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F&C UK Real Estate’s industrial and distribution assets drive performance

F&C UK Real Estate Investments has announced its annual results for the year ended 30 June 2016/ During the year, the company’s NAV total return was 7.5% although its share price total return was -6.5% as the company moved from trading at a small premium to NAV, at the beginning of the period, to a 10.8% discount to NAV, at the end of the period. The company’s ungeared portfolio return was 7.1%. In comparison, the company says that the UK commercial property market delivered a total return of 9.1% as measured by the Investment Property Databank (IPD) UK Quarterly Index for all assets in the year to June 2016.

The total dividend for the year is 5.0p per share (the company has paid three interim dividends of 1.25p per share and the fourth interim dividend of 1.25 pence per share is to be paid on 30 September 2016), which represents a yield of 5.6 per cent on the year-end share price. The company says that it is its intention to continue to pay quarterly interim dividends at this rate. It also says that Dividend cover increased to 91.7% as compared to 76.8% for the previous year.

The Company entered into two new loan agreements totalling £110 million during the year: a £90 million 11-year non-amortising term loan facility agreement with Canada Life Investments and a £20 million 5-year revolving credit facility agreement with Barclays Bank plc. The company says that the weighted average interest rate reduced to 3.3%, from 5.8% under the previous loan arrangements. Following the refinancing, the gearing level, net of cash, represents 29.1 per cent of investment properties at 30 June 2016 and the company had £11.9 million of cash available at 30 June 2016.

In terms of performance, the manager, Peter Lowe (pictured), says that the year witnessed a moderation in investment activity to £57 billion from £77 billion in the previous year and that, while investors may have been influenced by wider economic and political developments, there was also concern at the level of pricing in some parts of the market, especially in London. Overseas buyers continued to drive parts of the market, although the volume of their net investment faded as the year under review drew to a close. Institutions were reportedly net sellers over the period with net disinvestment focused on the final three months of the reporting period. The manager says that investment into regional offices and retail warehousing proved relatively resilient but most segments recorded an annual decline. This was most pronounced for leisure and non-traditional property assets, which had seen both strong transactional volumes and relative performance in the prior period. The manager says that banks continued to wind down their problem loans but also were more willing to undertake new lending, competing alongside new entrants, for well-let standing investments.

In terms of performance, the manager says that, at the sector level, the portfolio’s industrial and distribution assets continued their run of outperformance, producing a total return of 11.8 per cent, in excess of both the IPD Quarterly Index and the sector average for the period. The manager says that performance has been driven by robust occupational demand and limited supply, complimented by successful asset management which has translated to income growth, whilst the Fund’s industrial assets have also benefitted from a general market preference for modern, well-specified property located within the South East. Retail and offices reportedly both underperformed their respective peers, particularly in terms of capital growth, the latter by some distance, however the manager says that both delivered meaningful yield premium, providing valuable dividend cover.

In terms of outlook, the manager says that the impact of the UK’s decision to leave the EU may well lead to slower economic growth and, in the short term at least, has the potential to lead to wider uncertainty and increased volatility in the capital markets. However, the manager says that weakening sentiment does pose a threat to near term values with the impact of recent transactions, some of them from motivated sellers such as the UK open-ended funds, likely to become apparent in the third quarter valuations. Following a three-year run of capital appreciation across the majority of the market, the Manager considers that the portfolio is well placed to capitalise on the likelihood of income dominated returns over the foreseeable future.

F&C UK Real Estate’s industrial and distribution assets drive performance : FCRE

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