Picton Property (PCTN) is exploring converting some of its office assets into “higher value alternative uses”, as market conditions in the office sector continue to be tricky.
The company has used permitted development rights to secure residential use at its part vacant Angel Gate office in London, EC1. Consent has also been secured across seven buildings, totalling 17,760 sq ft, with the potential to create 19 residential units. In addition, applications are being progressed for residential use on another six buildings totalling 11,700 sq ft, creating a further 16 units.
[QD comment: The growth in flexible/hybrid working since the onset of the pandemic has led many landlords to reconsider the future performance of offices, especially smaller, older offices in secondary locations. Greater energy efficiency requirements, including from both investors and occupiers, also means several older buildings require significant capital expenditure to bring them up to standard. Not all offices can easily be converted into residential (due to floor plates configurations and light restriction – especially in the centre of the floors), so it is interesting that Picton has decided to go down this path. We assume they will sell the building with plans in place for residential conversion to residential developers rather than carry out the works themselves.]
In the trading update, Picton also said that the value of its property portfolio at 31 March 2023 was £766.2m, a fall of 1.2% over the quarter. This is in line with the MSCI UK Monthly Property Index which shows that All Property Capital Growth over the first three months of the year was -1.2%.
The MSCI data showed that total returns for UK real estate were positive in March, for the first time since June last year. The month-on-month total return in March was 0.67%, resulting from a 0.46% income return from rental income and a 0.21% capital return. [Good news for the sector and the first signs that the bottom for valuations may have been reached – fingers crossed.]
Michael Morris, chief executive commented: “Our own independent valuation and the recent MSCI figures appear to indicate that the marked repricing seen at the end of last year has substantially run its course. In our portfolio increasing rents and rising rental values are having a positive valuation impact and offsetting some of the outward yield movement we have seen in recent months. Being able to improve occupancy and adapt our portfolio to changing market conditions is also encouraging.”
Leasing activity during the quarter meant that occupancy on Picton’s portfolio notched up to 91% (December 2022: 90%). This included 19 lease renewals and extensions, 15 lettings, eight rent reviews and six surrenders. Key highlights included:
- At Parkbury Industrial Estate, Radlett, an existing occupier was upsized, with two leases extended from 2025 to 2030 and the rent increased by 46% from £0.4m to £0.6m per annum, effective January 2025. In addition, Picton has pre-leased a unit which will become vacant in 2024, increasing the passing rent by 60% to £0.2m per annum. Rents were in line with the December ERV.
- At Riverway Industrial Estate, Harlow, an occupier has agreed to take an additional unit which became vacant at the end of 2022, after completion of upgrading works by Picton, including the installation of solar panels. Their rent increases from £0.3m to £0.7m per annum, which is in line with the December ERV.
- At Madleaze Trading Estate, Gloucester, a rent review has been agreed with the largest occupier, increasing the rent by 29% to £0.3m per annum. Elsewhere on the estate, two leases were renewed and separately occupier break options were removed in a further two leases, securing income until 2029. These transactions resulted in a combined uplift on the previous passing rent of 52% to £0.3m per annum, 5% ahead of the December ERV.
PCTN : Picton Property to convert offices to residential