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Market Overview

For the BlackRock Property Trust (Aust)

The BlackRock Combined Property Income Fund (Aust) invests into the BlackRock Property Trust (Aust) (BPT).

• The stabilisation in commercial property markets, witnessed in late 2009, and the modest recovery evident in early 2010 paused during the June quarter. This was largely in response to deterioration in global investor sentiment and associated financial market weakness as sovereign debt issues continued to cloud the global economic recovery.
• The NAB Business Survey highlighted that while trading and employment conditions in Australia were broadly unchanged, business confidence, fell sharply in May.
• Lower business confidence appears to have translated to slower leasing activity within the commercial office markets. Businesses are taking a more cautious approach and deferring decision making.
• Employment lead indicators however, remain positive with total job advertising rising 2.7% in May, maintaining the upward trend for the eleventh consecutive month. This positive outlook for continued employment growth, assuming the global economic recovery continues, when combined with modest vacancy levels nationally, and the limited commencement of new office buildings during the Global Financial Crisis (“GFC”), provides a sound platform for the future performance of commercial office markets.
• Similarly, in the industrial sector there has been a general decrease in enquiry and leasing activity throughout the second quarter with rents having remained stable. Investor activity however, has improved off a very low base in the March quarter and there is evidence of mild yield compression for prime assets.
• The retail sector has seen retail trade, occupancy and rents remain stable over the June quarter.
• The retail construction cycle remains subdued with many projects on hold due to challenging development conditions and renewed economic uncertainty.
• Consumer confidence has fallen from a high of 120.1 points in January 2010 to 101.9 points in June 2010, most likely reflecting recent interest rate rises and renewed global uncertainty. There was some isolated tightening of yields for high quality retail assets.

For the BlackRock Wholesale Indexed Australian Listed Property Fund

The BlackRock Combined Property Income Fund (Aust) invests into the BlackRock Wholesale Indexed Australian Listed Property Fund for its allocation to listed property.

• The Australian Real Estate Investment Trust (A-REIT) sector fell 1.5%, outperforming the broader S&P/ASX 300 Accumulation Index by 9.7%.
• Weaker commodity prices, concerns surrounding European sovereign debt issues, moderating growth expectations in China and in the US as well as the announcement of the proposed Resource Super Profits Tax (RSPT) continue to spook the market. However, the change in the Labor Party leadership from Kevin Rudd to Julia Gillard renewed hopes that the proposed RSPT would be watered down from its original form.
• During the last reporting season, most A-REITs reported earnings in line with market consensus with commentary from management leaning towards a cautious bias for the coming 12 months.
• Goodman Group (-0.3%) signed a Memorandum of Understanding to develop a premier business and logistic hub in China whist its Industrial Fund announced securing new debt facilities to refinance existing 2010 maturities in May.
• ING Office Fund reversed its May losses to finish up 0.8% for the quarter after announcing that it has leased approximately 29,000sqm of office space across its portfolio.
• Westfield Group finished the quarter up 1.0%. The company presented its quarterly update in May and updated investors on its Australian development activities in June.

Market Outlook

Global and domestic economic recovery is underway however, the fragility of the recovery was evident in the June quarter. The cost and availability of debt continued to weigh on the property sector however the medium term market fundamentals remain attractive.

Portfolio Activity

• The portfolio continues to generate a solid income which is being distributed quarterly. We remain heavily focused on asset management to minimise vacancy and maximise income for clients.
• During the second quarter of 2010, tenant enquiry slowed slightly in comparison to the up lift experienced throughout the first quarter. The BPT has been successful in concluding a number of leasing transactions throughout the second quarter of 2010 and has re-signed a number of tenants across the portfolio. Occupancy has improved from a cyclical low of 91.6% at 31 December 2009 to 93.2% as at 30 June 2010.
• Direct asset values have rebounded 3.9% in the first half of 2010 on a like for like basis. Despite the caution that has enveloped investment markets in the last quarter in response to sovereign debt issues and the apparent fragility of the global recovery, we anticipate we will be able to continue to improve the occupancy of the BPT. This improved occupancy should translate in to an uplift in asset values at a number of key assets.

Transation Activity

• During the June quarter we successfully negotiated the sale of 87 Chifley Drive, Preston.
• This asset, whilst well located and possessing long term redevelopment potential, has a 2011 lease expiry with a tenant who is unclear about its future occupancy needs. We assessed that there was not sufficient reward in continuing to hold this asset for its redevelopment potential given the tenancy uncertainty. It was decided to de-risk the portfolio and sell the asset.
• A sale price of $8.125m was negotiated at a 7.8% premium to the most recent valuation. The sale was contracted in April and settled in late June. The proceeds of this asset sale are likely to be made available for a further withdrawal offer in late 2010.

Valuations

• Each of the 19 properties were valued as at 30 June 2010 by five different valuation firms selected from our panel of approved valuers.
• The total assessed value of the portfolio of direct property assets increased by 1.6% from 31 March 2010 to 30 June 2010.
• The inertia witnessed in leasing markets was also seen to some extent in the quarterly valuations with 42.5% of the asset values remaining unchanged, 42.5% reflecting an increase, although most less than 1%, and the remaining 15% recording lower values reflecting specific leasing issues.
• The weighted average capitalisation rate of the direct assets within the portfolio has firmed marginally from 8.58% at 31 March 2010 to 8.47% at 30 June 2010.

The major contributors to performance were:

About the Fund

Investment objective

The primary objective of the Fund is to deliver a combination of income and capital growth over the medium to long-term by investing in a portfolio of direct property and listed property securities, with an emphasis on income. The Fund aims to deliver an attractive income yield from both direct and listed property.

We aim to achieve this objective by outperforming the benchmark asset allocation returns over rolling five-year periods.

The Fund is actively managed against a passive benchmark, equally weighted between the following listed and direct property indices:

• 50% Mercer Unlisted Property Funds Index (before fees and tax).
• 50% S&P/ASX 200 A-REIT Accumulation Index.
  

Fund strategy

The investment objective of the Fund is currently pursued by investing in a portfolio of direct property and listed property securities. Exposure to direct property and listed property securities is obtained through related Funds managed by BlackRock – the BlackRock Property Trust and the BlackRock Property Securities Fund.

Designed for investors who…

• Seek a fund which aims to provide a regular income stream from a diversified portfolio of direct property and listed property securities.
• Seek growth over the long term.

Additional information

On 3 May 2010 the BlackRock Combined Property Income Fund (Aust) gained its exposure to listed property securities through the passively-managed BlackRock Wholesale Indexed Australian Listed Property Fund rather than the actively-managed BlackRock Property Securities Fund (Aust). Moving the A-REIT component of the Fund from the current actively-managed style to a passively-managed indexed approach continues to give investors exposure to the listed A-REIT sector and enables the existing Property Team to concentrate principally on the direct property component of the Fund (increasing the overall portfolio management resources allocated to managing the Fund).

There is no change to the Fund’s benchmark neutral asset allocation of 50% to direct property and 50% to listed property securities, however the benchmark index used for listed property will change fromthe S&P/ASX 200 Property Trust Accumulation Index to the broader S&P/ASX 300 Property Trust Accumulation Index. This change will align the Fund’s listed property benchmark to that of the indexed portfolio through which it will gain its A-REIT exposure.While the new index is broader (22 stocks compared with 16 stocks in the previous index) the stock weightings between the two indexes are very similar. The six additional stocks currently have a collective weighting of less than 2% in the broader index.

The BlackRock Combined Property Income Fund (Aust) is currently “non-liquid” within the meaning of the Corporations Act. Accordingly, BlackRock can only accept and process withdrawal requests from investors in the BlackRock Combined Property Income Fund (Aust) on the basis of aWithdrawal Offer issued by BlackRock. AnyWithdrawal Offers issued will be offered to all investors in the Fund. AWithdrawal Offer dated 23 March 2010 was issued for the Fund. TheWithdrawal Offer closed on 23 April 2010.

Although withdrawals will only occur on the basis of aWithdrawal Offer, other aspects of the Fund continue to operate as normal, including:

• applications continue to be accepted as the Fund has not closed;
• unit pricing continues to occur on a daily basis;
• distributions continue to be paid as normal; and
• the investment strategy and management of the Fund remains unchanged.

BlackRock is committed to restoring liquidity and details of further offers will be provided in due course.