Net Asset Value(s)

29 January 2016

UK Commercial Property Trust Limited (“UKCPT” or the “Company”)

Net Asset Value/ Trading Statement
For the three month period from 1 October 2015 to 31 December 2015

CONTINUED NAV GROWTH, PORTFOLIO REPOSITIONING, SUCCESSFUL ASSET MANAGEMENT ACTIVITY AND APPOINTMENT OF NEW CHAIRMAN

UK Commercial Property Trust Limited (LSE: UKCM), the largest Guernsey based, London listed, UK focused commercial property trust, today provides its Trading Statement for the three months to 31 December 2015 and unaudited quarterly Net Asset Value (“NAV”) as at 31 December 2015.

Key Highlights

• NAV total return over the quarter of 1.8% and total return for calendar year 2015 of 9.1%

• 1.1% like-for-like increase in portfolio valuation over the final quarter, which now stands at £1,320 million (before capital expenditure and stamp duty)

• 0.7% increase in NAV per share as at 31 December 2015 to 86.7p (30 September 2015: 86.1p)

Continued progress in rebalancing the portfolio towards higher quality assets and sustainable income

• £144 million of dividend-cover accretive acquisitions during the year, across four assets which offer a mix of good tenant covenants and/or significant asset management opportunities and sustainable income in prime locations.  These assets were acquired at an average equivalent yield of 5.7%, of which the following two were acquired in Q4 for £50 million in aggregate:
  • The multi-let Central Square office complex in central Newcastle for £21.0 million, a price based off a yield of 6.4%
  • The landmark 18 screen Cineworld leisure scheme in Glasgow city centre for £29.2 million at an initial yield of 5.1%, generating additional rent of £1.7 million per annum

• Five properties were sold for £164 million during 2015 in line with the Company’s strategy of divesting assets which it expects to underperform

• £34 million of cash is retained for new acquisitions, plus a £50 million revolving debt facility

Continued focus on delivering value through asset management

• 15 new leases entered into during the quarter, generating an additional £1.15 million of annualised rent after lease incentives

• 12 lease renewals agreed, retaining £1.4 million of annual rent

• Specific asset management highlights include:

• Completing the redevelopment of surplus car park spaces at Junction 27, Leeds, into a new restaurant let to Zizzi on a 20 year lease adding an average £140,000 per annum to the rent roll over 5 years after lease incentives
• Renewal of the Adidas store lease in Market Street, Manchester, for a further 10 years increasing this asset’s value by £1.6 million
• At St Georges Retail Park, Leicester, new leases completed with Iceland and Mattressman, moving the park to full occupancy and generating £249,000 of additional annual rent after lease incentives and adding £1.2 million of value

• Void rate of 2.8% in the portfolio as at 31 December 2015

• Gross gearing of 18.2% (net 13.4%) as at 31 December 2015, the lowest in the Company’s peer group

Appointment of New Chairman

• Christopher Hill has informed the Board of his decision to step down to pursue other business interests.  He will retire from the Company at its Annual General Meeting in June 2016 and be replaced by UKCPT’s current Senior Independent Director, Andrew Wilson

Christopher Hill, Chairman of the Company, commented:

“We have seen both strong NAV growth and total returns over the course of the year.  These positive results have been achieved against a backdrop of an ongoing repositioning of the portfolio, involving the sale of £164 million of assets which we believe have a higher risk of future underperformance, as well as, more importantly, the acquisition of £144 million of new assets which offer greater potential for growth and more sustainable levels of rental income.  We still have resources available that will allow us to continue with this strategy where suitable opportunities arise.  I am particularly pleased with the value the team has created from its asset management initiatives, with a number of notable wins which have both increased the quality of the portfolio and generated new revenue. With UK real estate total returns appearing to have peaked this cycle and with income expected to be the key driver of more normalised return going forwards, we believe the Company’s portfolio is well positioned within this changing market dynamic.”

“Having led UKCPT as Chairman since its launch, during which time the Company has doubled in size, I feel that the time is right for me to move on to pursue other business interests.  In passing the reins over to Andrew Wilson I leave the Company in the very safe and capable hands of a proven real estate investment professional who also brings valuable continuity to this important role.”

Enquiries

Will Fulton / Graeme McDonald, Standard Life Investments
Tel: [phone]

Edward Gibson-Watt / Oliver Kenyon, J.P. Morgan Cazenove
Tel: [phone]

Richard Sunderland /Claire Turvey/Clare Glynn, FTI Consulting
Tel: [phone]

Breakdown of NAV movement

Set out below is a breakdown of the change to the unaudited Net Asset Value per share calculated under International Financial Reporting Standards (“IFRS”) over the quarter from 1 October 2015 to 31 December 2015. The property portfolio has been externally valued by CBRE Limited and Knight Frank LLP (one asset, Ventura Park, Radlett, where CBRE had a conflict of interest).

UK Commercial Property Trust Limited	Per  Share (p)	Attributable Assets (£m)	Comment
Net assets as at 1 October 2015	86.1	1,118.8
Unrealised increase in valuation of property portfolio	1.0	13.6	Increase of 1.1% in quarter on both existing and acquired assets
Stamp duty costs on purchases	-0.2	-2.2	At Newcastle and Glasgow
Capital expenditure during the period	-0.2	-2.0	Principally relates to acquisition costs on purchases plus asset management initiatives at Exeter, Leeds and Leicester.
Income earned for the period	1.3	17.1	Equates to dividend cover of 90% for the quarter, but only nine days of income included for Newcastle and Glasgow.
Expenses for the period	-0.5	-6.4
Dividend paid on 28 November 2014	-0.9	-12.0
Interest rate swaps mark to market revaluation	0.1	0.1	Decrease in swap liabilities as interest rate expectations affected by emerging market issues and falling oil price.
Net assets as at 31 December 2015	86.7	1,127.0

The NAV per share includes all current period income and is calculated after the deduction of all dividends paid prior to 31 December 2015. It does not include a provision for any unpaid dividends relating to periods prior to 31 December 2015, i.e. the proposed dividend for the quarter to 31 December 2015.

The NAV per share at 31 December 2015 is based on 1,299,412,465 shares of 25p each, being the total number of shares in issue at that time.

The EPRA NAV per share (excluding swap asset) is 86.7p (Sep 2015 – 86.2p).

Economic and Property Market Review  

Despite equity market volatility in the opening weeks of 2016, UK economic fundamentals remain firm and projections are for a reasonably strong UK economic environment in 2016 providing a solid base for real estate occupier demand. A key risk to the UK outlook is the cumulative effect of national and global political and economic uncertainties, particularly among emerging markets. Returns for real estate as an asset class continue to moderate but remain attractive relative to returns that can be found in others.

Over the twelve months to 31 December 2015 All Property, as measured by the MSCI IPD Monthly Index, recorded a 13.8% rise compared to 15.3% in the twelve months to 30 September. A slowdown in the rate of capital growth continues to be the main contributor to the moderation in returns. Capital values grew by 7.8% in the year to 31 December 2015, with rental growth remaining strong at 4.2% for the same period. Over the final quarter, rental growth continued to improve and benefited from sound economic growth. Total returns, however, moderated to 3.1% for the quarter.

The estimate for total UK real estate investment turnover for 2015 is £60.5 billion, which is marginally below the level of £63.3 billion achieved in 2014. Activity in Q4 was relatively weak, recording transaction volume of £11 billion, the lowest quarter in 2015. This contrasts with Q4 2014, where £21.5 billion of deals were transacted.

Overseas investors remained the driving force in this final quarter, followed by private individuals. Albeit a muted final quarter for UK institutional investors, they remained the second largest buyers of UK real estate in 2015, acquiring £12.9 billion of stock, which represents net investment of £2.5 billion.

Portfolio Performance

The external portfolio valuation as at 31 December 2015 is £1,319.6 million, representing an increase of 1.1% in the quarter on a like-for-like basis (excluding capital expenditure and the impact of new purchases). Whilst the Company’s benchmark MSCI IPD Balanced Monthly and Quarterly index has not yet been published, the IPD Monthly Index, which can be seen as a proxy for the wider market, rose by 1.7% over the same period.  Examining the components of total return for the quarter, income and capital growth, and including capital expenditure and costs on new purchases, the Company’s portfolio produced a net income return of 1.2%, keeping pace with the market’s 1.3%, but lagging on capital growth. This lag was most evident in the Company’s office and industrial portfolios. Overall the portfolio delivered a total return of 1.9% for the quarter against the market’s total return of 3.1%. The table below sets out the capital value movements in each of the main sub-sectors.

	Portfolio Value as at 31 Dec 2015   (£m)	Exposure as at 31 Dec 2015	Like for Like Capital Value Shift (1)	Capital Value Shift (including transactions) (2)      (£m)
		(%)	(%)
Valuation as at 30 Sep 2015				1,255.7
Retail	468.7	35.5	1.1	5.1
High St – South East		2.9	1.6	0.6
High St – Rest of UK		2.4	12.7	3.6
Shopping Centres		8.4	-0.7	-0.8
Retail Warehouse		21.8	0.6	1.7
Offices	328.1	24.9	0.9	23.7
City		2.1	0.5	0.2
West End		11.1	0.8	1.2
South East		1.7	0.0	0.0
Rest of UK		10.0	1.1	22.3*
Industrial	395.9	30.0	1.5	5.7
South East		22.1	1.4	4.1
Rest of UK		7.9	1.5	1.6
Leisure/Other	126.9	9.6	0.0	29.4*
External valuation as at 31 Dec 15	1,319.6	100.0	1.1	1,319.6

1. Excludes sales, purchases, and capex in the quarter
2. Includes sales, purchases, and capex in the quarter
   (*Includes sales / acquisitions in the quarter)

Industrial

UKCPT’s industrial property increased in value by 1.5%, which reflected an uplift of £5.7 million over the quarter.  Investment demand continues to be strong for this sector, as is the occupational market, with good levels of tenant demand and an overall lack of supply for both modern distribution warehouses and well-located industrial estates.  As a consequence, we have benefited from ERV growth and yield compression across a number of properties.  Particular highlights were the removal of a break with Howard Tenens at Dolphin Estate, Sunbury, which led to a capital uplift of £1,610,000 (3.6%) and the improvement in ERV at Hannah Close, Neasden, which provided capital growth of £1,550,000 (4.5%).  

Offices

The office portfolio increased in value by 0.9% over the quarter, reflecting an uplift of £2.6 million (excluding the Newcastle acquisition).  Investor demand remains strong across the sector and rental growth is seen in most key markets.  Our Central London offices provided a 0.8% like for like increase driven by an improvement in rental value at 6 Arlington Street, situated opposite The Ritz Hotel.  This asset recorded an uplift of 4.2%, or £1,230,000. Regionally, Birmingham witnessed another strong quarter with a 3.7% (£1,050,000) uplift from the Company’s city centre office, benefiting from investor appetite for strong regional centres.          

Retail

The Company’s relatively small High Street retail portfolio, well located in Exeter, Kings Road London, Manchester, and Marlow, performed well during the quarter with growth of 5.3%. This was as a result of yield compression driven by greater interest in the sub-sector and a strong uplift from good asset management, such as an extension to the Adidas lease at Market Street, Manchester, and progress with the new H&M store in Exeter. The larger exposure to shopping centres and retail warehouse parks held its combined value in net terms, the highlight being a 1.9% uplift at St Georges Retail Park, Leicester, reflecting new lettings and the redevelopment potential of part of the site.

Leisure

The Company’s two standing investments in Kingston-upon-Thames and Swindon were unchanged in value over the quarter.

Acquisitions

During the final quarter of the year, the Company was particularly active in its strategy of repositioning the portfolio and invested the proceeds from the £164 million of lower growth asset sales undertaken during the year.  Two new properties in Newcastle and Glasgow were acquired in Q4 for a combined total of £50 million (excluding stamp duty and ancillary costs).

In December 2015, the Company acquired the Central Square office building in Newcastle for £21.0 million, a price based off a yield of 6.4%.  The 72,389 sq ft grade A office space is multi-let to a range of corporate tenants, producing a combined contracted rent of £1.5 million a year and an average unexpired lease term of 8.8 years. Located in Newcastle’s new Stephenson Quarter in Central Newcastle, opposite Newcastle Central railway station, it has a BREEAM “excellent” rating for sustainability and is expected to provide the Company with a strong, secure income return.

Also in December 2015, the Company acquired off-market a Cineworld leisure scheme in Glasgow for £29.2 million. Located in Glasgow’s city centre, the complex is anchored by an 18 screen multiplex Cineworld cinema on a long-term lease, with further leisure accommodation across three units. Purchased at an initial yield of 5.1%, the asset currently generates annual rent of £1.7 million with scope for further income growth through a range of asset management initiatives, including re-letting the vacant basement leisure unit and reconfiguring the first floor leisure unit.

Overall, both of these assets offer good fundamentals in terms of location and specification and, both independently and as part of the £144 million acquired in 2015, support the Company’s strategy to reposition the portfolio for sustainable and growing income and are accretive to dividend cover.

Market Outlook and Forecast 

Total returns for UK real estate appear to have peaked for this cycle and it is anticipated that more normalised returns are in prospect for the next few years with income likely to be the main component as opposed to capital growth, reversing a key trend of the past few years.  Despite heightened global uncertainty, projections for UK economic growth remain firm and provide a reasonable backdrop for the domestic real estate outlook.  Relative to longer term government bonds, the real estate yield gap remains positively significant by historical standards and, in comparison to other asset classes, the sector remains attractive from a fundamental point of view. We expect reasonable positive total returns for investors on a three year hold period due to real estate’s yield and improving income growth prospects. Rising interest rates are an emerging risk although yield curves suggest that potential interest rate rises have been pushed out further towards 2017, a sentiment which is supported by recent comments from the Bank of England.

Base Erosion and Profit Shifting

In early October 2015, the OECD published guidance relating to base erosion and profit shifting (“BEPS”).  This subject may be relevant to the Company as a result of the inter-company loans the Company has in place between subsidiaries. Given the broad range of potential outcomes arising from BEPS and with any UK legislation unlikely before 2017, it is too early to be definitive as to the impact, if any, that BEPS will have on the Company.  However, the Company and its advisers will continue to monitor the potential impact of the BEPS project and will make further announcements, if required, in due course.

Board Changes

The Board has five directors, three of whom have held office since the establishment of the Company in September 2006, with the other two directors joining the Board during 2013.  The Directors have carefully considered the appropriate balance between experience of the Company and the need to refresh the Board from time to time. Continuity is important and succession planning for a relatively young company like UKCPT needs to recognise that shareholders will not be well-served if a large proportion of the Board retires at the same time.  Bearing this in mind, the Board established a policy of renewal whereby directors have retired at the AGMs of 2013 and 2014 and new directors with appropriate skills were selected by an independent search carried out at an earlier stage.  This resulted in a short time period where the number of directors has been six.

Having led the Company as Chairman since its launch, Mr Christopher Hill has decided to step down at the Annual General Meeting in June 2016. The Board would like to thank Mr Hill for his leadership, knowledge and dedication that has seen the Company double in size over his tenure as Chairman and wish him all the very best for the future. It is the intention of the Board to appoint Mr Andrew Wilson, currently the Company’s Senior Independent Director, to become Chairman upon Mr Hill’s departure.  His knowledge of the Company and of the property sector generally, combined with his leadership and energy, equip him particularly well for this role.

The Board hope to announce the appointment of a new Director in the near future and intend to continue with a phased program to replace the long serving directors over the next few years.  This phased retirement of the remaining original Directors ensures a gradual refreshment of the Board without sudden loss of collective experience. 

The above statistical information is unaudited and has been calculated by Standard Life Investments.

Further information can be found on the Company’s website at www.ukcpt.co.uk.