Net Asset Value at 31 December 2019
30 January 2020
UK Commercial Property REIT Limited (“UKCM†or “the Companyâ€)
LEI: 213800JN4FQ1A9G8EU25
Net Asset Value at 31 December 2019
Solid performance over the quarter driven by successful asset management and portfolio aligned to stronger sectors
UK Commercial Property REIT Limited (FTSE 250, LSE: UKCM), announces its unaudited quarterly Net Asset Value (“NAVâ€) as at 31 December 2019. The Company owns a diversified portfolio of high quality income producing UK commercial property and is advised by Aberdeen Standard Investments.
Net Asset Value
- NAV per share of 89.8p (30 September 2019: 90.5p), reflecting a NAV total return of 0.2% over the quarter with continued low net gearing of 14.7%*.
- Like-for-like portfolio capital value decreased by -0.4%, with a decline in retail assets offset by growth in industrial and offices, and overall capital performance net of capital expenditure investment of -0.5%. This compares favourably to a -1.0% fall in the MSCI IPD monthly index over the period. After strategic disposals in the quarter, totalling £34.75 million, the portfolio is valued at £1,378 million (30 September 2019: £1,419 million).
- Outperformance of the MSCI IPD monthly index referred to above was driven by the Company’s strategic overweight position in the industrial / logistics sector, representing 51% of the portfolio, with a bias towards urban industrial stock in the south-east. In addition, the Company’s prime office portfolio gained in value in the quarter due to successful asset management and positive yield shift across a number of the properties.
Further progress on strategic sales
Two sales were completed in the quarter:
- Disposal of the Company’s sole remaining shopping centre asset, The Parade, Swindon, in November for £23.35 million, in line with the September 2019 valuation.
- Having concluded a 10-year lease renewal with Hertfordshire County Council, the sale of Meadowside House, an office investment in Apsley, Hemel Hempstead, for £11.5 million, in line with the September 2019 valuation.
These strategic disposals provide the Company with additional firepower for reinvestment into assets that offer more sustainable income, while also reducing exposure to assets that have greater future return risk.
Active asset management and positive leasing momentum creating value
Over the quarter, £4.9 million per annum of headline rent was secured across 17 lettings, lease renewals and rent reviews, reflecting a combined 10% uplift on the previous rent and 4% ahead of the Estimated Rental Value (“ERVâ€), including:
- The White Building in Reading resulting in the building being fully let at the year end, with new lettings to Barracuda Networks Ltd (ten years) and Act-on Software Ltd (five years) generating a combined annual rent of £596,454 after lease incentives.
- The Company successfully completed the refurbishment of its entire 180,000 sqft Wembley logistics distribution centre, Central Way, Neasden, allowing completion of the new 10 year index-linked lease to Amazon at a rent of £2.7 million per annum.
- Lease renewal with Affinion International at Motor Park, Portsmouth. A combined rent of £359,640 per annum has been secured across two units for the next five years, while the liquidity of this investment has also been improved.
- A lease extension completed at Junction 27 Retail Park, Leeds. Sofology agreed a 5 year reversionary lease increasing the unexpired lease term from 2.5 years to 7.5 years at a rent of £338,715 per annum. Further regear discussions are underway as the Company looks to increase lease terms on the Park.
- Fixed increases within leases at two light industrial properties in Aberdeen let on long leases to Total E&P UK Limited and Tetra Technologies UK Limited generated an additional £393,192 per annum.
- ‘Know Escape’, an escape room leisure concept, has taken a new five year lease at the Company’s Kingston-upon-Thames cinema and leisure asset, at a rent of £46,900 per annum, ahead of ERV.
In addition to the above quarter’s activity, one lease at Kew Retail Park, Richmond, was renewed on a short term basis to facilitate our ongoing strategy for this asset.
Portfolio occupancy remained constant at 92% at the year end, with the majority of the remaining vacancy in well located industrial assets, where there has been an observable uptick in letting interest from potential occupiers following the UK General Election.
Strong Balance Sheet with significant resources for deployment
- Prudent net gearing of 14.7%* at 31 December 2019 remains one of the lowest in the quoted REIT sector (gross gearing of 17.7%**) at a blended interest rate of 2.8%
- £130 million of uncommitted capital, including £100 million of undrawn revolving credit, available for investment
*Net gearing - Gross borrowing less cash divided by total assets (excluding cash) less current liabilities
**Gross gearing - Gross borrowings divided by total assets less current liabilities
Continuation Vote
Under the Articles, the Directors are required to put an ordinary resolution to Shareholders to approve the continuation of the Company at a meeting of the Company to be held in 2020 and at seven yearly intervals thereafter. The Investment Manager continues to identify attractive opportunities for the Company's property portfolio and the Board believes it is important to give Shareholders certainty as regards the Company’s continuation in order for the Investment Manager to pursue the investment strategy effectively. Accordingly, the Company will, in due course, be publishing a circular calling an Extraordinary General Meeting to consider that continuation resolution and the Board will be recommending shareholders vote in favour of the Company's continuation.
Ken McCullagh, Chair of UKCM, commented: “The office market and logistics sector, which the majority of UKCM’s portfolio has been strategically aligned to, have continued to perform well, with favourable supply and demand dynamics in addition to a good occupational market underpinning growth. Together with the team’s hands on asset management approach, the portfolio has delivered a robust quarterly performance, outperforming the MSCI IPD Monthly Index. Whilst the General Election in December provided the market with greater political stability, our focus remains on active asset management to drive income and on targeting investment opportunities with durable income prospects. With our strong balance sheet, we are well placed to act.â€
Will Fulton, Lead Manager of UKCM at Aberdeen Standard Investments, said: “We have delivered a number of asset management successes in the final quarter of the year, notably letting the final space at our office asset in Reading, adding new headline rent to the Company’s income. The sale of our final shopping centre asset was also a significant milestone and means our retail portfolio now predominantly comprises well located retail parks with a diverse tenant base. Looking ahead, the reversionary potential of the wider portfolio, in terms of both vacancy and rent, and also the ability to add earnings through acquisitions, presents the opportunity to increase income over the medium term. We are seeing a number of interesting investment opportunities in line with our strategy.â€
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 period from 1 October 2019 to 31 December 2019:
| UK Commercial Property REIT Limited | Per Share (p) | Attributable Assets (£m) | Comment |
| Net assets as at 30 September 2019 | 90.5 | 1,175.4 | |
| Unrealised decrease in valuation of property portfolio | -0.7 | -8.2 | Predominantly like-for-like decrease of 0.4% in the property portfolio. |
| Capital expenditure during the period | -0.2 | -2.0 | Principally relates to final expenditure at the Company's now occupied logistics warehouse refurbishment at Neasden, plus an ongoing asset management initiative at Gatwick Gate and sales costs of the two assets sold. |
| Income earned for the period | 1.5 | 19.4 | Equates to dividend cover of 95% for the year to 31 December 2019. This represents EPRA earning per share of 3.50p, a 15.5% increase compared to 2018. |
| Expenses for the period | -0.4 | -5.5 | |
| Dividend paid on 29 November 2019 | -0.9 | -12.0 | |
| Net assets as at 31 December 2019 | 89.8 | 1,167.1 |
The EPRA NAV per share is 89.8p (30 September 2019: 90.5p) with EPRA earnings per share for the quarter being 1.07p (30 Sep 2019: 0.73p).
Sector analysis
| Portfolio Value as at 31 Dec 2019 (£m) | Exposure as at 31 Dec 2019 (%) | Like for Like Capital Value Shift (excl sales, purchases & CAPEX) | Capital Value Shift (including sales & purchases) (£m) | |
| (%) | ||||
| Valuation as at 30 Sep 19 | 1,418.5 | |||
| Industrial | 706.8 | 51.3 | 0.2 | 1.4 |
| South East | 32.3 | 0.5 | 2.1 | |
| Rest of UK | 19.0 | -0.3 | -0.7 | |
| Retail | 289.4 | 21.0 | -3.9 | -35.1 |
| High St – South East | 2.4 | -1.8 | -0.7 | |
| High St- Rest of UK | 2.3 | -1.4 | -0.4 | |
| Shopping Centres | 0.0 | 0.0 | -23.4 | |
| Retail Warehouse | 16.3 | -4.5 | -10.6 | |
| Offices | 227.5 | 16.5 | 2.2 | -6.5 |
| City | 2.8 | 1.3 | 0.5 | |
| West End | 2.2 | 0.0 | 0.0 | |
| South East | 4.5 | 4.3 | -8.8 | |
| Rest of UK | 7.0 | 1.9 | 1.8 | |
| Alternatives | 154.2 | 11.2 | -0.3 | -0.4 |
| External valuation at 31 Dec 2019 | 1,377.9 | 100.0 | -0.4 | 1,377.9 |
Net Asset Value analysis as at 31 December 2019 (unaudited)
| £m | % of net assets | |
| Industrial | 706.8 | 60.6% |
| Retail | 289.4 | 24.8% |
| Offices | 227.5 | 19.5% |
| Leisure | 154.2 | 13.2% |
| Total Property Portfolio | 1,377.9 | 118.1% |
| Adjustment for lease incentives | -19.5 | -1.7% |
| Fair value of Property Portfolio | 1,358.4 | 116.4% |
| Cash | 49.0 | 4.2% |
| Other Assets | 30.2 | 2.6% |
| Total Assets | 1,437.6 | 123.2% |
| Current liabilities | -23.1 | -2.0% |
| Non-current liabilities (bank loans) | -247.4 | -21.2% |
| Total Net Assets | 1,167.1 | 100.0 |
The NAV per share is based on the external valuation of the Company’s direct property portfolio. It includes all current period income and is calculated after the deduction of all dividends paid prior to 31 December 2019.
The NAV per share at 31 December 2019 is based on 1,299,412,465 shares of 25p each, being the total number of shares in issue at that time.
Economic and property market review
Following a positive reaction to the election of the Conservative government, we expect fiscal stimulus to come through and steadily feed into growth, with a boost to consumer spending. Current lagging indicators, however, continue to show slowing momentum in the UK economy and, as the UK looks set to drift further from EU economic and regulatory alignment, we do not envisage a material pick-up in business investment. With Conservatives representing some constituencies for the first time in many years – or, in some cases, ever – the focus of increased fiscal spending and capital could be tilted more towards the regions.
Occupational markets have, so far, largely been unfazed by prevailing uncertainty and a lack of clarity on the UK’s future trading relationships. Take-up in the office sector remains strong, with Central London leasing volumes now marginally above the five-year quarterly average. Regionally, headline rents have been steadily rising and vacancy rates falling across the big six office markets, boosted by large corporate occupier consolidation programmes.
Retail, however, continues to suffer structural headwinds. Indications are that Christmas trading was mixed and occupiers are still under significant margin pressure. We have concerns that 2020 could see further retailer restructuring and further rental decline.
Industrials continue to report healthy take-up, especially for well-connected areas in the M1 corridor, South East and East Midlands. A pronounced undersupply of logistics/industrial assets exists in the South East which is driving strong rental growth and continued investor appetite for prime assets in well-connected locations. However, investor appetite seems to be lower in the rest of the UK, where a supply shortage is less pronounced.
‘All Property’ capital values, as measured by the MSCI IPD Monthly Index, declined by -1% in Q4 2019 with declines in retail offsetting positive growth in industrials and offices. The investment market in UK real estate remained highly polarised last year, with alternative sectors clearly in vogue. Alternative property types accounted for close to 40 percent of investment activity in Q4. Total UK real estate investment volumes in 2019 reached £48 billion, down on the £63 billion recorded in 2018, as Brexit negotiations and the general election resulted in a more subdued UK investment market.
Market Outlook
The political clarity derived from the election result has prompted a noticeable increase in the level of optimism from agents in the market, particularly towards Central London offices. However, as we enter a critical period for Brexit negotiations, we see very little justification to be taking on unnecessary risk at this stage in the UK real estate cycle. The focus remains on asset-level risk and income prospects to identify attractive long term investment opportunities in the UK real estate market.
Given the macroeconomic environment, the UK commercial property market is holding up well with positive total returns forecast for ‘all commercial property’ over the next three years (from December 2019) primarily driven by income. While investment volumes in 2019 were down compared to previous years, occupancy is generally high (other than for much of the retail sector) and there are signs in the first few weeks of the current year of a general pick-up in sentiment and property market activity. The trends that have negatively impacted the retail sector have benefitted the industrial/logistics sector as retailers move more of their business online, increasing the need for storage and distribution space.
Aside from well documented issues in much of the retail sector, the wider property market continues to be underpinned by good fundamentals - limited development, high occupancy rates and controlled leverage with attractive income returns compared to other asset classes.
For further information please contact:
Will Fulton / Tom Elviss/Graeme McDonald, Aberdeen Standard Investments
Tel: 0131 245 2799 / 0131 528 4331/0131 372 0134
Edward Gibson-Watt / Oliver Kenyon, J.P. Morgan Cazenove
Tel: 020 7742 4000
Richard Sunderland / Claire Turvey / Eve Kirmatzis, FTI Consulting
Tel: 020 3727 1000
The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014). Upon the publication of this announcement via Regulatory Information Service this inside information is now considered to be in the public domain.
Details of the Company may also be found on the Company’s website which can be found at: www.ukcpreit.com
The above information is unaudited and has been calculated by Aberdeen Standard Investments.
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