abrdn Property Income Trust expects commercial real estate returns to turn positive this year, after a difficult 2022.
The company today reported a -12.8% NAV total return for the year to 31 December 2022, having been impacted by a rapid revaluation of assets due to higher interest rates and increased cost of its own debt.
However, manager Jason Baggaley has a positive outlook for the remainder of this year and forecasts a 4.3% return of the three years from April 2023.
He said: “Given the magnitude and speed of correction we have seen in sectors including supermarkets, industrial and logistics, and long duration income more generally, we believe that the market pricing for these areas of UK real estate will find a floor much quicker than we have seen in previous cycles. As such, our outlook, and forecasts for these areas of the market have improved materially, given the size of the corrections experienced.
“Following the poor reception to the mini budget in September 2022 longer term yields may have peaked in early 2023 and could reduce by year end if inflation falls as predicted. Lower yields, and in particular forward swap rates, will make utilising debt more accretive again and will likely increase investment volumes as debt backed buyers re-enter the market.
“It is never easy to call the bottom of a market cycle, however it appears that the industrial sector may be bottoming out about now, with offices and retail values having further to fall. The rapid repricing of the UK market means that the prospective returns from today’s levels look more attractive, along with the likely improvement of the yield premium of growth assets over gilts as the year develops. abrdn forecasts a market return of 4.3% over the 3 years from April 2023.”
He added that the outlook for the industrial sector in particular, especially for better quality assets in strong locations as both occupiers and investors narrow their focus on best-in-class assets, was good. “The size and speed of value correction in 2022 means the sector now looks better value relative to other real estate sectors and indeed, other asset classes,” he said.
The group’s NAV was down 16.0% over 2022, due to a 16.7% fall in the value of its portfolio. EPRA earnings per share decreased from 3.69p to 2.94p per share as a result of a one-off break costs associated with terminating the interest rate swap entered into in October 2022. Without the break costs the EPRA earnings per share would have been 3.86p, an increase of 4.6% reflecting improved rental collection (which was at 98.9% for 2022).
The company maintained the annual dividend of 4p per share for 2022, but dividend cover decreased to 73%, down from 98% in 2021, due to the one-off swap break costs. Excluding this, dividend cover was 97%. The board has reaffirmed its stated intention to maintain the current dividend level, of 4p per share, despite the increased financing costs for the next two years.
Debt facilities
The company has a low loan-to-value (LTV) ratio of 22.6% and unutilised financial resources of £55m available for investment in the form of its revolving credit facilities (RCF).
The existing debt facility (which includes the RCF) of £165m comes to an end in April 2023. This was renewed at the end of the summer 2022 at a three year tenor comprising an £85m term loan and an £80m RCF. A swap contract to fix rates on the £85m term loan was also negotiated at the height of the politically induced gilt market volatility. UK fixed interest markets began to improve shortly after new terms had been agreed and so the company took the decision to terminate the new swap contract in December 2022 and replace it with an interest rate cap arrangement. This limits the interest cost on the term loan to 5.46%, but if SONIA declines the company’s interest cost will decline too.
These new arrangements resulted in a one-off charge of £3.56m to terminate the swap, along with the payment of a premium of £2.5m for the cap arrangement. This premium will be amortised over the three years from April 2023.
API : abrdn Property Income Trust has positive outlook after difficult 2022