UK Commercial Property Trust (UKCM) has announced its final results for the year ended 31 December 2016. During the year, which the Trust’s chairman, Andrew Wilson, describes as, “a positive and progressive year” for the trust, UKCM provided an NAV total return of 3.8% and a share price total return of 3.8%. UKCM says that this compares favourably to the FTSE All-Share REIT Index, which it says provided a total return of minus 7.0%.
In terms of portfolio highlights, the company says that value was delivered through asset management and positive investment market activity. 44 new leases and 25 lease renewals generated over £6.5 million of annual income (after rent free periods and incentives) and the portfolio provided a total return of 4.4%, which the company says was above the IPD benchmark return of 3.6%. The company’s void rate of 3.7% is also below that of the IPD benchmark (reportedly 6.9%), whilst 99% of rent collected within 21 days, which the company says underlines the strength of its tenant base and operational effectiveness. The portfolio has a yield of 4.9% with reversionary yield of 5.8% whilst the disposal of 6 Arlington Street, London, W1 and Dolphin House, Sunbury-on-Thames, for a combined price of £45.6 million, reflecting an aggregate 14% premium to the 31 March 2016 market value.
Looking forward, the company says that it had £75million of uncommitted cash resources available for investment at the year end and has access to £50 million revolving credit facility which remains undrawn, providing additional investment potential. It has net gearing of 11.4%, which it says is one of the lowest in the Company’s peer group.
Looking at individual segments, the manager says that investment volumes over the year, though down from a £70 billion peak in 2015, remained healthy at £50 billion and that it was interesting to see this split more or less evenly between the first and second halves of the year, either side of the EU Referendum. The manager says that overseas investors boosted the total, accounting for 43%, with many of those investors attracted by both cheaper sterling and the relative safe haven status of the UK.
The manager says that retail remained the laggard of the sectors, recording a total return of 1.6% in the 12 months to the end of December 2016. Retail capital growth continued to be weak with values falling by 3.5% over the year and, whilst rents were fairly stable, retail rental growth continued to be considerably weaker than the other two major sectors at 0.5%. This was well below office rental growth at 3.2% and industrial at 3.9%. The manager says that Christmas trading was broadly reasonable with most sectors recording an increase in sales compared to last year. However, despite the improvement in the value of sales (£ taken), the quantity of goods bought fell which could be down to price increases feeding through via the weakness of sterling and also less discounting in the sector. The manager says that consumer confidence remains at relatively low levels and the forward looking indicators for consumer spending, together with actual figures for the three months to the end of February 2017 showing non-food sales at a five year low, suggest that retailers face a more challenging environment in the year ahead. The pressures include higher import prices impacting margins and more forceful cost pressures from the National Living Wage, increased business rates, particularly in London and parts of the South East, higher inflation and, potentially, interest rate increases.
In the UK office market, the manager says that Central London offices experienced the most noticeable slowdown in 2016 compared to the double digit growth the sector delivered in the previous year. Total office returns of 2.4% were recorded over 2016 reflecting pessimistic sentiment following the Referendum vote to leave the EU on top of forecasts which, in the first half of the year, were already switching off any yield price improvement. Through the year, overall, office capital values reduced by 1.6%. Inner London recorded the highest rental growth at 5.2% followed by the South West of the UK and the West End. Yorkshire & Humberside and Scotland witnessed the lowest performance across office segments with the city of Aberdeen a key element behind Scotland’s weaker office performance as a result of its uncertain and dominant oil industry. Despite this slowdown in growth, office investment accounted for 43% of overall investment activity in 2016. Central London, where activity rebounded in the final quarter from the low levels witnessed in the third quarter, had the largest share of the overall investment pie at 27% (the same level as 2015). Overseas investors, the majority from the US, Hong Kong, China, Canada and Singapore, continued to account for a significant share of Central London activity in 2016 at close to 70% of all investment in the capital. Office investment outside Central London accounted for 16% of overall activity (up slightly on the 14% share in 2015).
The manager says that the industrial sector continues to demonstrate its strength in the current environment. According to the MSCI/IPD Balanced Monthly & Quarterly Index, the industrial sector delivered a total return of 7.3% with capital values having risen by 2.0% on a 12 month basis to the end of December 2016. In comparison, values for assets in the retail and office sectors fell by 3.5% and 1.6% over the same time frame. Industrial rents rose by 3.9% and significantly outperformed all property as a whole. The manager says that the sector fundamentals continue to look attractive with demand, driven by retailers’ stronger online sales growth requiring more distribution space, having reduced supply earlier than expected, leading to higher rental growth expectations.
In terms of UKCM’s performance, the manager says that the dominant driver of performance was the Company’s South East industrial portfolio – both from the tailwind impact of being intentionally overweight in the sector, by 10.8%, following the 2015 repositioning exercise, and from out-performance from the portfolio’s specific properties against other industrials in the benchmark. Profit from the Company’s two office sales also boosted performance whilst a dampener on what would otherwise have been far stronger outperformance came from the Company’s shopping centre portfolio which, particularly at Swindon following the loss of the Company’s only BHS store, created a material drag. The manager says that, projecting forward to a period of slowing capital growth across the whole market, the more prime nature of the Company’s portfolio should stand it in good stead to deliver sustainable income, better protect capital, and, with cash resources available, acquire new stock fit for the economic environment.
The Board has noted the announcement in the 2016 Autumn Statement relating to Base Erosion and Profit Shifting (BEPS), including the ramifications for non UK resident property companies and the proposed restriction on interest deductions. Although legislation has not yet been finalised, the proposals as currently drafted are likely to mean that additional tax will have to be paid on the Company’s net rental profits in the medium term. Therefore, the Board is exploring how shareholder value can be protected as far as practicable, including the possibility of joining the UK REIT regime.
UK Commercial Property Trust has a ‘positive and progressive year’ : UKCM