F&C UK Real Estate Investments’ share price doesn’t reflect NAV performance – The total return of the NAV per share of F&C UK Real Estate Investments (FCRE) was 13.6% for the 12 month period ending 30 June 2018. The UK commercial property market delivered a total return of 9.4% as measured by the Investment Property Databank (‘IPD’) UK Quarterly Index.
The chairman noted that he was disappointed that that the strong performance of the company reflected investors uncertainty. The share price total return for the year was -1.9%. The discount to NAV was 8.0%.
In the year to 30 June 2018, open market rental value growth at the all-property level was 1.7%, led by a 7.3 per cent increase for South East industrials, but the structural weakness of regional retail persisted and rental growth for this segment remained negative. Yields edged slightly lower over the year, helped by stronger investment demand.
Highlights
- Portfolio ungeared total return of 11.7 per cent for the year
- NAV total return of 13.6 per cent for the year
- Dividend of 5.0 pence per share for the year, giving a yield* of 5.0 per cent on the year-end share price
- Dividend cover increased to 95.7 per cent for the year from 94.4 per cent
- The portfolio has an (above market) income yield of 5.3 per cent,
- Low void rate of 4.6 per cent (reduced further since the end of the reporting period by completion of additional asset management initiatives),
- A weighted average unexpired lease term of approximately 6 years.
Activity
The market remains competitive for quality assets, driving yields to historic lows.
One asset was acquired over the year, a single let Industrial asset located in Basingstoke, for £9.56 million, a yield of 5.2 per cent.
Whilst the portfolio has not required any wholesale repositioning, the priority has been to continue the success of the recent sales programme.
- Six assets have been disposed of over the previous two years to address the non-core tail of legacy, predominantly Retail assets, selling into a well bid investment market at a net premium to valuation.
- Two further assets were sold over the reporting period. The high street Retail asset at 100a Princes Street, Edinburgh was disposed of to crystallise the recent asset management plan and pursue a continued down weighting to the subsector.
- There was also the disposal of an Office asset known as The Clock Tower, Brookwood. The sale was completed in advance of the lease expiry, where we considered there to be not inconsequential re-letting risk, to a special purchaser at a significant premium to valuation.
The strategic decision to maintain a comparatively high exposure to the South East by geography and the Industrial and Logistics market by sector have been key factors in portfolio performance. As in the previous period, portfolio turnover and the burden of associated transaction costs were relatively low, as were the non-recoverable costs linked to below benchmark property voids.
Outlook; Peter Lowe, BMO Rep Property Management Limited (Pictured)
“Despite headwinds for the Retail portfolio in particular, and a period likely to be characterised by mid to low single digit returns, the Manager believes that the portfolio is well placed to deliver solid relative performance, led by exposure to desirable areas of the market, the completion of selected asset management initiatives and a dependable income return. Given the level of competition for core, defensive assets, the objective remains to approach both acquisitions and disposals on an opportunistic basis, but to continue to prioritise exiting the diminishing tail of smaller non-core assets that are less likely to offer attractive risk adjusted contributions to the Company objective. Plenty of value-add opportunities exist amongst the Company’s held assets which may well prove a more appropriate use of the Company’s cash resources at this time than new purchases, with the associated drag of acquisition costs.
Brexit and its economic and political repercussions will inevitably be a major factor influencing investors for several years. The consensus economic outlook is for sustained but fairly modest economic growth and some moderation in inflation. In this environment, we would expect investors to continue to favour core product and prioritise the longevity of a secure income stream. The other major factor is the likely path of interest rates. The Bank of England has indicated that long term central bank interest rates may be lower than in the past and while some further rate increases are anticipated by the market, this may act to reduce upward pressure on property yields as rates rise, though a weakening of rental growth may justify a softening of capital values for selected sub markets. Despite marginally higher yields in UK core markets than comparable European counterparts, the scope for further yield compression to drive performance looks to be limited. We would therefore continue to expect income to be the major driver of performance over the coming years.”
FCRE : F&C UK Real Estate Investments’ share price doesn’t reflect NAV performance