AEW UK Real Estate Fund/media/Files/A/AEW-UK-Investment... · 2018-04-06 · AEW UK Real Estate...

Annual Report and Financial Statements for the year ended 31 December 2017

AEW UK Core Property FundAEW UK Real Return Fund

AEW UK Real Estate Fund

AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2017

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

Role of the Authorised Corporate Director (ACD) 8-9

Report from the Chair of the Governance Committees 10-13

Statement of the ACD’s Responsibilities 14

ACD’s Statement 14

Statement of Depositary’s Responsibilities 15

Report of the Depositary 15

Report of the Auditor 16-17

AEW UK Core Property Fund Fund Manager’s Report 19-29 Fund Objective 30 Investment Benchmark 30 Investment Policy 30 Investment Strategy 30 Investment Guidelines 31 Report of the Valuer 32-35 Portfolio Statement 36-38 Summary of Material Portfolio Changes 39 Fund Information 40-47 Statement of Total Return 48 Statement of Changes in Net Assets Attributable to Shareholders 48 Balance Sheet 49 Statement of Cash Flows 50 Notes to the Financial Statements 51-69 Distribution Tables 70-71

AEW Real Return Fund Fund Manager’s Report 73-80 Fund Objective 81 Reference Benchmark 81 Investment Policy 81 Investment Strategy 82 Investment Guidelines 82-83 Report of the Valuer 84-85 Portfolio Statement 86-87 Summary of Material Portfolio Changes 88 Fund Information 89-95 Statement of Total Return 96 Statement of Changes in Net Assets Attributable to Shareholders 96 Balance Sheet 97 Statement of Cash Flows 98 Notes to the Financial Statements 99-115 Distribution Tables 116-117 Depositary, ACD & Advisers 118

Contents

1AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2017

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’).

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


2 AEW UK Real Estate Fund • Annual Report and Financial Statements • 31 December 2017

Managing Director’s report of AEW UK Investment Management LLP


AEW UK Investment Management LLP is a 50:50 joint venture between the UK Management Team and AEW. 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, real return strategy and latterly a long lease strategy. The management team1 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 the top performing fund in the AREF/IPD UK Quarterly Property Fund Index – All Balanced Property Fund Index over 1, 3 and 5 years as at December 2017.

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.

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 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.

In June 2017 AEW launched a new real estate investment trust onto the Main Market of the London Stock Exchange. AEW UK Long Lease REIT is a long lease strategy with inflation linked growth, diversified across alternative property sectors in strong locations across the UK. With a focus on capital preservation; a minimum of 85% income to benefit from inflation linked growth and a minimum weighted average lease term (WAULT) of 18 years at acquisition.

AEW2 is one of the world’s largest real estate asset managers. As at 31 December 2017, AEW has €58.5 billion in assets under management, with over €28 billion 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 in Europe.

AEW completed €4.5 billion of transactions across Europe last year, of which €3.5 billion were acquisitions, marking another strong year. A total of 231 transactions were completed in 2017, with acquisitions predominantly made in France, Germany, the UK, Italy, Spain and the Netherlands.

Rob Wilkinson, European CEO said: “2017 was a year of further growth for our European platform as well as operational consolidation following the merger with Ciloger. We had another strong year in terms of transaction volumes and capital raising and we plan to further develop our footprint across Europe in 2018.”

1. AEW UK Management Team comprises Richard Tanner, Rachel McIsaac, Nick Winsley and Dana Eisner.

2. AEW comprises AEW SA and AEW Capital Management, L.P. and their respective subsidiaries as well as AEW UK Investment Management LLP. AEW SA and AEW Capital Management, L.P. are subsidiaries of Natixis Investment Management (NIM). Data as at 31 December 2017.


Managing Director’s report of AEW UK Investment Management LLP (continued)


Total Asset Under Management

£1.49bn Institutional Funds

£779m Separate Accounts

£713m

EXPECTED RISK

EXPECTED RETURN/ VOLITILITY

Source: AEW UK, on GAV basis as at 31 December 2017

AEW UK Real Return Fund • Open-ended • Alternative real estate • GAV £84m • Distribution yield 5.3%

AEW UK South East Office Fund • Closed-ended • Sector specific • GAV £131m • Target IRR of 12-20%

AEW UK Core Property Fund • Open-ended • Diversified • GAV £275m • Distribution yield 4.8%

AEW UK REIT • Listed on LSE • Diversified • GAV £181m • Dividend 8p/share p.a.

RISK FREE RATE

AEW UK Long Lease REIT • IPO 31 May 2017 • Listed on LSE • GAV £76m

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 UK

Rachel McIsaac Executive Director, AEW UK

Louise Staniforth Executive Director, AEW UK

Jeff Furber Chairman, AEW Capital Management

Rob Wilkinson Chief Executive Officer, AEW Europe LLP

Russell Jewell Managing Director, AEW Europe LLP

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




AEW UK Board Jeff Furber Chairman

AEW Capital Management

Rob Wilkinson Chief Executive Officer

AEW Europe LLP

Russell Jewell Managing Director AEW Europe LLP

Richard Tanner Managing Director

AEW UK

Rachel McIsaac Executive Director

AEW UK

Louise Staniforth Executive Director

AEW UK

1

2Evergreen Member LLP shareholder

Remunerated by the Funds

As at December 2017

AEW UK Management Committee Richard Tanner 1

Managing Director AEW UK

Rachel McIsaac 1 Executive Director

AEW UK

Nick Winsley 1 Executive Director

AEW UK

Dana Eisner 1 Executive Director

AEW UK

Louise Staniforth Executive Director

AEW UK


AEW Europe LLP

Russell Jewell Managing Director AEW Europe LLP

Philp Olmer Executive Director AEW Europe LLP

Investment & Portfolio Management

Richard Tanner Portfolio Manager, Core

Nick Winsley Portfolio Manager, SEOF

Ian Mason Portfolio Manager, Real Return

Fund Alex Short

Portfolio Manager, AEWL REIT &

Laura Elkin

Director

Spencer Corkin

Associate Director

Ed Long Associate

Asset Management Fund Operations & Risk Management

Jon SaxtonDirector

Louise StaniforthExecutive Director AEW UK

Anish ShahAssociate

Tom HoustonAssociate

Francesca HawkinsOperations administrator

Client Management & Capital Raising

Dana Eisner Executive Director

Douglas Rowlands Capital Raising & Client

Management

Kari Clarke Client Management

Nicki Gladstone

Marketing & Communications

Lauren Kirby Investor Relations Assistant

Consultants

James Hyslop 1 External Consultant

Andrew Strang 1 External Consultant

George Henshilwood 2

Independent Chairman of Governance Committees

AEW Europe LLP Resources

Research Investment Asset Management Debt Client Management /

Capital Raising Legal, Compliance and

Corporate

Hans Vrensen Head of Research

Jonathan Cherel Research Analyst

Dennis Schoenmaker

Associate


Russell Jewell Head of Private Equity Funds

Nikolas Koulouras Executive Director

Alexander Strassburger Executive Director

Simon Barrett Executive Director

Fabrizio De Corato Director

Martin Finke Director

Josephine Flattery Director

Philippe Dewevre Director

Marcus Davidson- Wright Managing Director

Jason Langley Director

Alex Griffiths Executive Director

Laura Banks Associate

Eleanor Champion Associate

Client Management – NIM

Will Fox-Robinson

Fred McNeil

Carlos Vilares

Philp Olmer (Legal and compliance)

Executive Director

Ed North Associate

Lucinda Seddon Human Resources

Ramesa Moghal Finance

AEW UK

Rachel McIsaac Executive Director

Charles Royle Director

Michael Shears Director

Andrew Playfer Associate Director

Henry Butt Associate

Warren Meech Associate

Emily Grant Asset Management administrator

AEWU REIT

AEW UK Organisational Structure


€28.1bn AUM

€28.4bn AUM

€2.0bn AUM

EUROPE • 390+ staff • 10 offices

NORTH AMERICA • 260+ staff • 2 offices

Boston Los Angeles

Paris London Bucharest Düsseldorf Frankfurt

Luxembourg Milan Madrid Prague Warsaw

Over 30 years’ real estate

investment management

experience

One of the largest real

estate investment

managers in the world

with €58.5bn in assets

under management

Over 600 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

ASIA PACIFIC • 20+ staff • 3 offices

Singapore Hong Kong Sydney

As at 31 December 2017. Total AEW Global AUM includes $37.0 billion in assets managed by AEW Capital Management and its affiliates, of this $816 million in advisory/subadvisory securities wrap accounts for which AEW Capital Management provides only a model portfolio.



North America, Europe and Asia Pacific




ASSETS UNDER MANAGEMENT

PROPERTY BY SECTOR

Office 43%

Retail 35%

Logistics 10%

Residential 9%

Other 3%

PROPERTY BY VEHICLE

Separate Accounts 49%

Funds 36%

Club Deals 15%

Paris 272 staff

London 63 staff

Milan 6 staff

Warsaw 6 staff

Frankfurt 12 staff

Prague 3 staff

Bucharest 3 staff

Luxembourg 14 staff

Antwerp 1 staff

Düsseldorf 15 staff

Madrid 2 staff

15.9 16.6 16.7 18.8

26.6 28.4

0.0

4.0

8.0

12.0

16.0

20.0

24.0

28.0

32.0

2012 2013 2014 2015 2016 2017

€bn

As at 31 December 2017. AUM includes €730mn managed by AEW Capital Management in European REIT securities. Sector and vehicle breakdowns do not include European REIT securities AUM.

European Platform




Economic and property market overview

The final quarter continued the economic themes of 2017, producing a relatively robust level of growth that has defied the predictions of many of the early Brexit forecasts. Both the services and manufacturing sectors seemed to continue their strong performance, however the retail sector faced a difficult Christmas trading period with weak consumer confidence and ferocious online competition taking their toll on the high street.

Whilst results from Next surprised on the upside, there was little surprise in the New Year profits warning from Debenhams and others, which commentators took more as a sign of the pressure on the retail sector, from consumers being squeezed by rising costs and falling real wages. Property investors remain braced for the inevitable further round of rent renegotiations or more formal pre-packed CVAs where a long lease provides little defence to a fall in value required to reflect more affordable rents or alternative uses.

At the start of the New Year the prognosis for the UK economy seems to be more of the same although consensus views on GDP growth are more cautious at c1.5% in 2018. Undoubtedly this view reflects the impact of the gnawing uncertainty of Brexit on business confidence and spending, but consensus also suggests the potential for the UK to rally strongly by 2020 and to even start to outperform both the US and major European economies.

Our view on CPI inflation is that it should have peaked at the end of 2017 and should return to more normal long term levels as the impact of the fall in sterling washes through the numbers; the only note of caution is the extent to which higher costs have been absorbed by suppliers in the short term and the extent to which that can continue.

Despite these economic pressures we think that the property sector is set for another strong year, primarily because of its relative high yield compared to other sectors. The weight of money targeting the sector will remain high from both UK and overseas private wealth investors, attracted by the relative yield and the ever-increasing demand for long leased investments being used as bond proxies as the hunt for yield gets more intense.

Within the UK market we expect that business space assets, particularly industrial and warehouses will benefit from low supply and strong demand, providing good rental growth, whilst retails assets will tend to suffer rental falls and voids from supply exceeding a diminishing pool of demand. Alternative use will increasingly define the prospects for many retail assets.

With prices increasing for these long duration assets at a time when interest rates had increased, we raised the question of what impact rising gilt yields would have on these specialist strategies. Interestingly, in the FT Survey of (over 100) economists, December 2017, over half forecast at least one or two more interest rises in 2018, suggesting that the debate about which real estate strategies will be more resilient (in an environment of normalising gilt yields and a reversal of quantitative easing), will gain some momentum.

Our conviction remains that strategies that focus on sustainable income secured on property fundamentals that meet the changing demands of the real economy, will serve investors better in the long term, as they have done in the past.

Managing Director, AEW UK


Role of the Authorised Corporate Director (ACD) of the AEW UK Real Estate Fund

Investment Decision MakingAEW UK Investment Management LLP (“AEW UK”) in its capacity as the ACD and the Authorised Investment Fund Manager is responsible for setting, implementing and achieving the investment policies for each of the sub-funds. AEW UK follows a systematic and disciplined approach to the acquisition, management and disposal of investment assets. AEW UK operates an Investment Management Committee (IMC) ensuring that clients’ interests are central to all decision making. It has a single committee that sits over all mandates to provide a rounded view over all strategies and to ensure that market views are applied consistently.

AEW UK has an Investment Strategy Committee (ISC) that meets every quarter (or more frequently if required) to help form broad views on the economy and other macro influences on the property market. The IMC takes these views into account in formulating policy, including sector views.

Against this strategic overview, the IMC is responsible for:–

a) Approving purchases

b) Reviewing and approving portfolio strategy and asset business plan reports

c) Reviewing and approving risk management reports

d) Approving strategic asset management initiatives above defined thresholds

e) Approving sales

Corporate Governance:The Governance CommitteeThe ACD appoints a Governance Committee in respect of each Fund. The Governance Committee will not be involved in the day-to-day decision-making but will be consulted by the ACD. It is designed to try to ensure that the principles of sound corporate governance are observed in the management of each Fund’s assets and to protect the interests of the Shareholders. The Governance structure combined with the management team owning 50% of the AEW UK business provides a strong and genuine form of alignment with client interests.

Governance Committee will be consulted, or can make certain recommendations to the ACD, on certain matters including the following (although the final decision in all cases will remain with the ACD):

a) any adjustment to the price of Shares in unusual market conditions to protect a Fund and continuing, entering and exiting Shareholders, to reflect the value of assets in those conditions having taken into consideration any other material information it may see fit and the long-term interests of investors. The ACD will only exercise this power where it believes it to be in the best interests of the Shareholders;

b) specific issues relating to a Fund raised by the ACD or the Depositary from time to time;

c) charges payable to the ACD on the launch of any new Share Classes;

d) amendments to the investment policy or guidelines of a Fund or a change to a Fund index or performance target;

The ‘Terms of Reference’ document sets out the provisions for appointment of committee members and voting rights and is available upon request. The minutes of Governance Committee meetings are also available to investors upon request.

Conflicts of interestAEW UK’s business model revolves solely around providing UK real estate investment solutions to institutional investors, either by way of investment opportunities through collective investment schemes or through individual advisory and asset management mandates. AEW UK has implemented a framework to manage potential conflicts of interest that is both comprehensive and tailored to its business. The full policy document detailing arrangements to handle conflicts of interest is available on request.



Confidentiality and DisclosureThe ACD and the Company are bound by confidentiality and disclosure provisions as specified in Clause 20 of the Management and Administration agreement dated 5 July 2013 between AEW UK Real Estate Fund and AEW UK Investment Management LLP.

Fund Management and Administration:The ACD is responsible for managing and administering the Company’s affairs in compliance with the Regulations, including portfolio management and risk management. The ACD may delegate its management and administration functions, but not responsibility, to third parties, including associates subject to the rules in the COLL Sourcebook. Appointments made on behalf of the Company are made by the ACD and are fully discretionary. The ACD is responsible for providing all relevant information to the appointed third parties. The appointments and performance of third parties are reviewed on a regular basis.

The DepositaryThe Depositary of the Company is BNY Mellon Trust & Depositary (UK) Limited. The ACD shall give the Depositary all the requisite information to enable the depositary to identify the property of the Company as belonging to the Company and shall comply with the Depositary’s reasonable requirements for the registration of Investments comprised in that property.

Standing Independent ValuerOn behalf of the Company the ACD has appointed the Standing Independent Valuer (Knight Frank LLP) to provide certain independent valuation services. Under the terms of the Property Valuation Agreement, the Standing Independent Valuer must carry out its obligations under the agreement in accordance with the applicable provisions of COLL, on the basis of a physical inspection, with all information being made available to the Valuer by the ACD. The Valuer reports and has a fiduciary duty to the Company to provide independent valuation services.

Managing AgentOn behalf of the Company the ACD has appointed the Managing Agents (MJ Mapp, Mayfields Ltd and Workman LLP) to provide certain property management services.

The AdministratorOn behalf of the Company the ACD has appointed the Administrator, Link Alternative Fund Administrators Limited, to provide certain administration services including fund accounting and fund pricing services. The Administrator will be paid by the ACD out of its fee.

The RegistrarOn behalf of the Company the ACD has also appointed Link Fund Administrators Limited to act as registrar to the Company.

TerminationThe termination provisions of the ACD’s position are set out in clause 17 of the Management and Administration agreement dated 5 July 2013 between AEW UK Real Estate Fund and AEW UK Investment Management LLP.

Details of all fund documentation and key appointments are available upon request from the ACD to existing investors and to prospective investors on a confidential basis.

Role of the Authorised Corporate Director (ACD) of the AEW UK Real Estate Fund (continued)



Report from the Chair of the Governance Committees

AEW UK Core Property Fund (‘Core Fund’) Governance Committee

In January 2017, James Hutton and Kieran Farrelly resigned from the Governance Committee. I would like to thank them both for their contribution to the work of the Governance Committee. Kieran Farrelly has been replaced by Duncan Graham from Townsend.

I am pleased to announce that Linda McAleer from Hymans Robertson joined the committee on 1 March 2017.

During 2017, four quarterly Core Fund Governance Committee meetings were held, attendance is summarised in the following table:

Name Position RepresentingNo. of Meetings Attended

George Henshilwood Chair of Committee Independent 4/4

Duncan Graham Townsend Group Investors 4/4

Linda McAleer Hymans Robertson Investors 2/2

Matt Day Kames Capital Investors 4/4

James Hyslop Consultant AEW(UK) 4/4

Andrew Strang Consultant AEW(UK) 4/4

Jon Saxton Secretary to Committee [non-voting] AEW(UK) 4/4

No changes were made to the Committee’s Terms of Reference during the year. The process for appointing committee members and duration of appointments is stipulated in the Terms of Reference.

No remuneration is paid to the Committee for their duties other than to me in my role as Chairman. The agreed remuneration is £2,500 per quarter plus expenses. Contact details for the members of the Committee are available to all investors on request. The minutes of all Committee meetings are available to all investors on request.

The main issues covered in the course of the year were as follows:

Recurring Agenda Items

Performance: We monitor the performance of the Core Fund against its peer group (All Balanced Property Fund Index as contained in the AREF/IPD UK Quarterly Property Fund Index). The Committee was pleased to note another year of strong performance for the Core Fund. The Core Fund’s total return for 2017 was 15.2% versus 10.2% for the All Balanced Property Fund Index. The Core Fund celebrated its 5 year anniversary by winning the AREF ‘5-year Risk Adjusted Relative Performance’ award.

Risk Measures: At each meeting, we monitor a number of key risk indicators against the peer group, both with a view to checking that no agreed limits have been breached but, more generally, to bring to the Manager’s attention any measure which we consider needs to be addressed. The main focus during 2017 has been on the Core Fund’s void rate.

Voids: Since the early part of 2016, the Core Fund’s void rate has been excess of the 15% guideline prescribed by the Core Fund’s prospectus. During the year the Assistant Fund Manager of the Core Fund attended 3 Governance Committee meetings to update the Committee on the asset management initiatives in place to reduce this level of vacancy in the portfolio. Following the sales of Belvedere House, Basingstoke and Freshford House, Bristol and a letting made at Aztec West, Bristol, the void rate has fallen from 17.7% to 10.3% during the year.



Report from the Chair of the Governance Committees (continued)

Prospectus: The Manager gave progress updates during the latter part of 2017 on revisions being made to the Company’s Prospectus, the main revision being to reflect the change of the Core Fund’s Managing Agents from Jones Lang LaSalle to MJ Mapp.

Cashflow: The Committee is responsible for making sure that any cashflows [in or out of the Core Fund] are managed sensibly in line with our agreed policies. There were no major movements during 2017.

Pricing Committee: In my role as Chairman of the Pricing Committee I was able to report to the Governance Committee that the Committee continued to monitor the market on a regular basis but the Pricing Committee did not feel, at any time during 2017, that any adjustment was appropriate or necessary.

One-off Agenda Items

Fund/Business update: Richard Tanner, as the Fund Manager of the Core Fund and Managing Director of AEW UK, gave an update on the Core Fund and on the AEW UK business.

Other Matters: In my role as Chairman of the Committee, I attended an annual audit clearance meeting and was reassured that there were no major issues arising.

AEW UK Real Return Fund (‘Real Return Fund’) Governance Committee

During 2017, four quarterly Real Return Fund Governance Committee meetings were held; attendance is summarised in the following table:

Name Position RepresentingNo. of Meetings Attended


Darren Robinson Aviva Investors Investors 3/4

Laura Donohoe Schlumberger Investors 3/4

Stuart Pawson KPMG (Schlumberger Consultant) [non-voting] Investors 4/4



Ian Mason [non-voting] Fund Manager AEW(UK) AEW(UK) 4/4


No changes were made to the Committee’s Terms of Reference during the year. The process for appointing committee members and duration of appointments is stipulated in the Terms of Reference.

No remuneration is paid to the Committee for their duties other than to me in my role as Chairman. The agreed remuneration is £1,250 per quarter plus expenses. Contact details of the members of the Committee are available to all investors on request. The minutes of all Committee meetings are available to all investors on request.

The main issues covered in the course of the year were as follows:




Recurring Agenda Items

Performance: We monitor the performance of the Real Return Fund, against its total real return performance target of 4% per annum, net of all fees and expenses. During the year the Real Return Fund joined the All Balanced Fund Index and achieved a one year total return performance of 9.1% and a one year total real return (after inflation) of 6.4%.

Risk Measures: At each meeting, we monitor a number of key risk indicators against the peer group, both with a view to checking that no agreed limits have been breached but, more generally, to bring to the Manager’s attention any measure which we consider needs to be addressed. The majority of the investment guidelines only become applicable when the Real Return Fund reaches an AUM of £200m. No issues have arisen to date.

Fund Update: Ian Mason as Fund Manager to the Real Return Fund attended the Committee meetings to give a regular update on capital raising and portfolio construction.

Prospectus: The Manager gave progress updates during the latter part of 2017 on revisions being made to the Company’s Prospectus, the main revision being to reflect the change of the Real Return Fund’s Managing Agents from Jones Lang LaSalle to Workman LLP.

One-off Agenda Items

Inflation measure change: In February 2017, the Office of National Statistics (‘ONS’) stopped calculating the RPIJ as a measure of inflation. RPIJ had previously been used by the Real Return Fund as a measure of inflation. In place of RPIJ, the Real Return Fund used CPIH as a temporary measure while it considered what would be the most appropriate measure as a permanent replacement to RPIJ, and while the UK Statistics Authority considered if CPIH would be approved as a national statistic.

On 31 July 2017 the Office for Statistics Regulation announced that CPIH has achieved the status of National Statistic. The Governance Committee were consulted on the Manager’s recommendation that RPIJ should be replaced by CPIH. Investors were informed of the new measure before it was adopted and the Prospectus was updated on 24 January 2018.




Pricing Sub-Committee

A Pricing Sub-Committee has been in place since March 2016. In unusual market conditions, the Pricing Sub-Committee reviews the market conditions and if appropriate recommends changes in the Core and Real Return Fund’s share price to the Manager. The composition of the Pricing Sub-Committee is as follows:

Name

Position

Representing

No. of Meetings Attended




Charles Follows Consultant Independent 4/4


George Henshilwood and Charles Follows have one vote each and Andrew Strang & James Hyslop share a vote.

The Pricing Sub-Committee have met on a quarterly basis throughout the year. At all meetings it was agreed that there were no exceptional market conditions and the Pricing Sub-Committee did not need to recommend any prices changes to the Manager.

Our responsibilities to investors

The Committee takes very seriously its broader responsibility to ensure good stewardship of the Funds. The two consultants on the Committees are involved in most decision-making meetings [I attend most as an observer] and we are well placed to judge if the Manager is acting in line with its stated policies and approach and, more importantly, with best practice in this market. If any issues arise in the course of the year which are not resolved to the Committee’s satisfaction - none have arisen to date - we have the right to write directly to investors, explaining the issue and setting out our views. Of course, we will be only too happy to respond to any queries raised by investors; investors can write to the Committee, C/O Jon Saxton, at any time and we will respond in a timely fashion.

I would like to thank my fellow Committee members for their participation in the work of the Committees over the course of the year.

George L Henshilwood Independent Chair of the Governance Committees



Statements and Responsibilities

Statement of the ACD’s ResponsibilitiesThe Collective Investment Schemes sourcebook published by the FCA, (“the COLL Rules”) require the Authorised Corporate Director (“ACD”) to prepare financial statements for each annual accounting period which give a true and fair view of the financial position of the Company and of the net income and net gains or losses on the property of the Company for the period.

In preparing the financial statements the ACD is responsible for:

• selecting suitable accounting policies and then applying them consistently;

• making judgements and estimates that are reasonable and prudent;

• following UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland;

• complying with the disclosure requirements of the Statement of Recommended Practice for UK Authorised Funds issued by the Investment Management Association in May 2014;

• keeping proper accounting records which enable it to demonstrate that the financial statements as prepared comply with the above requirements;

• assessing the Company and its sub-funds’ ability to continue as a going concern, disclosing, as applicable, matters related to going concern;

• using the going concern basis of accounting unless they either intend to liquidate the Company or its sub-funds or to cease operations, or have no realistic alternative but to do so;

• such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and

• taking reasonable steps for the prevention and detection of fraud and irregularities.

The ACD is responsible for the management of the Company in accordance with its Instrument of Incorporation, the Prospectus and the COLL Rules.

ACD’s StatementThis report has been prepared under FRS 102 ‘The Financial Reporting Standard’ and in accordance with the requirements of the Statement of Recommended Practice as issued and amended by the Investment Association in May 2014.

AEW UK Investment Management LLP



Statements and Responsibilities (continued)

Statement of Depositary’s Responsibilities for the year ended 31 December 2017

The Depositary must ensure that the Company is managed in accordance with the Financial Conduct Authority’s Collective Investment Schemes Sourcebook, and, from 22 July 2014 the Investment Funds Sourcebook, the Open-Ended Investment Companies Regulations 2001 (SI 2001/1228), as amended, the Financial Services and Markets Act 2000, as amended, (together “the Regulations’’), the Company’s Instrument of Incorporation and Prospectus (together “the Scheme documents’’) as detailed below.

The Depositary must in the context of its role act honestly, fairly, professionally, independently and in the interests of the Company and its investors.

The Depositary is responsible for the safekeeping of all custodial assets and maintaining a record of all other assets of the Company in accordance with the Regulations.

The Depositary must ensure that:

• the Company’s cash flows are properly monitored and that cash of the Company is booked into the cash accounts in accordance with the Regulations;

• the sale, issue, repurchase, redemption and cancellation of shares are carried out in accordance with the Regulations;

• the value of shares of the Company are calculated in accordance with the Regulations;

• any consideration relating to transactions in the Company’s assets is remitted to the Company within the usual time limits;

• the Company’s income is applied in accordance with the Regulations; and

• the instructions of the Alternative Investment Fund Manager (‘’the AIFM’’) are carried out (unless they conflict with the Regulations).

Report of the Depositaryfor the year ended 31 December 2017

The Depositary also has a duty to take reasonable care to ensure that Company is managed in accordance with the Scheme documents and the Regulations in relation to the investment and borrowing powers applicable to the Company.

Having carried out such procedures as we consider necessary to discharge our responsibilities as Depositary of the Company, it is our opinion, based on the information available to us and the explanations provided, that in all material respects the Company, acting through the AIFM:

(i) has carried out the issue, sale, redemption and cancellation, and calculation of the price of the Company’s shares and the application of the Company’s income in accordance with the Regulations and the Scheme documents of the Company; and

(ii) has observed the investment and borrowing powers and restrictions applicable to the Company in accordance with the Regulations and Scheme documents of the Company.

For and on behalf of:

BNY Mellon Trust & Depositary (UK) Limited 160 Queen Victoria Street London EC4V 4LA



Independent auditor’s report to the shareholders of AEW UK Real Estate Fund (‘the Company’)

Opinion

We have audited the financial statements of the Company for the year ended 31 December 2017 which comprise Statements of Total Return, the Statements of Changes in Net Assets Attributable to Shareholders, the Balance Sheets, the Statements of Cash Flows and the Related Notes and Distribution Tables for each of the Company’s sub-funds listed on page 1.

In our opinion the financial statements:

• give a true and fair view, in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, of the financial position of each of the sub-funds as at 31 December 2017 and of the net revenue/deficit of revenue and the net capital gains/net capital losses on the property of each of the sub-funds for the year then ended; and

• have been properly prepared in accordance with the Instrument of Incorporation, the Statement of Recommended Practice relating to Authorised Funds, and the COLL Rules.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Company in accordance with, UK ethical requirements including the FRC Ethical Standard.

We have received all the information and explanations which we consider necessary for the purposes of our audit and we believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion.

Going concern

We are required to report to you if we have concluded that the use of the going concern basis of accounting is inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis for a period of at least twelve months from the date of approval of the financial statements. We have nothing to report in these respects.

Other information

The Authorised Corporate Director is responsible for the other information, which comprises the Authorised Corporate Director’s Report. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work:

• we have not identified material misstatements in the other information; and

• in our opinion the information given in the Authorised Corporate Director’s Report is consistent with the financial statements.

Report of the Auditor



Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where under the COLL Rules we are required to report to you if, in our opinion:

• proper accounting records for the Company have not been kept; or

• the financial statements are not in agreement with the accounting records.

Authorised Corporate Director’s AEW UK Investment Management LLP responsibilities

As explained more fully in their statement set out on page 14 the Authorised Corporate Director is responsible for: the preparation of financial statements which give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Company and its sub-funds’ ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Company or its sub-funds or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.

The purpose of our audit work and to whom we owe our responsibilities

This report is made solely to the Company’s shareholders, as a body, in accordance with Rule 4.5.12 of the Collective Investment Schemes sourcebook (‘the COLL Rules’) issued by the Financial Conduct Authority under the Open-Ended Investment Companies Regulations 2001. Our audit work has been undertaken so that we might state to the Company’s shareholders those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s shareholders as a body, for our audit work, for this report, or for the opinions we have formed.

Bill Holland for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL

29 March 2018

Report of the Auditor (continued)



AEW UK Core Property Fund


Fund Manager’s Report

Investment Update

With Brexit very much an unfolding event, we remain hopeful that 2018 will bring us closer to clearing the mist around Brexit and that this will unlock some of the ‘global investor’ log jam we see. The structure of a UK relative benchmarked core fund is increasingly attractive to global investors and they may become significantly active when the uncertainty lifts. Investor demand in the UK is still very strong for funds and structures investing in long inflation linked leases, but outside this area stock supply is much greater, as are opportunities for a value manager.

Whilst much has been written about the slower growth in the UK economy, it’s clear that, as yet, the healthy supply and demand balance in the subsectors we invest in continues to give good performance.

The Fund’s performance has again been strong delivering 15.2% over the year, reflecting a number of successful asset management initiatives. The Fund is ranked No1 in the AREF/IPD UK Quarterly Property Fund Index (UK PFI) over one, three and five years as at 31 December 2017. The return over the 5 year average is 14.7%. During 2017, the Fund secured an AREF/IPD performance award for the best risk-adjusted return over a 5-year period to the end of the second quarter of 2017, relative to the UK PFI.

We continue to sell retail and office assets at good prices relative to valuations and redeploy in the warehouse and alternative sectors. Letting and transactional activity still seem on course to increase our distribution yield to above 6% somewhat faster than previously indicated in the coming year, with perhaps some post-Christmas retailer insolvency as a most likely depressing factor.

The Fund NAV increased from to £243.1 million as at 31 December 2016 to £269.6 million as at 31 December 2017. During this period the Fund acquired nine new properties for a purchase price (plus costs) of £37.1 million and sold seven properties (less sale costs) for £37.5m. This has taken the number of properties held by the Fund as at 31 December 2017 to 70 properties. Following 31 December 2017, the Fund purchased four properties (plus costs) for £26.6m and sold a property (less sale costs) for £4.2m. The Fund has also exchanged on sale of a property for £6.4m with completion due in June 2018.



Performance

The Fund has experienced strong outperformance when compared to our peers in the AREF / IPD UK All Balanced Property Funds Index.

Source: AREF / IPD UK All Balanced Property Funds Index.

Source: Average distribution yield calculated by AEW using data from the AREF/IPD UK Quarterly Property Fund Index, and represents an unweighted average of the distribution yields of all Funds listed in the index (excluding Managed Property Funds which do not distribute their income).

Our efforts are focused on delivering income for our investors over time. We are aware that as a result of buildings being sold and expenditure on asset management initiatives, our income return has reduced in recent periods, although it remains high. As rents start to flow, our income yield, off the current valuation, should rise significantly.

Portfolio statistics

4

10

6

12

14

2

8

16

%


All Balanced Property Fund Index

3 months 6 months 9 months 1 year 3 years 5 years

Fund performance as at 31 December 2017 (%)

3.5% 3.1%

6.9%

5.6%

11.7%

8.0%

15.2%

10.2%

11.6%

8.4%

14.7%

10.3%

2

4

6

8

10

12

%

Historic distribution yields since inception (%)

31 December 2013


AREF/IPD UK All Balanced Property Funds Index Average Distribution Yields

31 December 2014

10.3%

5.4%

8.9%

4.8%

31 December 2015

31 December 2016

31 December 2017

7.9%

4.3%

6.2%

4.5% 4.8%4.2%


Fund Manager’s Report (continued)

50

100

150

300

250

200

31 December2012

Historic Net Asset Value Trend since inception (£m)

31 December2013

31 December2017

31 December2015

31 December2014

269.6

31 December2016

243.1225.4

78.1

174.2

36.9


20

60

80

40

100

10

50

70

30

90

%

31 December2016

Occupancyrate as % of rental value

Vacancy rate as % of rental value

Occupancy/vacancy rate

31 December 2017

31 December2016

Number of tenancies

31 December 2017

61

62

63

64

70

65

69

68

66

67

31 December2016

Number of properties

31 December 2017

67

70 82.30

17.70

220

240

260

320

300

280

140

160

200

180

296

240

89.70

10.30



Sector allocation

31 December 2017

Offices, Rest of South East and UK 20.8%City Offices, 0.0%West-end Offices, 0.0%Standard Retail, 16.7%Industrials, 32.2%Retail Warehouses, 11.2%Other, 10.9%Shopping Centres, 2.2%Cash, 6.0%

31 December 2016

Offices, Rest of South East and UK 31.4%City Offices, 0.0%West-end Offices, 0.0%Standard Retail, 20.5%Industrials, 22.7%Retail Warehouses, 12.1%Other, 6.3%Shopping Centres, 2.4%Cash, 4.6%

Geographical allocation

31 December 2017

West Midlands, 21.0%South East, 14.5%Yorkshire and Humberside, 7.0%Eastern, 9.3%Wales, 4.1%Rest of London, 5.7%South West, 18.1%North West, 12.2%North East, 3.4%Scotland, 4.7%

31 December 2016

West Midlands, 19.6%South East, 17.3%Yorkshire and Humberside, 5.8%Eastern, 12.5%Wales, 4.6%Rest of London, 3.9%South West, 20.1%North West, 7.3%North East, 3.8%Scotland, 5.1%


Asset Management reportGeneralThe Asset Management team at AEW UK is focused on preserving and generating new income and driving capital growth predominantly through new lettings, refurbishments and lease re-structuring. Over the past year, our in-house asset managers have identified trends in the wider UK market, resulting in opportunities to add value to the Fund’s properties. This has resulted in approx. £2.5m/330,000 sq ft of deals (new lettings/renewals/regears) across the Fund, equating to circa 12.5% of the total Fund income/circa 8.5% total floor area.

The value add initiatives that have had the most significant impact on value are:

1) Refurbishing and letting grade A office space;

2) Capturing rental growth in the supply constrained industrial sector; and

3) Securing residential planning consent, via Permitted Development Rights (PDR), on office space.

The above opportunities have been identified in a number of the Fund’s properties. Consequently we have been able to drive the Fund’s performance, albeit with a temporary reduction on the Fund’s dividend yield as a result of vacancy.

Successful new lettings of refurbished office spaceWhere the Fund has committed capital expenditure, refurbishing well located office space, we have secured lettings to strong tenants at above our valuers estimated rental value (“ERV”).

730 Aztec West, Bristol

730 Aztec West is located on Bristol’s Premier Business Park location, which is one of the country’s leading out of town business parks located adjacent to the M4/M5 interchange. The property is a modern well configured flexible office building with excellent natural daylight and floor to ceiling height.

The property was refurbished which allowed us to attract Taylor Wimpey to the building with the letting of 11,399 sq ft of office space at a rent of £205,182 pa (£18.00 psf). In doing so, we let the entire ground floor to a strong tenant at above ERV (£17.50 psf) only two months following practical completion of the refurbishment.

We further competed the letting of the part first floor to Original Insurance Services Ltd on a 10 year ex-Act lease with a 5 year break. We achieved a new headline rent at £19.25 psf.

Reception Typical Office Floor




Freshford House, Bristol

Freshford House was purchased in 2014. It is centrally located in Bristol, close to Temple Meads railway station with flexible floor plates. The property was refurbished in 2005, but required some additional capital expenditure to maximise the rental profile.

We undertook minor improvements, such as the installation of shower facilities, providing cycle parking, increasing the car parking provision and creating a larger more inviting reception.

In late 2016 we completed our first letting, which acted as a catalyst for further success going into 2017, where we let the remaining accommodation at circa 30% above the ERV we had assumed on purchase (£18 psf).

During last year, we let approx. 4,700 sq ft to Fujitsu on the ground floor at £23 psf and 15,500 sq ft on the first and part second floors to Epic Medical on a 10 year lease at a rent of £23.50 psf. The remaining 5,200 sq ft on the part second floor was let to Milstead Langdon at £23.50 psf.

Rental growth in the industrial sector With a supply-pinched market and consistently improving tenant demand, industrial units are letting at rents above ERVs. Rents have been helped by a significant lack of speculative development in the industrial sector for the past 10 years.

Intec Business Park, Basingstoke

This business park is located in a well established commercial area of Basingstoke and consists of a fully landscaped 13 acre site. Following conversion of some offices into industrial we achieved letting success throughout 2017. 10 units were converted and 50% of these unit are now let. The most recent lettings completed at a rent of £8.25 per sq ft, approximately 10% above ERV. Further units are currently under offer with good levels of tenant demand in general.

Before Conversion After Conversion

Peartree Business Park, Dudley

Following the acquisition of the asset, the lease was regeared to the incumbent tenant for a further 5 years at £104,250 pa (£4.00 psf), more than 16% above the passing rent (£89,500 pa / £3.78 psf) with no tenant incentive.

Globe Square, Dunkinfield

We have completed 25,142 sq ft of new lettings amounting to £106,665 pa of new income. These new lettings have firmly established the tone of the estate at £3.75 psf. The value of the property has subsequently increased.




Blackpole Industrial Estate, Worcester

Blackpole Industrial Area is the principal industrial area of Worcester with positive supply-demand dynamics. Our two neighbouring units (F&G), measuring 51,000 sq ft, were purchased in January 2017. The rent on purchase reflected approximately £3.15 psf, which we felt was below the market rate.

We held various discussions with the tenant on their occupation requirements, finally agreeing a lease extension of 15 years at a headline rent of £4.25 psf, circa 25% above the current passing rent.

Wallows Industrial Estate, Brierley Hill

Following various discussion and negotiations, the tenant in May 2016 decided against actioning their break option and committed to the building for a further 5 years. This enabled us to undertake the outstanding May 2016 rent review. After protracted negotiations we successfully agreed the rent review in Q3 2017 at rent of £435,000 pa, £75,000 / 21% above the passing rent.

Crystallising value through disposalsHaving executed the asset management initiatives, i.e. letting refurbished/vacant accommodation, completing lease renewals/regears and securing alternative use values (via permitted development rights), a decision was made to sell a number of the properties last year, crystallising the capital appreciation achieved.

Freshford House, Bristol

Having carried out a refurbishment of the property and subsequently fully re-let it, we sold the property for £9.8m. The property was originally acquired for £3.6m and the Fund spent £1.2m on refurbishment.

Cranfield Technology Park, Cranfield

Having initially purchased the long leasehold interest, the freehold was subsequently acquired and the two interests merged. A decision was then made to dispose of the property, capitalising on the asset’s improved liquidity and the limited supply of investment stock in the South East office market. Contracts for the disposal completed in July for £13.4m, £1.15m above valuation.

Zenith House, Solihull

Purchased for £2.75m fully let to Paragon Finance, this building was refurbished in 2016 after the tenant decided to vacate. The building was sold for £4.3m in October 2017.

Century Court, Rickmansworth

With the tenant vacating Unit 1 in October 2016, the Fund applied for PDR consent to convert to residential as opposed to refurbish as offices. Having been granted residential approval (May 2016), we sold the property to a residential developer for £1.2m (£230 psf).

9-19 Bold Street

We have sold off the upper parts on a 250 year leasehold for £850,000 to Uniform Communications who were occupying the part second floor.




Other deals

Bridgefoot House, Radlett

We secured a £96,270 pa uplift on the December 2016 rent review. The new rent of £575,400 (£14.11 psf) is 15% in excess of ERV (£500,000 pa).

St Mary’s Square, Swansea

After protracted lease renewal procedures, we have renewed the HMV lease on a 5 year term with a 3 year break at £190,000 pa with no rent free period.

Commercial Road, Portsmouth

We have renewed The Bank of Scotland’s (trading as Halifax) two leases for a period of 5.5 years at a combined rent of £150,000 pa with no rent free periods.

Dudley Street, Wolverhampton

We have renewed Card Factory’s lease for a 10 year term with a break in year 5 at £103,000 pa.

Przym, Kingston upon Thames

We have secured an £86,181 pa rental uplift on the September 2017 rent review to £776,181 pa.

St David’s Retail Park, Swansea

We completed the agreement for lease (subject to PC) to a financially robust Starbuck’s franchisee, for a 1,800 sq ft drive-thru pod development. The tenant has taken a 15 year RPI index linked lease, paying a rent of £58,500 pa.




Environmental, Social & Governance

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.

The Fund continues to demonstrate year-on-year improvements, with a 7 percentage point increase in the score this year. This include an improvement in each of the seven GRESB ‘Aspects.’

GRESB scores overall performance through two Dimensions:

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

• The Fund achieved a score of 55 out of 100, which was 4 percentage point above the peer group average.

• The Fund outperformed its peer group despite the Fund’s composition, which sees a higher percentage of indirectly managed (FRI lease) assets at 72% compared to 28% that are directly managed (i.e. multi-let) assets.

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

• The Fund scored 92 out of 100, which outperformed both the peer group (80) and GRESB global average (72).

• This was due to the development of Fund level policies and initiatives which are directly applicable to the Fund (e.g. Environmental, Governance and Employee Policies).

MEES

AEW UK are committed to ensuring compliance with MEES regulations, which are due to come into effect from April this year and require 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.

This has seen a 8% increase in ‘C’ rated assets across the Fund and a reduction in ‘G’ rated risk assets (from 5% ERV in 2017 to 3% ERV in February 2018).

One further ‘risk’ EPC is due to re-assessment, with three ‘risk’ EPCs still present in the portfolio after re-assessment. An example of how we will bring ‘risk’ EPCs in line with MEES is at Unit 10 The Rivergate, Peterborough, where we are due to undergo the necessary fit out requirements to push the unit to a MEES compliant rating.

The Fund has action plans in place to mitigate EPC below E and any future risk of MEES.

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






Portfolio Acquisitions in 2017

Units 8, 9 & 10, Bloxwich Lane, WalsallLow capital value in established industrial location

Property characteristics Investment summary• Well located unit is an established

location next to motorway junction/prominent road frontage position

• Low capital value per sq ft and low passing rent

• Lack of similar sized stock

Property type Industrial

Property size 76,853 sq ft

Purchase date June 2017

Year built 1970’s

Initial yield 8.0%

Reversionary yield 9.2%

Puma Distribution Unit, BatleyLow capital value in established industrial location

Property type Retail warehouse Investment summary• Very limited supply of existing stock in

wider area


• Distribution space that would suit a second tier 3PL operator / distributor

• Higher value alternative uses adjoining


Purchase date May 2017

Year built 1970’s

Initial yield 10.6%


Mecca Bingo, Caesar’s Palace, LutonLong income secured against a strong covenant

Property characteristics Investment summary• Long term redevelopment potential,

subject to planning

• Income secured against a strong tenant

• WAULT significantly longer than the fund’s average WAULT

• Large site area of 3.7 acres

Property type Leisure


Purchase date February 2017

Year built 1967

Initial yield 7.7%





Portfolio Acquisitions in 2017 (continued)

Planet Ice, Milton KeynesPrime freehold leisure investment

Property characteristics Investment summary• South East town centre location

• 20 year lease with RPI reviews

• Low passing rent

• Potential alternative uses including retail warehousing, subject to planning



Purchase date January 2017

Year built Recently refurbished

Initial yield 6.8%


Block L, Peartree Business Park, DudleyEstablished industrial location

Property characteristics Investment summary• Established industrial location

• Modern premises with potential for reversion

• Low capital value

• Rental growth in medium term due to a lack of competing stock increasing tenant demand




Year built 1990’s

Initial yield 7.8%


Unit F & G, Blackpole Trading Estate, WorcesterEstablished industrial location

Property characteristics Investment summary• Established industrial location


• Reversionary Rent

• Potential to re-gear with tenant




Year built 1970’s

Initial yield 7.8%






233 High Street, UxbridgeProminent town centre leisure location

Property characteristics Investment summary• Adjacent to the Intu Chimes Shopping

Centre. Future redevelopment opportunities, to extend the Chimes food and beverage area

• Low capital value per sq ft

• Income secured for a WAULT of 9 years with 82% linked to RPI

• Large town centre site of 0.7 acres



Purchase date July 2017

Year built 1930’s

Initial yield 7.0%


Warehouse, Weston Road, CreweEstablished industrial and distribution location

Property type Warehouse Investment summary• Second hand unit in prime, well

established location

• Low capital value per sq ft

• Multi-let to two tenants with a WAULT of 4.6 years (2.6 years to break)

• Purchase price fully underpinned by vacant possession value


Purchase date September 2017

Year built 1977

Initial yield 9.2%


The Bear, Ditchfield Road, WidnesSingle let high bay industrial warehouse

Property characteristics Investment summary• Low capital value per sq ft

• Low passing rent

• Reversionary

• Lease length 1.8 to break and 6.8 to expiry

• Close proximity to the new Mersey gateway bridge opened in October 2017

Property type Warehouse


Purchase date December 2017

Year built 1970s

Initial yield 7.3%


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.


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, IPD 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, 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.

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 GuidelinesParameters Guidelines

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)

• Other

The Fund will be limited to the AREF/IPD 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

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

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

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

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

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

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

10% of NAV

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



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 31 December 2017, 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 70 Immovables held in the scheme and described in the attached schedule, as at 31 December 2017 (the measurement date), was £254,280,000 (Two Hundred and Fifty Four Million, Two Hundred and Eighty Thousand Pounds).

This valuation has been undertaken in accordance RICS Valuation – Global Standards 2017, incorporating the International Valuations Standards, and RICS Professional Standards UK January 2014 (revised April 2015). References to “the Red Book” refer to either or both of these documents, as applicable.

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.

Report of the Valuer



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.

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, Brierly 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.

Report of the Valuer (continued)



Centre 27, Birstal, Leeds

In respect of the Centre 27, Birstal, Leeds we have had sight of a Structural report prepared by ACIES, dated 30 September 2014. The report states that parts of the south eastern corner of the site are located on a former landfill site which has led to subsidence issues with Units 6 and 7. It concludes that the movement of Unit 6 has stopped and that the building is therefore considered stable. However, the report states that Unit 7 is still showing signs of movement, albeit ACIES concludes that the extent of the movement is considered minor in magnitude.

In addition, the Phase 1 desk top Environment Assessment summary, prepared by Delta Simons Consultants Ltd, dated 3 November 2014, notes that the site is underlain by a coal seam which may have been worked. We have assumed that the load bearing qualities of the site of the property is sufficient to support the buildings constructed thereon. However, should the site be redeveloped in the future, Delta Simons have recommended that a full and detailed ground investigation of the site be commissioned before any works are 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. We have allowed for remedial costs of £225,000 within the valuation.

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

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 available from Knight Frank LLP. 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, Valuations Associate, ValuationsFor and on behalf of Knight Frank LLP For and on behalf of Knight Frank LLP




Portfolio Statementas at 31 December 2017

Investment Properties


Market Value £’000

Net Assets %

Sector

Industrial 22 86,985 32

Offices 15 56,350 21

Retail:

– Standard Retail 13 45,175 17

– Retail Warehouses 11 30,340 11

– Shopping Centres 2 5,900 2

Other 7 29,530 11

Total Portfolio of Investments 70 254,280 94

Other Assets and Liabilities 15,279 6


Market value

Industrial

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

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

Adare Pressicion Ltd, Kineton Road Industrial Estate, Southam Under £5m

Unit 15C, Blackpole Trading Estate, Worcester Under £5m

The Bear, Ditchfield Road, Widnes Under £5m

Oak Furniture Land, Cheney Manor, Swindon Under £5m

Blochairn Industrial Estate, Glasgow Under £5m

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

Puma Distribution Unit, Batley Under £5m

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

Globe Square Industrial Estate, Duckinfield Under £5m

Units F & G, Cosgrove Close, Worcester Under £5m

Whitehall Trading Estate, Bristol Under £5m

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

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

MESL Microwave, 1 Queen Anne Drive, Newbridge Under £5m



Market value

Industrial (continued)

Unit 1 Jamage Industrial Estate, Stoke on Trent Under £5m

Tata Steel, Chainbridge Road, Blaydon on Tyne Under £5m

Block L, Peartree Business Park, Dudley Under £5m

Wakefield 41, Grandstand Road, Wakefield £5m to £10m

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

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

Offices

River Court, Uxbridge Under £5m

Tangent Court, Solihull Under £5m

Norseman and Westcott House, South Queensferry Under £5m

River Court, Woking Under £5m

Centre 27, Birstall Under £5m

Cadogan House, Reading Under £5m

Tangent House, Reading Under £5m

30A, 32 & 43 South Gyle Crescent, Edinburgh Under £5m

Dakota House, Colnbrook Under £5m

Units 6, 7 and 8 Century Court, Rickmansworth Under £5m

Buchanan Gate, Glasgow Under £5m

730 Aztec West, Bristol £5m to £10m

Bridgefoot House, Radlett £5m to £10m

Cresta House, Luton £5m to £10m

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

Retail

24-32 Bond & 59-65 Horsefair, Bristol Under £5m

Jerome Retail Park, Walsall Under £5m

Chaffinch Retail Park, Castletown Under £5m

Imperial Arcade, Brighton Under £5m

21-25 Bold Street, Liverpool Under £5m

Go Outdoors, New Hall Street, Stoke-on-Trent Under £5m

91/101 Lower Precinct, Coventry Under £5m

Portfolio Statement (continued)as at 31 December 2017



Market value

Retail (continued)

55-63 Cornwall Street and 135-147 Armada Way, Plymouth Under £5m

105-109 Foregate Street, Chester Under £5m

School Brow Retail Park, Warrington Under £5m

New Street Retail Park, Ashford Under £5m

46 and 47/48 Dudley Street, Wolverhampton Under £5m

50 New George Street & 131/133 Armada Way, Plymouth Under £5m

Wickes, Glebe Road, Scunthorpe Under £5m

175/177 Commercial Road, Portsmouth Under £5m

69 Above Bar Street, Southampton Under £5m

Rowland Hill Shopping Centre, Kidderminster Under £5m

Magnet Limited, Pontrack Lane, Stockton on Tees Under £5m

Poundstretcher & HSS, Wallgate, Wigan Under £5m

589-613 Hagley Road, West Quinton Under £5m

1-3 Salter Row, Pontefract Under £5m

The Rivergate Shopping Centre, Peterborough Under £5m

Castleview, Castletown Under £5m

18/20 St.Mary’s Square, Swansea £5m to £10m

St Davids Retail Park, Morriston £5m to £10m

36-42 Old Christchurch Road, Bournemouth £10m to £15m

Other

Monkspath Leisure Park, Solihull Under £5m

Caesar's Palace, Skimpot Road, Luton Under £5m

Planet Ice, Milton Keynes Under £5m

233 High Street, Uxbridge Under £5m

Travelodge, Thurrock Under £5m

Ryde Arena, Ryde Under £5m

Pryzm, Kingston Upon Thames £10m to £15m




Purchases and sales for the year

Cost £’000

Purchases

Block L, Peartree Business Park, Dudley Under £5m

Units F & G, Cosgrove Close, Worcester Under £5m

Planet Ice, Milton Keynes Under £5m

Caesar's Palace, Skimpot Road, Luton Under £5m

Puma Distribution Unit, Batley Under £5m

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

233 High Street, Uxbridge Under £5m

The Bear, Ditchfield Road, Widnes Under £5m

Warehouse, Weston Road, Crewe £5m to £10m

Total purchases for the year 37,067

Proceeds £’000

Sales

Burgess House, Coventry Under £5m

9-19 Bold Street, Liverpool (Upper Floors) Under £5m

Unit 1 Century Court, Rickmansworth Under £5m

55/63 Murraygate, Dundee Under £5m

Belvedere House, Basingstoke £5m to £10m

Trent House, Derwent House, Cranfield Innovation Centre, Cranfield £5m to £10m

Freshford House & WCA House, Bristol £5m to £10m

Total sales for the year 37,504

Purchases for the year include associated acquisition costs, with sales in the year stated net of sales costs.

Summary of Material Portfolio Changesfor the year ended 31 December 2017



Fund Information

Accounting and Distribution dates

XD date

First interim distribution 31 March 2017

Second interim distribution and half year end 30 June 2017

Third interim distribution 30 September 2017

Final distribution and year end 31 December 2017

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% for the year ended 31 December 2017.

Distributions in the year

First Interim 31 March

2017 (p)

Second Interim 30 June

2017 (p)

Third Interim 30 September

2017 (p)

Final Distribution

31 December 2017

(p)

Share Class

Share Class A income 1.461 1.359 1.502 1.833

Share Class B income 1.461 1.359 1.502 –

Share Class C income 1.461* 1.359* 1.502* 1.833*

Share Class E income 1.735 – – –

* Gross distribution.



Performance Record

Year Share Class

Highest Share price

(p)

Lowest Share price

(p)

2017^ A income 135.79 124.86

2017^ B income 135.63 124.86

2017^ C income 135.79 124.86

2017^ E income† 127.54 124.96

2016 # A income 126.59 107.52

2016 # B income 126.59 107.52

2016 # C income 126.59 107.52

2016 # E income 126.79 107.60

2015 * A income 124.22 118.42

2015 * B income 124.22 118.42

2015 * C income 124.22 118.42

2015 * E income 124.42 120.64

^ From 1 January 2017 to 31 December 2017. † The E Income Share Class holding were fully converted to Share Class A holdings in May 2017. # From 1 January 2016 to 31 December 2016. * From 1 January 2015 to 31 December 2015.

Summary of share dealing as at 31 December 2017

A income B income C income E income

Opening shares in issue 184,912,188.054 572,870.240 16,010,179.363 8,035,272.787

Shares issued in the year 4,174,348.018 – 37,897.424 –

Shares cancelled in the year (1,006,870.537) (572,870.240) (161,144.897) –

Shares converted in the year 8,041,605.273 – – (8,035,272.787)

Closing shares in issue 196,121,270.808 – 15,886,931.890 –

Fund Information (continued)



NAV (as calculated in accordance with the Prospectus)

Year Share Class

NAV of Share Class

£’000 Shares in issue

NAV per share

(p)

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 – – –

31 December 2016 A income 214,562 184,912,188.064 116.03 31 December 2016 B income 665 572,870.240 116.03 31 December 2016 C income 18,577 16,010,179.363 116.03 31 December 2016 E income 9,324 8,035,272.787 116.03

31 December 2015 A income 207,981 178,067,509.356 116.8031 December 2015 B income 1,007 862,129.754 116.8031 December 2015 C income 7,074 6,056,155.051 116.8031 December 2015 E income 9,385 8,035,272.787 116.80

* The Share Class E Income holdings were fully converted to Share Class A Income holdings in May 2017.** The Share 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.

Share dealing

Turnover of shares

During the year ended 31 December 2017, 4,212,245.442 shares were created, 1,740,885.674 shares were redeemed. 8,035,272.787 Class E Shares were converted to 8,041,605.273 Class A Shares. 15,164,063.440 shares were traded on the secondary market in 2017.

The brokerage facility for secondary market trades was provided by CBRE Capital Advisors Ltd. There has been no consolidation or sub-division of units during the year.

Subscriptions

Eligible Investors may purchase shares 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 shares in the Fund will be processed at the share 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 shares 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 shares 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.

Redemptions

Every shareholder is entitled on any dealing day for redemption to redeem its shares 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 shares in the Fund will be processed at the share 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 December 2017 there were 250,294.914 shares in the redemption queue which were redeemed in January 2018.

Deferrals

Where the ACD considers it to be in the best interests of the Shareholders, 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 Shareholders to do so. The ACD will review the position every month.

The ACD must give Shareholders notice of the deferral no later than seven business days before the relevant dealing day for redemption. The price at which the shares will be redeemed will be the price for redemptions on the dealing day for redemption on which the shares 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 Shares in any or all of the Funds, where, due to exceptional circumstances, it is in the interests of all the Shareholders 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 Shareholders. For further information, please refer to clause 3.13 of the Prospectus. There have been no deferrals or suspensions during the year.

Adjustments to share price

In unusual market conditions the ACD in consultation with the Governance Committee, may adjust the share 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 IPD, the Valuers and other material information which the ACD may think fit. This is to protect the interests of all Shareholders by ensuring that shares 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 shares through the ACD, shares 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 shares in issue 33 10.46

1% or greater but less than 2% 2 3.55



8% or greater 3 47.12

Total 48 100.00

Percentage held by largest investor 20.64

Percentage held by top 5 investors 58.93

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 twelve month period to 31 December 2017:

Year ended31 December

2017

Total remuneration paid to employees during financial year:

a) remuneration, including, where relevant, any carried interest paid by the AIFM; £2,342,894

b) the number of beneficiaries 26

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

a) senior management £604,939

b) members of staff £1,737,955

Fixed remuneration

£

Variable remuneration

£

Total remuneration

£

Senior management 604,939 – 604,939

Staff 1,458,955 279,000 1,737,955

Total 2,063,894 279,000 2,342,894

Fixed remuneration comprises basic salaries and variable remuneration comprises bonuses.

Fund Performance

Year ended 31 December

2017 %

AREF / IPD All Balanced Property Fund Index – weighted average 10.2

AEW UK Core Property Fund 15.2





2017 %

Total Expense Ratio for the accounting year

Fund Management Fees 0.70

Fund Operating Expenses 0.44

Total Expense Ratio (‘TER’) 1.14

Property Expense Ratio (‘PER’) (excludes items in TER) 1.78

Real Estate Expense Ratio (‘REER’) (TER + PER) 2.92

Transaction Costs 1.08

Performance Fees 0.25

Portfolio Turnover Ratio 25.90

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 year.

The following table analyses the operating costs incurred by the Fund for the year ended 31 December 2017:


2017 %

Management Fees 0.70

Performance Fees 0.25

Depositary Fees 0.04

Valuation Fees 0.05

Other variable Fees 0.10

1.14




AREF Code of Practice

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 aims to achieve best practice compliance with the AREF Code of Practice. The Fund completes the AREF/IPD Pooled Property Questionnaire each quarter, which is made available to all investors and which forms the basis of its entry in AREF/IPD Property Fund Vision handbook.

Risk Warning

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

Past performance is no guide to the future. The value of shares, 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.




Year ended 31 December 2017


Notes £’000 £’000 £’000 £’000

IncomeNet capital gains/(losses) 3 22,629 (2,808)

Revenue 5 21,349 22,575

Expenses:

Direct property expenses 6 (4,720) (5,301)

Operating expenses 6 (2,647) (2,382)

Interest payable and similar charges 7 (372) (383)

Net revenue before taxation 13,610 14,509

Taxation 8 – –

Net revenue after taxation 13,610 14,509

Total return before distributions 36,239 11,701

Distributions 9 (13,000) (14,509)

Change in net assets attributable to Shareholders from investment activities 23,239 (2,808)

Statement of Changes in Net Assets Attributable to Shareholdersfor the year ended 31 December 2017



£’000 £’000 £’000 £’000

Opening net assets attributable to Shareholders 243,128 225,447

Amounts receivable on issue of shares 5,272 22,220

Amounts payable on cancellation of shares (2,285) (2,922)

2,987 19,298

Dilution adjustment 205 1,191Change in net assets attributable to Shareholders from investment activities 23,239 (2,808)

Closing net assets attributable to Shareholders 269,559 243,128

The notes on pages 51 to 69 form an integral part of these Financial Statements.

Statement of Total Returnfor the year ended 31 December 2017



As at 31 December 2017


Note £’000 £’000 £’000 £’000

Assets

Fixed assets:

Investment properties 10 230,722 221,273

Current assets:


Debtors 11 4,893 7,352

Cash and bank balances 12 17,159 11,284

Total current assets 46,002 31,705

Total assets 276,724 252,978

Liabilities

Long term liabilities

Finance lease obligations 14 (1,924) (4,518)

Current liabilities

Finance lease obligations 14 (195) (455)

Investment liabilities 16 – (128)

Distribution payable 16 (3,931) (3,130)

Other creditors 16 (1,115) (1,619)

Total current liabilities (5,241) (5,332)

Total liabilities (7,165) (9,850)

Net assets attributable to Shareholders 269,559 243,128

The Financial Statements on pages 48 to 69 were approved by the ACD on 29 March 2018 and signed on their behalf by:

On behalf of the ACD


Balance Sheetas at 31 December 2017



Statement of Cash Flowsfor the year ended 31 December 2017



£’000 £’000 £’000 £’000

Total return before distributions for the year 36,239 11,701

Adjustments for:

Capital (gain)/loss on investments (22,629) 2,808

Finance costs 372 383

Decrease/(increase) in income debtors 2,448 (3,900)

Decrease in income creditors (504) (1,082)

Net cash generated from operating activities 15,926 9,910

Cash flows from investing activities

Paid for the purchase of investment properties (37,388) (8,258)

Paid on capital expenditure (788) (6,215)

Received on sale of investment properties 37,504 9,637

Net cash used in investing activities (672) (4,836)

Cash flows from financing activities

Proceeds from issue of shares 5,272 22,220

Payments on cancellation of shares (2,285) (2,922)

Equalisation received 25 46

Dilution adjustment received 205 1,191

Credit facility repaid – (5,211)

Finance costs paid (372) (485)

Distribution paid (12,224) (15,436)

Net cash used in financing activities (9,379) (597)

Net increase in cash for the year 5,875 4,477

Cash and cash equivalents at start of the year 11,284 6,807

Cash and cash equivalents at end of the year 17,159 11,284




1. Accounting policies

1.1 Basis of accounting

The Financial Statements have been prepared under the historical cost basis, as modified by the revaluation of investment properties, 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.

1.2 Revenue

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 insurance or service charge rebates are recognised within other income.

Any dilapidation is recognised as income when received.

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 share classes

Any revenue or expenses not directly attributable to a particular share class will normally be allocated pro-rata to the net assets of the relevant share 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 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 at 20% on taxable revenue, after the deduction of allowable expenses.

Notes to the Financial Statementsfor the year ended 31 December 2017



1. Accounting policies (continued)

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 Shareholders.

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 Shareholders for more than six years are credited to the capital assets of the Fund.

1.7 Equalisation

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

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 year when they arise.

Investment properties are valued by the Valuation Agent on the basis of a full valuation with physical inspection at least once a year. Any valuation of an Immovable by the Valuation Agent must be undertaken in accordance with the current issue of RICS Valuation – Professional Standards (the ‘Red Book’), or in the case of overseas immovables, on an appropriate basis, but guided by the FCA Rules.

Notes to the Financial Statements (continued)for the year ended 31 December 2017




1.8 Investment properties (continued)

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 levy

In the PAIF a dilution levy will be reflected in the calculation of the share 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, proposed by the ACD and independently reviewed by the Governance Committee, to reflect the value of the assets in such circumstances based on information received from MSCI, valuation agents 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 debtor which are stated at transaction value less premium for impairment. 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 liabilities

All 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 Creditors

Creditors are stated at their transaction value. Amounts received in respect of future years 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 recognised valuation techniques. These techniques comprise both the Yield Method and the Discounted Cash Flow Method. In some cases, the fair values are determined based on recent real estate transactions with similar characteristics and location to those of the Fund assets. Any valuation of a property by the Valuation Agent must be undertaken in accordance with the current issue of RICS Valuation – Professional Standards (the ‘Red Book’).

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 shareholder 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. Risk management policies (continued)

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 valuing is difficult. Real estate 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 shares 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.





2.3 Credit risk (continued)

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

As at 31 December

2017 £’000

As at 31 December

2016 £’000

Debtors (excluding prepayments) 2,959 5,314

Bank and cash 17,159 11,284

Total 20,118 16,598

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 shares.

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 and the Governance Committee, decide to suspend both subscriptions and redemptions of shares 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 ACD maintains close investor relationships in order to gauge redemption requirements.




3. Net capital gains/(losses)


2017 £’000


2016 £’000

Proceeds from sales of investment properties during the year 37,504 9,637

Carrying value of investment properties sold during the year (31,278) (8,750)

Gains realised on investment properties during the year 6,226 887

Net unrealised valuation gain/(loss) on investment properties 16,966 (3,555)

Movement in rent free debtor (563) (140)

Net capital gains/(losses) 22,629 (2,808)

4. Purchases and transaction costs

% of principal purchase

price


2017 £’000


2016 £’000

Purchases excluding transaction costs 34,860 7,755

Commissions 1.0 349 126

Taxes 4.7 1,630 366

Other costs 0.7 228 11

Total purchase transaction costs 6.4 2,207 503

Purchases including transaction costs 37,067 8,258




5. Revenue


2017 £’000


2016 £’000

Rental income 20,321 21,812

Dilapidation income 837 403

Lease surrender income 55 350

Sundry property income 136 10

Total revenue 21,349 22,575

6. Expenses


2017 £’000


2016 £’000

Direct property expenses:

Irrecoverable service charges 1,281 1,330

Empty rates 1,123 1,419

Property legal and professional fee 611 835

Head rent 345 480

Lease renewals 295 105

Letting fees 282 254

Other property expenses 212 257

Utility fees 157 140

Managing agents fees 148 166

Valuer’s fee 118 117

Insurance 84 67

Marketing fees 64 131

Total property expenses 4,720 5,301




6. Expenses (continued)


2017 £’000


2016 £’000

Expenses associated to the ACD:

Management fee 1,770 1,588

ACD’s performance fee 632 567

Expenses associated to the Depositary:

Depositary fee 96 91

Other operating expenses:

Auditor’s fee 27 47

Irrecoverable value added tax 18 –

Governance committee fees 14 13

Tax agent fees 14 8

VAT agent fees 10 13

Other operating expenses 66 55

Total operating expenses 2,647 2,382

Total expenses 7,367 7,683

7. Interest payable and similar charges


2017 £’000


2016 £’000

Analysis of finance costs

Loan arrangement fee 181 117

Loan interest – 22

Loan commitment fee 183 238

Bank charges 8 6

Total finance costs 372 383




8. 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.


2017 £’000


2016 £’000

(a) Analysis of tax charge for the year

UK corporation tax – –

Total tax charge – –

(b) Factors affecting the tax charge for the year

Net income before taxation 13,610 14,509

Theoretical tax at UK corporation tax rate of 20% 2,722 2,902

Net property income not taxable (2,722) (2,902)





9. Distributions


2017 £’000


2016 £’000

(a) Analysis of distributions

First interim 3,090 4,244

Second interim 2,864 3,976

Third interim 3,185 3,253

Final interim 3,886 3,082

Total distributions 13,025 14,555

Equalisation received on the issue of shares (25) (46)

Net distribution for the year 13,000 14,509

(b) Reconciliation of net revenue after taxation to distributions


Less: Reinvestment of dilapidation income* (610) –

Total distributions for the year 13,000 14,509

* Total dilapidation income for the year was £837k of which £610k was reinvested to bring the relevant properties into a lettable condition.




10. Investment properties


2017 £’000


2016 £’000

At valuation:

At beginning of year at valuation 230,533 228,365

Acquisitions during the year 37,271 8,258

Capital expenditure during the year 788 6,215

Carrying value of properties sold during the year (31,278) (8,750)

Net unrealised gain/(loss) on revaluation 16,966 (3,555)

Professional valuation 254,280 230,533

Adjustment for rent incentive debtor (1,727) (1,164)

Adjustment in respect of minimum payment under head leases separately included as a liability as the Balance Sheet 2,119 4,973

Carrying value at the end of the year 254,672 234,342

Represented as:

Investment properties – non current 230,722 221,273

Investment properties – current 23,950 13,069

At end of year 254,672 234,342

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 – Professional Standards (incorporating the International Valuation Standards).

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.




10. Investment properties (continued)The following tables show an analysis of the fair values of financial instruments recognised in the balance sheet:

31 December 2017

Class 1 £’000

Class 2 £’000

Class 3 £’000

Total £’000

Assets measured at fair value*

Investment properties – – 254,280 254,280

Professional valuation – – 254,280 254,280

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

Explanation of the fair value hierarchy:

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

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

Class 3 – Valuation techniques using non-observable data.

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

The significant unobservable inputs used in the fair value measurement categorised within Class C 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

Increases (decreases) in the ERV (per sq ft p.a.) and rental growth p.a. in isolation would result in a higher (lower) fair value measurement. Increases (decreases) in the long term vacancy rate and discount rate (and exit or yield) in isolation would result in a lower (higher) fair value measurement.




10. Investment properties (continued)The significant unobservable inputs used in the fair value measurement categorised within Class 3 of the fair value hierarchy of the portfolio of investment property are:

31 December 2017

ClassFair Value £’000

Valuation Technique

Key Unobservable Inputs Range

Investment Property £254,280 Income capitalisationERV per sq ft Discount rate

£1.60-£110.00 6.12% – 15.67%

31 December 2016


Valuation Technique



£1.58-£125.00 3.33% – 14.79%

Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Class 3 of the fair value hierarchy amount to net unrealised gain of £16,966,000 and are presented in the Statement of Total Return under line item ‘net capital gains/(losses)’.

The carrying amount of the assets and liabilities, detailed within the balance sheet is considered to be the same as their fair value.

11. DebtorsAs at

31 December 2017

£’000

As at 31 December

2016 £’000

Capital VAT receivable 131 563

Capital expenses 11 1,263

Total capital debtors 142 1,826

Held by rent agent 560 371

Prepayments and other debtors 192 874

Rent receivable 2,272 3,117

Rent incentive debtor 1,727 1,164

Total income debtors 4,751 5,526

Total debtors 4,893 7,352




12. Cash and bank balance

As at 31 December

2017 £’000

As at 31 December

2016 £’000

Amounts held at bank 17,159 11,284

Total cash and bank balances 17,159 11,284

13. Interest bearing loans and borrowings


2017 £’000


2016 £’000

Unsecured bank loans – –

Loan arrangement fee brought forward 192 309

Amortised loan arrangement fee (181) (117)

Additional loan arrangement fees 5 –

Loan arrangement fee carried forward* 16 192

* Balance of loan arrangement fee has been included with prepayments

On 6 March 2015, the Fund entered into a £37.5m revolving credit loan facility with the Royal Bank of Scotland International Limited. On 20 June 2017, the Fund reduced the revolving credit loan facility to £20m.

The Fund intends to use this facility for short term borrowing and intends to keep usage with 10% of NAV.

As at 31 December 2017, there were no drawdowns on the revolving credit loan facility.




14. 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 31 December

2017 £’000

As at 31 December

2016 £’000

Current liabilities

Not later than one year 195 455

Non current liabilities

After one year but not more than five years 595 1,398

More than five years 1,329 3,120

Total 2,119 4,973

15. 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 20* years.

Future minimum rentals receivable under non-cancellable operating leases as at 31 December are as follows:

As at 31 December

2017 £’000

As at 31 December

2016 £’000

Within one year 19,469 17,167

After one year but not more than five years 48,097 39,231


99,413 78,908

* Excluding leases at peppercorn rents.




16. Creditors

As at 31 December

2017 £’000

As at 31 December

2016 £’000

Investment liabilities

Capital expenditure – 128

Total investment liabilities – 128

Distribution payable 3,931 3,130

Other creditors

Deferred rental income 553 1,079

VAT payable – 178

Accruals and other creditors 562 362

Total other creditors 1,115 1,619

Total creditors 5,046 4,877

17. 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 0.7% per year of the NAV of the Fund.




17. Transactions with significant parties (continued)In addition, 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, AREF / IPD UK Pooled Property Fund Indices – weighted average over a three year rolling period and if the return is positive. The ACD will forego any performance-related fee for the first year the Fund is in operation, but will be entitled to take its performance-related fee at the end of the first quarter of the second year (if applicable), calculated by reference to the Fund’s performance over a twelve month rolling period. This method will be applied until the three year rolling period Indices is available.

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


2017 £’000


2016 £’000


ACD’s management fee 1,770 1,588


Total 2,498 2,246

As at 31 December 2017 the following amounts were outstanding due to significant parties.

As at 31 December

2017 £’000

As at 31 December

2016 £’000

Depositary 16 15

ACD’s management fee 160 139


Total 233 203




18. DerivativesThe Fund has no derivatives exposure at 31 December 2017 (31 December 2016: £nil).

19. Subsequent events

Distribution

On 28 February 2018, the Fund made a distribution of £3.89m, in respect of the period from 1 October 2017 to 31 December 2017. This was paid on 28 February 2018, to the Shareholders of the Fund as at 31 December 2017.

Property acquisitions

Since the year end the Fund has completed on the following purchases:

• 24 January 2018, Kayley Industrial Estate, Ashton

• 24 January 2018, Anglo Office Park, High Wycombe

• 25 January 2018, Lincoln Office Village, High Wycombe

• 23 March 2018, London East Leisure Park, Dagenham

Property sales

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

• 2 February 2018, Tangent Court, Solihull

Credit Facility

On 9 March 2018, following expiry of the unsecured revolving credit facility with the Royal Bank of Scotland International, the Fund entered into an unsecured revolving credit facility with Lloyds Bank plc. The total commitment is £20m. The duration of the facility is to 17 February 2020.

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. There is also an annual monitoring fee of £15,000 payable in advance on each anniversary of the date of the Agreement.




Distribution Tablesfor the year ended 31 December 2017

First Interim

Group 1 – shares purchased prior to 31 December 2016

Group 2 – shares purchased on or after 1 January 2017 and on or before 31 March 2017

Gross Revenue

(p)

Income tax (p)

Net revenue

(p)Equalisation

(p)

Distribution paid

(p)

Share Class A Income Group 1 1.461 – 1.461 – 1.461

Group 2 0.810 – 0.810 0.651 1.461

Share Class B Income Group 1 1.461 – 1.461 – 1.461

Group 2 – – – – –

Share Class C Income Group 1 1.461 (0.002) 1.459 – 1.459

Group 2 0.521 (0.002) 0.519 0.940 1.459

Share Class E Income Group 1 1.735 – 1.735 – 1.735

Group 2 – – – – –

Second Interim

Group 1 – shares purchased prior to 31 March 2017

Group 2 – shares purchased on or after 1 April 2017 and on or before 30 June 2017

Gross Revenue

(p)

Income tax (p)

Net revenue

(p)Equalisation

(p)

Distribution paid

(p)


Group 2 0.589 – 0.589 0.767 1.356


Group 2 – – – – –


Group 2 0.823 (0.003) 0.820 0.533 1.353

Share Class E Income* Group 1 – – – – –

Group 2 – – – – –



Third Interim

Group 1 – shares purchased prior to 30 June 2017

Group 2 – shares purchased on or after 1 July 2017 and on or before 30 September 2017

Gross Revenue

(p)

Income tax (p)

Net revenue

(p)Equalisation

(p)

Distribution paid

(p)

Share Class A Income Group 1 1.502 – 1,502 – 1.502

Group 2 0.763 – 0.763 0.739 1.502


Group 2 – – – – –


Group 2 0.423 (0.003) 0.420 1.079 1.499


Group 2 – – – – –

Final Interim

Group 1 – shares purchased prior to 30 September 2017

Group 2 – shares purchased on or after 1 October 2017 and on or before 31 December 2017

Gross Revenue

(p)

Income tax (p)

Net revenue

(p)Equalisation

(p)

Distribution paid

(p)


Group 2 0.653 – 0.653 1.180 1.833

Share Class B Income Group 1 – – – – –

Group 2 – – – – –


Group 2 0.653 (0.003) 0.650 1.180 1.830


Group 2 – – – – –

* Share Class E Income holdings were fully converted to Share Class A Income holdings in May 2017.

Distribution Tables (continued)for the year ended 31 December 2017



AEW UK Real Return Fund


• The AEW UK Real Return Fund (‘the Fund’) is a new strategy focused on inflation-linked cash flows to align the real benefits of property with the needs of long term savers

• 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.

• 50% of the Fund’s income stream must be linked to inflation and with a weighted average unexpired lease term “WAULT” greater than the reference benchmark* (circa 8 years)

• Long term gross income targeted at 5% p.a.

• 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.

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

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

* AREF / IPD UK QPFI All Balanced Funds Index.


Fund Manager’s Report




Investment updateThe Fund portfolio has continued to deliver its performance objectives in terms of total real returns driven by a predictable and sustainable income distribution. The Fund delivered a total return of 9.1% and a total real return (after inflation) of 6.4% for the year ended 31 December 2017. The distribution yield as at 31 December 2017 was 5.3%.

We have continued to use the flexibility of the Fund’s strategy to acquire more tactical assets and further diversify the portfolio, whilst maintaining the defensive shape which has delivered the Fund’s performance objectives consistently since inception. In particular we have targeted an increased exposure to the social sector, taking the weighting to care homes and supported living from 13% to 29% over the year.

The Fund NAV increased from £55.3m as at 31 December 2016 to £81.3m as at 31 December 2017. The Fund acquired 6 properties in 2017 for a purchase price (including costs) of £26.7m and completed on the pre-let development of a 78 bed hotel. This has taken the total number of properties as at 31 December 2017 to 34 properties.

With further commitments and mandates secured, the fund anticipates having significant capital to deploy in 2018 and has a strong pipeline of opportunities across both traditional and alternative sectors.

Whilst longer leases and inflation-linked rents are still attractive, having built a portfolio with 77% of rents linked to inflation and with a WAULT of over 18 years, we do not need to compete in this area. The flexibility of the Real Return Fund strategy (which sets it apart from long lease funds) is that we have the ability to be contra cyclical and target areas of the market where long term property fundamentals are strong and we feel pricing overly discounts any shorter term perceptions of risks in these uncertain times.

We know income growth is important to our investors. We continue to estimate in the chart below, the projected yield and distribution profile going forward, based on the current cash flow and reflecting known minimum uplifts and reversionary rental values.

Historic distribution yields since inception (%)


AREF/IPD UK All Balanced Property Funds – Average Distribution Yield

AREF/IPD UK LongIncome Property Funds – Average Distribution Yield

1.0

2.0

3.0

4.0

5.0

6.0

%

Q1 2017 Q2 2017 Q3 2017 Q4 2017

5.1%

4.4%

3.8%

5.1%

4.3%

3.7%

5.3%

4.3%

3.7%

5.3%

4.2%

3.6%

Projected annual distribution growth profile assuming inflation based on Oxford Economics RPI Forecast

1.0

2.0

3.0

4.0

5.0

7.05.3%*

5.3 penceper unit

5.8%**5.7 pence

per unit

5.9%**5.9 pence

per unit

6.1%**6.0 pence

per unit

6.2%**6.2 pence

per unit

6.4%**6.3 pence

per unit

6.0

%

December 2017

December 2018

December 2019

Year

Yiel

d (%

)

December 2020

December 2021

December 2022

* MSCI historic annual yield on NAV as at 31 December 2017.** AEW: Projected annual distribution on NAV as at 31 December

2017.Calculations do not include rental growth on open market rent reviews.

Source: Average distribution yield calculated by AEW using data from the AREF/IPD UK Quarterly Property Fund Index, and represents an unweighted average of the distribution yields of all Funds listed in the index (excluding Managed Property Funds which do not distribute their income).


Fund Performance to 31 December 2017 3 months %

6 months %

9 months %

12 months %

Since inception

p.a. %

Total Return1 1.8 4.4 6.8 9.1 8.5

Income Return2 1.4 2.7 4.1 5.5 5.4

Total Real Return2 (adjusted for inflation3) 1.1 3.0 4.6 6.4 5.91 AREF/IPD UK Quarterly Property Fund Index2 Calculated by AEW.3 CPIH



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 • 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 estate still plays a role in optimising portfolios

A new language of cash flow matching options to meet investor needs


Sector weightings as at 31 December 2017 Sector weightings as at 31 December 2016

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



MSCI categorisation

Standard Retail, 37.5%Offices, 4.9%Other Property, 50.2%Cash, 7.4%

Industry categorisation

MSCI categorisation

Standard Retail, 24.8%Offices, 3.2%Other Property, 70.3%Cash, 1.7%

Leisure, 29.3%Care Home, 23.1%Pubs/Restaurants, 18.9%Hotel, 6.7%Supported Living, 6.1%Convenience Retail, 5.9%Car Showroom, 5.1%Office, 3.2%Cash, 1.7%

Leisure, 35.4%Care Home, 12.8%Pubs/Restaurants, 28.5%Hotel, 2.0%Convenience Retail, 9.0%Office, 4.9%Cash, 7.4%

Industry categorisation

FUND STRUCTURE FCA Regulated Open-ended PAIF

PERFORMANCE OBJECTIVE/BENCHMARK

4% real total return (net)5% p.a. Gross income target

INITIAL PORTFOLIO YIELD

VACANCY

DISTRIBUTION YIELD(NET OF ALL FEES AND EXPENSES)

6.9%2

REVERSIONARY PORTFOLIO YIELD 7.7%2

WEIGHTED AVERAGE UNEXPIRED LEASE TERM TO BREAK/EXPIRY (WAULT)

PERCENTAGE INCOME LINKED TO INFLATION

77% (must exceed 50%)3

17.1 years/18.4 years2

TOTAL ANNUAL RETURNS

FUND NAV

£81.3m

5.3%1

0.6%1

9.1%3 (6.4% Real Return and 5.5% Income Return)3

UNIT PRICING

Dual price

Speculative development not permitted

0% (Long term gearing not permitted)

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

LEVERAGE

DEVELOPMENT EXPOSURE

Key data as at 31st December 2017

OfficeConvenience RetailHotelsPubs & RestaurantsLeisureHealthcareSupported Living




Asset Management report

Whilst there are no significant initiatives to report this period, we continue to actively asset manage the portfolio. Active asset management is central to the Real Return Fund investment process, as it should be for any core property strategy.

The Fund has the flexibility to acquire tactical assets across all sectors and segments of the market, that might be typical of AEW’s proven “value” style of investing, where adding value through a considered asset management initiative is part of the investment rationale. For example, in 2016 we were successful in acquiring assets that had shorter leases with open market reviews and regearing them (to meet the occupier’s needs) to 20 year income streams with rents linked to inflation, that match the Fund’s strategic objectives.

Environmental, Social & Governance

GRESBGRESB is an investor driven organisation assessing the sustainability performance of real estate portfolios.

The Fund participated for the first time in 2017 and was awarded a Green Star status, the leading category for GRESB participants GRESB scores overall performance through two Dimensions:

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

• The Fund achieved a score of 54 out of 100, which was 5 percentage point above the peer group average. RRFs composition has a much higher percentage of indirectly managed assets (72%) than its peer group average (59%). The Implementation and Measurement dimension is heavily influenced by the level of control landlords have across issues such as energy management, service charge budgets and access to environmental data. The Fund score was aided by the reporting of tenant data at FRI assets.

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

• The Fund scored 82 out of 100, just below their peer group average (83) but above the GRESB global average (77). This was due to the development of fund level policies and initiatives which are directly applicable to the Fund (e.g. Environmental, Governance and Employee Policies).

MEESAEW UK are committed to ensuring compliance with MEES regulations, which are due to come into effect from April this year and require all new lettings to have a minimum ‘E’ rated EPC.

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.

No ‘F’ rated EPCs remain in the portfolio – with these all improving to a ‘C’ rating in re-assessment.

There is one ‘G’ rated unit within the Fund, however this only represents 0.2% of ERV. An action plan is in place to mitigate this and any future risk of MEES.

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



Bentley Court, Victoria Street, BoltonSupported living accommodation for local community

Property characteristics Investment summary• 35 years lease to Registered Housing

Provider; annual RPI increases with 2% p.a. minimum increases

• Provides supported living accommodation for mental health needs

• Increases Fund’s diversification to social/demographic demand in line with strategy

• Investment value significantly underpinned by vacant possession value

Property type Supported Living/Residential

Property size 26 two bed apartments and 1 one bed apartment

Property purchase date May 2017

Initial yield 7.0%

Year built 2005

Denmark Street, AltrinchamCinema and restaurants in Altrincham town centre

Property characteristics Investment summary• Well trading cinema located in an

affluent demographic

• Over 9 years WAULT to break (over 13 years to expiry). Cinema lease contains fixed rental uplifts of 3% p.a.

• Let to strong tenants – Apollo Cinema (trading as Vue Cinema) & The Restaurant Group

• Running yield of cinema increases to 8.7% (2021) and 10.1% (2026)



Purchase date September 2017

Year built 2006

Initial yield 7.5%

Ashlands Mews and St Georges, Ratcliffe Road, LeicesterThree purpose built care homes

Property characteristics Investment summary• Well specified care home with a total of

80 beds across 3 settings

• Purpose built and converted homes, 100% of rooms are single occupancy the majority of which offer en-suite facilities

• Vast majority of occupants are Local Authority funded

• 31.5 years unexpired lease to Prime life, the UK’s second largest mid-cap home operator. Rent is subject to annual increases to RPI with a collar and cap of 2%-3.5%

Property type Care home

Property size 80 beds

Purchase date October 2017

Year built 2007

Initial yield 6.7%




Portfolio Acquisitions in 2017 (continued)

Holmes Court and Holmes House, Kenilworth Road, South WigstonTwo purpose built care homes

Property characteristics Investment summary• Well specified care homes with a total of

78 beds across 2 homes

• Purpose built homes, 100% of rooms are single occupancy the majority of which offer en-suite facilities

• 31.5 years unexpired to Prime Life, the UK’s second largest mid-cap home operator

• Rent is subject to annual increases to RPI with a collar and cap of 2%-3.5%

Property type Care home

Property size 78 beds

Purchase date October 2017

Year built 2009

Initial yield 6.0%

Audi Car Showroom, Wheatley Hall Road, DoncasterModern Audi dealership in prominent location

Property characteristics Investment summary• Modern Audi dealership in prominent

location on Doncaster’s ‘motor alley’

• Purpose built facility with low site cover on 1.7 acre site

• Let to VW Group UK for a further 8 years with potential to regear lease to existing sub-tenant

• Investment value significantly underpinned by vacant possession value

Property type Car Showroom



Year built 1996

Initial yield 6.3%

Hestia House, 22 Old Walsall Road, BirminghamSupported living accommodation for local community

Property characteristics Investment summary• 20 year lease to Spring Housing

Association

• 5 yearly RPI increases with collar of 1% and cap of 5%

• Provides supported living accommodation for vulnerable young adults. Ground floor office accommodation provides the head office for Spring Housing Association and teaching rooms for residents

• Increases Fund’s diversification to social/demographic demand in line with strategy

Property type Supported Living

Property size 23 studio apartments


Year built Recently converted

Initial yield 7.3%






Completion of pre-let Development in 2017

Travelodge, West BromwichForward funding of a 78 bed hotel pre-let to Travelodge

Property characteristics Investment summary• Prominent edge of town centre location

• 25 year lease with 5 yearly RPI linked reviews between 1% and 4%

• 100% of income linked to RPI

• Constructed to Travelodge’s new format specification with air conditioning

Property type Hotel

Property size 78 bed hotel, with 85 car spaces

Land purchase date

Site acquired for RRF September 2016

Year built Completion in May 2017

Yield on cost 6.4%

Appraised cost on completion

£5.02m

Appraised value on completion £5.35m

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.


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 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.

* RRIJ had previously been used by the AEW UK Real Return Fund as a measure of inflation for performance measurement purposes. In February 2017 the office for National Statistics stopped calculating RPIJ, following consultation with the Governance committee and obtaining approval from the FCA, CPIH was adopted as the Funds measure of inflation and Prospectus updated on 24 January 2018. For further information please refer to the Report from the Chair of the Governance Committees on page 12.

Reference BenchmarkThe Fund is not managed to an investment benchmark. It has an Index “Reference Benchmark” for risk control purposes which is the All Balanced Property Funds Index (AREF / IPD UK Property Fund Indices) 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 Guidelines

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

Minimum 50% of gross passing rent

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

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

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 AREF/IPD Pooled Property Fund Index (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)

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

Not permitted

Investment in pre-let development Maximum 20% of NAV (will not apply until the Fund reaches £200m)

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

Investment in unoccupied and non-income producing 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



Parameters Guidelines

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.

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.

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.

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.

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.

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 Reference benchmark (will not apply until the Fund reaches £200m)

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

Cash Not more than 10% of the NAV may be held in uncommitted cash at any one time where that cash is from the issue of new shares 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.

Investment Guidelines (continued)



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 31 December 2017, for financial reporting under FRS102. Our report is subject to our General Terms of Business for Valuations, a copy of which is available from Knight Frank LLP.

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 31 December 2017 (the measurement date), was £80,285,000 (Eighty Million, Two Hundred and Eighty Five Thousand Pounds).

We confirm that the valuations stated in this report have been undertaken by us as qualified valuers, in accordance RICS Valuation – Global Standards 2017, incorporating the International Valuations Standards, and RICS Professional Standards UK January 2014 (revised April 2015). References to “the Red Book” refer to either or both of these documents, as applicable.

The properties have been valued on the basis of Fair Value in accordance with the RICS Valuation – Professional Standards VVPS4 (1.5) 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, 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.

Hestia House 22 Old Walsall Road, Birmingham

The property does not directly abut the public highways and is accessed from Old Walsall Road under rights to pass with or without vehicles at all times. We understand this to mean there is unfettered access for vehicles, pedestrians and services at all times. There is an existing insurance policy that covers the risk of the owner of the access way preventing a right of way.

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.

Report of the Valuer




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. 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.

The valuer, on behalf of Knight Frank LLP, with the responsibility for this report is Peter Youngs MRICS. Parts of the valuation have been undertaken by additional valuers. We confirm that the valuer and additional valuers collectively meet the requirements of RICS Valuation – Professional Standards (January 2014) Global and UK PS 2(3.1) 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, Peter Youngs, has been responsible for this instruction since 31 March 2016. 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,

Peter Youngs MRICSPartner, ValuationsFor and on behalf of Knight Frank LLP



Portfolio Statementas at 31 December 2017

Investment Properties


Market Value £’000

Net Assets %

Sector

Leisure 4 23,875 30

Care Home 3 18,850 23

Pubs / Restaurants 17 15,465 19

Hotel 1 5,500 7

Supported Living 2 4,975 6

Convenience Retail 5 4,795 6

Car Showroom 1 4,200 5

Office 1 2,625 3


Other Assets and Liabilities 1,046 1


Market value

Leisure

Cinema and Restaurants, Denmark Street, Altrincham Under £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

Care Homes

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

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

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

Pubs/Restaurants

Red Lion Inn, 2 Broad Street, Newent Under £5m

Bugle Inn, 24 St Martins Street, Brighton Under £5m

Greyhound, 2 High Street, Brighton Under £5m

Abbots Mitre, Village Street, Chilbolton Under £5m



Market value

Pubs/Restaurants (continued)

Churchill Arms, Paxford, Chipping Camden Under £5m

The Jubilee Inn, Main Road, Flax Bourton Under £5m

The Royal Oak, Oaklands Lane, Midhurst Under £5m

White Horse Hotel, 2 The Square, Storrington Under £5m

Craft Beer, Uppernorth Street, Brighton Under £5m

The Goudhurst Inn, Cranbrook Road, Goudhurst Under £5m

Cricket Inn, Penny Lane, Totley Under £5m

Thomas Tripp, 10 Wick Lane, Christchurch Under £5m

Woodbridge Inn, Ironbridge, Telford Under £5m

New Pear Tree Inn, Crannock Road, Wolverhampton Under £5m

Tickled Trout, Lower Road, West Farleigh Under £5m

The Hare & Hounds, 75 London Road, Brighton Under £5m

White Hart, Chapel Green, Crowborough Under £5m

Hotel

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

Supported Living

Hestia House, 22 Old Walsall Road, Birmingham Under £5m

Bentley Court, Victoria Street, Bolton Under £5m

Convenience Retail

Tesco Express, 4 Eaton Green, Luton Under £5m

Tesco Express, 1 Canterbury Road, Sittingborne Under £5m

Tesco Express, Westbury Hill, Westbury on Trym Under £5m

Tesco Express, 80 Cove Road, Farnborough Under £5m

The Co-operative, 205 Fairmile Road, Christchurch Under £5m

Car Showroom

Audi Car Showroom, Wheatley Hall Road, Doncaster Under £5m

Office

Regeneration House, Gorsey Lane, Coleshill Under £5m




Purchases and sales for the year

Cost £’000

Purchases

Bentley Court, Victoria Street, Bolton Under £5m

Cinema and Restaurants, Denmark Street, Altrincham Under £5m

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

Audi Car Showroom, Wheatley Hall Road, Doncaster Under £5m

Hestia House, 22 Old Walsall Road, Birmingham Under £5m

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

Total purchases for the year 26,715

Purchases for the year include associated acquisition costs.

Proceeds £’000

Sales

Total sales for the year –

Development expenditure for the year

Cost £’000

Travelodge Hotel, Providence Place, West Bromwich 3,901

Total development expenditure for the year 3,901

Summary of Material Portfolio Changesfor the year ended 31 December 2017




Accounting and Distribution dates

XD date

First interim distribution 31 March 2017

Second interim distribution 30 June 2017

Third interim distribution 30 September 2017

Final distribution and year end 31 December 2017

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.

Distributions in the year

First Interim 31 March

2017 (p)

Second Interim 30 June

2017 (p)

Third Interim 30 September

2017 (p)

Final Distribution

31 December 2017

(p)

Share Class

Share Class A income 1.264 1.356 1.311 1.330

Share Class C income# 1.264* 1.356* 1.311* 1.330*

* Gross distribution.

Fund Information


Performance RecordHighest Share price Lowest Share price

Year Share ClassOffer basis

(p)Bid basis

(p)Offer basis

(p)Bid basis

(p)

2017† A income 106.30 98.05 102.68 94.70

2017† C income 106.30 98.05 102.68 94.70

2016* A income 103.02 95.02 100.57 92.75

2016# C income 103.02 95.02 101.02 93.17

† From 1 January 2017 to 31 December 2017. * From 5 February 2016 to 31 December 2016. # From 14 July 2016 to 31 December 2016.

Summary of share dealing as at 31 December 2017

A income C income

Opening Shares in Issue 53,189,794.190 2,347,431.726

Shares issued in the year 26,575,501.104 –

Closing shares in issue 79,765,295.294 2,347,431.726

NAV (as calculated in accordance with the Prospectus)

Year Share Class

NAV of Share Class

£’000 Shares in issue

NAV per share

(p)

31 December 2017† A income 79,006 79,765,295.294 99.05

31 December 2017† C income 2,325 2,347,431.726 99.05

31 December 2016* A income 50,928 53,189,794.190 95.75

31 December 2016# C income 2,248 2,347,431.726 95.75

† From 1 January 2017 to 31 December 2017. * From 5 February 2016 to 31 December 2016. # From 14 July 2016 to 31 December 2016.

NAV represents a standard NAV as calculated in accordance with AREF’s Fund Pricing Recommendation.

Share dealing

Turnover of shares

During the year ended 31 December 2017, 26,575,501.104 shares were created. Nil shares were redeemed and no shares were transferred.

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




Subscriptions

Eligible Investors may purchase shares 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 shares in the Fund will be processed at the share 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 shares 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 shares 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 31 December 2017, £6.7m of subscriptions were in the queue and were called in Q1, 2018.

Redemptions

Every shareholder is entitled on any dealing day for redemption to redeem its shares 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 shares in the Fund will be processed at the share 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 31 December 2017, there were no redemptions in the queue.

Deferrals

Where the ACD considers it to be in the best interests of the Shareholders, 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 Shareholders to do so. The ACD will review the position every month.

The ACD must give Shareholders notice of the deferral no later than seven business days before the relevant dealing day for redemption. The price at which the shares will be redeemed will be the price for redemptions on the dealing day for redemption on which the shares 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 Shares in any or all of the Funds, where, due to exceptional circumstances, it is in the interests of all the Shareholders 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 Shareholders. For further information, please refer to clause 3.13 of the Prospectus. There have been no deferrals or suspensions during the year.

Adjustments to share price

In unusual market conditions the ACD in consultation with the Pricing Sub-Committee, may adjust the share 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 Shareholders by ensuring that shares 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 shares through the ACD, shares 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 shares in issue 5 0.75

1% or greater but less than 2% – –


4% or greater but less than 8% – –

8% or greater 5 96.39

Total 11 100.00

Percentage held by largest investor 29.50

Percentage held by top 5 investors 96.39




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 twelve month period to 31 December 2017:

Year ended31 December 2017

Total remuneration paid to employees during financial year:

a) remuneration, including, where relevant, any carried interest paid by the AIFM; £2,342,894

b) the number of beneficiaries 26

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

a) senior management £604,939

b) members of staff £1,737,955

Fixed remuneration

£

Variable remuneration

£

Total remuneration

£

Senior management 604,939 – 604,939

Staff 1,458,955 279,000 1,737,955

Total 2,063,894 279,000 2,342,594

Fixed remuneration comprises basic salaries and variable remuneration comprises bonuses.




Fund Performance


%

Total Expense Ratio for the accounting year

Fund Management Fees 0.75

Fund Operating Expenses 0.28

Total Expense Ratio (‘TER’) 1.03

Property Expense Ratio (‘PER’) (excludes items in TER) 0.23

Real Estate Expense Ratio (‘REER’) (TER + PER) 1.26

Transaction Costs 2.54

Portfolio Turnover Ratio 2.00

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 year.

The following table analyses the operating costs incurred by the Fund for the year ended 31 December 2017:


%

Management Fees 0.75

Depositary Fees 0.07

Valuation Fees 0.05

Other variable Fees 0.16

1.03




AREF Code of Practice

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 aims to achieve best practice with the AREF Code of Practice. The Fund completes the AREF/IPD Pooled Property Questionnaire each quarter, which is made available to all investors and which forms the basis of its entry in AREF / IPD Property Fund Vision handbook.

Risk Warning

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

Past performance is no guide to the future. The value of shares, 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.





Period 5 February 2016 to 31 December 2016

Notes £’000 £’000 £’000 £’000

IncomeNet capital gains/(losses) 3 333 (2,623)

Revenue 5 4,162 2,027

Expenses:

Direct property expenses 6 (175) (148)

Operating expenses 6 (616) (321)

Interest payable and similar charges 7 (1) –

Net revenue before taxation 3,370 1,558

Taxation 8 – –


Total return before distributions 3,703 (1,065)

Distributions 9 (3,370) (1,558)

Change in net assets attributable to Shareholders from investment activities 333 (2,623)

Statement of Changes in Net Assets Attributable to Shareholdersfor the year ended 31 December 2017



£’000 £’000 £’000 £’000

Opening net assets attributable to Shareholders 53,176 –

Amounts receivable on creation of shares 25,979 54,934

Dilution adjustment 1,843 865

27,822 55,799Change in net assets attributable to Shareholders from investment activities 333 (2,623)

Closing net assets attributable to Shareholders 81,331 53,176


Statement of Total Returnfor the year ended 31 December 2017





Note £’000 £’000 £’000 £’000

Assets

Fixed assets:


Current assets:

Debtors 11 410 705

Cash and bank balances 12 3,383 4,433

Total current assets 3,793 5,138

Total assets 84,878 55,369

Long term liabilities

Finance lease obligations 13 (996) (1,137)

Current liabilities

Finance lease obligations 13 (72) (77)

Investment liabilities 15 (87) (28)

Distribution payable 15 (1,098) (700)

Other creditors 15 (1,294) (251)

Total current liabilities (2,551) (1,056)

Total liabilities (3,547) (2,193)

Net assets attributable to Shareholders 81,331 53,176

The Financial Statements on pages 96 to 115 were approved by the ACD on 29 March 2018 and signed on their behalf by:

On behalf of the ACD


Balance Sheetas at 31 December 2017



Statement of Cash Flowsfor the year ended 31 December 2017



£’000 £’000 £’000 £’000

Total return before distributions for the year/period 3,703 (1,065)

Adjustments for:

Capital (gain)/loss on investments (333) 2,623

Decrease/(increase) in income debtors 297 (705)

Increase in income creditors 1,102 251

Net new cash generated from operating activities 4,769 1,104

Cash flows from investing activities

Paid for the purchase of investment properties (26,715) (50,361)

Paid for acquisition of properties under construction – (237)

Development expenditure on properties under construction (3,901) (1,015)

Paid on capital expenditure (51) –

Net cash used in investing activities (30,667) (51,613)

Cash flows from financing activities

Proceeds from issue of shares 25,979 54,934

Equalisation received 98 299

Dilution adjustment received 1,843 866

Distribution paid (3,072) (1,157)

Net cash generated from financing activities 24,848 54,942

Net (decrease)/increase in cash for the year/period (1,050) 4,433

Cash and cash equivalents at start of year/period 4,433 –

Cash and cash equivalents at end of year/period 3,383 4,433




1. Accounting policies

1.1 Basis of accountingThe Financial Statements have been prepared under the historical cost basis, as modified by the revaluation of investment properties, 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.

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. 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.

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 Establishment costsInitial establishment costs relating to the launch of the Fund are being borne by the Fund and have been written off in the first year of operation.

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

1.6 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 at 20% on taxable revenue, after the deduction of allowable expenses.

Notes to the Financial Statementsfor the year ended 31 December 2017




1.7 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 Shareholders.

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 Shareholders for more than six years are credited to the capital assets of the Fund.

1.8 Equalisation

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

1.9 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 Valuation Agent on the basis of a full valuation with physical inspection at least once a year. Any valuation of an Immovable by the Valuation Agent must be undertaken in accordance with the current issue of RICS Valuation – Professional Standards (the ‘Red Book’), 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.





1.9 Investment properties (continued)

Investment properties under construction is measured at fair value if the fair value is considered to be reliably determinable. Investment properties under construction for which the fair value cannot be determined reliably, but for which the Company expects that the fair value of the property will be reliably determinable when construction is completed, are measured at cost less impairment until the fair value becomes determinable or construction is completed whichever is earlier.

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.

1.10 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 Dilution levy

In the Fund a dilution levy will be reflected in the calculation of the share 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, proposed by the ACD and independently reviewed by the Governance Committee, to reflect the value of the assets in such circumstances based on information received from MSCI, valuation agents and any other material information as the ACD may see fit.

1.12 Debtors

Amounts due but not received are included within debtors. Which are stated at transaction value less premium for impairment. 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.

1.13 Creditors

Creditors are stated at their transaction value. Amounts received in respect of future years 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 recognised valuation techniques. These techniques comprise both the Yield Method and the Discounted Cash Flow Method. In some cases, the fair values are determined based on recent real estate transactions with similar characteristics and location to those of the Fund assets. Any valuation of a property by the Valuation Agent must be undertaken in accordance with the current issue of RICS Valuation – Professional Standards (the ‘Red Book’).




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 shareholder 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.

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 valuing is difficult. Real estate 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 shares 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.

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.





2.2 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, 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 31 December

2017 £’000

As at 31 December

2016 £’000

Debtors (excluding prepayments) 69 538

Bank and cash 3,383 4,433

Total 3,452 4,971





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 shares.

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 and the Governance Committee, decide to suspend both subscriptions and redemptions of shares 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.

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 IPD) 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.

3. Net capital gains/(losses)


2017 £’000

Period 5 February 2016 to 31 December

2016 £’000

Net unrealised gains/(losses) on investment properties 490 (2,512)

Movement in rent free debtor (157) (111)

Net capital gains/(losses) 333 (2,623)




4. Purchases and transaction costs

% of principal purchase

price


2017 £’000


2016 £’000

Purchases excluding transaction costs 25,110 47,181

Commissions 1.1 271 533

Taxes 4.6 1,157 2,282

Other costs 0.7 177 628

Total purchase transaction costs 6.4 1,605 3,443

Purchases including transaction costs 26,715 50,624

5. Revenue


2017 £’000


2016 £’000

Rental income 4,091 2,026

Interest income 61 –

Sundry property income 10 1

Total revenue 4,162 2,027




6. Expenses


2017 £’000


2016 £’000

Direct property expenses:

Head rent 80 63

Valuers fees 31 15

Agents fee 26 15

Property legal and professional fee 24 8

Abortive costs 1 42

Other property expenses 13 5

Direct property expenses 175 148

Expenses associated to the ACD:

Management fee 453 212

Expenses associated to the Depositary:


Other operating expenses:

Auditor’s fees 36 20

Legal & professional fees 23 1

Irrecoverable value added tax 15 –

Printing & publication fee 10 –

Governance committee fee 6 5

Other operating expenses 24 28

Other costs:

Set-up costs 4 17

Total operating expenses 616 321

Total expenses 791 469




7. Interest payable and similar charges


2017 £’000


2016 £’000

Bank charges 1 –

Total finance costs 1 –

8. 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.


2017 £’000


2016 £’000

(a) Analysis of tax charge for the year/period

UK corporation tax – –


(b) Factors affecting the tax charge for the year/period

Net income before taxation 3,370 1,558

Theoretical tax at UK corporation tax rate of 20% 674 312

Net property income not taxable (674) (312)





9. Distributions


2017 £’000


2016 £’000

(a) Analysis of distributions

First interim 702 13

Second interim 809 559

Third interim 865 589

Final distribution 1,092 696

Total distributions 3,468 1,857

Equalisation received on the issue of shares (98) (299)

Net distribution for the year/period 3,370 1,558

(b) Reconciliation of net revenue after taxation to distributions


Total distributions for the year/period 3,370 1,558




10. Investment properties


Properties under development

£’000

Investment properties

£’000Total

£’000

At valuation:

At beginning of year at valuation 1,075 48,053 49,128

Acquisitions during the year – 26,715 26,715

Capital expenditure on properties 3,901 51 3,952

Transfer to investment properties (4,976) 4,976 –

Net unrealised gain on revaluation – 490 490

Professional valuation – 80,285 80,285

Adjustment for rent incentive debtor – (268) (268)

Adjustment in respect of minimum payments under head leases separately included as a liability in the Balance Sheet – 1,068 1,068

Carrying value at the end of the year – 81,085 81,085

Period ended 31 December 2016

Properties under development

£’000

Investment properties

£’000Total

£’000

At valuation:

At beginning of period at valuation – – –

Acquisitions during the period – 50,388 50,388

Acquisitions of properties under construction 237 – 237

Capital expenditure on properties under construction 1,015 – 1,015

Net unrealised loss on revaluation (177) (2,335) (2,512)

Professional valuation 1,075 48,053 49,128

Adjustment for rent incentive debtor – (111) (111)

Adjustment in respect of minimum payments under head leases separately included as a liability in the Balance Sheet – 1,214 1,214

Carrying value at the end of the period 1,075 49,156 50,231




10. 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 – Professional Standards (incorporating the International Valuation Standards).

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

31 December 2017

Class 1 £’000

Class 2 £’000

Class 3 £’000

Total £’000

Assets measured at fair value*

Investment properties – – 80,285 –

Professional valuation – – 80,285 –

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

Explanation of the fair value hierarchy:

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

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

Class 3 – Valuation techniques using non-observable data.

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

The significant unobservable inputs used in the fair value measurement categorised within Class C 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

Increases (decreases) in the ERV (per sq ft p.a.) and rental growth p.a. in isolation would result in a higher (lower) fair value measurement. Increases (decreases) in the long term vacancy rate and discount rate (and exit or yield) in isolation would result in a lower (higher) fair value measurement.




10. Investment properties (continued)The significant unobservable inputs used in the fair value measurement categorised within Class 3 of the fair value hierarchy of the portfolio of investment property are:

31 December 2017


Valuation Technique



£7.00-£29.25 5.81% to 9.81%

31 December 2016


Valuation Technique



£7.00-£29.25 5.83% to 9.64%

Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Class 3 of the fair value hierarchy amount to a net gain of £490,000 and are presented in the Statement of Total Return under line item ‘Net capital gains/(losses)’.

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.

11. Debtors

As at 31 December

2017 £’000

As at 31 December

2016 £’000

Capital VAT receivable 13 199

Capital expenses – 1

Total capital debtors 13 200

Rent receivable 56 338

Rent incentive debtor 268 111

Prepayments and other debtors 73 56

Total income debtors 397 505

Total debtors 410 705




12. Cash and bank balances

As at 31 December

2017 £’000

As at 31 December

2016 £’000

Amounts held at bank 3,383 4,433

Total cash and bank balances 3,383 4,433

13. 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 31 December

2017 £’000

As at 31 December

2016 £’000

Current liabilities

Not later than within one year 72 77

Non current liabilities

After one year and not more than five years 240 261

More than five years 756 876

Total 1,068 1,214




14. 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 between 2 to 31 years.

Future minimum rentals receivable under non-cancellable operating leases as at 31 December are as follows*:

As at 31 December

2017 £’000

As at 31 December

2016 £’000

Within one year 5,579 3,427

After one year but not more than five years 22,034 13,707


Total 95,316 51,863

* The above analysis excludes any fixed minimum increments which reflects the expected general inflation.

15. Creditors

As at 31 December

2017 £’000

As at 31 December

2016 £’000

Investment liabilities

Capital expenditure 87 28

Total investment liabilities 87 28

Distribution payable 1,098 700

Other creditors

Deferred rent 1,030 130

Accruals and other creditors 264 121

Total other creditors 1,294 251

Total creditors 2,479 979




16. 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 year the following fees were payable to significant parties.


2017 £’000


2016 £’000



Total 498 250

As at 31 December 2017 the following amounts were outstanding due to significant parties.

As at 31 December

2017 £’000

As at 31 December

2016 £’000

Depositary 8 8


Total 57 40




17. DerivativesThe Fund has no derivative exposure at 31 December 2017.

18. Subsequent events

Distribution

On 28 February 2018, the Fund made a distribution of £1.09m, in respect of the period from 1 October 2017 to 31 December 2017. This was paid on 28 February 2018, to the Shareholders of the Fund as at 31 December 2017.

Property acquisitions

• 6 February 2018, 7A and 7B Gatehouse Way, Aylesbury

• 14 March 2018, Kia Car Showroom, Bullrush Grove, Balby.

Investor commitments

Following the year end, the Fund secured £20m of investor commitment of which £3m was called for the April 2018 dealing date.




Distribution Tablesfor the year ended 31 December 2017

First Interim

Group 1 – shares purchased prior to 31 December 2016

Group 2 – shares purchased on or after 1 January 2017 and on or before 31 March 2017

Gross Revenue

(p)

Income tax (p)

Net revenue

(p)Equalisation

(p)

Distribution paid

(p)


Group 2 0.417 – 0.417 0.846 1.263


Group 2 – – – – –

Second Interim

Group 1 – shares purchased prior to 31 March 2017

Group 2 – shares purchased on or after 1 April 2017 and on or before 30 June 2017

Gross Revenue

(p)

Income tax (p)

Net revenue

(p)Equalisation

(p)

Distribution paid

(p)


Group 2 0.944 – 0.944 0.412 1.356


Group 2 – – – – –

Third Interim

Group 1 – shares purchased prior to 30 June 2017

Group 2 – shares purchased on or after 1 July 2017 and on or before 30 September 2017

Gross Revenue

(p)

Income tax (p)

Net revenue

(p)Equalisation

(p)

Distribution paid

(p)


Group 2 0.705 – 0.705 0.606 1.311


Group 2 – – – – –



Final Distribution

Group 1 – shares purchased prior to 30 September 2017

Group 2 – shares purchased on or after 1 October 2017 and on or before 31 December 2017

Gross Revenue

(p)

Income tax (p)

Net revenue

(p)Equalisation

(p)

Distribution paid

(p)


Group 2 1.065 – 1.065 0.265 1.330


Group 2 – – – – –

Equalisation

Equalisation applies only to shares purchased during the distribution period (Group 2 shares). It represents the accrued revenue included in the purchase price of the shares. 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 shares for Capital Gains Tax purposes.

Distribution Tables (continued)for the year ended 31 December 2017



Depositary, ACD & Advisers

DepositaryBNY Mellon Trust & Depositary (UK) Limited BNY Mellon Financial Centre 160 Queen Victoria Street London EC4V 4LA

ACDAEW UK Investment Management LLP 33 Jermyn Street London SW1Y 6DN

Governance Committee MembersRefer to Governance Report of pages 10 and 13.

Registrar and Transfer AgentLink Fund Administrators Limited 17 Rochester Row Westminster London SW1P 1QT

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 LLP One Wood Street London EC2V 7WS

Managing AgentsFor: AEW UK Core Property Fund

M J Mapp 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

CustodianBNY Mellon Trust & Depositary (UK) Limited BNY Mellon Financial Centre 160 Queen Victoria Street London EC4V 4LA

SolicitorsFor properties in England and Wales:

Mischon de Reya Summit House 12 Red Lion Square London WC1R 4QD

CMS Cameron McKenna Nabarro Olswang LLP Cannon Place 78 Cannon Street London EC4N 6AF

Pinsent Masons LLP 1 Park Row Leeds LS1 5AB

For properties in ScotlandBrodies LLP 15 Atholl Crescent Edinburgh EH3 8HA

United Kingdom33 Jermyn StreetLondonSW1Y 6DN

+44 20 7016 4845www.aewuk.co.uk

France8-12 rue des Pirogues de Bercy75012 ParisFrance

+33 1 78 40 92 00www.aeweurope.com

United States of AmericaTwo Seaport LaneBoston MA 02210United States

+1 617 261 9334www.aew.com

AREF/IPD PROPERTY FUND VISION

December 2017

AEW UK CORE PROPERTY FUND

INVESTMENT POLICY AND OBJECTIVES

INVESTOR CONSTITUENCY


UK

March 2012

Open-ended

31-Dec

269.6

Source: AEW

Management/professional advisors

Trust Manager

Source: AEW

Investment rates of return, %

Other balanced

funds

All balanced

fundsAll funds

3 months 3.3 3.1 2.9

Year-to-date 10.6 10.2 9.7

12 months 10.6 10.2 9.7

3 years+ 9.0 8.4 7.9

5 years+ 10.7 10.3 9.8

10 years+ 3.6 3.8 2.6

Note: * Weighted average returns + Annualized

Source: AREF/IPD UK Quarterly Property Fund Index (Sponsored by Property Match)

Residence

Launch date

Year-end

Trustee

Auditors

Richard Tanner

BNY Mellon Trust & Depositary

Open/closed-ended

AEW UK

AEW UK

3.5

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 AREF/IPD UK All Balanced Property Fund Index) over three-year

rolling periods.

NAV (GBPm)

KPMG

Property investment manager

Portfolio Manager

AREF/IPD UK Quarterly Property Fund Index*

Type of fund

The AEW UK Core Property 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 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

15.2

Fund details

AEW UK CORE PROPERTY FUND

15.2

11.6

14.7

0.0

MSCI.COM — Internal —


December 2017

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 3.1 6.1 6.0 5.0

Standard retail – Rest of UK 13.6 4.7 4.4 4.4

Shopping centres 2.2 3.0 3.8 9.9

Retail warehouses 11.2 15.0 15.6 14.9

All UK retail 30.1 28.8 29.8 34.2

City offices 0.0 3.1 3.8 3.7

West End offices 0.0 6.9 7.8 7.0

Rest of South East offices 12.8 12.7 10.9 7.3

Rest of UK offices 8.0 6.2 6.7 4.9

All UK offices 20.8 29.0 29.3 22.9

South East industrial 0.0 17.2 15.3 12.6

Rest of UK industrial 32.2 9.8 10.3 8.1

All UK industrial 32.2 27.0 25.7 20.6

Other UK properties 10.9 10.9 9.7 18.2

Cash*** 6.0 4.3 5.5 4.0

Overall 100.0 100.0 100.0 100.0

Sources: *AEW ** AREF/IPD UK Quarterly Property Fund Index (Sponsored by Property Match)

Property ownership structure

Number of assets Valuation (GBPm)

% of total

portfolio

Direct holdings 70 254.3 100.0

Joint and indirect holdings 0 0.0 0.0

Listed investments 0 0.0 0.0

Total 70 254.3 100.0

Source: AEW

AREF/IPD UK Quarterly Property Fund Index **



December 2017

Largest direct investments by lot size & percentage of total portfolio

Property LocationValuation

(GBPm)

% of total

portfolio

Spectrum Swindon 10-15 5-10

PryzmKingston Upon

Thames10-15 0-5

Warehouse, Weston Road Crewe 10-15 0-5

36-42 Old Christchurch Road Bournemouth 10-15 0-5

730 Aztec West Bristol 5-10 0-5

Wakefield 41 Wakefield 5-10 0-5

Bridgefoot House Radlett 5-10 0-5

Cresta House Luton 5-10 0-5

Intec Business Park Basingstoke 5-10 0-5

18/20 St Mary's Square Swansea 5-10 0-5

10 largest investments as % of portfolio 85.2 33.5

Source: AEW

Direct portfolio structure by lot-size bands

Value band (GBPm)Number of

assets

Valuation

(GBPm)

% of total

portfolio

0 -2.5 24 39.0 15.3

2.5 - 5 35 125.0 49.2

5-10 7 44.3 17.4

10-25 4 46.0 18.1

25 - 50 0 0.0 0.0

50 - 100 0 0.0 0.0

100-150 0 0.0 0.0

Over 150 0 0.0 0.0

Total 70 254.3 100.0

Average lot size 3.6

Source: AEW

Net initial yield 6.82% Investments 10.28%

Nominal equivalent yield 8.02% Developments 0.00%

True equivalent yield 8.43% Total 10.28%

Net reversionary yield 8.48%

Source: Knight Frank

Rental income & ERV by type of property

Rental income

%

Estimated

rental value %

Standard retail 21.7 16.3

Retail warehousing 9.2 11.5

Shopping centres 4.5 4.6

Central London offices 0.0 0.0

Other offices 15.3 23.4

Industrial 38.3 34.9

Other 10.9 9.4

Overall 100.0 100.0

Source: AEW

Industrial

Office

Office

Sector

Office

Standard Retail

Office

Industrial

Other

Industrial

Standard Retail

Property Yield Voids as % of ERV



December 2017

Comparison of rents passing and ERV by type of property*

Sector Rent passing %Pre-lets & rent-

free periods %

Development

voids %Other voids % Over rented %

Reversionary

potential %

Net reversionary

potential %ERV %

Standard retail 115.1 0.0 0.0 6.8 -24.2 2.3 -21.9 100.0

Retail warehousing 69.3 7.4 0.0 6.5 -6.3 23.1 16.8 100.0

Shopping centres 85.7 0.0 0.0 17.9 -18.0 14.4 -3.6 100.0

Central London offices - - - - - - - -

Other offices 56.6 11.4 0.0 29.1 -1.5 4.3 2.9 100.0

Industrial 94.8 0.9 0.0 0.8 -4.8 8.3 3.5 100.0

Other 100.6 0.0 0.0 5.8 -16.9 10.4 -6.5 100.0

Overall 86.4 3.8 0.0 10.3 -9.1 8.6 -0.5 100.0

*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

5.3

Valuation

-

5.2

19.2

-

-

70.3

% of rent passing

0.0

-

-

-



December 2017

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 AREF/IPD 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

Fixed rate borrowings Variable rate borrowings

10%

*

Monthly

Knight Frank

Yes

Yes

Full member

10%

Capital value of developments



December 2017

The contribution of major tenants to rental income

Tenant %

The Deltic Group Limited 4.7

Cooper Tire & Rubber Company Europe Limited 4.6

J E Beale Plc 4.4

Bargain Booze Limited 3.6

New Look Retailers Ltd 3.6

Integrated Third Party Logistics Limited 2.9

Alstrom Transport UK Limited 2.8

Argos Ltd 2.6

David Lloyd Leisure Limited 2.4

Poundworld Retail Limited 2.2

Three largest tenants' contribution to rental income 13.7

Five largest tenants' contribution to rental income 20.9

Ten largest tenants' contribution to rental income 33.8

Source: AEW

Balance sheet/gearing

Direct holdings Joint holdingsIndirect

investments

Listed

investmentsTotal

Balance sheet (GBPm)

Properties at valuation 254.3 0.0 0.0 0.0 254.3

Listed investments 0.0 0.0 0.0 0.0 0.0

Debt 0.0 0.0 0.0 0.0 0.0

Cash 16.3 0.0 0.0 0.0 16.3

Other net assets/liabilities -1.0 0.0 0.0 0.0 -1.0

Total net assets 269.6 0.0 0.0 0.0 269.6

Gearing (%)

Net debt (cash)/properties -6.4 - - - -6.4

Net debt (cash)/equity -6.0 - - - -6.0

Source: AEW

Quarterly data per unit

As at 30-Sep-16 31-Dec-16 31-Mar-17 30-Jun-17 30-Sep-17 31-Dec-17

Bid (GBP) - - - - - -

Offer (GBP) 1.220 1.239 1.262 1.304 1.331 1.358

Mid (GBP) - - - - - -

Bid/offer spread - - - - - -

Net asset value (GBP) 1.143 1.160 1.181 1.221 1.246 1.272

Quarterly distribution (GBP) 0.0156 0.0148 0.0147 0.0136 0.0150 0.0183

Yield 6.8% 6.2% 5.5% 4.8% 4.7% 4.8%

Source: AEW



December 2017

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’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

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 AREF/IPD 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.

A minimum initial investment of £100,000, although the Manager may approve smaller holdings

The Fund is not subject to capital gains tax.

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



December 2017

Unit holder analysis

Number of unitholders Total % held

Less than 1% of units in issue 33 10.5




Greater than 8.0% 3 47.1

Total 48 100.0

Major investors

Largest holder 1 20.6

Three largest holders 3 47.1

Five largest holders 5 58.9

Ten largest holders 10 78.7

Internal/external investors

Internal 3 0.3

External 45 99.7

Source: AEW

Liquidity

Period

Year to

Dec 2013

Year to

Dec 2014

Year to

Dec 2015

Year to

Dec 2016

Year to Dec

2017

Issues and redemptions

38,927,762 78,343,346 157,204,632 193,021,067 209,530,510

Units issued during period 39,415,584 78,861,286 35,988,327 19,012,340 4,218,577

Units redeemed during period - - -171,892 -2,502,897 -1,740,886

Units in issue at end of period 78,343,346 157,204,632 193,021,067 209,530,510 212,008,201

Unit transfers

Matched bargains 50,849,766 15,164,063

Matched bargains %* - - - 24.27% 7.15%

* as % of units in issue at the end of the period

Source: AEW

Units in issue as at start of period



December 2017

AEW UK REAL RETURN FUND

INVESTMENT POLICY AND OBJECTIVES


UK

Q1 2016

Open-ended

N/A

31 December

81.3

Source: AEW

Management/professional advisors

Manager

Auditors

Source: AEW

Investment rates of return, %

Long income FundsAll balanced

fundsAll funds

3 months 2.8 3.1 2.9

Year-to-date 10.5 10.2 9.7

12 months 10.5 10.2 9.7

3 years+ 7.8 8.4 7.9

5 years+ 8.7 10.3 9.8

10 years+ - 3.8 2.6

Note: * Weighted average returns (Annualized)

Source: AREF/IPD UK Quarterly Property Fund Index (Sponsored by Property Match)

** 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

9.1

0.0

0.0

AEW UK

AEW UK

KPMG

Investment Advisor

Fund Manager

AEW UK REAL RETURN FUND**

1.8

9.1

AREF/IPD UK Quarterly Property Fund Index*

Depository

Ian Mason

BNY Mellon Trust & Depositary

0.0



December 2017

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*** 14.3 10.3 6.0 5.0

Standard retail – Rest of UK*** 10.5 11.8 4.4 4.4

Shopping centres 0.0 0.8 3.8 9.9

Retail warehouses 0.0 1.7 15.6 14.9

All UK retail 24.8 24.6 29.8 34.2

City offices 0.0 5.1 3.8 3.7

West End offices 0.0 1.1 7.8 7.0

Rest of South East offices 0.0 5.1 10.9 7.3

Rest of UK offices 3.2 7.0 6.7 4.9

All UK offices 3.2 18.2 29.3 22.9

South East industrial 0.0 2.2 15.3 12.6

Rest of UK industrial 0.0 5.5 10.3 8.1

All UK industrial 0.0 7.7 25.7 20.6

Other UK properties 70.3 47.4 9.7 18.2

Cash 1.7 2.0 5.5 4.0

Overall 100.0 100.0 100.0 100.0

Sources: *AEW ** AREF/IPD UK Quarterly Property Fund Index (Sponsored by Property Match)

*** 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 34 80.3 100.0

Joint and indirect holdings 0 0.0 0.0

Listed investments 0 0.0 0.0

Total 34 80.3 100.0

Source: AEW

Not Permitted

n/a

10%

*

*

AREF/IPD UK Quarterly Property Fund Index**

20% (pre let development)

Not Permitted



December 2017

Largest direct investments by lot size & percentage of total portfolio

Property Location Valuation (GBPm) % of total portfolio

Ashlands, Ashlands Mews and St Georges Care Homes Stoneygate 5-10 5-10

Larkland House Care Centre Ascot 5-10 5-10

Cross Point Coventry 5-10 5-10

The Point Borehamwood 5-10 5-10

Clifton Boulevard, Redfield Way Lenton 5-10 5-10

Travelodge Hotel, Providence Place West Bromwich 5-10 5-10

Cinema & Restaurants, Denmark Street Altrincham 0-5 5-10

Holmes Court and Holmes House South Wigston 0-5 5-10

Audi Car Showroom Doncaster 0-5 5-10

Bentley Court Bolton 0-5 0-5

10 largest investments as % of portfolio 55.5 69.1

Source: AEW

Direct portfolio structure by lot-size bands

Value band (GBPm)Number of

assets

Valuation

(GBPm)% of total portfolio

0 -2.5 23 22.2 27.6

2.5 - 5 5 18.6 23.1

5-10 6 39.6 49.3

10-25 - - -

25 - 50 - - -

50 - 100 - - -

100-150 - - -

Over 150 - - -

Total 34 80.3 100.0

Average lot size 2.4

Source: AEW

Net initial yield 6.45% Investments 0.61%

Nominal equivalent yield 7.12% Developments 0.00%

True equivalent yield 7.45% Total 0.61%

Net reversionary yield 7.54%

Source: Knight Frank Source: Knight Frank

Rental income & ERV by type of property

Rental income

%Estimated rental value %

Standard retail 23.0 28.6

Retail warehousing 0.0 0.0

Shopping centres 0.0 0.0

Central London offices 0.0 0.0

Other offices 3.9 3.8

Industrial 0.0 0.0

Other 73.0 67.6

Overall 100.0 100.0

Source: AEW

Other Healthcare

Other Healthcare

Other Leisure

Other Leisure

Other Leisure

Standard Retail

Residential

Sector

Voids as % of ERVProperty Yield

Other Hotel

Other Leisure

Other Healthcare



December 2017

Comparison of rents passing and ERV by type of property*

Sector Rent passing %Pre-lets & rent-

free periods %

Development

voids %Other voids % Over rented %

Reversionary

potential %

Net reversionary

potential %ERV %

Standard retail 78.2 0.0 0.0 2.1 -1.3 21.0 19.7 100.0

Retail warehousing - - - - - - - -

Shopping centres - - - - - - - -

Central London offices - - - - - - - -

Other offices 100.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0

Industrial - - - - - - - -

Other 104.6 0.0 0.0 0.0 -7.1 2.5 -4.6 100.0

Overall 96.9 0.0 0.0 0.6 -5.2 7.7 2.5 100.0

Source: AEW

* 77% of income linked to inflation

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 breaks 17.1 years

Joint and Indirect property holdings

Holdings Sector Joint/Indirect Vehicle Type Ownership % Est. % of total portfolio

- - - - - -

- - - - - -

- - - - - -

- - - - - -

- - - - - -

- - - - - -

Source: AEW

Valuation

% of rent passing

29.9

20.6

-

-

-

-

-

-

4.1

15.0

30.4



December 2017

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 AREF/IPD 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



December 2017

The contribution of major tenants to rental income

Tenant %

Prime Life Ltd 14.6

Ten Pin Limited 14.5

Care UK Comminity Partnerships Ltd 8.0

Travelodge Hotels Ltd 6.0

Gala Leisure Ltd 5.2

Volkswagen Group UK Limited 5.0

Pure Gym Ltd 4.2

Tesco Stores Limited 3.9

Keepmoat Limited 3.9

My Space Solutions Ltd 3.8

Three largest tenants' contribution to rental income 37.1

Five largest tenants' contribution to rental income 48.3

Ten largest tenants' contribution to rental income 69.1

Source: AEW

Balance sheet/gearing

Direct holdings Joint holdingsIndirect

investments

Listed

investmentsTotal

Balance sheet (GBPm)

Properties at valuation 80.3 0.0 0.0 0.0 80.3

Listed investments 0.0 0.0 0.0 0.0 0.0

Debt 0.0 0.0 0.0 0.0 0.0

Cash 1.4 0.0 0.0 0.0 1.4

Other net assets/liabilities -0.3 0.0 0.0 0.0 -0.3

Total net assets 81.3 0.0 0.0 0.0 81.3

Gearing (%)

Net debt (cash)/properties -1.7 - - - -1.7

Net debt (cash)/equity -1.7 - - - -1.7

Source: AEW

Quarterly data per unit

As at 30-Sep-16 31-Dec-16 31-Mar-17 30-Jun-17 30-Sep-17 31-Dec-17

Bid (GBp) 0.932 0.943 0.951 0.959 0.971 0.976

Offer (GBp) 1.010 1.023 1.032 1.040 1.053 1.058

Bid/offer spread 7.8% 7.8% 7.8% 7.8% 7.8% 7.8%

Net asset value (GBp) 0.946 0.958 0.966 0.974 0.986 0.991

Quarterly distribution (GBp) 0.0112 0.0125 0.0126 0.0136 0.0131 0.0133

Yield - - 5.1% 5.1% 5.3% 5.3%

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



December 2017

Redemptions

Taxation

Capital Gains Tax

Income Tax

Charges

Unit holder analysis

Number of unitholders Total % held

Less than 1% of units in issue 5 0.8




Greater than 8.0% 5 96.4

Total 11 100.0

Major investors

Largest holder 1 29.5

Three largest holders 3 65.7

Five largest holders 5 96.4

Ten largest holders 10 100.0

Internal/external investors

Internal 5 0.8

External 6 99.3

Source: AEW

Liquidity

Period

Year to

Dec 2016

Year to

Dec 2017

Issues and redemptions

- 55,537,227

Units issued during period 55,537,227 26,575,500

- -

55,537,227 82,112,727

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.


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