¶ … Property portfolio ownership and management is not based on charitable foundations but rather on the idea that investors will benefit from that ownership. Therefore, in order to ascertain the profitability of owning and managing certain specific properties is of importance to the investors interested in achieving those benefits. One method for that ascertaining is to employ the Modern Portfolio Theory (MPT). MPT was actually developed as a tool to moderate individual and group risk in stock and bond portfolios during the 1950's but was adapted to real estate portfolios in an attempt to mitigate the risk of those types of portfolios as well. Modern Portfolio Theory states that "by combining investments with different risk characteristics into a portfolio risk is spread, and thereby reduced" (see MPT presentation). The MPT works well with stocks and bonds because those investments are very liquid and easily dispersed of or purchased, and MPT was originally designed as a theory that would assist investors in those types of financial vehicles. Implementing the MPT regarding a real estate portfolio is a different matter all together.

MPT states that "clearly it is always possible to reduce risk by switching funds into less risky assets but this comes at the expense of lower returns" (MPT presentation). According to MPT the key then would be to reduce risk yet at the same time ensure that "it does not come at the expense of lower returns." Accomplishing the objective of higher returns with less risk is especially difficult to do if the inherent investments are bulky, difficult to liquidate, have fewer buyers and sellers, and the market for the investments is not nearly as flexible as the stock and bond market; such is true of the real estate portfolio marketplace.

Factors

Since this particular portfolio is concerned primarily with the next two years, certain factors will need to be taken into consideration regarding the real estate portfolio. Some of those considerations include; the overall real estate market, the specific market in which the property is located, the specific property itself and its characteristics, and whether the property is viewed as a growth vehicle or income generating vehicle. Within those guidelines are also a number of considerations, including but certainly not limited to; what or who would purchase the property and at what price, will the market price be stronger or weaker in a two-year timeframe and will the income generated from the current portfolio be enough to augment any additional risk if the portfolio were to be held for two years?

The last two years have been rough years in general for real estate portfolios, especially effecting the value and capital growth areas. Some of the properties currently held by the portfolio suffered extensive declines in capital value and none of the properties experienced an overall rise in value over the last three years. Since the purpose of the fund is to generate high income with medium risk, it would seem to be that an analysis of the income might assuage the worry that investors might have with the drop in value if a coincident income-based return was presented. With that goal in mind an analysis of the properties is deemed important and is carried out within this report.

Portfolio Properties

The overall portfolio contains six properties, all located in the North West region. At the end of the calendar year 2004 the overall valuation of the properties in the portfolio was 21,435,000. By the end of the year 2009 that valuation had dropped substantially to 20,590, a drop of approximately 4.8%.

There are six properties in the portfolio; two properties each in Manchester, Liverpool and Warrington. The biggest drop in value based on a percentage were the two properties in Liverpool, where the value dropped from 5,310,000 to 4,475,000; a drop of just over 16%. The real estate in Manchester rose by 275,000 and the space in Warrington dropped by 285,000. The two properties in Manchester are retail and office as are the two in Liverpool. The properties in Warrington are office and industrial. The total return on the overall portfolio during the last five years was approximately 8.01% per annum. One property performed extraordinarily well (70.81% total return for five years) while another property performed poorly (6.01% total return over the same five-year time frame). Ironically enough, both properties were located in Liverpool and both properties showed an overall drop in valuation. Additionally, those two properties also showed the highest and lowest income related percentages as well; the Liverpool retail location averaged 4.51% income return per year (the lowest in the portfolio) and the Liverpool office location averaged 15.26% income return per...

The other four properties displayed a 'normal' range of both total return and income for the previous five-year history. One recent expert wrote that "the physical asset and its covenant strength are key" (GVA Grimley, 2010, p. 2).
The same expert went on to espouse the thought that in the current market the prime assets are the assets that are attracting the most attention and selling those assets that it might actually be a good time to sell an attractive asset (GVA, 2010).

Individual Properties

As stated above, there are currently six individual properties contained in the portfolio. An analysis of each property is contained herein:

Manchester -- Style Mall -- Retail

Value as of 2004 6,950,000

Value as of 2009 7,540,000 gain 590,000 8.5% 1.7% per year

Highest Value 8,950,000

Total Net Income 2,561,024 31.83% 6.36% per year

Total Return 42.4% 8.48% per year

Rental income rose for this property but was lower in 2009 than both 2007 and 2008; that was also true for the property evaluation and capital growth. Total return averaged 8.48% per year and net income return averaged 6.36%, second lowest in the portfolio. Risk factors include a continuing recession which would dampen retail sales affecting the retailer establishments who are currently leasing space in the mall. Another risk would be the fact that a larger portion of the fund's capital is invested in this particular piece of property. At 7,540,000 it is the largest property in the portfolio by far and away, the next closest is the Irwell House (4,875,000) also in Manchester. Income is only 6.36% per year which raises the risk of holding the property facing a continuing downtrend in the real estate market. It would have been nice to sell this piece in 2007 after it had hit its high valuation of 8,950,000 and it could reach that level again, but that time might be a long time in coming.

This property is also the most volatile of the six properties, which augments much higher potential for greater return, but could also be a forbearance of a much lower return if the property had to be sold at a time when the market was depressed.

Manchester -- Irwell House -- Office

Value as of 2004 5,190,000

Value as of 2009 4,875,000 loss 315,000

Highest Value 6,225,000

Total Net Income 2,563,664 45.26% 9.05% per year

Total Return 41.49% 8.29% per year

Rental income rose during 2005 and then fluctuated between a relatively tight range from 2006 through 2009. The income during 2005 was 504,456 and then averaged 514,802 per year for the next four years. Risk factors do not seem as depressed as displayed by the retail location in Manchester and the numbers bear that out as well. This property has generated a far more significant income portion of its valuation than the other Manchester property. Total net income for this property as a percentage of its current valuation is at 52.5% as compared to the Manchester retail property at approximately 34%. If that figure were to hold true over the next five years, this property would then have achieved a 100% return of capital, which is a positive sign for keeping this property in the portfolio, especially since it has averaged 9.05% per year in income.

Warrington -- Gateway North West - Office

Value as of 2004 2,500,000

Value as of 2009 2,450,000 loss 50,000 (2%)

Highest Value 3,057,000

Total Net Income 1,191,317 42.68% 8.53% per year

Total Return 42.66% 8.51% per year

This property generates a higher percentage of income compared to either of the Manchester properties. Its value dropped by 50,000 which was nominal at 2%. The income generated during the last five years which is approximately 48.8% of value. Describing this property as a middle-of-the-road investment that generates an income at 8.53% per year would be a good description. Since the fund is following a high income, medium -- risk investment philosophy, this property fits that description. The risk factors are relatively low as well with very little volatility in its property value and a net income return that fluctuated between 9.41% on the high end, and 7.90% on the low end. Interestingly enough, its gross income for the last two years was 243,158 and 242,798 during the last two years; the highest two years out of the last five.

Warrington -- Enterprise Park - Industrial

Value as of 2004 1,485,000

Value as of 2009 1,250,000 loss 235,000 (15.8%)

Highest Value 1,725,000

Total Net Income 807,056 50.18% 10.03% per year

Total Return 37.04% 7.40%…