

AEW UK REAL

RETURN FUND*

Long Income

FundsAll balanced funds All funds

Standard retail – South East*** 8.5 8.95 6.09 5.30

Standard retail – Rest of UK*** 13.1 8.82 2.85 3.46

Shopping centres 0.0 0.70 1.74 5.80

Retail warehouses 0.0 1.95 11.13 9.83

All UK retail 21.6 20.42 21.81 24.39

City offices 0.0 3.77 3.79 3.22

West End offices 0.0 5.16 8.54 7.71

Rest of South East offices 0.0 5.48 10.93 7.71

Rest of UK offices 2.0 8.50 5.92 5.11

All UK offices 2.0 22.91 29.19 23.76

South East industrial 6.6 2.14 20.86 16.69

Rest of UK industrial 4.4 6.30 10.68 8.64

All UK industrial 11.0 8.44 31.54 25.33

Other UK properties 61.8 46.47 10.63 21.67

Cash 3.7 1.76 6.83 4.85

Overall 100.0 100.00 100.00 100.00

Sources: *AEW ** MSCI/AREF UK Quarterly Property Fund Index

*** MSCI Standard Retail Definition includes public houses, car showrooms and other alternative sub sectors.

Property ownership structure

Number of assets Valuation (GBPm) % of total portfolio

Direct holdings 49 136.7 100.0

Joint and indirect holdings 0 0.0 0.0

Listed investments 0 0.0 0.0

Total 49 136.7 100.0

Source: AEW

Not Permitted

n/a

10%

*

*

MSCI/AREF UK Quarterly Property Fund Index**

20% (pre let development)

Not Permitted

MSCI.COM


Jun 2020

Largest direct investments by lot size & percentage of total portfolio

Property Location Valuation (GBPm) % of total portfolio

THE RESIDENCES MIDDLESBROUGH 15-20 10-15%

SPRINGHILL CARE CENTRE ACCRINGTON 10-15 5-10%

LARKLAND HOUSE CARE CENTRE ASCOT 5-10 5-10%

ASHLANDS MEWS AND ST GEORGE'S LEICESTER 5-10 5-10%

CROSS POINT COVENTRY 5-10 5-10%

THE POINT BOREHAMWOOD 5-10 0-5%

TEN PIN BOWLING NOTTINGHAM 5-10 0-5%

TRAVELODGE HOTEL WEST BROMWICH 5-10 0-5%

HOLMES COURT AND HOLMES HOUSE WIGSTON 0-5 0-5%

BENTLEY COURT BOLTON 0-5 0-5%

10 largest investments as % of portfolio 73.8 54.0

Source: AEW

Direct portfolio structure by lot-size bands

Value band (GBPm)Number of

assets

Valuation

(GBPm)% of total portfolio

0 -2.5 30 35.3 25.8

2.5 - 5 12 41.0 30.0

5-10 5 34.3 25.1

10-25 2 26.1 19.1

25 - 50 - - -

50 - 100 - - -

100-150 - - -

Over 150 - - -

Total 49 136.7 100.0

Average lot size 2.8

Source: AEW

Net initial yield 6.00% Investments 0.00%

Nominal equivalent yield - Developments 0.00%

True equivalent yield 6.80% Total 0.00%

Net reversionary yield 7.20%

Source: Knight Frank Source: Knight Frank

Rental income & ERV by type of property

Rental income

%Estimated rental value %

Standard retail 25.6 25.4

Retail warehousing 0.0 0.0

Shopping centres 0.0 0.0

Central London offices 0.0 0.0

Other offices 2.5 2.3

Industrial 15.0 13.7

Other 56.9 58.7

Overall 100.0 100.0

Source: AEW

Apartments

Healthcare

Healthcare

Healthcare


Healthcare

Apartments

Sector

Voids as % of ERVProperty Yield



Hotel – Not categorised

MSCI.COM


Jun 2020

Over Renting and Reversionary Potential, % Rent Passing

SectorRent Passing, GBP

Millions

Rent Free , %

Rent Passing

Development

vacancy, %

Rent Passing

Investment vacancy, %

Rent Passing

Over rented,%

Rent Passing

Reversionary

potential,% Rent

Passing

Reversionary

potential Net of

Over renting,%

Rent Passing

Market Value,% Rent

Passing

Standard retail 2.2 3.8 0.0 0.0 -7.6 12.0 4.4 108.2

Retail warehousing 0.0 - - - - - - -

Shopping centres 0.0 - - - - - - -

Central London offices 0.0 - - - - - - -

Other offices 0.2 0.0 0.0 0.0 0.0 0.0 0.0 100.0

Industrial 1.3 0.0 0.0 0.0 -3.0 2.8 -0.1 99.9

Other 5.0 1.2 0.0 0.0 -8.2 1.6 -6.6 112.6

Overall 8.7 1.6 0.0 0.0 -7.1 4.4 -2.6 109.2

Source: AEW

* 83% of income linked to inflation or fixed uplifts

Listed Investments

% of Issue held

Valuation

(GBPm) Est. % of total portfolio

- - - -

- - - -

- - - -

- - - -

- - - -

- - -

The unexpired term of leases*

Years

20 years or greater




Less than 5 years

Source: AEW

* WAULT to break 16.1 years

Joint and Indirect property holdings

Holdings Sector Joint/Indirect Vehicle Type Ownership % Est. % of total portfolio

- - - - - -

- - - - - -

- - - - - -

- - - - - -

- - - - - -

- - - - - -

Source: AEW

Valuation

% of rent passing

26.7

15.4

-

-

-

-

-

-

20.5

12.9

24.5

MSCI.COM


Jun 2020

Debt analysis

Amount drawn

(GBPm)Average rate (%)

Average

unexpired term

(years)

Amount drawn

(GBPm)

Rate above LIBOR

(incl expenses)

(%)

Off balance sheet debt

(GBPm)+

- - - - - -

- - - - - -

- - - - - -

- - - - - -

- - - - - -

Source: AEW

Development exposure*

Not yet started In progress+ All developments

Cost to complete

schemes in progress+

GBPm - - - -

% of all directly held properties* - - - -

* Includes joint ventures in which the Fund has an interest of 50% or more

Valuations/performance monitors/affiliations

Frequency of valuation

Valuers

Portfolio performance monitored by MSCI

Constituent of MSCI/AREF UK Quarterly Property Fund Index

Member of the Association of Real Estate Funds

Source: AEW

Restrictions on holdings of cash/borrowings

Maximum total gearing permitted

For investment purposes

Cash holdings (maximum)

Knight Frank

Yes

Yes

Full Member

*

10%**

Capital value of developments

Fixed rate borrowings Variable rate borrowings

Source: AEW

*Long term gearing not permitted

**Due to unit creations. Can be higher due to strategy

Monthly

MSCI.COM


Jun 2020

The contribution of major tenants to rental income

Tenant %

PRIME LIFE LIMITED 19.6

SOUTH TEES NHS TRUST 8.6

VOLKSWAGEN GROUP UK LIMITED 6.4

CARE UK COMMUNITY PARTNERSHIPS LTD 5.6

JABLITE LIMITED 4.5

TRAVELODGE HOTELS LTD 3.8

BARCLAY & MATHIESON LTD 3.4

BUZZ GROUP LIMITED 3.3

TESCO STORES LIMITED 2.8

CELESTRA LIMITED 2.7

Three largest tenants' contribution to rental income 34.6

Five largest tenants' contribution to rental income 44.7

Ten largest tenants' contribution to rental income 60.7

Source: AEW

Balance sheet/gearing

Direct holdings Joint holdings Indirect investmentsListed

investmentsTotal

Balance sheet (GBPm)

Properties at valuation 136.7 0.0 0.0 0.0 136.7

Listed investments 0.0 0.0 0.0 0.0 0.0

Debt 0.0 0.0 0.0 0.0 0.0

Cash 5.2 0.0 0.0 0.0 5.2

Other net assets/liabilities 0.0 0.0 0.0 0.0 0.0

Total net assets 141.9 0.0 0.0 0.0 141.9

Gearing (%)

Net debt (cash)/properties -3.8 - - - -3.8

Net debt (cash)/equity -3.7 - - - -3.7

Source: AEW

Quarterly data per unit

As at 31-Mar-19 30-Jun-19 30-Sep-19 31-Dec-19 31-Mar-20 30-Jun-20

Bid (GBp) 1.020 1.017 1.018 1.026 1.011 0.000

Offer (GBp) 1.106 1.103 1.104 1.112 1.097 0.000

Bid/offer spread 7.8% 7.8% 7.8% 7.8% 7.8% -

Net asset value (GBp) 1.036 1.032 1.034 1.041 1.027 0.993

Quarterly distribution (GBp) 0.0134 0.0131 0.0140 0.0134 0.0133 0.0072

Yield 5.3% 5.3% 5.3% 5.2% 5.2% 4.8%

Note: *The Fund’s distribution yield is calculated once it has made four quarterly distributions

Unit pricing

Distributions

Minimum investment/disinvestment

Creation, transfer and realisation of units

Distributions are declared on a quarterly basis and paid within two months of the end of the quarter during which they were earned.

A minimum initial investment of £1,000,000, although the Manager may approve smaller holdings.

Units may be issued by the Depository on the direction of the Manager on giving notice at least 14 business days ahead of the next Dealing Day for

Subscriptions which is the first business day in each calendar month.

The Fund’s NAV and the bid / offer price of its units are calculated on the date of the monthly revaluation of the portfolio as at the last day of each month.

**Based on MSCI methodology as a Percentage of Offer Price. Bid / offer spread as a Percentage of NAV price is 8.3%

Source:AEW

MSCI.COM


Jun 2020

Redemptions

Taxation

Capital Gains Tax

Income Tax

Charges

Unit holder analysis

Number of unitholders Total % held





Greater than 8.0% 7 85.0

Total 17 100.0

Major investors

Largest holder 1 17.0

Three largest holders 3 44.6

Five largest holders 5 65.9

Ten largest holders 10 97.7

Internal/external investors

Internal 2 0.2

External 15 99.8

Source: AEW

Liquidity

PeriodYear to

Dec 2016

Year to

Dec 2017

Year to

Dec 2018

Year to

Dec 2019

Year to

Dec 2020

Issues and redemptions

- 55,537,227 82,112,727 127,943,693 142,573,871

Units issued during period 55,537,227 26,575,500 45,830,966 17,981,717 241,278

- - - -3351539 0

55,537,227 82,112,727 127,943,693 142,573,871 142,815,149

Unit transfers

Matched bargains - - - - -

Matched bargains %* - - - - -

* as % of units in issue at the end of the period

Source: AEW

Units in issue at end of period

Units in issue as at start of period

Annual charges: The Fund Manager is entitled to an annual fee (payable monthly) equivalent to 0.75% pa of the Net Asset Value of the Fund.

The Fund qualifies as a PAIF for tax purposes. Accordingly, the income generated by their Property Investment Business will be exempt from tax.

Units may be redeemed on written notice to be received by the Manager at least one month prior to the next Dealing Day for Redemptions which is the first

business day in each calendar month. At its discretion and in consultation with the Governance Committee, the Manager may defer redemptions for up to

six months.

Units redeemed during period

The Fund is not subject to capital gains tax.

MSCI.COM

aew uk real estate fund/media/files/a/aew-uk...net cash generated from financing activities 6,054...

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