La Valette Sicav: Europe debt creates headwinds for property market

FULL ANNUAL REPORT (PDF)

The La Valette Funds Sicav plc held its sixteenth AGM, in the year of the €40 million compensation to investors in the Sicav's multi-manager property fund, which turned out to be the focus of the AGM.

The Sicav's managers report stressed that property values had been hit by the global financial crisis as more financing dried up.

During the period under review, the share price of the Main Shares, decreased by 0.78% from €0.5348 on 30 September 2010 to €0.5306 on 30 September 2011.

On 26 May 2011, Bank of Valletta launched a conditional offer to purchase and acquire the shares held in the La Valette Multi Manager Property Fund at a price of €0.75 for each share.

BOV now holds 99% of the shareholding of the fund.

On 15 June 2011, the MFSA concluded that Valletta Fund Management, the manager of the fund, had wrongly applied and wrongly monitored the application by its underlying fund managers of investment restrictions laid down in the fund's prospectus.

"VFM remains of the view that the conclusions of the MFSA were wrong in fact and at law and based on the authority having taken a different view from that taken by VFM and other relevant parties on the proper interpretation and application of the gearing restriction as set out in the prospectus," the Sicav said in their report.

"BOV and VFM among others elected not to proceed with an appeal against the conclusions of the MFSA. This decision was taken without prejudice to the views of BOV and VFM that the MFSA conclusions were wrong and misconceived, both in fact and at law."

The Sicav said the decision not to appeal the MFSA conclusions was taken because BOV and VFM saw little practical merit in an extended adversarial dispute with the MFSA given the 98% response rate to an offer made by BOV to fund investors on 26 May 2011, to acquire their shares in the fund, on condition that all legal claims against the bank are dropped.

The Sicav managers said the portfiolio's holding in Speymill Macau Property Company p.l.c. was sold by the sub-manager, however the fund's holding in Macau Property Opportunities Fund was held, with the position paying an 8% dividend in July.

The Fund's iShares FTSE/EPRA European Property Fund and iShares FTSE EPRA/NARETT Asia Property Yield Fund positions have both fallen over the year given broad economic slowdown concerns. However, Huet Capital FCM Salamanca Global Property Fund has continued to deliver strong returns, capturing the structural opportunities in the Brazilian residential property market, and financing opportunities in Europe.

All the assets within the underlying Belgravia fund, with the exception of two assets, were sold to Palmer BidCo. "The Belgravia fund is expected to retain the cash balance and the net cash receipts from the two properties which are not part of the deal with Palmer. In addition, the Belgravia fund may benefit from receipts arising from the settlement of any claims as well as any upside market movement potential should Palmer Capital be successful with the new structure," the Sicav said.

The Belgravia European Logistics Fund holds full ownership interests in two sites located in Serbia and Bulgaria, a cash balance and no outstanding loans. "Economic recovery in Serbia and Bulgaria is slowly taking place, however the commercial property markets have so far witnessed a limited increase in investment activity. In view of the unfavourable market conditions, sale of these two sites, or parcels thereof, might take longer than anticipated."

As previously communicated, the La Valette Multi Manger Property Fund had placed a redemption request for all Belgravia China fund shares on 5 August 2008 and the Belgravia directors indicated that based on Jersey legal advice and in accordance with the fund's constitutional documents, the outstanding redemptions requests are valid and will be processed at the redemption price applicable on the relevant redemption day.

The directors of the China fund have also communicated that the previously reported procedural, taxation and accounting issues with respect to the sale of the China fund's sole property have been settled and consequently the July and August 2008 net asset values have been finalized but not communicated to shareholders.

Over the twelve months to the end of September 2011 commercial property in the UK has been underpinned by a strong period of positive growth in capital values. Prime property in supply constrained central London are a focus for buy-and-hold investors and it is interesting that the credit crunch has actually benefited the west end by constraining the new development pipeline.

"In mainland Europe increased concerns over the level of debt in peripheral countries such as Greece and Portugal has created a headwind for property values, although most regions were broadly flat over the period. The decision by the European Central Bank to raise interest rates is also significant for the property market as it increases the cost of variable rate mortgages across Europe," the Sicav said.

"In Asia, rising inflationary pressures has led central banks to raise interest rates sharply, which has impacted regional property values in the short-term. The underlying investment case for the region remains robust, however, with strong demographics and rising income levels."