UK Commercial Property reports that its NAV per share at the end of the period was 86.5p, just 0.2p lower than the level at 31 December 2015 resulting in a NAV total return of 1.9% for the six month period to 30 June 2016. On an EPRA basis, adjusting for the effect of their interest rate swap transaction, the NAV was 87p, up from 86.7p. Two quarterly dividends of 0.92p have been declared
The total return on the property portfolio was 2.8%, just ahead of the 2.6% return posted by the industry benchmark.
They raised cash from the sale of a mixed use holding in Arlington Street, London and of an office property in Sunbury, Surrey. These two sales realised a total of GBP45.6 million, some 14% above their combined March quarter
end valuations. This performance was generated despite BHS going into administration which resulted in an GBP8.3 million valuation reduction in Q1 of the Company’s holding at The Parade, Swindon, where BHS occupied one of the
Company’s retail units.
As at 30 June 2016 the Company had low net gearing of 10.7%, gross gearing of 18.1%, an attractive blended rate of interest of 2.89% and a weighted average expiry period of six and a half years. The Company also had cash of GBP114 million of which GBP70 million is available for investment after allowing for dividend and capital expenditure commitments. Additionally, the Company has access to a GBP50 million revolving credit facility which remains undrawn.
Industrial
The strongest performance during the first half came from the Company’s industrial portfolio, with a total return of 4.8% against 3.5% for the benchmark. Generally, the market continues to reward the strong income characteristics of the industrial sector and investment demand remains robust with a scarcity of stock, particularly for London and South East, underpinning performance. Within this period the Company benefited from the accretive sale of a redundant office property on one of its London industrial estates to a residential developer.
Offices
Boosted by the profitable sale of a low-yielding ‘trophy’ office investment in London’s St James’s, 6 Arlington Street, the return posted by the Company’s office portfolio was a close second to the industrial performance at 4.2% for the period against 3.0% for the benchmark.
The Company’s underexposure to the South East office sub-sector, at 1.7% of capital employed versus the benchmark’s 11.1%, has not materially hurt it this period reflecting capital growth coming off the bulk of that market. On the other hand the Company’s 2015 acquisition of Eldon House, in the City of London close to the imminent Liverpool Street Crossrail / Elizabeth Line station, generated a total return of 4.3% against the benchmark for the City of 2.6%, as the Company’s asset management programme increased rental income as anticipated at the time of acquisition.
During the first six months, we also witnessed continuing investment demand for both core London and regional offices. Overseas demand has been particularly strong for the former whilst the latter saw more focus from UK institutional investors, many of whom have been attracted by a more generous yield. It is important to observe that, after the EU Referendum, demand for City of London office investments has declined, reflecting uncertainty over future levels of cross-border financial services operations.
Retail
Whilst it has been common to read of retail underperforming the other major property sectors in recent periods, and the last six months is no exception, on this occasion the Company’s retail performance was disrupted by the BHS debacle. In Q1 its filing for a CVA procedure and with it the expected closure of its store in the Company’s Swindon shopping centre, The Parade, led to a one-off GBP8million value write-down. With this impact the Company’s retail total return was 0.5% against 1.8% for the benchmark. The ongoing strategy for the Company’s shopping centres, which account for less than 8% of portfolio value, is to maintain and, where possible, improve the net operating income at each centre. In particular the Company is pleased to have commenced work to refurbish the main mall of the Charles Darwin Centre, Shrewsbury, creating a new anchor unit for Primark. Aside from improving net operating income in its own right, the new Primark anchor store will significantly improve the attractiveness of this shopping centre for other tenants, creating, we expect, a snowball of interest further improving net operating income in what is the Company’s largest current void. We attribute an early new letting to Costa Coffee directly to the Primark announcement.
The Company’s standard regional shops in Manchester and Exeter delivered a strong performance recording a total return of 9.5% – the best across all sub-sectors over the last six months. However, with only 2.5% of the Company’s
portfolio invested here, the impact at the aggregate level was muted. It was also positive to note the Company’s retail warehouse portfolio, representing 21.8% of the portfolio against 16.1% for the benchmark, out-performed the
benchmark sub-sector return at 2.3% versus 1.8%, whilst also providing an income return of 2.6% – ahead of the all property income return of 2.4%. This is reflective of the quality of the Company’s retail warehouse portfolio and
the active management carried out to enhance value during the period.
The retail market has been polarised towards the prime and good secondary spectrum whilst significant risk remains in the poor secondary and tertiary locations. After the EU Referendum we continue to witness positive signals from
the retail occupational market in good locations although, as before, rental growth in all but the best locations remains subdued.
Leisure
The Company has approximately 10% of its portfolio invested in leisure investments which, amongst other attributes, extend the portfolio’s average unexpired lease term. MSCI/IPD groups leisure in its ‘Other’ designation which includes student housing, hotels, etc. Over the period the Company’s leisure assets produced a superior income return but lost a little value at Regent Circus, Swindon, reflecting a reducing risk appetite and that asset’s residual
restaurant vacancy.