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F&C Commercial Property underperforms in 2017

17
2018
April

F&C Commercial Property underperforms in 2017 – the NAV total return of F&C Commercial Property (FCPT ) for the year was 8.8% and the share price total return was 3.9% for the year to 31 December 2017. The total return from the portfolio was 8.7%, whereas the MSCI Investment Property Databank (‘IPD’) Quarterly Benchmark Index returned 10.3% on the same basis.

The longer-term performance of the portfolio remains strong with IPD rating it upper 25% (quartile) of equivalent funds over three and five years and top quartile over ten years.

Further highlights from the annual report

  • Dividend cover decreased to 83.1% from 87.0%
  • Yield on year-end share price of 4.4%. Maintained dividend at 6.0 pence per share for the 12th successive year

The company reported that some of the underperformance against the index came from an underweight position in industrials in the South East. This accounted for 0.9% of the relative underperformance. The company’s holdings in the office sector underperformed the index because of increased empty space and shortening unexpired lease terms. The Company has no exposure to shopping centres which was the poorest performing segment.

From the Chairman’s statement

“UK commercial property experienced positive demand during 2017 as investors, particularly from overseas but also UK institutions, continued to look to invest in core assets with a secure income stream. Investment activity in 2017 moved up sharply from the previous year’s levels as sentiment adjusted to the changed circumstances following the referendum result and the economy continued to advance more strongly than initially feared. Against this backdrop, progress on the Brexit negotiations was slow and uneven and many uncertainties remain, politically, economically, domestically and internationally. The market has seen polarization, with industrials and distribution out-performing strongly, while regional town centre retail has remained under pressure.”

Outlook from the Chairman

Chris Russell, chairman of FCPT gave the following outlook:

“The property market out-performed initial expectations for 2017 but an environment of higher interest rates and inflation, subdued economic growth, political uncertainty and some keen pricing may begin to weigh more heavily on investor sentiment this year. Performance is expected to be driven by income return in the next few years and property as an asset class to remain attractive to those seeking a secure income return and access to a large, mature and relatively liquid property investment market. Investment opportunity is likely to be seen as a result of the impact of technology, infrastructure and demographic change on commercial property.

The Company has a well-positioned and resilient portfolio where the priority continues to be to invest in and complete asset management initiatives within the portfolio and to exploit any external opportunity to provide a dependable and long-term rental income.”

Outlook from the fund manager

BMO Real Estate Partners Asset Management’s Richard Kirby, the Fund Manager of FCPT offered the following comments:

“After another year of absolute high total returns for the UK commercial property market, we expect 2018 to produce more muted but stable returns broadly in line with the long-term average. The yield compression experienced in the industrial markets that has driven recent performance is likely to abate and we believe most commercial sectors have reached a pricing apex.

Uncertainty from the Brexit negotiations will continue and this should soften rental growth in some markets. Interest rates increased over the year from historic lows and following a period of strong inflation and economic growth we expect further increases over 2018.

The environment and outlook in retail has deteriorated recently with a number of Company Voluntary Arrangements (‘CVA’s) and restructurings being announced. This will not only put pressure on rental growth from this sector but also on maintaining current income.

In terms of property pricing, the margin above government bonds (the adopted proxy for the risk-free rate of investment) has been far above the long-term average for a sustained period. Therefore, current pricing is reasonably well placed to absorb further increases in interest rates but any continued yield compression is unlikely.

We will seek new acquisitions on a selective basis and we will continue to favour quality industrial and logistics, town centre offices in targeted locations and the alternative sector. We will continue to focus on asset management initiatives apparent in the portfolio and to reducing the exposure to voids. Despite forecasting more modest performance in the short term, UK commercial property continues to offer investors attractive long-term income returns and the Company’s portfolio is well positioned whilst we navigate this period of political uncertainty.”

 

FCPT: F&C Commercial Property underperforms in 2017

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