THE GROUP TOTAL RETURN OF 7.5% INCLUDES STRONG RESULTS IN CONTINENTAL EUROPE AND AUSTRALIA, EACH WITH A TOTAL RETURN OF OVER 11% EXCLUDING CURRENCY MOVEMENTS. OVERALL, THE RESULTS CONTINUE TO BE STRONGLY INFLUENCED BY THE LONDON ESTATE; THIS PORTFOLIO IS IN TURN MAINLY INFLUENCED BY OFFICE PROPERTY (46%) AND HAS HISTORICALLY UNDER PERFORMED WHEN THE ECONOMY IS WEAK AND OUTPERFORMED WHEN IT IS STRONG.

While the UK economy as a whole has performed well, the London financial services sector has been very weak and significant job losses are only now being arrested. The Group’s increased diversification of the last 10 years reduces the effect, but it still exists. We are optimistic that 2003 saw the low point in this cycle for our key markets in London, San Francisco and Hong Kong. In the long term, we continue to believe that the central London office, residential and retail sectors will be among the best performing property markets in the world and we are happy to maintain London’s West End as the core of our portfolio.
Real estate has been rehabilitated as an investment class since 2001; while this is at least partly due to the woeful performance of equities, most investors now accept that property should play a larger role in their portfolios in the future. The capital flows into property investment throughout the developed world have grown and are likely to continue to do so. This means that, based on a finite short term supply of quality investment stock, capital prices are likely to continue to rise and yields to fall. Office returns should improve over the next couple of years as service sector employment levels pick up and rents start to recover. The way that capital values have diverged from income return has unnerved many professional investors; there is no doubt that we experienced a great selling opportunity in many markets last year but our view is that these lower capitalisation rates are likely to endure for some time and we should get used to them. Following our recent strategic sales of large, securely leased, down-town and regional scale assets overseas we are in a position to invest a substantial amount of capital. Generally, we are searching for opportunities that require greater property expertise to generate better returns.
Our strategy is to manage our activities in three strands. First, we aim to create value in real estate by developing and improving properties; second, we aim to manage properties in the best way possible; and third, we aim to advise and assist others investing in real estate. Fund Management represents a very large opportunity for Grosvenor. Having co-invested with and advised third party investors for nearly 30 years, we have built solid foundations upon which we plan to grow. Capital is progressively becoming more international and the majority of our Fund Management partners have always invested across borders. Our business has evolved from small clubs of investors and discrete joint ventures and we have started to build on these to establish specialist larger funds which will become ‘flagships’ both in their market and as Grosvenor products.
One of the most important changes that we have made at Grosvenor in recent years has been the much greater emphasis on research as a basis of both strategy and decision making. We have a team of economic and market research specialists who collectively provide us with a highly individual and distinctive view of the world economy and our markets. They provide a challenge to the conventional thinking into which we, as typical industry insiders, are apt to fall; by integrating strategy and decision making with the research process we ensure that our research effort is tailored to the business and that the research team themselves are more clearly valued.
In this report, the Chairman raises the challenge of becoming more involved in society and one way we are addressing this is through the education sector; our simple logic is that nothing is more important to any society’s long term future than education and the property industry has a great deal to offer. This can include direct support in teaching, mentoring or career advice, commissioning research and making endowments, as well as advice to universities and schools on real estate strategy, property management, construction and financing. Each Grosvenor business around the world is developing a plan to increase the work with education and universities in particular coordinated at the centre by Stephen Barter.
Currency fluctuations caused a significant adjustment to our results in 2003, both the fall of the US dollar and the rise of the Euro. Our policy is to hedge only short term cash flows. Other than by raising debt locally we do not hedge our long term property exposure in any region against sterling, although we may hedge within a region. We believe this policy is sound because we are investing capital overseas for the long term and do not expect to repatriate significant amounts of capital already invested. We monitor our results by reference to local currency although our economic research and analysis inevitably addresses currency as an economic indicator.
We both travel extensively throughout the Grosvenor world. We see the initiatives of very different local businesses, we hear the ambition to succeed locally and we are witnesses to the common bond with the Grosvenor Estate in London, with its history and that of the Grosvenor family. We manage the Group on a devolved basis and we are sometimes asked what our role is. Perhaps the best answer is that our task is to make something so unique be as normal as possible!