New Star property fund announcement

Since mid-summer there has been an adverse shift in sentiment towards the commercial property market.

The immediate consequence of this shift has been a sharp reduction in transaction volumes and therefore of the liquidity of the commercial property market as a whole. The relative scarcity of transactions has made the task of valuing commercial property more difficult.

In recent days sentiment has deteriorated sharply, partly as a result of the publicity given to redemptions from open-ended commercial property funds. This has stimulated further redemptions and heightened concerns about the liquidity of these funds.

The New Star UK Property Unit Trust (the “Fund”) is, we believe, one of the most liquid of the UK open-ended commercial property funds. Its property portfolio is heavily weighted towards prime office property in the City and the south east. The portfolio has a high rate of occupancy by blue-chip tenants. Vacancies are currently less than 1% and 91% of the rental income received by the Fund is paid by tenants that are categorised by Dun and Bradstreet as low, very low or lowest risk. The prospects for rental income growth from this portfolio have not, we believe, changed materially since mid-summer.

Notwithstanding the quality of the Fund’s portfolio, its valuation must reflect the recent deterioration in sentiment towards the commercial property market generally. Accordingly, the value of the Fund’s property portfolio has today been reduced by 8.2% by the Fund’s valuer, CB Richard Ellis. This follows a capital fall of 9.6% in the previous 4 months, making a total capital fall of 17.8% since the end of July.

New Star regrets that the value of the Fund’s properties has had to be reduced. The Fund’s property portfolio is being valued at least twice each month until the property market returns to a more stable state. In this way, property values will be kept as current as possible so that all unit holders are treated fairly, both those redeeming and those remaining as long term holders. During this period of uncertainty, New Star will make every effort to maintain the Fund’s liquidity.

New Star has consistently emphasised that the case for investment in commercial property is portfolio diversification and income rather than short term capital appreciation. We continue to believe that this investment case remains as strong as ever notwithstanding the recent short term falls in commercial property values. In view of the quality of the Fund’s assets, New Star believes that the Fund will be well positioned when commercial property values in due course rebound.

At the current valuation, the income yield on the Fund is 4.4% net of charges.