Annual Results
Guernsey: 3 April 2023
LEI: 213800JN4FQ1A9G8EU25
UK Commercial Property REIT Limited
(“UKCM” or the “Company”)
FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022
UK Commercial Property REIT Limited (FTSE 250, LSE: UKCM) which owns a £1.31 billion diversified portfolio of high-quality income-producing UK commercial property and is managed and advised by abrdn, announces its final results for the year ended 31 December 2022.
FINANCIAL REVIEW AS AT 31 DECEMBER 2022
- ·NET ASSET VALUE TOTAL RETURN
NAV of £1.0 billion as at 31 December 2022 (2021: £1.3 billion) representing a NAV total return* decline in the year of -18.1% (2021: 21.5%), due to market yield expansion following increased bank interest rates / cost of debt and macro-economic position. Over the longer term (10 years) the Company has delivered a NAV total return of 77.9% (2021: 114.9%) compared to the Association of Investment Companies (“AIC”) peer group of 52.6% (2021: 54.6%).
- EPRA EARNINGS PER SHARE
19% increase in EPRA earnings per share to 3.15p (2021: 2.65p).
- DIVIDENDS
11% increase in ordinary dividends paid to 3.25p (2021: 2.92p). In addition, a 1.92p special dividend was paid in August 2022. Annual dividend cover of 97%.
- SHARE PRICE TOTAL RETURN
A total return of -16.2%* (2021: 12.5%).
- INCREASING LEVERAGE
The Company benefits from relatively low and prudent gearing at 20.0% group loan to value* and a current blended interest cost of 3.68% per annum, of which 68% is at a fixed rate. All covenants well covered.
PORTFOLIO REVIEW AS AT 31 DECEMBER 2022
- WELL-POSITIONED PORTFOLIO
Industrial weighting of 59% (Benchmark: 35%). Portfolio strategy continues to be implemented with the portfolio well aligned to sectors which are expected to outperform.
- EPC BY ERV
77% (2021: 75%) of the property portfolio’s Estimated Rental Value (“ERV”) has an Energy Performance Certificate (“EPC”) rating of A, B or C.
- OCCUPANCY RATE
Occupancy rate of 98.0% (2021: 97.9%). Also compares favourably to the MSCI benchmark occupancy rate of 92.0% (2021: 92.3%).
* Alternative Performance Measures
For further information please contact:
Will Fulton / Jamie Horton, abrdn
Via FTI consulting
William Simmonds, J.P. Morgan Cazenove
Tel: 020 7742 4000
Richard Sunderland / Emily Smart / Andrew Davis, FTI Consulting
Tel: 020 3727 1000
UKCM@fticonsulting.com
The Company's Annual Report and Accounts for the year ended 31 December 2022 and the Notice of the Annual General Meeting will shortly be available to view on the Company's corporate website at https://www.ukcpreit.com/en-gb/literature/. The Documents have also been submitted to the National Storage Mechanism and are available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism. Hard copies will be posted to shareholders shortly.
PERFORMANCE SUMMARY
| CAPITAL VALUES AND GEARING | 31 December 2022 | 31 December 2021 | % Change |
| Total assets less current liabilities (excl Bank loan) £000 | 1,327,405 | 1,573,554 | -15.6% |
| IFRS Net asset value (£000) | 1,035,719 | 1,325,228 | -21.8% |
| Net asset value per share (p) | 79.7 | 102.0 | -21.9% |
| Ordinary Share Price (p) | 58.4 | 74.7 | -21.8% |
| Discount to net asset value (%) | (26.7) | (26.8) | n/a |
| Gearing (%)*: | 20.0 | 13.5 | n/a |
|
1 year
% return |
3 year
% return |
5 year
% return |
|
| TOTAL RETURN | |||
| NAV † | (18.1) | (1.3) | 3.3 |
| Share Price † | (16.2) | (24.3) | (17.4) |
| UKCM Direct Portfolio | (13.3) | 6.3 | 14.2 |
| MSCI Balanced Portfolios Quarterly Property Index | (9.6) | 4.4 | 13.4 |
| FTSE Real Estate Investment Trusts Index | (31.6) | (25.8) | (15.0) |
| FTSE All-Share Index | 0.3 | 7.1 | 15.5 |
| 31 December 2022 | 31 December 2021 | ||
| EARNINGS AND DIVIDENDS | |||
| Net (loss)/profit for the year £000 | (222,329) | 236,233 | |
| EPRA Earnings per share (p) | 3.15 | 2.65 | |
| IFRS Earnings per share (p) | (17.11) | 18.18 | |
| Dividends declared per ordinary share (p) | 3.25 | 2.923 | |
| Dividend Yield (%)# | 5.6 | 3.9 | |
| MSCI Benchmark Yield (%) | 4.8 | 4.1 | |
| FTSE Real Estate Investment Trusts Index Yield (%) | 4.6 | 2.6 | |
| FTSE All-Share Index Yield (%) | 3.6 | 3.1 | |
| ONGOING CHARGES AND VACANCY RATE | |||
| As a % of average net assets including direct property costs | 1.2 | 1.3 | |
| As a % of average net assets excluding direct property costs | 0.7 | 0.8 | |
| Vacancy rate (%) | 2.0 | 2.1 |
* Calculated, under AIC guidance, as gross borrowings less cash divided by portfolio value.
† Assumes re-investment of dividends excluding transaction costs.
# Based on dividend paid in 2022 of 3.25p and the share price at 31 December 2022.
Sources: abrdn, MSCI
CHAIR’S STATEMENT
Dear Shareholder,
The high level of optimism last year as we emerged from COVID restrictions dissipated following Russia’s invasion of Ukraine. As the year progressed, inflationary pressures led to a rapid rise in interest rates which ultimately resulted in a rerating of property values, particularly in the final quarter of the year. More positively, the year was also characterised by continued strong occupier markets which translated into rental growth.
UK Commercial Property REIT has delivered robust earnings growth in the year from its high quality, diversified portfolio, which is weighted towards sectors that benefit from strong underlying structural and social drivers, and from its proactive approach to asset management. It also gives me confidence that, at an operational level, and because of the Company’s strong and lowly geared balance sheet, we are well placed to weather the current economic headwinds in this higher interest rate environment.
Our continued focus on asset management has driven strong rental growth during the year, with leasing momentum continuing into the current year. It is testament to the Investment Manager and the underlying quality of UKCM properties that we have been able to consistently capture rental reversion while maintaining a very low void rate. The Company also expects to deliver further income growth in the next 12 months as we complete development projects in the student accommodation, industrial and hospitality sectors.
The prospect for good earnings potential over the next two years, combined with projections of more accommodative monetary policy to come, will be positive for investment in real estate. Those sectors that benefit from longer-term growth drivers, such as the industrial and living sectors, will see greater demand return and at more attractive pricing levels.
The Board is very much aware of the discount at which the Company’s shares, and other diversified REIT’s shares, trade versus their net asset value and is actively considering with the Investment Manager options to redress this. This will be led by a focus on increased earnings, controlled gearing, and continuing to drive the strong operational performance of the Company.
Portfolio Activity
In May 2022, the Company entered into an agreement to fund a high-quality hotel development in Leeds for a total commitment of £62.7 million. Aimbridge, a leading hotel operator will manage the hotel on UKCM’s behalf under the renowned Hyatt brand, with the lease structured so the Company’s income is solely derived from turnover and performance of the hotel. This is in line with UKCM’s strategy to invest in operational real estate sectors that are expected to deliver resilient and elevated rental incomes in well-researched markets.
The 12-storey, 305 room hotel is scheduled to complete in Q3 2024, opening in an already undersupplied market which continues to enjoy a strong recovery since COVID. The hotel is targeting a BREEAM Excellent rating and EPC A, as well as positively impacting the local community with the creation of a number of new jobs.
In July 2022, the Company disposed of its 68,400 sq ft central Birmingham office, 9 Colmore Row, to Birmingham City Council at a price of £26.48 million, ahead of book cost and at a premium to the 30 June 2022 valuation. In addition to securing a strong sale price, the disposal reflects a continuation of UKCM’s strategy to exit risk assets and those in need of capital expenditure which will not enhance value, with a particular focus on assets with weaker ESG credentials.
The Company completed its student housing development at Gilmore Place, Edinburgh. We were pleased to secure a 20-year lease with the University of Edinburgh at an annual rent of £1.24 million per annum, which is subject to annual CPIH increases. At the time of purchase we expected to operate and lease the asset directly, but on balance the Board believed the opportunity to de-risk the investment by fixing a long term guaranteed and growing income stream from a first-class tenant covenant, was in the best interests of shareholders.
The larger first phase of the Company’s student development at Exeter was completed and its 131 beds are now fully occupied. Phase 2 was completed in Q1 2023 and will provide a further 83 beds with the Company benefitting from a minimum guaranteed total annual income of £1.65 million for the 2022/23 academic year. Homes for Students has been appointed to manage the asset and interest from students in Phase 2 has been strong.
Portfolio occupancy was 98% at year end and this low level of vacancy demonstrates the appeal of the assets to both current and prospective tenants and provides good visibility on income streams. The Board and the Investment Manager are focussed on driving earnings growth from the portfolio and capturing the reversionary potential of the assets to deliver value for shareholders. Rent collection rates have normalised and returned to pre-Covid levels. Further details on all investment transactions and significant lettings are outlined in the Investment Manager Review.
Portfolio and Corporate Performance
The 2022 NAV total return decline of -18.1% was driven by a sharp market-wide correction to real estate values, principally in Q4 2022 and primarily to the industrial sector to which UKCM is tilted. Due to the strong potential for rental growth, which your Company is now benefitting from, such stock was highly priced at low yields. With a sudden correction to bank interest rates those low yields suddenly became unsustainable given the predominantly debt-driven market, and despite the ongoing strength of the occupational market, and so the market, led by industrial, corrected and industrial assets experienced their most sudden fall since MSCI records started in 1981.
Over the longer term, the Company has outperformed the AIC Sector – Property – UK Commercial peer group on both a NAV and share price total return basis, delivering 77.9% and 43.1% respectively over ten years, compared to the 52.6% and 17.8% returns from the peer group. The 2022 NAV and share price total return performance was -18.1% and -16.2%.
The Company’s strategic overweight position to the industrial sector (59.1% v MSCI 35.9%) was the primary driver of portfolio under-performance over the year against its MSCI benchmark, with a total return of -13.3% versus -9.6% for the benchmark. Positively, over all longer term periods and since its inception, the portfolio continues to outperform its MSCI benchmark. Further details on the Company’s portfolio performance are given in the Investment Manager Review.
The portfolio benefits from strong underlying fundamentals to generate earnings growth. The Company’s EPRA earnings per share increased 19% from 2.65 pence per share to 3.15 pence per share.
The following table provides an analysis of the movement in the NAV per share for the year:
| NAV as at 1 January 2022 | 102.0 |
| Unrealised decrease in valuation of property portfolio | (20.6) |
| Realised gain on sale of properties | 0.3 |
| Income earned in year | 5.2 |
| Expenses for the year | (2.0) |
| Dividends | (3.3) |
| Special Dividend | (1.9) |
| NAV as at 31 December 2022 | 79.7 |
Financial Resources
UKCM has a solid balance sheet, with a NAV as at 31 December of £1.0 billion and gearing at 20.0%* (Group loan to value). The Company has maintained its position as one of the lowest geared companies in the AIC peer group and the wider REIT sector.
At the year end, the Company had fully invested its free cash but still had available resources of £42.5 million after allowing for future capital commitments and payment of February 2023 dividend, due to the £87 million remaining undrawn flexible revolving credit facility.
The Company continues to be comfortably within the covenants on its three debt facilities and has more than £431 million of unencumbered assets which provide further significant headroom and balance sheet flexibility. The year end blended interest rate is 3.61% per annum on drawn debt of which 68% is at a fixed rate of 2.88%.
On the 19 August 2022 the Group increased its revolving credit facility with Barclays Bank plc to £180 million (Dec 2021: £150 million) and on 10 January 2023 extended its duration from February 2024 to January 2026 with a new margin of 1.90%. £93 million of this facility was drawn at the year end. The new overall blended interest rate is 3.68% per annum with a weighted maturity of 5.2 years. Extending the maturity of our flexible revolving credit facility protects the Company from the risk of refinancing in a potentially volatile banking market.
The Company adopts a prudent approach to debt and continues to target a gearing level up to 25% (as calculated using the Gross Asset methodology**) at the time of drawdown or commitment where borrowings are used to fund development expenditure.
The Company has a pipeline of four high quality developments due to complete over the course of 2023 and one in 2024 which will add further long-term income to the Group’s rent roll. If the c.£55 million of remaining development commitments are funded through the Barclays RCF facility this would move gearing to approximately 24.6%***. It is reasonably foreseeable that the current economic and investment climate and its market wide impact on valuations could take gearing slightly above, over the medium term, the Board’s target level of gearing of 25%. The Board, with the Investment Manager, will continue to ensure that borrowings are controlled and managed effectively taking into account the Company’s development plans.
* Calculated, under AIC guidance, as gross borrowings less cash divided by portfolio value
** Calculated as (Current Borrowings £293m / Gross Assets £1,359m).
*** Based on the assumption that development valuations change in line with project
expenditure and calculated as (Current Borrowings £293m + Development Commitments £54.5m) /
(Gross Assets £1,359m + Development Commitments £54.5m).
Dividends, including Special Dividend
The Company paid four interim dividends totalling 3.25 pence per share during the period. This represents an 11% increase in ordinary distributions over the year, a level which is 97% covered.
In addition, the Company paid a special dividend of 1.92p per share in August 2022 to return some of the strong gains, realised over the last number of quarters from capital allocation and asset management initiatives for the benefit of all shareholders.
Environmental, Social and Governance (“ESG”)
ESG is embedded within the processes of UKCM and underpins every Board discussion and decision. We fully appreciate not only its importance more broadly but also the vital role we believe it will play in both protecting and creating future value as well as income for shareholders.
In terms of the environment, where real estate has a large role to play, the Company has previously announced two significant Net Zero Carbon targets following a bottom-up asset-level review across the entire portfolio. By 2030, we aim to achieve Net Zero Carbon for landlord operational emissions and extend this to all emissions by 2040. These targets are in advance of the UK Government’s target of 2050. Further details on all targets are outlined in the ESG Report.
Investment Management Fee
During the year the Board and Investment Manager agreed a reduction in the investment management fee. From 1 April 2022, the annual fee charged to the Company was reduced from a rate of 0.60% of Total Assets up to £1.75 billion, to 0.525% of Total Assets. The rate of 0.475% remains unchanged for Total Assets above £1.75 billion. In addition, the Company will not be charged for fees on cash balances over £50 million.
Board Composition
Having served on the Board for just over ten years, and as Chair for three years, I intend to retire as a Director later this year. It has been a pleasure to lead the Company through these interesting, and often very challenging times.
The Board and I, having discussed the timing of my retirement and succession planning, initiated a search for my successor. Following this successful search, the Board is delighted to announce the appointment of Peter Pereira Gray as a non-executive Director of the Company with effect from 3 April 2023. He will be put forward for election to the Board at the Company’s AGM on 21 June 2023 and will take over as Chair later this year.
Peter has wide ranging experience of global institutional investment markets having, served Wellcome Trust’s Investments team from February 2001, initially as Head of Property Investment and latterly as co-Lead of the Investment Division in the role of Managing Partner and Chief Executive Officer from September 2017 to his recent retirement from executive duties in September 2022.
Previously Peter was a Director of Property Fund Management with Prudential Portfolio Managers Ltd, and before that, an adviser with Drivers Jonas, Chartered Surveyors. He is Chair of Urban&Civic Plc., the UK’s leading master-planner and strategic land development company, and of Premier Marinas Holdings Ltd., the UK’s leading operator of Marinas and Boatyards on the South Coast. He is a fellow of the Royal Institution of Chartered Surveyors and the Royal Society of Arts and was the independent lead for the RICS Review of Investment Property Valuations published in January 2022.
Peter currently holds 100,000 shares in the capital of the Company.
The Board is cognisant of the Company’s Tenure Policy and, the requirements of the AIC Code on Corporate Governance, and, to ensure a smooth handover of Chair responsibilities, the Board has asked that I remain on the Board for a period of no more than six months from the date of the Company’s AGM. I will, therefore, be seeking re-election at the AGM but will stand down before the end of the financial year.
Outlook
2022 was a year dominated by inflationary pressures. The monetary policy tightening phase, which began in earnest to tame inflation, saw interest rates increasing across all major economies. Whilst it appears that we are now past peak inflation globally, 2023 is likely to be another year dominated by inflation and more importantly for real estate, by the interest rate policy of central banks.
Looking forward, and despite the poor performance in 2022, the outlook is more positive for the industrial sector where the Company has a weighting of 59.1%. The size and speed of capital value correction in 2022 means the sector now looks better value relative to other real estate sectors. The sector continues to benefit from structural tailwinds and a positive supply/demand dynamic, with the UK-wide vacancy rate at 3.3%, (according to CoStar), a near historic low.
Overall, we expect a recovery in UK real estate performance in 2023. The pace of repricing for UK real estate in 2022 means opportunities will arise over the course of 2023, particularly as the path of monetary policy turns more accommodative. Those sectors that benefit from longer-term growth drivers, such as the industrial and living sectors, will see greater demand return, attracted by re-based yields and rental value growth prospects. We believe that market pricing for these areas of UK real estate is finding a floor more quickly than we have seen in previous cycles. As such, our outlook, and forecasts for these areas of the market, have improved materially. Inflationary pressures are expected to moderate as we move through 2023, with the BoE likely to commence its base rate cutting cycle in the latter part of the year which will provide a more supportive backdrop for real estate pricing.
Overall, the Company, with its clear investment strategy, well-structured portfolio and solid financial footing, is strongly positioned to increase earnings, drive shareholder value and enhance UKCM’s status as one of the UK’s largest diversified REITs.
Ken McCullagh
Chair
31 March 2023
INVESTMENT MANAGER REVIEW
2022 Review
While the occupancy market remained robust, 2022 can be categorised as a year of two halves for UK real estate valuations and investment activity. During the first six months of the year, UK real estate performed well, however, the narrative changed in the second half of the year as inflationary pressures and weakening economic sentiment led the Bank of England, alongside most central banks, to embark on a monetary tightening cycle in order to tame inflation.
This resulted in a considerable repricing of UK gilts and increased financing costs for real estate, which acted as the catalyst for a broader market repricing of UK real estate, and virtual closing of the investment markets.
The UK real estate market recorded a total return of -9.1% in 2022 according to the MSCI quarterly index (this is different from the Company’s benchmark which is the MSCI UK Balanced Portfolios Quarterly Index benchmark), with the positive performance recorded in the first six months of the year being unwound during the second half of the year. In fact, UK real estate generated a positive total return of 7.8% in H1’22, but after June there was a 4.2% fall in capital values through Q3 which accelerated in Q4 with a 12% fall.
However, the all-property average total return of -9.1% in 2022 masks significant divergence in returns at a sector level. Having been the beneficiary of yield compression for a number of years, the UK industrial sector was the weakest performing sector, posting a total return of -14.6% over the course of 2022, while offices and retail recorded returns of -9.1% and -4.8% respectively over the same period. Transaction volumes reached £62.8 billion over the course of the year, 16% down on 2021 but 26% ahead of 2020 levels.
Following a very strong year of performance in 2021, the FTSE UK REIT Index registered a total return of -31.9% in 2022, underperforming the FTSE All Share Index, which recorded a total return of 0.3% over the same timeframe. There was a significant divergence in UK equity indices, with the more internationally focussed FTSE 100 index recording a total return of 4.7% in 2022, helped by a sharp rise in performance from energy and mining companies.
However, the more domestically focussed FSTE 250 Index returned -17.4% during the year. The FTSE UK REIT Index experienced a sharp sell-off in 2022, particularly over the third quarter of the year as financing costs increased, acting as the catalyst for a broad repricing. However, performance for the UK REIT Index did recover in the final quarter of the year, posting a positive return of 4.5% over this period.
2022 Review - Offices
The office sector delivered a total return of -9.8% to December 2022 according to the MSCI Quarterly Index, a deterioration on the 5.3% recorded in 2021. Performance for the sector was impacted by declining capital values as yields moved out in response to increasing interest rates and a narrowing spread over the UK 10-year gilt (risk free rate).
Capital values rose by a modest 0.9% during the first half of 2022, but they declined by -13.9% in the second half of the year, resulting in values declining by -13.2% for the calendar year 2022. There was a big polarisation in performance within the office sector, with London West End offices posting the strongest total return of -4.5% during 2022, versus total returns of -12.1% and -11.6% respectively for Rest of UK and Rest of South East offices.
Since 2020, the increased prominence of hybrid working and the subsequent impact on office occupation, has resulted in higher vacancy rates across most UK office markets. Tenant demand is focussed on the best buildings with strong sustainability credentials and amenity offer; for example 80% of central London take-up was focussed on Grade A space. Indeed, we believe that occupier preference for the best quality space will
create an increasing wedge in rents between best-in-class offices and the rest.
2022 Review – Retail
The retail sector delivered a total return of -4.8% in 2022 according to the MSCI Quarterly Index. In a similar vein to other UK real estate sectors, total returns turned negative due to weakening capital value growth. Capital values rose by 4.9% during the first six months of the year but this was unwound in the second half when values declined by -13.9%. Most of the capital value decline was recorded in Q4 2022 at -10.5%.
Polarisation across retail sub sectors was acutely evident, with retail warehousing posting the best performance of the retail sub-sectors, delivering a total return of -0.8% and -6.2% capital growth. Well positioned retail warehouses with essential and discount retailers as anchor tenants continued to attract investor interest at the expense of discretionary and nonessential retail. Shopping centres delivered a total return of -5.3%, whereas supermarkets delivered the lowest total return of -13.4% and were heavily impacted by the -17.5% capital value decline in Q4 2022. The supermarket sector was more sensitive to the rising interest rate environment given its generally low yields.
Retail sales volumes fell by 1.0% in December, following a fall of -0.5% in November 2022. A divergence between retail sales volumes and values is evident within the ONS retail sales data. When compared with the pre-Covid level in February 2020, total retail sales were 13.6% higher in value terms in December 2022, but 1.7% lower in volume terms.
In the lead up to the Christmas trading period, retailers suggested that consumers were cutting back on spending because of increased prices and affordability concerns. Indeed, despite easing slightly in December, inflation in the UK remains very high, with food and energy costs remaining elevated.
Total non-food stores sales volumes fell by -2.1% over the month. In the supermarket sector, 2022 saw the trend towards discount retailers accelerate in the UK, with data showing that sales for these retailers increased compared to traditional retailers.
Online retail sales also continued to slow in December, with values decreasing by 2.9% as a result of monthly falls across all areas except household goods and food stores. Online retail sales still account for 26.6% of all retail sales, which remains above pre-Covid levels, but they are slowing to more normalised levels. This trend corroborates the weaker set of results released from pureplay online retailers and evidence of a rise of in-store shopping over December, which was likely influenced by postal strikes over this period.
2022 Review – Industrial
The fortunes of the industrial and logistics sector worsened during the course of 2022, with the sector leading the repricing of UK real estate in response to rising debt costs and a weaker macro-economic environment. Yields within the sector reached historic lows in the first half of 2022 as investors continued to favour the sector but, as investor demand weakened in response to rising debt costs, yields moved out by between 150 – 200 bps between June and December 2022.
As a consequence, capital values fell 17.4% across the sector during 2022 according to the MSCI Quarterly Index, leading to the sector also recording the weakest performance across the UK real estate market, with a total return of -14.6% during the year, a stark change when compared to a return of 36.4% for the sector in 2021.
Lower yielding areas of the market, such as within London and the wider South East, were the most adversely impacted, with London industrial seeing the largest quarterly capital value decline in the history of the MSCI Index of 22.2% in Q4 2022. However, rental growth remained positive throughout the year, with UK industrial market rental growth significantly outperforming the market at 10.4% in 2022 – compared to 3.8% for all property – as occupational demand remained healthy and with supply still constrained.
Demand was principally driven by the third party logistics (‘3PL’) sector, while demand from the manufacturing sector saw continued growth, which helped offset the fall in take up from online retailers over the year. Although the level of take up fell in the second half of 2022, it still remained well
above the long term H2 average and ‘Big Box’ take up for the year reached 47.99 million sq ft, the third highest level on record according to Savills.
Despite robust take up, supply levels have trended upwards during 2022, with the UK vacancy rate rising to 3.94%. However, this remains near historic lows and the existing development pipeline is unlikely to materially alter the strong supply/ demand dynamic the sector currently enjoys.
2022 Review – Alternatives
The UK real estate alternative sector, or “Other Property” as it is categorised by MSCI, recorded a total return of -2.6% in 2022, outperforming the all property return of -9.1% over the same timeframe. The healthcare sector, which represents approximately 10% of the “Other Property” sector within the MSCI sample, was the standout performer, generating a total return of 3.5% over 2022.
Despite the cost of living crisis placing pressure on disposable incomes, the leisure and hotel sectors still outperformed the wider market, returning -3.8% and -5.3% respectively over the course of 2022. Hotel trading improved significantly over the course of the year and, whilst room rates were the primary driving force behind the recovery in performance, occupancy has also improved, supported by growing weekend leisure stays and a recovery in weekday business demand. With a weaker pound, there are tentative indications that the return of international visitors has aided the recovery.
Investor appetite for the living sectors continued on its strong trajectory. A total of £12.7 billion was invested in the living sector in 2022 according to Real Capital Analytics data, equating to 20% of all UK real estate transactions. However, of the £12.7 billion invested in the living sector last year, the Purpose Built Student Accommodation (PBSA) sector accounted for £8.5 billion, or 67% of all activity.
The largest deal in the PBSA sector last year was GIC and Greystar’s purchase of the Student Roost portfolio from Brookfield for £3.3 billion. The continued investor interest in the sector helped provide support for pricing, with direct let PBSA assets moving out by 25bps over the second half of 2022, which was much less than other areas of the commercial real estate market.
Market Outlook
It is clear that 2022 was a year dominated by inflationary pressures. The monetary policy tightening phase, which began in earnest in order to tame inflation, saw interest rates increasing across all major economies. Whilst it appears that we are now past peak inflation globally, 2023 is likely to be another year dominated by inflation and more importantly for real estate, the subsequent path that central banks take in relation to interest rates.
UK inflation unexpectedly jumped in February 2023 from 10.1% to 10.4%, ahead of both consensus and the Bank of England (BoE)’s forecasts. Wholesale gas prices have fallen from their highs in 2022 and global supply chain disruption has eased, which should place downward pressure on headline inflation in the UK. We forecast UK headline inflation to decline over the course of 2023.
However, core inflation, which strips out the impact of food, fuel, beverages and tobacco, is proving stickier and more challenging to bring under control. Core inflation is being driven by more domestically oriented forces, with the UK labour market playing a crucial role in this regard. The UK unemployment rate is currently 3.7%, with the labour market remaining extremely tight. Reflecting this tightness in the labour market, private sector wage growth is running above 7% year on year, with little sign in wage surveys that any meaningful slowdown is in the pipeline. So, whilst we expect headline CPI in the UK to moderate to 6.2% by the end of 2023 and reach 2.2% by 2024, there are risks that inflation could remain higher than anticipated due to the strength of the UK labour market, preventing core inflation from falling as quickly as the Bank of
England (BoE) would like.
This has an important bearing on where interest rates will peak, before the BoE pauses its current monetary policy tightening cycle. It is our view that the burden of economic rebalancing will need to be shouldered by weaker labour demand. This means that further monetary tightening will be required even as the economy enters recession as the result of the many shocks hitting the economy. In particular, we think the US economy is heading for recession which will also drag down the UK economy, combined with the UK’s own higher interest rates hitting the housing market, and weak inflation-adjusted wages weighing on consumer spending. This will see unemployment increase which is ultimately the necessary condition for squeezing inflation down.
Despite our forecast for a mild and relatively short-lived recession, it is likely that UK household finances will continue to be under strain. In fact, at the UK Spring Budget, the Office for Budget Responsibility (OBR) forecast that real household disposable income will fall by 2.6% in 2023.
Overall, we see interest rates peaking at the current level of 4.25% and after recent financial market volatility will likely see the BoE adopt a slightly more cautious approach. We then expect rates to remain elevated for longer than originally anticipated, to bear down inflationary pressures in the UK, but we still see a rate cutting cycle beginning by the end of 2023, with a sustained fall through 2024. We expect the UK interest rate to reach 3% by the end of 2023, before falling further in 2024, helping to cushion some of the impact of the recession.
Falling real household disposable incomes will be more acutely felt in the retail sector, but it is important to highlight that this will support the case for further polarisation within the sector in our view. Consumer spending habits will be driven by consumer cost considerations and, as such, retail assets which have a higher concentration of discount or non-fashion-based retailers are expected to be best placed in this regard.
Following a period of repricing in 2022, the retail warehouse sector is garnering more interest from investors, particularly for food anchored schemes with a discount orientated line-up, which will be more insulated from any slowdown in consumer spending.
Equally, the supermarket sector now looks more attractive following a broad re-pricing last year, but the sector will not be immune to increasingly price sensitive consumers, with supermarket operators adapting to changes in consumer behaviour. A divergence in performance between the supermarket operators is already evident and therefore a focus on the quality of the underlying real estate will remain crucial. Given the economic backdrop and a more price sensitive UK consumer, we expect retail parks and supermarkets to be the best performing retail sectors.
In a similar vein to the retail sector, we expect the divergence in performance between best in class and secondary assets to continue in the office sector. The Covid-19 pandemic acted as the catalyst for a fundamental change in working habits and importantly, a re-assessment of space requirements for occupiers. Indeed, whilst tenant demand for best-in-class offices remains robust, the same cannot be said for secondary office space where demand has waned given changes to tenant requirements for space. Secondary office accommodation is at risk of accelerated obsolescence with the capital requirements to ensure assets meet minimum ESG requirements becoming increasingly prohibitive.
The office sector did not reprice as much as several other UK commercial real estate sectors in 2022, predominantly due to limited transactional evidence. However, we expect further price discovery over the course of 2023 and for secondary accommodation, this will likely result in large downward revisions to valuations. Supply of truly best-in-class office space remains extremely limited across the UK, which will provide more support for pricing and tenant demand.
Looking forward, and despite the poor performance in 2022, the outlook is more positive for the industrial sector, and particularly for better quality assets in strong locations. The size and speed of capital value correction in 2022 means the sector now looks better value relative to other real estate sectors. The sector continues to benefit from structural tailwinds and a positive supply/demand dynamic, with the UK-wide vacancy rate at 3.3% according to CoStar, a near historic low.
Whilst we anticipate the industrial vacancy rate to move higher this year, largely as a result of a weaker economic backdrop, we do expect occupational demand to remain positive.
The advent of ‘onshoring’ in the UK and demand from a broader variety of businesses for industrial space will provide support for take-up in the sector. As a result, further rental value growth is expected to drive performance in the medium term.
Whilst 2022 was a challenging year for UK commercial real estate as a whole, the Purpose Built Student Accommodation (PBSA) market once again demonstrated its resilience. The primary reason is the very supportive demand and supply dynamics that the sector exhibits. As the number of students enrolling in UK universities has increased, so too has the demand for student accommodation. This has placed significant pressure on existing supply, with the under provision of first-year accommodation forcing some students to seek housing in other cities, or to defer their places for the following academic year. Applications reached their highest level in 2022, approximately 8.5% higher than in 2019 according to UCAS data, with over 760,000 undergraduate applications to UK universities. Demand for accommodation shows no signs of abating as the number of university applicants is anticipated to increase over the next decade, driven by both domestic and foreign sources. Domestically, university participation rates (the number of 18-year-olds attending university) have been rising and this trend is expected to continue. At the same time the number of 18-year-olds in the UK is forecast to grow by approximately 20% by 2030.
Overall, we expect a recovery in UK real estate performance in 2023. The pace of repricing for UK real estate in 2022 will mean opportunities will arise over the course of 2023, particularly as the path of monetary policy turns more accommodative. Those sectors that benefit from longer-term growth drivers, such as the industrial and living sectors, will see greater demand return, attracted by re-based yields and rental value growth prospects. We believe that market pricing for these areas of UK real estate is finding a floor much more quickly than we have seen in previous cycles. As such, our outlook, and forecasts for these areas of the market, have improved materially. Inflationary pressures are expected to moderate as we move through 2023, with the BoE likely to commence its base rate cutting cycle in the latter portion of the year which provides a more supportive backdrop for real estate pricing.
Portfolio Performance
The table sets out the components of the returns for the year to 31 December 2022 with all valuations undertaken by the Company’s external valuer, CBRE Limited.
| Weighting as at 31 Dec 2022 % | Total Return for the year to 31 Dec 2022 | Income Return for the year to 31 Dec 2022 | Capital Return for the year to 31 Dec 222 | ||||
| Fund % | Benchmark % | UKCM % | Benchmark % | UKCM % | Benchmark % | ||
| Industrial | 59.1% | -19.6 | -14.6 | 3.1 | 3.3 | -22.0 | -17.4 |
| Office | 13.1% | -7.7 | -10.3 | 4.9 | 3.6 | -12.1 | -13.5 |
| Retail | 13.8% | 1.6 | -4.9 | 5.1 | 5.2 | -3.4 | -9.7 |
| Alternatives | 14.0% | -1.0 | -4.4 | 4.7 | 4.3 | -5.4 | -8.3 |
| Total | 100% | -13.3 | -9.6 | 3.7 | 3.9 | -16.5 | -13.1 |
Source: MSCI UK Balanced Portfolios Quarterly Property Index
In line with the wider UK real estate market, portfolio performance was impacted in the reporting period by external events. A rapid increase in interest rates, firstly in the U.S., as governments sought to grapple with rising inflation and the impact of Russia’s invasion of Ukraine.
This was further exacerbated in the UK by the policies of Liz Truss’s Conservative government, which caused a sharp spike in the UK gilt rate. Debt costs increased significantly as a result and many previously acquisitive investors temporarily withdrew from the market. These combined factors led to a general rerating of property yields with the lowest yielding properties, which were predominantly industrial assets, experiencing rapid and significant yield expansion. CBRE’s prime industrial yields moved out 150 bps from June 2022 until end of December 2022.
As a result, the Company’s strategic overweight position to the industrial sector was the primary driver of portfolio underperformance over the year against its MSCI benchmark, with a total return of -13.3% versus -9.6% for the benchmark. Positively, over all longer term periods and since its inception, the portfolio continues to outperform its MSCI benchmark.
Portfolio Performance - Industrial
As stated above, the key driver of the portfolio’s underperformance over the last 12 months was its overweight position to the industrial sector. Whilst the sector benefits from continued structural tailwinds and low vacancy rates, by the middle of Q2 2022 it was the lowest yielding market sector having seen initial yields reduced to very low levels as investors effectively priced the sector off its growth potential. The sector was therefore most exposed to rapid yield rerating.
Despite large capital value corrections in H2 2022 we anticipate the industrial portfolio will remain a key driver of portfolio income growth. For this reason we are comfortable with a weighting of 59% at the end of Q4 2022, compared to 35% for the benchmark. Recent examples of positive income growth are outlined in the Asset Management Activity section.
The industrial assets total return was -19.6% over 2022, driven by a capital decline of 22.0%. This was a greater decrease than the benchmark, which recorded a total return of -14.6% and capital falls of 17.4%. This is a result of the Company’s far higher weighting to South East industrials than the benchmark (36% vs. 21% at end Q4 2022) with many of the Company’s assets located near London, which was the most keenly valued part of the wider industrial sector. As a result, UKCM’s portfolio was more affected by yield rerating.
Four of the five assets with the largest negative contribution to performance were industrial properties in and around London, with the only exception within the five assets being Emerald Park in Bristol, a prime multi-let industrial estate which also experienced significant valuation yield expansion. In common with the London and South East assets, Emerald Park is highly reversionary with strong potential to grow rents.
Portfolio Performance – Office
The Company has a maintained a deliberately underweight position to the office sector, which faces challenges from uncertain occupier demand as tenants continue to assess the long term impact of hybrid work patterns. This is set against a backdrop of increased pressure on landlords for capital expenditure to both attract those tenants in the market and also to comply with forthcoming minimum energy standards legislation. At the end of Q4 2022 the Company has a weighting of 13.1% compared to the benchmark of 26.1%.
The office portfolio recorded a total return of -7.7% with a capital decline of 12.1%. Whilst this negative return is disappointing it is ahead of the benchmark office total return of -10.3% for the period, which also recorded a more pronounced capital decline at 13.5%.
Across 2022, all the Company’s office assets were subject to a detailed review against strict criteria to ensure they are future-proofed, can meet the discussed increased demands from occupiers and comply with ESG-related legislation. As a result of this exercise, 9 Colmore Row in Birmingham was sold to Birmingham City Council in July for £26.48m, reflecting a premium to its latest valuation and book cost.
Portfolio Performance - Retail
The performance of the Company’s retail portfolio was ahead of the benchmark delivering a total return of 1.6%, while the benchmark was -4.9%. UKCM has no shopping centres and no pure high street retail exposure within its retail portfolio instead being comprised of bulky goods and discount-led retail warehouses and supermarkets.
These assets have proven to be resilient in recent years and benefit from a diverse tenant base and robust income streams. The Company’s retail assets were not however immune to the impact of market yield rerating and experienced a 3.4% capital decline over the period, albeit this was far less pronounced than the benchmark level of -9.7% over the year.
The Company’s retail warehouse parks, which form the vast majority of the retail portfolio, strongly outperformed their benchmark, delivering a total return of 4.4% whilst the benchmark was negative at -1.1%, due to far stronger capital declines. UKCM’s retail parks recorded capital fall of 0.7% whilst the benchmark saw a decline of 6.3%.
The Company’s retail holdings should be less exposed to the forecast reduction in consumer discretionary spending. This is due to the fact that its retail parks and supermarkets are situated within strong locations with appropriate tenants and rental levels for their catchment areas. At the end of Q4, retail assets made up 13.8% of the Company’s portfolio compared to 21.9% for the benchmark.
Portfolio Performance – Alternatives
The Company’s alternative assets were significantly ahead of the benchmark return of -4.4%, delivering a return of -1.0%.
UKCM’s alternatives portfolio has been dominated historically by three cinema-anchored leisure schemes: The Rotunda in Kingston, Cineworld in Glasgow and Regent Circus in Swindon. These assets have generally stabilised following the disruption of the Covid-19 pandemic, albeit there are concerns over the strength of some underlying tenants including Cineworld, which entered Chapter 11 proceedings in the USA in September 2022.
The Company has been diversifying its alternatives exposure with the completion of its student housing development at Gilmore Place, Edinburgh and partial completion of the second student housing development at Glenthorne Road, Exeter. Final completion of Glenthorne Road, was achieved in Q1 2023. Both are excellent quality developments that will offer differing income profiles. The Edinburgh asset is let on a 20 year index-linked lease to the University of Edinburgh while the Exeter property let directly to students themselves and offering a higher income return.
In aggregate, the Company’s 14% weighting to the alternatives sector is below the benchmark 17.3% but the portfolio weighting will increase with the final completion of the Exeter asset and the Company’s commitment to develop a new 305 bed Hyatt Hotel in central Leeds.
The Hyatt development is scheduled to run until summer 2024 with the Company’s rent linked directly to the trade of the hotel. Given the quality of the hotel, strength of the Hyatt brand and the dynamics of the Leeds market, we expect this to deliver an attractive elevated income return against a traditional leased hotel model.
Investment Activity
In line with the rest of the market, there was less transactional activity this year. This reflects the quality of the Company’s assets and the construction of the portfolio, which we believe is aligned towards sectors with strong long-term structural growth drivers. Furthermore, the Company invested significant capital in progressing its developments which were committed to in 2020 and 2021.
Investment Activity – Purchase
The only acquisition completed in the year was the agreement to develop a high quality hotel in central Leeds referred to previously. A 25-year franchise agreement is already in place with Hyatt Hotels, one of the leading global hotel brands.
The development lies within Sovereign Square to the south of the city’s main railway station and will complete in summer 2024 with the Company having agreed a total commitment of £62.7 million. The hotel will be operated under a lease by Aimbridge Hospitality, a global leader in hotel operation, with the Company’s rental income based on the income generated from the operation of the hotel. The acquisition is in line with UKCM’s strategy to invest in operational real estate sectors that are expected to deliver resilient rental incomes and are backed by both strong local fundamentals and high quality properties.
The 140,000 sq ft hotel’s 305 rooms will be split between the short stay Hyatt Place and the long stay Hyatt House brands. The upscale hotel will provide meeting rooms, a gym and several food and beverage options, including a rooftop bar with its own dedicated entrance. The development has progressed well throughout the period.
Investment Activity – Sale
In July, the Company disposed of its 68,400 sq ft multi-let office building 9 Colmore Row, which is situated in central Birmingham. In line with all UKCM’s office assets, the building had been subject to a rigorous review process and there were concerns over the asset’s ability to meet increased tenant demands in relation to wellness and ESG against the wider backdrop of uncertain levels of future demand for older offices.
We therefore believed there was significant potential for income disruption and non-accretive expenditure. The asset was sold for £26.48m to Birmingham City Council, which represented a premium to valuation and book cost.
Asset Management Activity
Rent collection rates within the portfolio have returned to levels recorded prior to the onset of the Covid-19 pandemic with 99% of rents due across 2022 collected. Where arrears have accrued in past years, we remain in dialogue with tenants to maximise recovery.
The average weighted unexpired lease term of the portfolio has been maintained at 8.3 years, in line with the previous year. This compares to the benchmark unexpired term of 9.4 years. At 31st December 2022, 28% of portfolio rent is subject to a form of index-linked rent reviews or fixed increases, which provide an estimated blended annualised increase of 3.3% per annum.
The following asset management activity, grouped by sector with percentage occupancy shown as at 31 December 2022, represents a summary of noteworthy transactions:
Industrial / Logistics Distribution - 97% occupied
Newton’s Court, Dartford
A significantly increased headline rent was achieved at this multi-let industrial estate in June, when a new tenant was secured for Unit 12 following a comprehensive refurbishment and environmental upgrade of the property. Paak Logistics UK Limited took a new 15 year lease without break over the 67,300 sq ft unit at a rent of £942,816 per annum, representing a 27% premium to the ERV at the start of the year and demonstrating the continued demand for high quality, well located logistics space. The lease incorporates five-yearly upwardly only open market rent reviews.
The achieved rent is significantly ahead of the original underwritten rental level when the refurbishment commenced, demonstrating the potential within the portfolio to capture strong rental growth. In line with the Company’s ESG priorities, the building’s EPC was improved from a rating of D to A through refurbishment works that included using energy efficient materials and installing PV panels.
Also, in the second quarter, Unit 6 was let to Rodenstock UK Ltd on a new 10 year lease with a tenant-only break option in year five over the 6,650 sq ft unit which had recently fallen vacant. The agreed annual rent of £89,775 per annum equates to £13.50 per sq ft per annum, which is 6% ahead of the unit’s previous ERV at the start of 2022. Also within the year, a 10 year extension was completed for a lease renewal with Clear Channel over Unit 9, with a tenant break in year five. The lease was agreed at a new rent of £169,737 per annum, equating to £12.50 per sq ft per annum, 32% ahead of the previous passing rent and 2% ahead of ERV.
Ocado, Hatfield
An open market rent review from September 2021 over the 298,400 sq ft automated distribution warehouse was settled in Q3 2022 with leading online logistics solutions retailer Ocado at £4,000,000 per annum, equating to £11.88 per sq ft over the warehouse space.
The reviewed rent reflects a 32% increase on the previous rent passing and was 13% ahead of ERV at the time of review. Since the review, the unit has experienced further rental growth and remains reversionary with the prospect of a further rental uplift at the next review cycle.
Emerald Park, Bristol
Strong progress has been made throughout the year in capturing increased rents at this prime multi-let industrial estate in Bristol. In September 2022, a new 10 year lease was secured over Unit 108 with sports supplier Pitchmark Group Ltd, incorporating a tenant-only break in year five. The letting set a new record rent of £10.50 per sq ft per annum on the estate, 11% up from the previous passing rent of £9.30 per sq ft per annum and 8% ahead of the unit’s previous ERV.
A six year lease renewal over Unit 109 was also agreed with MedaCo Ltd, a supplier of equipment for care homes, schools and hospitals. The lease will now run to 2030, with a tenant break in 2027. The new rent of £96,200 per annum, equates to £9.75 per sq ft which is 10% above the previous passing rent and a 3% premium to ERV.
Ventura Park, Radlett
The strong leasing momentum within the industrial portfolio has continued outside the period and into 2023 with the Company signing two significant lettings in January at its largest asset, the multi-let industrial estate Ventura Park in Radlett situated just off the M25 to the north of London.
Unit B, which extends to 31,803 sq ft has been let to Aerospace Reliance a global maintenance supplier to the aerospace industry at a headline rent of £17.50 per sq ft, whilst at the larger 85,640 sq ft Unit 7 an agreement for Lease is now in place with Location Collective, the UK’s third largest film studio operator, on a new 15 year lease at £17.00 per sq ft. Both deals were agreed within two weeks of the units becoming vacant, demonstrating the appeal of Ventura Park, which offers a value proposition to occupiers in the tight South East market.
The collective new rent of £2.0 million per annum is £800,000 above the previous passing rent and equates to a 69% increase and is 63% ahead of ERV at Q4 2021. The Company is also currently comprehensively refurbishing Units G/H totalling 28,000 sq ft with promising initial tenant interest.
Industrial Development
Throughout the year the Company has progressed its committed industrial developments. At the Sussex Junction industrial property in Bolney, the Company is delivering 60,229 sq ft of new space for geological survey company, CGG, which has taken two 15 year leases at a combined rent of £780,875, equating to £12.50 per sq ft per annum.
There is one speculative unit totalling 46,500 sq ft, which is being marketed for lease, with advanced occupier discussions to let the unit on completion. Construction also continues at Precision Park, Leamington Spa to create a modern logistics facility of 67,700 sq ft with strong ESG credentials. Practical completion is scheduled to take place in early Q2 2023 with the unit also attracting encouraging levels of occupier interest.
Office – 97% occupied
2 Rivergate, Temple Quay, Bristol
In early 2022 the Company negotiated an agreement for the Secretary of State to extend its occupation of the Company’s 70,000 sq ft office building in Bristol for a further three years with a 9% increase in rent to £1.72 million per annum.
The asset is in a prime location within Bristol’s office core, directly opposite Temple Meads railway station and, as part of the negotiations, the Secretary of State agreed to move the lease outside of the Landlord & Tenant Act, providing improved flexibility for a future redevelopment or refurbishment. At present, detailed planning and feasibility work is continuing at the asset.
Craven House, London
At Craven House, the Company’s 20,100 sq ft West End office, the rent review from June 2021 was settled 5% ahead of ERV at an increased rent equating to £54 per sq ft. The prominent building is situated adjacent to Carnaby Street and is let to film and television production company Molinaire until June 2026. This prime office building remains highly reversionary for its location.
Retail – 100% occupied
The Company’s retail portfolio been extremely well let throughout the period and at end of Q4 2022 is
fully occupied, demonstrating the appeal of these assets. At St. George’s Retail Park in Leicester, Autoglass completed a new 10 year lease in June, with a tenant break on the fifth anniversary, at a rent of £52,500 per annum in line with ERV. The park is now fully let following extensive work undertaken in previous years and boasts an attractive line-up of strong tenants including Next, Home Bargains, DSG and Iceland. Like the Company’s other two retail parks, Junction 27 in Leeds and Trafford Retail Park in Manchester, the focus is now on completing lease renewals and rent reviews to secure and grow rents.
Alternatives – 100% occupied
Excellent progress has been made on completing the Company’s two student housing developments in Edinburgh and Exeter.
Gilmore Place, Edinburgh
The Company’s new 230 bed student housing development reached completion on 1 September.
Prior to completion, a 20-year lease was agreed with the University of Edinburgh at an annual rent of £1.24 million per annum, which is subject to annual CPIH increases with a cap and collar of 1-4%.
The Company had originally expected to operate and lease the asset independently to generate a higher level of rent but decided that the opportunity to fix a long term guaranteed and growing income stream from a first-class tenant covenant was in the best interests of shareholders, particularly given that direct-let exposure would be maintained through the development in Exeter.
Glenthorne Road, Exeter
The larger first phase of the student hall development close to the University of Exeter was completed in November and its 131 beds were immediately occupied. Phase 2 completed in Q1 2023 to provide a further 83 beds with the Company benefitting from a minimum guaranteed total annual income of £1.65 million for the 2022/23 academic year. Homes for Students has been appointed to manage the asset and interest from students has been strong for the next academic year.
Hyatt Hotel, Leeds
As previously disclosed, the Company is developing a high quality hotel in central Leeds which will complete in summer 2024 with a 25-year franchise agreement in place with Hyatt Hotels, one of the leading global hotel brands. UKCM’s rental income based on the income generated from the operation of the hotel which will be operated on a lease by Aimbridge on UKCM’s behalf. The acquisition is in line with part of the Company’s strategy to invest in operational real estate sectors that are expected to deliver resilient rental incomes.
Leisure
The Company’s leisure assets have largely stabilised following the disruption caused by the Covid-19 pandemic. The assets are generally well let with occupation at 99% and rent collection has largely normalised. Key tenants such as Odeon, Cineworld and David Lloyd have consistently met their quarterly rental obligations since restrictions were lifted on their trade. Where historic arrears were accrued, we are in dialogue to recover these. There are concerns over some tenants’ underlying covenant strength, such as Cineworld who entered Chapter 11 proceedings in the US in September 2022, and we are therefore closely monitoring their levels of trade at our individual assets which we believe are backed by strong underlying fundamentals.
Environmental, Social and Governance (ESG)
Whilst real estate investment provides valuable economic benefits and returns for investors, it has – by its nature – the potential to affect environmental and social outcomes, both positively and negatively. The Company adopts the Investment Manager’s expansive policy and approach to integrating ESG in all areas of its investment process, and this has been used as the basis for establishing the Company’s ESG objectives. Both the Investment Manager and Board view ESG as a fundamental part of their business.
Energy Performance Certificates (EPCs)
Energy Performance Certificates (EPCs), which each property legally requires, form a powerful regulatory measure by which government can encourage the UK property industry to decarbonise. Draft legislation applying to England and Wales indicates that all property must have an EPC of class A, B, or C by 2027 and A or B by 2030. The legislation and rating scale in Scotland are different and there are currently no similar minimum standards based on the EPC system.
76% of the Company’s portfolio by ERV in England (it does not own in Wales) is currently rated A, B, or C. This is a positive position; however every property is kept under review and where asset level interventions are required we aim to do so at commercially sensible times such as lease expiries or during renewal discussions. There are also instances within the portfolio where there is no need to make improvements as the asset will be entirely redeveloped to modern and fully compliant specification at lease expiry.
Our embedded approach to ESG is carried through to our approach to development where we target an EPC of A as well as strong BREEAM ratings. With the forthcoming development completions, we expect the percentage of the portfolio with an EPC rating of A-C to increase.
Portfolio Strategy
Despite the unprecedented adjustment to values, particularly in Q4 of 2022, as a result of macroeconomic challenges, your Company’s portfolio is firing on all cylinders on an operational basis, reporting strong earnings growth through 2022 and demonstrating with early-2023 leasing activity the real potential for continued rental growth. With debates in full flow as to the depth of the 2023 UK recessionary environment and likely inflation levels, as well as how the Bank of England will adjust interest rate policy, your portfolio is well placed with its emphasis on industrial stock, particularly in London, to benefit from one of the most under-supplied sectors in the country where demand remains positive.
The Company has the potential to benefit from both earnings growth and, in the future, capital values. Earnings growth would be generated through continuing to unlock the portfolio’s “reversion conversion potential”, whereby the higher rental values of asset are converted at lease events to cash rents received, as well as through development projects coming on stream. Following rises in interest rates, capital values have declined which presents an opportunity for valuations to increase as income grows and an expected interest rate cutting cycle commences which expands the margin between property yields and the risk free rate, increasing the attractiveness of the sector to investors. Of course, it would be naïve to assume there will be no tenant bumps along the way, however, the portfolio is relatively protected from the riskiest areas such as F&B, leisure, fashion retail and the uncertainty around reletting older, non-ESG compliant office stock. Conversely, some tenant failure on our industrial estates would offer the opportunity to enhance rental income by earlier reversion capture.
As such, we are comfortable with the current structure of the portfolio although will remain alert to the potential to prune assets where we see undue risk or limited potential. Proceeds from any such pruning would most likely, in the short term, be deployed to reduce the modest level of drawn “floating interest rate” debt before redeploying when we have more confidence on the expected future timing of interest rate cuts.
In essence, our strategy is very straightforward – maintain our robust balance sheet and focus on continuing the progress we have made to improve earnings through leasing activity and successful completion of our modest development pipeline, while remaining alert to market opportunities linked to an eye on future interest rates.
Will Fulton
abrdn
31 March 2023
2022 PORTFOLIO & ANALYSIS (all figures as at 31 December 2022)
TOP 10 TENANTS BY RENT
| % of contracted rent | |||
| 1 | OCADO RETAIL LIMITED | Industrial | 5.8% |
| 2 | PUBLIC SECTOR | Industrial & Office | 4.9% |
| 3 | WARNER BROS LIMITED | Industrial | 4.2% |
| 4 | AMAZON UK SERVICES LIMITED | Industrial | 4.0% |
| 5 | AMSTRONG LOGISTICS | Industrial | 3.5% |
| 6 | TOTAL E&P UK LIMITED | Industrial | 3.1% |
| 7 | CINEWORLD ESTATES LIMITED | Alternatives | 2.8% |
| 8 | KANTAR | Office | 2.7% |
| 9 | B & Q PLC | Retail Warehouse | 2.7% |
| 10 | ODEON CINEMAS LIMITED | Alternatives | 2.7% |
PORTFOLIO SPLIT BY SUB SECTOR
| Industrials — South East & London | 35.9% |
| Industrials — Rest of UK | 23.3% |
| Retail Warehouses | 11.6% |
| Alternatives | 14.0% |
| Offices — Rest of UK | 5.9% |
| Offices — Rest of South East | 5.2% |
| Offices — West End Retails – Rest of UK |
1.9% 1.2% |
| Retails — South East | 1.0% |
PORTFOLIO SPLIT BY GEOGRAPHY
| South East | 33.9% |
| London | 15.7% |
| West Midlands | 12.2% |
| East Midlands | 8.9% |
| South West | 8.7% |
| Scotland | 8.9% |
| North East | 4.0% |
| Yorks and Humber | 5.0% |
| North West | 2.7% |
SECTOR SPLIT V BENCHMARK
| UKCM | MSCI | |
| Industrials | 59.1% | 33.1% |
| Offices | 13.1% | 26.5% |
| Retail | 14.0% | 18.0% |
| Alternatives | 13.8% | 22.4% |
LEASE EXPIRY PROFILE
| UKCM | Benchmark | |
| 0–1 yr | 5.5% | 9.9% |
| 1–2 yrs | 7.5% | 9.1% |
| 2–3yrs | 10.0% | 9.0% |
| 3–5 yrs | 20.5% | 16.1% |
| 5–10yrs | 25.7% | 19.8% |
| 10–15 yrs | 22.1% | 9.5% |
| >15 yrs | 8.7% | 26.6% |
Risk Management
In accordance with the UK Corporate Governance Code and FRC Guidance, the Board has established procedures to identify and manage risk, to oversee the internal control framework and to determine the nature and extent of the principal risks the Company is willing to take in order to achieve its long-term strategic objectives.
The Board recognises its responsibility to carry out a robust assessment of the Company’s principal risks and emerging risks. Principal risks are defined as those that could result in events or circumstances that might threaten the Company’s business model, future performance, solvency or liquidity and reputation. Emerging risks are those that have not yet occurred but are at an early stage of development or are current risks that are expected to increase in significance and become more fundamental in the future.
The Board has appointed a Risk Committee to ensure that proper consideration of risk is undertaken in all aspects of the Company’s business on a regular basis. The Risk Committee meets quarterly and comprises all members of the Board and is chaired by Margaret Littlejohns.
Its duties include the assessment of the Company’s risk appetite and the regular review of principal and emerging risks, seeking assurance that these risks are appropriately rated and that effective mitigating controls are in place, where possible.
Risks are identified and weighted according to their potential impact on the Company and to their likelihood of occurrence. The impact is evaluated in terms of the effect on the Company’s business, finances and reputation, the three of which are usually interlinked. Each identified risk is assessed twice: first as a “gross risk” before taking into consideration any mitigating controls and secondly as a residual or “net risk” after reviewing the safeguards in place to manage and reduce either the severity of its impact or the probability of its event.
The Risk Committee uses a detailed Risk Matrix to prioritise the individual risks, allocating scores of 1 to 5 to each risk for both the likelihood of its occurrence (ranging from very unlikely to almost certain) and the severity of its impact (ranging from minimal to highly significant). The combined scores for both the gross risks and net risks are then colour coded, applying a traffic light system of green, amber and red to emphasise those posing the greatest threats to the Company. Those with the highest gross rating in terms of impact are highlighted as top risks within the matrix and are defined here as principal risks.
The Risk Committee, with the help of the Investment Manager’s extensive research resources and market intelligence, surveys the full risk landscape of the Company in order to identify increasing and emerging risks to which the Company may be exposed in the future. In particular, the Risk Committee questions which parts of the Company’s business may be vulnerable to disruption, including but not limited to the business models of its key tenants and its outsourced third-party suppliers. The Risk Committee not only reviews the existing portfolio of investments but also ensures that risk is considered in the case of each property acquisition and disposal.
The Risk Committee works closely with the Audit Committee to examine the effectiveness of the risk management systems and internal control systems upon which the Company relies to reduce risk. This monitoring covers all material controls, including financial, operational and compliance controls. All risks and mitigating measures are reviewed by the Risk Committee at least quarterly, and any significant changes to the Risk Matrix are presented to the Board.
Principal Risks
The Company’s assets consist of direct investments in UK commercial property. Its risks are therefore principally related to the commercial property market in general and also to each specific property in the portfolio. Risks to the Company fall broadly under the following six categories:
Strategy Risk: A
Management may fail to execute a clear corporate strategy successfully and the strategic objectives and performance of the fund, both absolute and relative, may become unattractive or irrelevant to its investors.
Investment & Asset Management Risk: B C
Ill-judged property investment decisions and associated redevelopment and refurbishment may lead to health and safety dangers and environmental issues, including climate change, and ultimately to poor investment returns.
Financial Risk: D E F G
Macro-economic changes (e.g. levels of GDP, employment, inflation and interest rate movements), political changes (e.g. new legislation and regulation), structural changes (e.g. disruptive technology, demographics) or global events (e.g. pandemics, wars, terrorist attacks, oil price disruption) can all impact the commercial property market, both its capital value and income generation, its liquidity and access to finance and the underlying businesses of its tenants. This risk encompasses real estate market risk, interest rate risk, liquidity risk and credit risk, all of which are covered in more detail in note 18 to the accounts.
Operations Risk: H I
Poor service and inadequate control processes at the Company’s outsourced suppliers may lead to disruption, error and fraud, and increasingly, cyberattacks. The Company’s key service providers are the Investment Manager, the Company Secretary, the Managing Agent, the Valuer and the Registrar and are assessed at least annually through the Management Engagement Committee, or more often during times of stress.
Regulation Risk: J
Failure to comply with applicable regulation and legislation could lead to financial penalties and withdrawal of necessary permissions by governing authorities. Changes to existing regulations could also result in suboptimal performance of the Company.
Stakeholder Engagement Risk: K
Failure to communicate effectively and consistently with the Company’s key stakeholders, in particular shareholders and tenants, could prevent the Company from understanding and responding to their needs and concerns.
Emerging Risks
Emerging risks have been identified by the Risk Committee through a process of evaluating relatively new risks that have emerged and increased materially in the year, and subsequently, or through market intelligence are expected to grow significantly and impact the Company. Any such emerging risks are likely to cause disruption to the business model. If ignored, they could impact the Company’s financial performance and prospects. Alternatively, if recognised, they could provide opportunities for transformation.
Economic and Geopolitical
Russia’s invasion of Ukraine is the largest, most dangerous military conflict in Europe since WWII. Russian President Vladimir Putin failed in his initial aim to destroy Ukrainian sovereignty and has since increased attacks on Ukraine’s energy and civilian infrastructure. A settlement or even a ceasefire looks unlikely for now. Instead, an extended conflict is anticipated, alongside a long-term political, economic and military standoff between the West and Russia. Intentional or accidental escalation between NATO and Russia remains a risk.
The Investment Manager expects global markets to remain volatile. From a macro-economic perspective, higher medium-term oil, gas and food prices alongside financial market disruption and sanctions on Russia are likely to lead to an increase in already elevated inflationary pressures, which will in turn weaken the outlook for economic growth. There is also the risk of further interest rate increases. A period of prolonged instability, with impacts for Europe in particular, is now clearly a potential outcome.
Tensions are also increasing in the relationship between the United States and China which could lead to greater protectionism and a decline in global trade. In particular, the future of Taiwan hangs in the balance and as one of the largest producers and exporters of microchips in the world could cause considerable disruption if its independence was threatened.
The current economic and geopolitical environment is unpredictable, and changing rapidly, and this may affect real estate valuations the Company’s portfolio.
Climate
Climate change is happening now and its rate of change and impact on the environment will depend on the planet’s success in controlling global emissions. The average surface temperature in the UK has risen by 1.2oC since pre-industrial times, and further warming is predicted. More extreme weather events are also expected in future which could cause serious damage to infrastructure and property. The extent of climate change and the necessary regulation to control it are uncertain and will continue to be monitored.
The legacy of COVID-19
Although the direct impact of COVID on our lives has receded, it has introduced or accelerated some structural changes to the ways that we live, work and consume and reformed our expectations of our environment and society. In particular, the trend towards flexible and home working is affecting the use of offices, with sustainability, health, wellbeing and the social impact of office use increasing in importance. COVID has also impacted the way that we that we shop: social distancing measures in response to the pandemic have accelerated the increase in on-line shopping and decline in physical retailing. This has created challenging conditions for traditional retailers and their landlords. It is still uncertain how the role of offices and retail will develop and they both continue to be assessed in order to protect the portfolio but also to identify new investment opportunities.
Technology
Technology is also rapidly changing the habits of businesses and consumers which in turn is impacting occupiers’ future requirements for property and leading to greater disparity in the performance of different property sectors and also within each sector itself. Advances in technology have enabled many of the behavioural changes in the use of real estate: for example, the increased use of video conferencing by businesses has facilitated a more permanent shift to home working and could also redefine the need for office space in the future.
Robotics and automation are also altering the specifications for industrial buildings and greater use of data and advanced analytics is driving the need the data storage and data centres. Technology is also increasingly contributing to improvements in the sustainability of properties. If landlords fail to embrace technology, they may face the risk of “stranded” assets in the future.
The principal risks, including their impact and the actions taken by the Company to mitigate them, are provided below. The Changes to Risk (Increased, Decreased or No Change) all relate to any material change from the reporting provided in the 2021 Annual report that was finalised in April 2022.
| Risk A – Strategic Risks: Widening Discount and Continuation Vote | |
| Risks & Impact | The Company’s strategic objectives and performance, both absolute and relative, could become unattractive to investors leading to a widening of the share price’s discount to net asset value, and potentially a continuation vote. An inappropriate investment strategy could lead to an erosion of shareholder value. This could include poor decisions on purchases and sales, sector allocation, tenant selection, levels of borrowing or inadequate consideration of ESG etc. |
| Mitigation | · The Company’s strategy and objectives are regularly reviewed by the Board to ensure they remain appropriate, effective and sustainable. · The Board receives regular presentations from research analysts on both the general economy but also the property market in particular to identify structural shifts and threats, so the Board can adapt the Company’s strategy if necessary. · The NAV and share price are constantly monitored and regular analyses of the Company’s performance are reviewed by the Board and compared with the Company’s benchmark and its peer group. · Cash flow projections are prepared by the Investment Manager and reviewed at least quarterly by the Board. · Regular contact is maintained with shareholders and the Company’s broker. |
| Commentary | · Investors have access to the Board, the Investment Manager and the underlying team who will respond to any queries concerning the discount. The Investment Manager and Broker themselves arrange regular meetings with prospective and existing investors to try and improve demand for the Company’s shares. The level of discount is kept under constant review but it is difficult to control. · Shareholders overwhelmingly supported the Company’s periodic continuation vote held in October 2022, with the next periodic continuation vote scheduled to be held in 2027 and seven yearly thereafter. · There is a marked divergence in the performance of different real estate sectors, and also within each sector itself, due to changes in the behaviour of tenants and consumers, particularly in the office and retail sectors, a trend accelerated by COVID-19. This is focusing the Company’s strategy on investing selectively in “future fit” properties. |
| Change | NET RISK: MEDIUM — NO SIGNIFICANT CHANGE IN RISK BUT TRENDING UP |
| Risk B – Investment and Asset Management Risks: Health & Safety | |
| Risks & Impact | The Company could fail to identify, mitigate or manage major Health & Safety issues potentially leading to injury, loss of life, litigation and the ensuing financial & reputational damage. |
| Mitigation | · Health & Safety checks are included as a key part of due diligence for any new property acquisition. · For existing multi-tenancy properties, the Group’s Property Agent (Jones Lang LaSalle) is responsible for managing and monitoring Health & Safety matters of each building. · The Investment Manager monitors on an ongoing basis all identified Health & Safety issues with strict deadlines for resolution by the Managing Agent. · The Investment Manager also engages S2 Partnership Limited who provide an independent Health & Safety review and fire risk assessment of all multi-let properties on an annual basis. · The Risk Committee reviews the Company’s Health & Safety performance quarterly. |
| Commentary | · No other major Health & Safety issues were noted in the year. |
| Change | NET RISK: MEDIUM — NO SIGNIFICANT CHANGE IN RISK |
| Risk C – Investment and Asset Management Risks: Environmental | |
| Risks & Impact | Properties could be negatively impacted by an extreme environmental event (e.g. flooding) or the Company’s own asset management activities could create environmental damage. Climate change could accelerate more quickly than anticipated, leading to legislative changes. Failure by the Company to achieve existing or future environmental targets could adversely affect the Company’s reputation, resulting in penalties and increased costs and ultimately in a reduction in the value of assets that are less energy efficient. Access to capital could be restricted: investors might avoid shareholdings in companies that do not meet their environmental expectations and banks could limit funding only to borrowers who fulfil pre-set environmental criteria. |
| Mitigation | · The Company considers its impact on the environment and its local communities in all its activities and works in partnership with its key stakeholder groups – investors, occupiers, suppliers and communities – to ensure that all parties share responsibility to achieve a more sustainable property performance. · In-depth research is undertaken on each property at acquisition with a detailed environmental survey. · The Investment Manager employs its own proprietary research framework, the ESG Impact Dial, which assesses 4 major forces: Environment & Climate, Governance & Engagement, Demographics & Technology and Infrastructure. · Experienced advisers on environmental, social and governance matters are also consulted both internally at the Investment Manager and externally where required. · The Investment Manager has adopted a thorough environmental policy which is applied to all properties within the portfolio. · EPC rating benchmarks have been set to ensure compliance with Minimum Energy Efficiency Standards (MEES). |
| Commentary | · The Company has recently set a net zero carbon target of 2040 for all carbon emissions, including tenants’ own emissions and also those embedded in the fabric and construction of buildings. · An interim target of 2030 has also been set to reach net zero for all landlord generated emissions. · The Company has submitted to the Global Real Estate Sustainability Benchmark (“GRESB”) since 2015. It has been recognised as a top performer in ESG coming second in the GRESB UK Diversified (listed) peer group. It was awarded an ‘A’ score for Public Disclosure by GRESB against a peer group average of B and received an EPRA “Gold” rating for European Sustainability Best Practice Recommendations in 2022. · A full review of EPC ratings across the Group’s portfolio has been undertaken and a strategy put in place to ensure compliance with all the deadlines for increasingly strict standards between now and 2030. Three units are currently rated as below standard and these are being actively assessed and addressed. · A number of asset management initiatives are underway to consider the feasibility of installing solar panels at some of the Company’s properties. |
| Change | NET RISK: MEDIUM — NO SIGNIFICANT CHANE IN RISK BUT TRENDING UP |
| Risk D – Financial Risks: Macroeconomic | |
| Risks & Impact | The property market is cyclical and very sensitive to changes in the economic environment. Macroeconomic changes (e.g. levels of GDP, employment, inflation, interest rate movements), political changes (e.g. Brexit, new legislation), structural changes (e.g. new technology, demographics) or global events (pandemics, wars, terrorist attacks, oil price disruption) could negatively impact commercial property values and the underlying businesses of tenants (market risk and credit risk). This may be reflected in a decline in the share price, Net Asset Value per share and earnings per share of the Company. Falls in the value of investments could also result in breaches of loan covenants and solvency issues. |
| Mitigation | · The abrdn Research team takes into account macroeconomic conditions when collating property forecasts. This research is fed into the Investment Manager’s decisions on purchases and sales and sector allocations. · The portfolio is UK based and diversified across a number of different sectors and regions of the UK and also has a wide and diverse tenant base to reduce any risk concentration where possible. · There is a wide range of lease expiry dates within the portfolio in order to minimise concentrated re-letting risk. · The Board intends that borrowing of the Group at the time of draw down will not exceed 25% of the total assets of the Group. · The Company has limited exposure to speculative development and is generally only undertaken on a forward funded and pre-let basis. · Rigorous portfolio reviews are undertaken by the Investment Manager and presented to the Board on a regular basis. · Annual asset plans are developed for each property, ensuring that inherent value can be realised through active asset management. · Individual investment decisions are subject to robust risk versus return evaluation and approval. Each potential investment is scrutinised and rigorously assessed, taking into account location, legal title, local market dynamics, physical and environmental conditions and the quality and soundness of the projected income stream. · Every building has comprehensive insurance to cover both the property itself and injury to associated third parties. |
| Commentary | · The UK economy has faced a period of significant volatility over the second half of 2022, as the macroeconomic environment weakened and political turmoil rocked financial markets. While greater political stability has returned to the UK, the economy is facing headwinds as we enter 2023. Although UK GDP edged up in November the ONS attributed this to a temporary World Cup-related services boost rather than evidence of a stronger underlying rate. abrdn Research Institute (aRI) currently forecasts UK GDP to decline by 1.3% in 2023, before recovering in 2024 with modest growth of 0.6%. · Headline inflation looks to have peaked with the Consumer Price Index falling in December from 10.7% to 10.5%. Powerful base effects combining with global goods disinflation are expected to pull inflation down in 2023. However, costs remain high and underlying inflation pressures are still apparent, leading to the expectation that headline inflation will only moderate through 2023, not fall to pre-2022 levels. aRI anticipates inflation of 6.2% by the end of the year, before falling to 2.4% in 2024. · The real estate investment market reacted quickly to increasing interest rates with a dramatic repricing of capital values in fourth quarter. As expected, the Bank of England continued its monetary policy tightening cycle in March 2023, with a further 25bps rise in response to the persistently high rate of UK inflation, taking the base rate to 4.25%. aRI forecasts base rate to peak at 4.5% before a sharp rate-cutting cycle begins towards the end of 2023 as the Bank of England attempts to stimulate the UK economy out of recession. · Portfolio continues to be diversified with investments in the four main commercial property sectors and across a number of geographical regions, but now with a much higher weighting to the industrial sector, particularly logistics and distribution, which has benefitted from the pandemic and, despite the falls in capital value in the fourth quarter of 2023, has outperformed the other sectors over the last 10 years. · 196 tenancies at the year end with top ten tenants accounting for 36.4% of contracted rental income. · Gearing of 20% at year end. Occupancy rate of 98% at year end. |
| Change | NET RISK: MEDIUM — NO SIGNIFICANT CHANGE IN RISK BUT TRENDING UP |
| Risk E – Financial Risks: Gearing | |
| Risks & Impact | An inappropriate level of gearing, magnifying investment losses in a declining market, could result in breaches of loan covenants and threaten the Company’s liquidity and solvency. An inability to secure adequate borrowing with appropriate tenor and competitive rates could also negatively impact the Company. |
| Mitigation | · The Board intends that borrowing of the Group at the time of draw down will not exceed 25% of the total assets of the Group. · This low gearing limit means that the Company should, barring exceptional circumstances, have adequate resources to service and repay its debt. · The Company’s diversified, prime UK commercial property portfolio, underpinned by its strong tenant base, should provide sufficient value and income in a challenging market to meet the Company’s future liabilities. · The Company’s relatively modest level of gearing has attracted competitive terms and interest rates from lenders for the Company’s loan facilities. · The Investment Manager has relationships with multiple funders and wide access to different sources of funding on both a fixed and variable basis. · Financial modelling is undertaken and stress tested annually as part of Company’s viability assessment, whenever new debt facilities are being considered and whenever unusual events occur. · Loan covenants are continually monitored and reported to the Board at least quarterly and also reviewed as part of the disposal process of any secured property. |
| Commentary | · Market yield expansion following bank interest rate hikes and macroeconomic uncertainty, increased the risk in general of potential loan covenant breaches and refinancing risk for some property companies with short-term debt. With debt levels unchanged, gearing has increased as a result of falls in capital values of the underlying properties. · At year end the Group had two fully drawn fixed rate facilities totalling £200 million with different expiry dates (April 2027 & February 2031). The Group had also draw down £93 million of its £180 million revolving credit facility, which is on a floating rate basis, and provides flexibility to make timely acquisitions when opportunities arise. Together, the drawn down facilities had a weighted maturity profile of 5.2 years, and an overall blended interest of 3.68% per annum. · At year end, gearing was 20.0%, relatively low for its peer group. · During the year, the Group’s bank covenants have been regularly monitored and stress tested under different value and revenue scenarios. There is considerable headroom before any loan covenants would be breached. · Over £431 million of property remains unencumbered, providing additional cushion if needed. · The Company benefits from good long-term relationships with supportive lenders and has engaged in constructive dialogue with them during this period. |
| Change |
NET RISK: MEDIUM — INCREASED RISK
The Group has increased gearing levels to 20% which is still relatively low against its peers and has scope to increase further with an additional £87 million of undrawn revolving credit facility. |
| Risk F – Financial Risks: Liquidity | |
| Risks & Impact | The Company may be unable to dispose of property assets in order to meet its financial commitments or obtain funds when required for asset acquisition or payment of expenses or dividends. Investments in property are generally illiquid, in that they may be difficult to sell quickly and may have to be sold at a discount to the recorded valuation. The Company’s shares could become illiquid due to lack of investor demand, market events or regulatory intervention and the Company’s shareholders may be unable to sell their shares due to lack of liquidity in the market. |
| Mitigation | · The Company has a diversified portfolio of good quality, marketable properties. · After allowing for capital commitments on ongoing developments, the Company has significant capital resources at year end of £42 million due to the undrawn £87 million of its revolving credit facility. The closed ended structure of the Company ensures that it is not a forced seller of assets. · The Company is listed on the London Stock Exchange and a component of the FTSE 350 Index made up of the largest 350 companies in the UK by market capitalisation. · Financial commitments are limited by the Company’s relatively low level of gearing. · Liquidity risk is managed on an ongoing basis by the Investment Manager and reviewed at least quarterly by the Board. · Cash is placed in liquid deposits and accounts with a high credit rating. |
| Commentary | · Real estate market liquidity has decreased over the second half of 2022, as the macroeconomic environment weakened and political turmoil rocked financial markets. Early indications are showing that market liquidity has improved during the first quarter of 2023. · Having a closed-ended structure, the Company was better able to withstand market movements as it is not subject to investor redemptions and forced property disposals. · All financial commitments were comfortably met during the year. · 2.7m shares on average were traded daily in 2022 highlighting the ongoing liquidity of the Company’s shares. · Shareholders are able to sell their shares in a highly regulated and liquid secondary market. |
| Change | NET RISK: LOW — NO SIGNIFICANT CHANGE IN RISK |
| Risk G – Financial Risks: Credit Risk of Tenants | |
| Risks & Impact | Income might be adversely affected by macroeconomic factors. Financial difficulties could cause tenants to default on their rents and could lead to vacant properties. This might result in falling dividend cover for the Company and potential dividend cuts. |
| Mitigation | · Dividend cover is forecast and considered at each Board meeting. · The property portfolio has a balanced mix of tenants and reflects diversity across business sectors, limiting reliance on a single tenant or industry. · The Group has 196 tenants, with the top 10 tenants representing 37% of the Company’s contracted rental income, and no single tenant accounting for more than 6%. · Rigorous due diligence is undertaken on all prospective tenants and their financial performance continues to be monitored during their lease. · Rent collection from tenants is closely monitored so that early warning signs can be detected. · Contingency plans are put in place where tenants with financial difficulties have been identified. · Board approval is necessary for any material lettings. |
| Commentary | · For the four key rent invoicing dates for quarterly payment in advance in 2022 (March, June, Sept, Dec 2020) 99% of rent had been collected by the end of February 2023. · Retail sector continues to be of concern with further administrations in this sector in the last 12 months, compared to the previous year. · Ongoing reduction in Company’s retail holdings which now represent 14% of the portfolio at the year end. · The Company has a bad debt provision of £5.1m for ultimate non-payment of rent by some tenants but still continues its concerted efforts to recover outstanding amounts due. · Reflecting the net acquisitions undertaken by the Company, improving rent collection rates, dividends were increased by 11% in 2022. · There are concerns over some tenants’ underlying covenant strength, such as Cineworld, and we are therefore closely monitoring their levels of trade. |
| Change | NET RISK: MEDIUM — NO SIGNIFICANT CHANGE IN RISK |
| Risk H – Operational Risks: Service Providers | |
| Risks & Impact | Poor performance and/or inadequate procedures at key service providers i.e. Investment Manager, Company Secretary, Managing Agent, Registrar, could lead to errors, fraud and non-compliance with their contractual agreements and/or with relevant legislation. Failings in their data management processes and disaster recovery and business continuity plans, including cyber security safeguards, could lead to financial loss and business disruption for the Company. |
| Mitigation | · The Company has a strong control culture that is also reflected in its partnerships with suppliers. · All investment decisions are subject to a formal approval process with specified authority limits. · All third party service providers are carefully selected for their expertise, reputation and financial standing. Service level agreements are negotiated with all material suppliers and regularly monitored to ensure that pre-agreed standards are met. · Suppliers’ business continuity and disaster recovery plans, including safeguards against cyber-crime, are also regularly examined. · The Management Engagement Committee (“MEC”) formally reviews all key service providers once a year and whenever necessary during times of stress. · Assurance reports on internal controls (ISAE 3402 reports) for both the Investment Manager and the Property Agent are received and reviewed annually. |
| Commentary | · Key service providers put their business continuity plans into practice quickly during the pandemic and adapted successfully to working remotely from their business premises and many have now adopted more permanently a hybrid model of home and office working. · The Investment Manager updated the Board on a regular basis on its own contingency arrangements and has demonstrated its operational resilience throughout. · The Investment Manager has also monitored regularly the ability of other key service providers to conduct their business effectively. Service quality has been maintained despite the restrictions and no material issues of concern have been raised. · Key service providers are on heightened alert of cyber attacks following Russia’s invasion of Ukraine and are monitoring intelligence updates of potential threats and strengthening their cyber security defences if needed. · Section 172 statement in the accounts provides details on the Company’s collegial approach to stakeholders. No material issues noted from the reviews of service providers in the year. · Key service providers have not changed during 2022. |
| Change | NET RISK: MEDIUM — NO SIGNIFICANT CHANGE IN RISK |
| Risk I – Operational Risks: Accounting and Valuation | |
| Risks & Impact | Accounting records and financial statements could be incorrect or incomplete or fail to comply with current accounting standards. In particular property valuations, income and expenses could be calculated and recorded inaccurately. Limited transactions in the property market could hinder price discovery and could result in out of date valuations. |
| Mitigation | · All properties within the portfolio are independently valued by CBRE Limited on a quarterly basis and their year-end valuations recorded in the Company’s accounts. This is a rigorous assessment process to which the Investment Manager also contributes information. · CBRE, the independent valuer, is required to carry out a physical inspection of each property at least annually. · The Property Valuation Committee reviews thoroughly each quarter this independent valuation process. · Accounting control and reconciliation processes are in place at the Investment Manager. These are subject to regular independent assessment for their suitability and operating effectiveness by an external auditor. · Financial statements are subject to a year end audit by Deloitte LLP. |
| Commentary | · The Property Agent (JLL) took over responsibility for the collection of rent and service charges in 2020. This process is operating smoothly and a high level of communication and collaboration between both parties has continued during 2022. |
| Change | NET RISK: LOW – DECREASED RISK |
| See further details on valuations in note 1(h) on and note 10 to the accounts. | |
| Risk J – Regulatory Risks: Regulatory change | |
| Risks & Impact | The Company could fail to comply with existing legislation or adapt to new or future regulation. In particular, the Company could fail to comply with REIT legislation and ultimately lose its REIT status, thereby incurring substantial tax penalties and reducing the amounts available for distribution to shareholders. Other key relevant legislation and regulations also include the Stock Exchange Listing Rules, Guernsey Company Law and Guernsey Registry requirements. Increased regulation and legislation concerning the environment is likely as the climate continues to change. This could lead to increased compliance costs for the Company and a revaluation of its less energy efficient assets if they become less attractive to investors and tenants. |
| Mitigation | · The Board receives regular updates on relevant regulatory changes from its professional advisors. · The highest corporate governance standards are required from all key service providers and their reputation and performance are reviewed at least annually by the Management Engagement Committee. · The Company has appointed experienced external tax advisors to advise on tax compliance matters. · Processes have been put in place to ensure ongoing compliance with REIT rules following the Company’s conversion to a REIT on 1 July 2018. · The Board reviews quarterly a REIT dashboard confirming compliance with REIT regulations. · The Company engages specialist consultants to advise on environmental matters as part of acquisition due diligence and when considering significant redevelopment work. Consultants are also engaged to monitor environmental credentials throughout the ownership of each property. |
| Commentary | · The Property Income Distributions (PIDs) announced for 2022 are in compliance with REIT rules. · The Company is in compliance with current energy efficiency standards and is actively working towards meeting future stricter criteria. |
| Change | NET RISK: MEDIUM — NO SIGNIFICANT CHANGE IN RISK |
| Risk K – Stakeholder Engagement Risks: Communication | |
| Risks & Impact | A communication breakdown with key stakeholders, particularly shareholders and tenants, could prevent the Company from understanding and responding to their needs and concerns. When required to fulfil certain reporting requirements, the Company could fail to communicate with regulatory authorities about its major shareholders. As a result the Company could potentially suffer financial penalties and reputational damage. |
| Mitigation | · A high degree of engagement is maintained with both shareholders and tenants. · The Investment Manager regularly meets with shareholders and periodically, the Chair of the Board also meets key shareholders. · Quarterly Board reports include detailed shareholder analysis, written and verbal reports from JP Morgan Cazenove, the Company’s Corporate Broker, and feedback from shareholder and analyst meetings where appropriate. · The Investment Manager works closely with tenants to understand better their needs and to remodel and refurbish buildings to fit their evolving requirements. This helps to reduce the risk of vacant properties. · The Company receives professional advice on its reporting obligations regarding major shareholders to ensure that it complies with regulations. |
| Commentary | · Communication with all stakeholders has continued. · Many meetings with shareholders and analysts are a hybrid of face-to-face or virtual meetings and presentations to ensure clear messaging of strategy and to provide accurate and timely updates. · The continuation vote was overwhelmingly passed by proxy votes in October 2022. · Investment Managers have continued to visit properties when possible to engage with tenants. · The Board of Directors will begin to visit properties again, as part of a rolling programme to visit all properties over a four-year period. · Section 172 report highlights the collaborative nature of interaction between the Company and its key stakeholders. |
| Change | NET RISK: LOW — NO SIGNIFICANT CHANGE IN RISK. |
Viability Statement
The Board conducted this review over a five year time horizon, a period thought to be appropriate for a Group investing in commercial property with a long-term investment outlook and is a reasonable timescale over which performance of the Group can be forecast with a degree of accuracy.
The Board also considers viability over the longer term, in particular to key points outside this time frame, such as the due dates for the repayment of long-term debt. In addition, the Board considers viability in relation to continuation votes. A periodic continuation vote held in October 2022 was passed with the next one scheduled for 2027 and seven yearly thereafter. In addition, under the discount control policy of the Company, a continuation vote may be required if the Company’s shares trade at a discount of over 5% for a continuous period of 90 dealing days or more, beginning after the date of the second anniversary of the Company’s most recent continuation vote. The second anniversary of the most recent continuation vote is 25 October 2024. This specific risk is assessed in light of the Company’s most recent continuation vote which was passed with 98.9% of shareholders voting for continuation based on a 77.4% turnout. In addition, feedback from shareholders in the last 12 months has not given rise to any concerns over future continuation votes should they arise.
The Board has considered the nature of the Group’s assets and liabilities and associated cash flows both in a normal environment and also in relation to the current environment as impacted by the emerging geopolitical and economic risks.
The Board has also carried out a robust assessment of the principal risks faced by the Group. The main risks which the Board considers will affect the business model, future performance, solvency, and liquidity, are macroeconomic and geopolitical uncertainties leading to a fall in the capital value of the Company’s property portfolio, tenant failure leading to a fall in dividend cover and ongoing discounts leading to a continuation vote. The Board takes any potential risks to the ongoing success of the Group, and its ability to perform very seriously and works hard to ensure that risks are consistent with the Group’s risk appetite at all times. In assessing the Group’s viability, the Board has carried out thorough reviews of the following:
· Detailed NAV, cash resources and income forecasts, prepared by the Company’s Investment Manager, for a five year period under both normal and stressed conditions;
· The Group’s ability to pay its operational expenses, bank interest, tax and dividends over a five year period under both normal and stressed conditions;
· Future debt repayment dates and debt covenants, in particular those in relation to LTV and interest cover under both normal and stressed conditions;
· Demand for the Company’s shares and levels of premium or discount at which the shares trade to NAV;
· Views of shareholders;
· The valuation and liquidity of the Group’s property portfolio, the Investment Manager’s portfolio strategy for the future and the market outlook and;
· The potential for a further continuation vote in 2024 should the Company’s discount remain at over 5% for 90 business days following the second anniversary of the previous continuation vote (25 October 2022).
The assessment for stressed conditions used a foreseeable severe but plausible scenario which modelled using the following assumptions:
· 46 per cent capital fall in the next two years (based on the largest UK commercial property downturn experienced in 2007–2008) followed by zero growth for the next three years;
· Tenant defaults of 20 per cent for the first year, then 15, 10, 5 per cent for the second to fourth years respectively before returning to normal levels;
· Transfer £326 million of unencumbered properties to lenders to support loan covenants with continued passing of loan tests (£431 million currently available); and
· Current dividend is maintained although in an uncovered dividend position.
Even under this extreme model the Group remains viable.
Despite the uncertainty in the UK regarding the impact of international conflict, the Board has a reasonable expectation, based on the information at the time of writing, that the Group will be able to continue in operation and meet its liabilities as they fall due over the next five years to March 2028. This assessment is based on the results of the reviews mentioned above and also the support of shareholders for the Company’s continuation.
Going Concern
The Group’s strategy and business model, together with the factors likely to affect its future development, performance and position, including principal risks and uncertainties, are set out in the Annual Report and Accounts for the year ended 31 December 2022.
The Directors have reviewed detailed cash flow, income and expense projections in order to assess the Group’s ability to pay its operational expenses, bank interest and dividends for the foreseeable future. The Directors have examined significant areas of possible financial risk including cash and cash requirements and the debt covenants, in particular those relating to LTV and interest cover.
The Directors have not identified any material uncertainties, including risks related to the war in Ukraine or to the current inflationary environment, which might cast significant doubt on the ability of the Group to continue as a going concern for a period of not less than 12 months from the date of the approval of the Annual Report.
The Directors have satisfied themselves that the Group has adequate resources to continue in operational existence for the foreseeable future and the Board believes it is appropriate to adopt the going concern basis in preparing the consolidated financial statements.
DIRECTORS’ RESPONSIBILITY STATEMENT
The Directors are responsible for preparing the Annual Report and the Group Consolidated Financial Statements in accordance with applicable Guernsey law and those International Financial Reporting Standards (“IFRS”) as adopted by the European Union. They are also responsible for ensuring that the Annual Report includes information required by the Rules of the UK Listing Authority.
In preparing those Group Consolidated Financial Statements the Directors are required to:
· Select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;
· Make judgement and estimates that are reasonable and prudent;
· Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
· Provide additional disclosures when compliance with the specific requirements in IFRS as adopted by the European Union is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance;
· State that the Group has complied with IFRS as adopted by the European Union, subject to any material departures disclosed and explained in the Group Consolidated Financial Statements; and
· Prepare the Group Consolidated Financial Statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business.
The Directors confirm that they have complied with the above requirements in preparing the Group Consolidated Financial Statements.
The Directors are responsible for keeping proper accounting records that are sufficient to show and explain, the Group’s transactions and disclose with reasonable accuracy at any time, the financial position of the Group and enable them to ensure that the Group Consolidated Financial Statements comply with The Companies (Guernsey) Law 2008.
The Directors are responsible for ensuring that the Group complies with the provisions of the Listing Rules and the Disclosure Rules and Transparency Rules of the UK Listing Authority which, with regard to corporate governance, require the Group to disclose how it has applied the principles, and complied with the provisions, of the AIC Code on Corporate Governance applicable to the Group.
The maintenance and integrity of the Company’s website is the responsibility of the Directors through its Investment Manager; the work carried out by the auditors does not involve considerations of these matters and, accordingly, the auditors accept no responsibility for any change that may have occurred to the Consolidated Financial Statements since they were initially presented on the website. Legislation in Guernsey governing the preparation and dissemination of the consolidated financial statements may differ from legislation in other jurisdictions.
Responsibility Statement of the Directors in respect of the Consolidated Annual Report under the Disclosure and Transparency Rules
The Directors each confirm to the best of their knowledge that:
· The Group Consolidated Financial Statements, prepared in accordance with the IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and comply with The Companies (Guernsey) Law 2008; and;
· The management report, which is incorporated into the Strategic Report, Directors’ Report and Investment Manager’s Review, includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that they face.
Statement under the UK Corporate Governance Code
The Directors each confirm to the best of their knowledge and belief that the Annual Report and Consolidated Financial Statements taken as a whole are fair, balanced and understandable and provide the information necessary to assess the Group’s position and performance, business model and strategy.
On behalf of the Board
Ken McCullagh
Director
31 March 2023
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME
For the year ended 31 December 2022
|
Notes |
Year ended
31 December 2022 £000 |
Year ended
31 December 2021 £000 |
|
| REVENUE | |||
| Rental income | 2 | 66,930 | 58,307 |
| Impairment reversal on trade receivables | 256 | 412 | |
| Service charge income | 3 | 6,451 | 6,063 |
| (Losses)/Gains on investment properties | 10 | (263,090) | 201,753 |
| Loss on liquidation of subsidiaries | (117) | - | |
| Total (expense) / income | (189,570) | 266,535 | |
|
EXPENDITURE |
|||
| Investment management fee | 4 | (8,617) | (8,500) |
| Direct property expenses | 5 | (6,522) | (6,789) |
| Service charge expenses | 5 | (6,451) | (6,063) |
| Other expenses | 5 | (2,299) | (1,783) |
| Total expenditure | (23,889) | (23,135) | |
| Operating (loss)/profit before finance costs | (213,459) | 243,400 | |
|
FINANCE COSTS |
|||
| Finance costs | 6 | (9,181) | (7,283) |
| Interest income | 311 | 116 | |
| Net finance costs | (8,870) | (7,167) | |
| Operating (loss)/profit after finance costs | (222,329) | 236,233 | |
|
Net (loss)/profit from ordinary activities before taxation |
(222,329) |
236,233 |
|
| Taxation on profit/(loss) on ordinary activities | 7 | - | - |
| Net (loss)/profit for the year | (222,329) | 236,233 | |
| Total comprehensive (deficit)/income for the year | (222,329) | 236,233 | |
| Basic and diluted earnings per share | 9 | (17.11)p | 18.18p |
| EPRA earnings per share | 9 | 3.15p | 2.65p |
The accompanying notes are an integral part of this statement.
All of the profit and total comprehensive deficit for the year is attributable to the owners of the Company. All items in the above statement derive from continuing operations.
CONSOLIDATED BALANCE SHEET
As at 31 December 2022
| Year ended | Year ended | ||
|
Notes |
31 December 2022
£000 |
31 December 2021
£000 |
|
| NON-CURRENT ASSETS | |||
| Investment properties | 10 | 1,275,610 | 1,508,368 |
| 1,275,610 | 1,508,368 | ||
|
CURRENT ASSETS |
|||
| Trade and other receivables | 12 | 52,648 | 50,763 |
| Cash and cash equivalents | 30,861 | 42,121 | |
| 83,509 | 92,884 | ||
| Total assets | 1,359,119 | 1,601,252 | |
|
CURRENT LIABILITIES |
|||
| Trade and other payables | 13 | (31,714) | (27,698) |
| (31,714) | (27,698) | ||
|
NON-CURRENT LIABILITIES |
|||
| Bank loans | 14 | (291,686) | (248,326) |
| Total liabilities | (323,400) | (276,024) | |
| Net assets | 1,035,719 | 1,325,228 | |
|
REPRESENTED BY |
|||
| Share capital | 15 | 539,872 | 539,872 |
| Special distributable reserve | 542,472 | 568,891 | |
| Capital reserve | (46,625) | 216,465 | |
| Revenue reserve | - | - | |
| Equity shareholders’ funds | 1,035,719 | 1,325,228 | |
| Net asset value per share | 16 | 79.7p | 102.0p |
The accompanying notes are an integral part of this statement.
The accounts were approved and authorised for issue by the Board of Directors on 31 March 2023 and signed on its behalf by:
Ken McCullagh
Director
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2022
|
Share Capital |
Special
Distributable Reserve |
Capital Reserve |
Revenue Reserve |
Equity
shareholders’ funds |
||
| Notes | £000 | £000 | £000 | £000 | £000 | |
| At 1 January 2022 | 539,872 | 568,891 | 216,465 | - | 1,325,228 | |
| Total comprehensive deficit | - | - | - | (222,329) | (222,329) | |
| Dividends paid | 8 | - | - | - | (67,180) | (67,180) |
| Transfer in respect of loss on investment property | 10 |
- |
- | (263,090) | 263,090 | - |
| Transfer from special distributable reserve | - | (26,419) | - | 26,419 | - | |
| As 31 December 2022 | 539,872 | 542,472 | (46,625) | - | 1,035,719 | |
For the year ended 31 December 2021
|
Share Capital |
Special
Distributable Reserve |
Capital Reserve |
Revenue Reserve |
Equity
shareholders’ funds |
||
| Notes | £000 | £000 | £000 | £000 | £000 | |
| At 1 January 2021 | 539,872 | 572,392 | 14,712 | - | 1,126,976 | |
| Total comprehensive income | - | - | - | 236,233 | 236,233 | |
| Dividends paid | 8 | - | - | - | (37,981) | (37,981) |
| Transfer in respect of gains on Investment property | 10 |
- |
- |
201,753 | (201,753) | - |
| Transfer from special distributable reserve | - | (3,501) | - | 3,501 | - | |
| As 31 December 2021 | 539,872 | 568,891 | 216,465 | - | 1,325,228 | |
The accompanying notes are an integral part of this statement.
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2022
| Year ended | Year ended | ||
|
Notes |
31 December 2022
£000 |
31 December 2021
£000 |
|
| CASH FLOWS FROM OPERATING ACTIVITIES | |||
| Net (loss)/profit for the year before taxation | (222,329) | 236,233 | |
| Adjustments for: | |||
| Losses/(gains) on investment properties | 10 | 263,090 | (201,753) |
| Loss on liquidation of subsidiaries | 116 | - | |
| Movement in lease incentives | 10 | (2,360) | (5,877) |
| Movement in provision for bad debts | 12 | 256 | 412 |
| Increase in operating trade and other receivables | 219 | 2,134 | |
| Increase/(Decrease) in operating trade and other payables | 4,016 | (464) | |
| Finance costs | 6 | 9,181 | 7,283 |
| Cash generated by operations | 52,189 | 37,968 | |
| Tax paid | - | - | |
| Net cash inflow from operating activities | 52,189 | 37,968 | |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|||
| Purchase of investment properties | 10 | (8,304) | (179,861) |
| Sale of investment properties | 25,609 | 74,181 | |
| Capital expenditure | 10 | (48,517) | (18,077) |
| Net cash outflow from operating activities | (31,212) | (123,757) | |
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|||
| Facility fee charges from bank financing | (727) | (1,020) | |
| Dividends paid | 8 | (67,180) | (37,981) |
| Bank loan drawdown | 14 | 43,000 | 50,000 |
| Bank loan interest paid | (7,166) | (5,831) | |
| Loan facility set up costs | (164) | - | |
| Net cash (outflow)/inflow from financing activities | (32,237) | 5,168 | |
| Net decrease in cash and cash equivalents | (11,260) | (80,621) | |
| Opening cash and cash equivalents | 42,121 | 122,742 | |
| Closing cash and cash equivalents | 30,861 | 42,121 | |
|
REPRESENTED BY |
|||
| Cash at bank | 21,321 | 22,879 | |
| Money market funds | 9,540 | 19,242 | |
| 30,861 | 42,121 | ||
The accompanying notes are an integral part of this statement.
Notes to the Accounts
1. ACCOUNTING POLICIES
A summary of the principal accounting policies, all of which have been applied consistently throughout the
year, is set out below.
(a) Basis of Accounting
The consolidated accounts have been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board (the IASB), interpretations issued by the IFRS Interpretations Committee that remain in effect, and to the extent that they have been adopted by the European Union, applicable legal and regulatory requirements of Guernsey law and the Listing Rules of the UK Listing Authority. The audited Consolidated Financial Statements of the Group have been prepared under the historical cost convention as modified by the measurement of investment property. The consolidated financial statements are presented in pound sterling.
The Directors have considered the basis of preparation of the accounts and believe that it is still appropriate for the accounts to be prepared on the going concern basis.
(b) Significant Accounting Judgements, Estimates and Assumptions
The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions that affect the amounts recognised in the financial statements. However, uncertainty about these judgements, assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future. In applying the Group’s accounting policies, there were no critical accounting judgements.
Key estimation uncertainties
Fair value of investment properties: Investment property is stated at fair value as at the balance sheet date as set out in note 1(h) and note 10 to these accounts.
The determination of the fair value of investment properties requires the use of estimates such as future cash flows from the assets and unobservable inputs such as capitalisation rates. The estimate of future cash flows includes consideration of the repair and condition of the property, lease terms, future lease events, as well as other relevant factors for the particular asset.
These estimates are based on local market conditions existing at the balance sheet date.
Provision for bad debts are also a key estimation uncertainty. These are measured with reference to amounts included as income at the year end but not yet collected. In assessing whether the credit risk of an asset takes into account qualitative and quantitative reasonable and supportable forward- looking information.
Each individual rental income debtor is reviewed to assess whether it is believed there is a probability of default and expected credit loss given the knowledge and intelligence of the individual tenant and an appropriate provision made. Further analysis with respect to the bad debt position has been set out in notes 1(m), 18 (credit risk) and 12 to these accounts.
(c) Basis of Consolidation
The consolidated accounts comprise the accounts of the Company and its subsidiaries drawn up to 31 December each year. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. The Jersey Property Unit Trusts (“JPUTS”) are all controlled via voting rights and hence those entities are consolidated.
(d) Functional and Presentation Currency
Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the Company and its subsidiaries operate (“the functional currency”) which is pounds sterling. The financial statements are also presented in pounds sterling. All figures in the financial statements are rounded to the nearest thousand unless otherwise stated.
(e) Revenue Recognition
Rental income, excluding VAT, arising from operating leases (including those containing stepped and fixed rent increases) is accounted for in the Consolidated Statement of Comprehensive Income on a straight line basis over the lease term. Lease premiums paid and rent-free periods granted, are recognised as assets and are amortised over the non-cancellable lease term.
IFRS 15 requires the Group to determine whether it is a principal or an agent when goods or services are transferred to a customer. An entity is a principal if the entity controls the promised good or service before the entity transfers the goods or services to a customer.
An entity is an agent if the entity’s performance obligation is to arrange for the provision of goods and services by another party. Any leases entered into between the Group and a tenant require the Partnership to provide ancillary services to the tenant such as maintenance works etc, therefore these service charge obligations belong to the Group. However, to meet this obligation the Group appoints a property agent, Jones Lang Lasalle Inc “JLL” and directs it to fulfil the obligation on its behalf. The contract between the Group and the Managing Agent creates both a right to services and the ability to direct those services. This is a clear indication that the Group operates as a principal and the Managing Agent operates as an agent. Therefore it is necessary to recognise the gross service charge revenue and expenditure billed to tenants as opposed to recognising the net amount.
Interest income is accounted on an accruals basis and included in operating profit.
(f) Expenses
Expenses are accounted for on an accruals basis. The Group’s investment management and administration fees, finance costs and all other expenses are charged through the Consolidated Statement of Comprehensive Income.
(g) Taxation
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date.
Current income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss. Positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation are periodically evaluated and provisions established where appropriate.
Deferred income tax is provided using the liability method on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which deductible temporary differences, carried forward tax credits or tax losses can be utilised.
The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. In determining the expected manner of realisation of an asset the Directors consider that the Group will recover the value of investment property through sale. Deferred income tax relating to items recognised directly in equity is recognised in equity and not in profit or loss.
(h) Investment Properties
Investment properties are initially recognised at cost, being the fair value of consideration given, including transaction costs associated with the investment property. Any subsequent capital expenditure incurred in improving investment properties is capitalised in the period during which the expenditure is incurred and included within the book cost of the property.
After initial recognition, investment properties are measured at fair value, with the movement in fair value recognised in the Consolidated Statement of Comprehensive Income and transferred to the Capital Reserve. Fair value is based on the external valuation provided by CBRE Limited, chartered surveyors, at the Balance Sheet date. The assessed fair value is reduced by the carrying amount of any accrued income resulting from the spreading o lease incentives and/or minimum lease payments.
On derecognition, gains and losses on disposals of investment properties are recognised in the Statement of Comprehensive Income and transferred to the Capital Reserve.
Recognition and derecognition occurs when the significant risks and rewards of ownership of the properties have transferred between a willing buyer and a willing seller.
Investment property is transferred to current assets held for sale when it is expected that the carrying amount will be recovered principally through sale rather than from continuing use. For this to be the case, the property must be available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such property and its sale must be highly probable.
The Group has entered into forward funding agreements with third party developers in respect of certain properties. Under these agreements the Group will make payments to the developer as construction progresses. The value of these payments is assessed and certified by an expert. Investment properties are recognised for accounting purposes upon completion of contract. Properties purchased under forward funding contracts are recognised at the lower of the certified value to date or a corresponding residual appraisal valuation. The residual appraisal method estimates the fair value of the completed property less estimated costs to completion and a risk premium. As a development approaches completion, within three to six months of practical completion, an income capitalisation method will be used at that stage with any remaining cost commitments being deducted to give the fair value.
Management considers each property transaction separately, with an assessment carried out to determine whether the transaction represents an asset acquisition or business combination. In making its judgement on whether the acquisition of property through the purchase of a corporate vehicle represents an asset acquisition or business combination, management consider whether the integrated set of assets and activities acquired contain both input and processes along with the ability to create outputs.
(i) Operating Lease Contracts
The Group has entered into commercial property leases on its investment property portfolio.
The Group as lessor
When the Group acts as a lessor, it determines at lease commencement whether each lease is a finance lease or an operating lease. The Group has assessed all leases where it acts as a lessor, based on an evaluation of the terms and conditions of the arrangements, and has determined that the Group retains all the significant risks and rewards of ownership of these properties therefore, the leases are accounted for as operating leases. Where the Group does not retain all the significant risks and rewards of ownership these leases would be classified as finance leases.
Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense on a straight-line basis over the lease term.
The Group as intermediate lessor
When the Group is an intermediate lessor, it accounts for its interest in the head lease and the sub-lease separately. The Group has assessed all leases where it acts as an intermediate lessor, based on an evaluation of the terms and conditions of the arrangements, and has identified that all head leases have low value at the lease commencement date.
The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets. The Group classifies the sub-leases as operating leases and accounts for the lease payments on a straight-line basis over the lease terms.
(j) Share Issue Expenses
Incremental external costs directly attributable to the issue of shares that would otherwise have been avoided are written off to capital reserves.
(k) Segmental Reporting
The Directors are of the opinion that the Group is engaged in a single segment of business being property investment in the United Kingdom. The Directors are of the opinion that the four property sectors analysed throughout the financial statements constitute this single segment, and are not separate operating segments as defined by IFRS 8 Operating Segments.
(l) Cash and Cash Equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits, and other short-term highly liquid investments readily convertible within three months or less to known amounts of cash and subject to insignificant risk of changes in value. Cash invested in the abrdn global liquidity fund can be accessed on the same business day.
(m) Trade and Other Receivables
Trade receivables are recognised initially at their transaction price unless they contain a significant financing component, when they are recognised at fair value. Trade receivables are subsequently measured at amortised cost using the effective interest method.
Other receivables are initially recognised at fair value plus any directly attributable transaction costs and subsequently measured at amortised cost using the effective interest method.
The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets.
The Group loss allowance is based on expected credit loss as calculated using the “provision matrix” approach and a forward looking component based on individual tenant profiles. The Group considers a financial asset to be in default when the borrower is unlikely to pay its credit obligations to the Group in full. The Group writes off trade receivables when there is no reasonable expectation of recovery.
A provision for impairment of trade receivables is established where the Investment Manager has indicated concerns over the recoverability of arrears based upon their individual assessment of all outstanding balances which incorporates forward looking information. Given this detailed approach, a collective assessment methodology applying a provision matrix to determine expected credit losses is not used. The amount of the provision is recognised in the Statement of Financial Position and any changes in provision recognised in the Statement of Comprehensive Income.
(n) Trade and Other Payables
Rental income received in advance represents the pro-rated rental income invoiced before the year end that relates to the period post the year end. VAT payable is the difference between output and input VAT at the year end. Other payables are accounted for on an accruals basis and include amounts which are due for settlement by the Group as at the year end and are generally carried at the original invoice amount. An estimate is made for any services incurred at the year end but for which no invoice has been received.
(o) Reserves
Share Capital
This represents the proceeds from issuing ordinary shares.
Special Distributable Reserve
The special reserve is a distributable reserve to be used for all purposes permitted under Guernsey law, including the buyback of shares and the payment of dividends. Dividends can be paid from all of the below listed reserves.
Capital Reserve
The following are accounted for in this reserve:
· Gains and losses on the disposal of investment properties;
· Increases and decreases in the fair value of investment properties held at the year end.
Revenue Reserve
Any surplus arising from the net profit on ordinary activities after taxation and payment of dividends is taken to this reserve, with any deficit charged to the special distributable reserve.
Treasury Share Reserve
This represents the cost of shares bought back by the Company and held in Treasury. The balance within this reserve is currently nil.
(p) Interest-bearing Borrowings
All bank loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of arrangement costs associated with the borrowing. After initial recognition, all interest-bearing loans and borrowings are subsequently measured at amortised cost. Amortised cost is calculated by taking into account any loan arrangement costs and any discount or premium on settlement.
On maturity, bank loans are recognised at par, which is equivalent to amortised cost. Bank loans redeemed before maturity are recognised at amortised cost with any charges associated with early redemptions being taken to the Statement of Comprehensive Income.
(q) New and revised IFRS Accounting Standards in issue but not yet effective
At the date of authorisation of these financial statements, the Group has not applied the following new and revised IFRS Accounting Standards that have been issued but are not yet effective.
Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures — Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
The amendments to IFRS 10 and IAS 28 deal with situations where there is a sale or contribution of assets between an investor and its associate or joint venture. Specifically, the amendments state that gains or losses resulting from the loss of control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture that is accounted for using the equity method, are recognised in the parent’s profit or loss only to the extent of the unrelated investors’ interests in that associate or joint venture. Similarly, gains and losses resulting from the remeasurement of investments retained in any former subsidiary (that has become an associate or a joint venture that is accounted for using the equity method) to fair value are recognised in the former parent’s profit or loss only to the extent of the unrelated investors’ interests in the new associate or joint venture.
The effective date of the amendments has yet to be set by the IASB; however, earlier application of the amendments is permitted.
The directors of the Group anticipate that the application of these amendments may have an impact on the Group’s consolidated financial statements in future periods should such transactions arise.
Amendments to IAS 1 Presentation of Financial Statements — Classification of Liabilities as Current or Non-current
The amendments to IAS 1 published in January 2020 affect only the presentation of liabilities as current or non-current in the statement of financial position and not the amount or timing of recognition of any asset, liability, income or expenses, or the information disclosed about those items.
The amendments clarify that the classification of liabilities as current or non-current is based on rights that are in existence at the end of the reporting period, specify that classification is unaffected by expectations about whether an entity will exercise its right to defer settlement of a liability, explain that rights are in existence if covenants are complied with at the end of the reporting period, and introduce a definition of ‘settlement’ to make clear that settlement refers to the transfer to the counterparty of cash, equity instruments, other assets or services.
The amendments are applied retrospectively for annual periods beginning on or after 1 January 2023, with early application permitted. The IASB is currently considering further amendments to the requirements in IAS 1 on classification of liabilities as current or non-current, including deferring the application of the January 2020 amendments.
The directors of the Group anticipate that the application of these amendments may have an impact on the Group’s consolidated financial statements in future periods.
Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 Making Materiality Judgements — Disclosure of Accounting Policies
The amendments change the requirements in IAS 1 with regard to disclosure of accounting policies. The amendments replace all instances of the term significant accounting policies’ with ‘material accounting policy information’. Accounting policy information is material if, when considered together with other information included in an entity’s financial statements, it can reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements.
The supporting paragraphs in IAS 1 are also amended to clarify that accounting policy information that relates to immaterial transactions, other events or conditions is immaterial and need not be disclosed. Accounting policy information may be material because of the nature of the related transactions, other events or conditions, even if the amounts are immaterial. However, not all accounting policy information relating to material transactions, other events or conditions is itself material.
The IASB has also developed guidance and examples to explain and demonstrate the application of the ‘four-step materiality process’ described in IFRS Practice Statement 2.
The amendments to IAS 1 are effective for annual periods beginning on or after 1 January 2023, with earlier application permitted and are applied prospectively. The amendments to IFRS Practice Statement 2 do not contain an effective date or transition requirements.
Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors — Definition of Accounting Estimates
The amendments replace the definition of a change in accounting estimates with a definition of accounting estimates. Under the new definition, accounting estimates are “monetary amounts in financial statements that are subject to measurement uncertainty”.
The definition of a change in accounting estimates was deleted. However, the IASB retained the concept of changes in accounting estimates in the Standard with the following clarifications:
· a change in accounting estimate that results from new information or new developments is not the correction of an error; and
· the effects of a change in an input or a measurement technique used to develop an accounting estimate are changes in accounting estimates if they do not result from the correction of prior period errors;
The IASB added two examples (Examples 4–5) to the Guidance on implementing IAS 8, which accompanies the Standard. The IASB has deleted one example (Example 3) as it could cause confusion in light of the amendments.
The amendments are effective for annual periods beginning on or after 1 January 2023 to changes in accounting policies and changes in accounting estimates that occur on or after the beginning of that period, with earlier application permitted.
IFRIC: Lessor forgiveness of lease payments (IFRS 9 ‘Financial Instruments’ and IFRS 16 ‘Leases’)
Concessions might take a variety of forms, including payment holidays and deferral of lease payments. In May 2021, the IASB issued an amendment to IFRS 16 which provided lessees with an option to treat qualifying rent concessions in the same way as they would if they were not lease modifications. However, the amendments do not apply to lessors. In October 2022, the IFRS Interpretations Committee issued an Agenda Decision that clarified the accounting for rent concessions by lessors. Lessors must apply IFRS 9 to a rent concession, or a part of a rent concession, that is a forgiveness of rent payments that are recognised as an operating lease receivable on the balance sheet. This includes applying the expected credit loss model to the operating lease receivables in periods prior to the forgiveness, considering expectations around any forgiveness of these amounts. Lessors must apply IFRS 16 lease modification accounting to a rent concession, or a part of a rent concession, that forgives lease payments not yet recognized as an operating lease receivable.
The amendment is effective immediately, the directors of the Group is determining the impact but don’t expect it to be material.
Annual Improvements to IFRS
The Group has adopted the amendments included in the Annual Improvements to IFRS Accounting Standards 2018–2020 Cycle for the first time in the current year. The Annual improvements include amendments to four standards.
IFRS 9 Financial Instruments
The amendment clarifies that in applying the ‘10 per cent’ test to assess whether to derecognise a financial liability, an entity includes only fees paid or received between the entity (the borrower) and the lender, including fees paid or received by either the entity or the lender on the other’s behalf.
IFRS 16 Leases
The amendment removes the illustration of the reimbursement of leasehold improvements.
2. RENTAL INCOME
|
Year ended
31 December 2022 £000 |
Year ended
31 December 2021 £000 |
|
| Rental Income | 66,930 | 58,307 |
3. SERVICE CHARGE INCOME
|
Year ended
31 December 2022 £000 |
Year ended
31 December 2021 £000 |
|
| Service Charge Income | 6,451 | 6,063 |
Service charges on rented properties are detailed in note 5.
Service charge expenses are recharged to tenants.
The service charge paid by the Group in respect of void units was £0.7 million (2021: £0.7 million) and is included within note 5 Direct Property Expenses.
4. INVESTMENT MANAGEMENT FEES
|
Year ended
31 December 2022 £000 |
Year ended
31 December 2021 £000 |
|
| Investment Management Fees | 8,617 | 8,500 |
The Group’s Investment Manager is abrdn Fund Managers Limited.
From 1 April 2022, the Investment Manager will receive an annual fee from the Group at a revised rate of 0.525 per cent (2021: 0.60 per cent) on Total Assets up to £1.75 billion, excluding any cash held over £50 million. The fee rate for Total Assets over £1.75 billion, adjusted for the £50 million cash tier, will remain at 0.475 per cent.
In 2022, the Company paid the Investment Manager £396,000 (2021: £396,000) for marketing services which is included in other expenses.
The Investment Management agreement is terminable by either of the parties to it on 12 months’ notice.
5. EXPENSES
| DIRECT PROPERTY EXPENSES |
Year ended
31 December 2022 £000 |
Year ended
31 December 2021 £000 |
| Direct property expenses of let rental units | 4,951 | 4,927 |
| Direct property expenses of vacant units | 675 | 670 |
| Bad debts recognised during the year, net | 896 | 1,192 |
| 6,522 | 6,789 | |
| Service charge expenses | 6,451 | 6,063 |
| OTHER EXPENSES | ||
| Professional fees | 705 | 605 |
| Abortive transaction costs | 380 | - |
| Valuation fees* | 152 | 131 |
| Directors’ fees and expenses | 263 | 326 |
| Marketing fees | 396 | 396 |
| Administration and company secretarial fees | 161 | 115 |
| Regulatory fees | 92 | 80 |
| Auditor’s remuneration for: | ||
| Statutory audit | 150 | 130 |
| Non audit services | - | - |
| 2,299 | 1,783 |
*Valuation fees are charged at the agreed basis being, 0.0022% of valuation plus a cash flow fee per property of £75 per quarter. Fees are billed quarterly consistent with the valuation cycle. The independent valuation agreement is effective from November 2016, initially for 5 years, moving to a quarterly rolling basis.
6. FINANCE COSTS
|
Year ended
31 December 2022 £000 |
Year ended
31 December 2021 £000 |
|
| Interest on principal loan amount | 7,922 | 5,835 |
| Facility fees | 735 | 963 |
| Amortisation of loan set up fees | 524 | 485 |
| 9,181 | 7,283 |
7. TAXATION
| Year ended | Year ended | |
| 31 December 2022 | 31 December 2021 | |
| £000 | £000 | |
| NET (LOSS) PROFIT FROM ORDINARY ACTIVITIES BEFORE TAX | (222,329) | 236,233 |
| UK Corporation tax at a rate of 19 per cent (2021: 19%) | (42,243) | 44,884 |
| Effect of: | ||
| Capital losses/(gains) on Investment properties not taxable | 49,987 | (38,333) |
| Income not taxable, including interest receivable | (59) | (22) |
| UK REIT exemption on net income | (7,685) | (6,529) |
| Total tax charge | - | - |
The Group migrated tax residence to the UK and elected to be treated as a UK REIT with effect from 1 July 2018. As a UK REIT, the income profits of the Group’s UK property rental business are exempt from corporation tax as are any gains it makes from the disposal of its properties, provided they are not held for trading or sold within three years of completion of development. The Group is otherwise subject to UK corporation tax at the prevailing rate. From 1 April 2023, the rate of UK Corporation Tax will increase to 25%.
As the principal company of the REIT, the Company is required to distribute at least 90% of the income profits of the Group’s UK property rental business. There are a number of other conditions that also are required to be met by the Company and the Group to maintain REIT tax status. These conditions were met in the period and the Board intends to conduct the Group’s affairs such that these conditions continue to be met for the foreseeable future. Accordingly, deferred tax is no longer recognised on temporary differences relating to the property rental business or income tax losses previously built up.
The Company and its subsidiaries are exempt from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. No charge to Guernsey taxation will arise on capital gains.
8. DIVIDENDS AND PROPERTY INCOME DISTRIBUTIONS (PID) GROSS OF INCOME TAX
|
Year ended
31 December 2022 £000 |
Year ended
31 December 2021 £000 |
|
| Interim dividends paid per ordinary share: | ||
| 2021 Fourth interim: property income dividend (“PID”) of 0.466p per share, Non_PID of 0.284p per share paid 25 February 2022 (2020 Fourth interim: PID of 0.460p per share) |
9,746 | 5,977 |
| 2021 Fifth interim of nil (2020 Fifth interim: PID of 0.531p per share) |
- | 6,900 |
| 2022 First interim: PID of 0.800p paid 27 May 2022 (2021 First interim: PID of 0.644p per share) |
10,395 | 8,368 |
| 2022 Second interim: PID of 0.850p per share paid 31 August 2022 (2021 Second interim: PID of 0.644p per share) |
11,045 | 8,368 |
| 2022 Special dividend: 1.92p per share paid 31 August 2022 | 24,949 | - |
| 2022 Third interim: PID of 0.500p per share and Non-PID of 0.350p per share paid 30 November 2022 (2021 Third interim: PID of 0.423p per share, Non-PID of 0.221p per share) |
11,045 | 8,368 |
| 67,180 | 37,981 |
A fourth interim, PID of 0.680p per share, Non-PID of 0.170p per share was paid on 28 February 2023 to shareholders on the register on 10 February 2023. Although this payment relates to the year ended 31 December 2022, under International Financial Reporting Standards it will be accounted for in the year ending 31 December 2023.
9. BASIC AND DILUTED EARNINGS PER SHARE
|
Year ended
31 December 2022 |
Year ended
31 December 2021 |
|
| Weighted average number of shares | 1,299,412,465 | 1,299,412,465 |
| Net (Loss)/Profit (£) | (222,329,000) | 236,233,000 |
| Basic and diluted Earnings per share (pence) | (17.11) | 18.18 |
| EPRA earnings per share (pence) | 3.15 | 2.65 |
As there are no dilutive instruments outstanding, basic and diluted earnings per share are identical. Earnings per share are based on the net profit of the year divided by the weighted average number of Ordinary Shares in issue during the period.
10. INVESTMENT PROPERTIES
| FREEHOLD AND LEASEHOLD PROPERTIES |
Year ended 31 December 2022
£000 |
Year ended 31 December 2021
£000 |
| Opening valuation | 1,508,368 | 1,182,812 |
| Purchase at cost | 6,934 | 179,861 |
| Capital expenditure | 48,517 | 18,077 |
| (Loss)/Gain on revaluation to market value | (264,295) | 209,635 |
| Disposals at prior year valuation | (21,554) | (76,140) |
| Lease incentive movement | (2,360) | (5,877) |
| Total fair value at 31 December | 1,275,610 | 1,508,368 |
| (LOSSES)/GAINS ON INVESTMENT PROPERTIES AT FAIR VALUE COMPRISE | ||
| Valuation (losses)/gains | (264,295) | 209,635 |
| Movement in provision for lease incentives | (2,360) | (5,877) |
| Gain/(loss) on disposal | 3,565 | (2,005) |
| (263,090) | 201,753 | |
| GAIN/(LOSS) ON INVESTMENT PROPERTIES SOLD | ||
| Original cost of investment properties | (22,972) | (76,483) |
| Sale proceeds less sales costs | 25,119 | 74,478 |
| Gain/(Loss) on investment properties sold | 2,147 | (2,005) |
| Recognised in previous periods | (1,418) | (2,285) |
| Recognised in current period | 3,565 | 280 |
| 2,147 | (2,005) |
Given the objectives of the Group and the nature of its investments, the Directors believe that the Group has only one asset class, that of Commercial Property.
CBRE Limited, (the “Property Valuer”) completed a valuation of Group investment properties as at 31 December 2022 on the basis of fair value in accordance with the requirements of the Royal Institution of Chartered Surveyors (RICS) ‘RICS Valuation — Global Standards (incorporating the International Valuation Standards) and the UK national supplement (the ‘Red Book’). For most practical purposes there would be no difference between Fair Value (as defined in IFRS 13) and Market Value.
The Property Valuer, in valuing the portfolio, is acting as an ‘External Valuer’, as defined in the Red Book, exercising independence and objectivity. The Property Valuer’s opinion of Fair Value has been primarily derived using comparable recent market transactions in order to determine the price that would be received to sell an asset in an orderly transaction between market participants at the valuation date. The fair value of these investment properties amounted to £1,308,025,000 (2021: £1,537,450,000).
The difference between the fair value and the value per the consolidated balance sheet at 31 December 2022 consists, in the main, to accrued income relating to the pre-payment for rent-free periods recognised over the life of the lease totalling £32,541,000 (2021: £30,181,000) which is separately recorded in the accounts as a current asset. In addition a balance of £126,000 (2021: £321,000) has been offset against the lease incentive representing the reduction in the lease incentive provided for as part of the provision for bad debts giving a net lease incentive balance of £32,415,000 (2021: £29,860,000).
The Group has entered into leases on its property portfolio as lessor (See note 20 for further information).
- No one property accounts for more than 15 per cent of the gross assets of the Group.
- All leasehold properties have more than 60 years remaining on the lease term.
- There are no restrictions on the realisability of the Group’s investment properties or on the remittance of income or proceeds of disposal.
However, the Group’s investments comprise UK commercial property, which may be difficult to realise.
The property portfolio’s fair value as at 31 December 2022 has been prepared adopting the following assumptions:
- That, where let, the Estimated Net Annual Rent (after void and rent free period assumptions) for each property, or part of a property, reflects the terms of the leases as at the date of valuation. If the property, or parts thereof, are vacant at the date of valuation, the rental value reflects the rent the Property Valuer considers would be obtainable on an open market letting as at the date of valuation.
- The Property Valuer has assumed that, where let, all rent reviews are to be assessed by reference to the estimated rental value calculated in accordance with the terms of the lease. Also there is the assumption that all tenants will meet their obligations under their leases and are responsible for insurance, payment of business rates, and all repairs, whether directly or by means of a service charge.
- The Property Valuer has not made any adjustments to reflect any liability to taxation that may arise on disposal, nor any costs associated with disposals incurred by the owner.
- The Property Valuer assumes an initial yield in the region of 2.33 to 9.90 per cent, based on market evidence. For the majority of properties, the Property Valuer assumes a reversionary yield in the region of 3.89 to 13.87 per cent.
- The Property Valuer takes account of deleterious materials included in the construction of the investment properties in arriving at its estimate of Fair Value when the Investment Manager advises of the presence of such materials.
The majority of the leases are on a full repairing basis and as such the Group is not liable for costs in respect of repairs or maintenance to its investment properties.
The following disclosure is provided in relation to the adoption of IFRS 13 Fair Value Measurement. All properties are deemed Level 3 for the purposes of Fair Value measurement and the current use of each property is considered the highest and best use. There have been no transfers from Level 3 in the year. The Fair Value of completed investment property is determined using a yield methodology. Under this method, a property’s Fair Value is estimated using explicit assumptions regarding the benefits and liabilities of ownership over the asset’s life including an exit or terminal value. As an accepted method within the income approach to valuation, this method involves the projection of a series of cash flows on a real property interest. To this projected cash flow series, an appropriate, market-derived discount rate (capitalisation rate) is applied to establish the present value of the cash inflows associated with the real property.
The duration of the cash flow and the specific timing of inflows and outflows are determined by events such as rent reviews, lease renewal and related void or rent-free periods, re-letting, redevelopment, or refurbishment. The appropriate duration is typically driven by market behaviour that is a characteristic of the class of property. In the case of investment properties, periodic cash flow is typically estimated as gross income less vacancy, non-recoverable expenses, collection losses, lease incentives, maintenance cost, agent and commission costs and other operating and management expenses. The series of periodic net cash inflows, along with an estimate of the terminal value anticipated at the end of the projection period, is then discounted. Set out below are the valuation techniques used for each property sector plus a description and quantification of the key unobservable inputs relating to each sector. There has been no change in valuation technique in the year.
Fair value by sector as at 31 December 2022
| Sector | Fair Value at 31 December 2022 (£m) | Valuation Techniques | Unobservable inputs | Range (weighted average) |
| Industrial | 773.4 | Yield methodology | Annual rent per sq ft Capitalisation rate |
£5–15 (£7) 4.9%–7.7% (5.6%) |
| Office | 171.2 | Yield methodology | Annual rent per sq ft Capitalisation rate |
£7–53 (£23) 4.0%–8.5% (6.6%) |
| Retail | 180.3 | Yield methodology | Annual rent per sq ft Capitalisation rate |
£12–30 (£19) 4.8%–6.5% (5.8%) |
| Alternatives | 183.1 | Yield methodology | Annual rent per sq ft Capitalisation rate |
£0–19 (£16) 6.3%–10.5% (4.7%) |
Fair value by sector as at 31 December 2021
| Sector | Fair Value at 31 December 2021 (£m) | Valuation Techniques | Unobservable inputs | Range (weighted average) |
| Industrial | 960.4 | Yield methodology | Annual rent per sq ft Capitalisation rate |
£4–19 (£9) 3.0%–7.0% (3.7%) |
| Office | 215.9 | Yield methodology | Annual rent per sq ft Capitalisation rate |
£21–51 (£29) 3.4%–7.3% (5.8%) |
| Retail | 163.7 | Yield methodology | Annual rent per sq ft Capitalisation rate |
£11–25 (£17) 4.4%–6.9% (5.5%) |
| Alternatives | 168.4 | Yield methodology | Annual rent per sq ft Capitalisation rate |
£0–18 (£15) 6.2%–7.8% (5.5%) |
Sensitivity analysis
The table below presents the sensitivity of the valuation to changes in the most significant assumptions underlying the valuation of investment property, which could be caused by a number of factors, including Brexit. The movement of 50 basis points is based on past observed data.
As at 31 December 2022
| Sector | Assumption | Movement | Effect on valuation |
| Industrial | Capitalisation rate | + 50 basis points - 50 basis points |
Decrease £67.2 million Increase £80.4million |
| Office | Capitalisation rate | + 50 basis points - 50 basis points |
Decrease £14.3 million Increase £16.8 million |
| Retail | Capitalisation rate | + 50 basis points - 50 basis points |
Decrease £14.1 million Increase £18.8 million |
| Alternatives | Capitalisation rate | + 50 basis points - 50 basis points |
Decrease £12.7million Increase £14.7 million |
As at 31 December 2021
| Sector | Assumption | Movement | Effect on valuation |
| Industrial | Capitalisation rate | + 50 basis points - 50 basis points |
Decrease £122.3 million Increase £163.4 million |
| Office | Capitalisation rate | + 50 basis points - 50 basis points |
Decrease £20.5 million Increase £24.8 million |
| Retail | Capitalisation rate | + 50 basis points - 50 basis points |
Decrease £15.6 million Increase £18.8 million |
| Alternatives | Capitalisation rate | + 50 basis points - 50 basis points |
Decrease £6.7 million Increase £7.8 million |
This represents the Group’s best estimate of a reasonable possible shift in capitalisation rate, having regard to historical volatility of the value.
Investment property valuation process
The valuations of investment properties are performed quarterly on the basis of valuation reports prepared by independent and qualified valuers and reviewed by the Property Valuation Committee of the Company.
These reports are based on both:
- Information provided by the Investment Manager such as current rents, terms and conditions of lease agreements, service charges and capital expenditure. This information is derived from the Investment Manager’s financial and property management systems and is subject to the Investment Manager’s overall control environment.
- Assumptions and valuation models used by the valuers — the assumptions are typically market related, such as yields. These are based on their professional judgment and market observation.
The information provided to the valuers and the assumptions and valuation models used by the valuers are reviewed by the Investment Manager. This includes a review of Fair Value movements over the period.
11. SUBSIDIARY UNDERTAKINGS
The Company owns 100 per cent of the issued share capital of UK Commercial Property Estates Holdings Limited (UKCPEHL), a company incorporated in Guernsey whose principal business is to hold and manage investment properties for rental income. UKCPEHL Limited owns 100 per cent of the issued share capital
of UK Commercial Property Estates Limited, a company incorporated in Guernsey whose principal business is to hold and manage investment properties for rental income and, 100% of the issued share capital of Duke Distribution Centres Sarl and Duke Offices & Developments Sarl, both companies are incorporated in Luxembourg with the principal business being to hold and manage investment properties for rental income.
UKCPEHL also owned 100% of Brixton Radlett Property Limited and UK Commercial Property Estates (Reading) Limited, both were UK companies, whose principal business was that of an investment and property company. UKCPEHL successfully completed the dissolution of both of these companies during the year, effective dissolution date 9 July 2022.
The Company owns 100 per cent of the issued ordinary share capital of UK Commercial Property Finance Holdings Limited (UKCPFHL), a company incorporated in Guernsey whose principal business is to hold and manage investment properties for rental income. UKCPFHL owns 100 per cent of the issued ordinary share capital of UK Commercial Property Holdings Limited (UKCPHL), a company incorporated in Guernsey whose principal business is to hold and manage investment properties for rental income. UKCPFHL owned 100 per cent of the issued share capital of UK Commercial Property Nominee Limited, a company incorporated in Guernsey whose principal business was that of a nominee company. During the year UKCPFHL successfully completed the liquidation of UK Commercial Property Nominee Limited, effective 21 December 2022.
UKCPT Limited Partnership, (LP), was a Guernsey limited partnership, whose principal business was to hold and manage investment properties for rental income. UKCPHL and the GP, had a partnership interest of 99 and 1 per cent respectively in the LP. The GP was the general partner and UKCPHL was a limited partner
of the LP. During the year UKCPHL successfully completed the dissolution of UKCPT Limited Partnership, effective 31 March 2021 and the liquidation of the GP, effective 28 December 2022.
In addition, the Group controls three JPUTS namely Junction 27 Retail Unit Trust, St George’s Leicester Unit Trust, and Rotunda Kingston Property Unit Trust. The principal business of the Unit Trusts is that of investment in property.
During the year the Group successfully completed the voluntary liquidation of Kew Retail Park, effective 10 June 2022, a JPUT whose principal business prior to liquidation was that of investment in property.
12. TRADE AND OTHER RECEIVABLES
|
Year ended 31 December 2022
£000 |
Year ended 31 December 2021
£000 |
|
| Rental debtors | 20,605 | 17,978 |
| Rental deposits | 3,000 | 2,439 |
| Provision for bad debts | (5,071) | (5,327) |
| Lease incentives | 32,541 | 30,181 |
| VAT receivable | - | 2,549 |
| Other debtors and prepayments | 1,573 | 2,943 |
| 52,648 | 50,763 | |
|
Provision for bad debts as at 1 January |
5,327 |
5,739 |
| Bad debts recognised during the year, net | 896 | 1,192 |
| Bad debts written off during the year as uncollectable |
(1,152) |
(1,604) |
| Provision for bad debts as at 31 December | 5,071 | 5,327 |
The ageing of these receivables is as follows:
|
Year ended 31 December
2022 £000 |
Year ended 31 December
2021 £000 |
|
| Less than 6 months | 697 | 953 |
| Between 6 and 12 months | 578 | 1,403 |
| Over 12 months | 3,796 | 2,971 |
| 5,071 | 5,327 |
All other debtors are due within one year. No other debts past due are impaired in either year.
13. TRADE AND OTHER PAYABLES
|
Year ended 31 December 2022
£000 |
Year ended 31 December 2021
£000 |
|
| Rental income received in advance | 14,223 | 12,161 |
| Investment Manager fee payable | 3,819 | 2,327 |
| Rental deposits | 3,000 | 2,439 |
| Bank loan interest | 2,402 | 1,637 |
| Transaction costs | 798 | 4,120 |
| VAT payable | 3,622 | - |
| Other payable | 3,850 | 5,014 |
| 31,714 | 27,698 |
The Group’s payment policy is to ensure settlement of supplier invoices in accordance with stated terms.
14. BANK LOANS
|
Year ended 31 December 2022
£000 |
Year ended 31 December 2021
£000 |
|
| Total facilities available | 380,000 | 380,000 |
|
Drawn down: |
||
| Barclays facility | 93,000 | 50,000 |
| Barings facility | 200,000 | 200,000 |
| Set up costs incurred | (6,792) | (6,628) |
| Accumulated amortisation of set up costs | 5,478 | 4,954 |
| 291,686 | 248,326 |
Movements in bank loan arising from financing activities
| Cash & cash equivalents £000 | Interest-bearing loans £000 |
2022 net debt £000 |
Cash & cash equivalents £000 |
Interest-bearing loans £000 |
2021 net debt £000 |
|
| Opening balance | 42,121 | (248,326) | (206,205) | 122,742 | (197,849) | (75,107) |
| Cash movement | (11,260) | (42,836) | (54,096) | (80,621) | (50,000) | (130,621) |
| Amortisation of arrangement costs | - | (524) | (524) | - | (477) | (477) |
| Closing balance | 30,861 | (291,686) | (260,825) | 42,121 | (248,326) | (206,206) |
(i) Barclays Facility £180 million
The Group has a £150 million revolving credit facility (“RCF”), maturing in February 2024, with Barclays Bank plc. The RCF was increased to £180 million on 19 August 2022. Initially this facility was granted at a margin of 1.70 per cent above LIBOR, however as part of the interest rate reform guidelines this facility has transitioned to a risk-free rate (RFR), (SONIA) interest basis. The RCF was taken out by UKCPEHL and is cancellable at any time. As at 31 December 2022 UKCPEHL drew down a further £43 million from the facility (2021: £50 million). The RCF has a non-utilisation fee of 0.68 per cent per annum (2021: 0.68 per cent per annum) charged on the proportion of the RCF not utilised on a pro-rata basis.
As at 31 December 2022, £87 million (2021: £100 million) remained unutilised. The RCF is secured on the property portfolio held by UKCPEHL. Under bank covenants related to the RCF, UKCPEHL
is to ensure that at all times:
· The loan to value percentage does not exceed 60 per cent.
· Interest cover at the relevant payment date is not less than 175 per cent and projected over the course of the proceeding 12 months is not less than 175 per cent.
UKCPEH met all covenant tests during the year for the RCF.
On 10 January 2023, UKCPEHL extended the facility with Barclays for a period of three years, the facility is now due to expire in January 2026 and at a slightly increased margin of 1.90 per cent.
(ii) Barings Facility £200 million
The Group has a £100 million facility, maturing in April 2027, with Barings Real Estate Advisers, a member of the MassMutual Financial Services Group. The loan was taken out by UKCFH. As at 31 December 2021, the facility was fully drawn (31 December 2021: Fully drawn). The bank loan is secured on a portfolio of seven
properties held within UKCFH. Under bank covenants related to the loan UKCFH is to ensure that at all times:
- The loan to value percentage does not exceed 75 per cent.
- Interest cover at the relevant payment date and also projected over the course of the proceeding 12 months is not less than 200 per cent.
UKCFH met all covenant tests during the year for this facility.
Interest is payable by UKCFH at a fixed rate equal to the aggregate of the equivalent 12-year gilt yield, fixed at the time of drawdown and a margin. This resulted in a fixed rate of interest payable of 3.03 per cent per annum. There are no interest rate swaps in place relating to this facility.
The Group took out a second £100 million facility in February 2019, maturing in February 2031, with Barings Real Estate Advisers. The loan was taken out by UKCFH. As at 31 December 2021, the facility was fully drawn (31 December 2020: Fully drawn). The bank loan is secured on a portfolio of seven properties held within UKCFH. This facility has the same covenant tests as the 2027 facility outlined above. UKCFH met all covenant tests during the year for this facility.
Interest is payable by UKCFH at a fixed rate equal to the aggregate of the equivalent 12 year gilt yield, fixed at the time of drawdown and a margin. This resulted in a fixed rate of interest payable of 2.72 per cent per annum. There are no interest rate swaps in place relating to this facility.
In the event that the Barings facilities were repaid in advance of their maturity date would incur an early repayment charge. Although the Company has no intention of doing so, as at 31 December 2021, the charge would be £nil (2021: £20,509,000).
15. SHARE CAPITAL ACCOUNTS
|
Year ended 31 December 2022
£000 |
Year ended 31 December 2021
£000 |
|
| SHARE CAPITAL | ||
| Opening balance | 539,872 | 539,872 |
| Share capital as at 31 December | 539,872 | 539,872 |
Number of shares in issue and fully paid at the year end being 1,299,412,465 (2021: 1,299,412,465) of 25p each.
Ordinary shareholders participate in all general meetings of the Company on the basis of one vote for each share held. The Articles of Association of the Company allow for an unlimited number of shares to be issued, subject to restrictions placed by AGM resolutions. There are no restrictions on the shares in issue. There are currently no Treasury shares in issue.
16. NET ASSET VALUE PER SHARE
| Year ended 31 December 2022 | Year ended 31 December 2021 | |
| Ordinary Shares | 1,299,412,465 | 1,299,412,465 |
| Net assets (£000) | 1,035,719 | 1,325,228 |
| NAV per share (pence) | 79.7 | 102.0 |
| EPRA Net Tangible Assets per share | 79.7 | 102.0 |
17. RELATED PARTY TRANSACTIONS
No Director has an interest in any transactions which are or were unusual in their nature or significant to the nature of the Group.
abrnd Fund Managers Limited, as the Investment Manager of the Group from 10 December 2018, received fees for their services as investment managers. Further details are provided in note 4. The total management fee charged to the Statement of Comprehensive Income during the year was £8,617,342 (2021: £8,500,385) of which £3,819,104 (2021: £2,326,894) remained payable at the year end. The Investment Manager also received £396,000 (£396,000 plus VAT) for marketing services incurred during the year of which £nil (2021: £396,000) remained payable at the year end.
The Directors of the Company are deemed as key management personnel and received fees for their services. Total fees for the year were £262,732 (2021: £325,225) none of which remained payable at the year end (2021: nil).
The Group invests in the abrdn Liquidity Fund which is managed by abrdn. As at 31 December 2022 the Group had invested £9.5 million in the Liquidity Fund (2021: £19.2 million). No additional fees are payable to abrdn as a result of this investment.
18. FINANCIAL INSTRUMENTS AND INVESTMENT PROPERTIES
The Group’s investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for income and capital growth from investing in a diversified UK commercial property portfolio. Consistent with that objective, the Group holds UK commercial property investments. The Group’s financial instruments consist of cash, receivables and payables that arise directly from its operations and loan facilities. The main risks arising from the Group’s financial instruments are credit risk, liquidity risk, market risk and interest rate risk. The Board reviews and agrees policies for managing its risk exposure. These policies are summarised below and remained unchanged during the year.
Fair value hierarchy
The following table shows an analysis of the fair values of investment properties recognised in the balance sheet by level of the fair value hierarchy:
Explanation of the fair value hierarchy:
· Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
· Level 2 Use of a model with inputs (other than quoted prices included in level 1) that are directly or indirectly observable market data.
· Level 3 Use of a model with inputs that are not based on observable market data.
| 31 December 2022 |
Level 1
£000 |
Level 2
£000 |
Level 3
£000 |
Total fair value
£000 |
| Investment properties | — | — | 1,308,025 | 1,308,025 |
|
31 December 2021 |
Level 1 £000 |
Level 2 £000 |
Level 3 £000 |
Total fair value £000 |
| Investment properties | — | — | 1,508,368 | 1,508,368 |
The lowest level of input is the underlying yield on each property which is an input not based on observable market data.
The following table shows an analysis of the fair value of bank loans recognised in the balance sheet by level of the fair value hierarchy:
| 31 December 2022 |
Level 1
£000 |
Level 2
£000 |
Level 3
£000 |
Total fair value
£000 |
| Bank loans | — | 293,000 | - | 293,000 |
| 31 December 2021 |
Level 1
£000 |
Level 2
£000 |
Level 3
£000 |
Total fair value
£000 |
| Bank loans | — | 257,486 | - | 257,486 |
The lowest level of input is the gilt yields (Note 14(ii)) applicable to each borrowing as at the balance sheet date which is a directly observable input.
The following table shows an analysis of the fair values of financial instruments and trade receivables and payables recognised at amortised cost in the balance sheet by level of the fair value hierarchy:
| 31 December 2022 |
Level 1
£000 |
Level 2
£000 |
Level 3
£000 |
Total fair value
£000 |
| Trade and other receivables | — | 52,648 | - | 52,648 |
| Trade and other payables | — | 31,714 | - | 31,714 |
| 31 December 2021 |
Level 1
£000 |
Level 2
£000 |
Level 3
£000 |
Total fair value
£000 |
| Trade and other receivables | — | 50,763 | - | 50,763 |
| Trade and other payables | — | 27,698 | - | 27,698 |
The lowest level of input was the daily SONIA rate, which is a directly observable input.
The carrying amount of trade and other receivables and payables is equal to their fair value, due to the short-term maturities of these instruments. Expected maturities are estimated to be the same as contractual maturities.
The fair value of investment properties is calculated using unobservable inputs as described in note 10.
The fair value of the bank loans are estimated by discounting expected future cash flows using the current interest rates applicable to each loan.
There have been no transfers between levels in the year for items held at fair value.
Real Estate Risk
The Group has identified the following risks associated with the real estate portfolio:
- The cost of any development schemes may increase if there are delays in the planning process given the inflationary environment. The Group uses advisers who are experts in the specific planning requirements in the scheme’s location in order to reduce the risks that may arise in the planning process.
- A major tenant may become insolvent causing a significant loss of rental income and a reduction in the value of the associated property (see also credit risk). To reduce this risk, the Group reviews the financial status of all prospective tenants and decides on the appropriate level of security required via rental deposits or guarantees;
- The exposure of the fair values of the portfolio to market and occupier fundamentals such as tenants’ financial position.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group.
At the reporting date, the maturity of the Group’s financial assets was:
| Financial Assets 2022 | 3 months or less |
More than 3 months
but less than one year |
More than
one year |
Total |
| £000 | £000 | £000 | £000 | |
| Cash and cash equivalents | 30,861 | - | - | 30,861 |
| Trade receivables and provision for bad debts | 15,534 | - | - | 15,534 |
| Other debtors | 1,573 | - | - | 1,573 |
| 47,968 | - | - | 47,968 |
| Financial Assets 2021 | 3 months or less |
More than 3 months
but less than one year |
More than
one year |
Total |
| £000 | £000 | £000 | £000 | |
| Cash and cash equivalents | 42,121 | - | - | 42,121 |
| Trade receivables and provision for bad debts | 12,651 | - | - | 12,651 |
| Other debtors | 5,492 | - | - | 5,492 |
| 60,264 | - | - | 60,264 |
In the event of default by a tenant, the Group will suffer a rental shortfall and incur additional costs, including legal expenses, in maintaining, insuring and re-letting the property until it is re-let. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Investment Manager has a credit department which has set out policies and procedures for managing exposure to credit. Some of the processes and policies include:
- an assessment of the credit worthiness of the lessee and its ability to pay is performed before credit is granted;
- where appropriate, guarantees and collateral are held against such receivables;
- after granting the credit, the credit department assesses monthly the age analysis and follows up on all outstanding payments;
- management of the credit department determines the appropriate provision, which receivables should be handed over for collection and which amounts should be written off.
The Company has a diversified tenant portfolio. The maximum credit risk from the trade receivables of the Group at 31 December 2022 is £23,605,000 (2021: £15,090,000). The Group holds rental deposits of £3,000,000 (2021: £2,439,000) as potential collateral against tenant arrears/defaults. All tenant deposits are in line with market practice. There is no residual credit risk associated with the financial assets of the Group. Other than those included in the provision for bad debts, no financial assets which are due for settlement are impaired. The provision for bad debts is adjusted, on a tenant-by-tenant basis, to reflect the evolving risk position. During the year this provision decreased by £256,000 to £5,071,000 (2021: £5,327,000).
All of the cash is placed with financial institutions with a credit rating of A or above. £9,540,000 (2021: £19,242,000) of the year end cash balance is held in the abrdn Liquidity Fund, which is a money market fund and has a triple A rating. Bankruptcy or insolvency of a financial institution may cause the Group’s ability to access cash placed on deposit to be delayed or limited. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, the Investment Manager would move the cash holdings to another financial institution subject to restrictions under the loan facilities.
Fair value of trade and other receivables and payables are materially equivalent to their amortised cost.
Liquidity Risk
Liquidity risk is the risk that the Group will encounter difficulty in realising assets or otherwise raising funds to meet financial commitments. While commercial properties are not immediately realisable, the Group has sufficient cash resources to meet liabilities.
The Group’s liquidity risk is managed on an ongoing basis by the Investment Manager investing in a diversified portfolio of prime real estate and placing cash in liquid deposits and accounts. This is monitored on a quarterly basis by the Board. In certain circumstances, the terms of the Group’s bank loan entitles the lender to require early repayment, and in such circumstances the Group’s ability to maintain dividend levels and the net asset value attributable to the ordinary shares could be adversely affected.
As at 31 December 2022 the cash balance was £30,861,000 (2021: £42,121,000).
At the reporting date, the contractual maturity of the Group’s liabilities, which are considered to be the same as expected maturities, was:
| Financial Liabilities 2022 | 3 months or less |
More than 3 months
but less than one year |
More than
one year |
Total |
| £000 | £000 | £000 | £000 | |
| Bank loans | 95,505 | 4,332 | 235,047 | 334,884 |
| Other creditors | 31,714 | — | — | 31,714 |
| 127,219 | 4,332 | 235,047 | 366,598 |
| Financial Liabilities 2021 | 3 months or less |
More than 3 months
but less than one year |
More than
one year |
Total |
| £000 | £000 | £000 | £000 | |
| Bank loans | 51,438 | 4,313 | 236,351 | 292,102 |
| Other creditors | 25,371 | — | — | 25,371 |
| 76,809 | 4,313 | 236,351 | 317,473 |
The amounts in the table are based on contractual undiscounted payments.
Interest rate risk
The cash balance as shown in the Consolidated Balance Sheet, is its carrying amount and has a maturity of less than one year.
Interest is receivable on cash at a variable rate ranging from 0.2 per cent to 0.6 per cent at the year end and deposits are re-priced at intervals of less than one year.
Reflecting current expectations around interest, an increase of 1 per cent in interest rates as at the reporting date would have increased the reported profit by £0.30 million (2021: increased the reported profit by £0.42 million). A decrease of 1 per cent would have reduced the reported profit £0.30 million (2021: decreased the reported profit by £0.42 million). The effect on equity is nil (excluding the impact of a change in retained earnings as a result of a change in net profit).
Interest rate risk arises on the interest payable on the RCF only, as the interest payable on the other facilities are at fixed rates. At 31 December 2022, the drawdown on the RCF was £93 million (2021: £50 million) so an increase of 1% on the year-end SONIA rate would have a £0.93 million decrease on the reported profit (2021: £0.50 million). A decrease of 1% on the year-end SONIA rate would have a £0.93 million increase on the reported profit (2021: £0.50 million). Assumptions are based on the RCF drawdown remaining at £93 million for the full year (2020: £50 million), based on the exposure to interest rates at the reporting date, and all other variables being constant.
The other financial assets and liabilities of Group are non-interest bearing and are therefore not subject to interest rate risk.
Foreign currency risk
There was no foreign currency risk as at 31 December 2022 or 31 December 2021 as assets and liabilities of the Group are maintained in pounds sterling.
Capital management policies
The Group considers that capital comprises issued ordinary shares, net of shares held in treasury, and long-term borrowings. The Group’s capital is deployed in the acquisition and management of property assets meeting the Group’s investment criteria with a view to earning returns for shareholders which are typically made by way of payment of regular dividends. The Group also has a policy on the buyback of shares which it sets out in the Directors’ Authority to Buyback Shares section of the Directors’ Report.
The Group’s capital is managed in accordance with its investment policy which is to hold a diversified property portfolio of freehold and long leasehold UK commercial properties. The Group invests in income producing properties. The Group will principally invest in four commercial property sectors: office, retail, industrial and alternatives. The Group is permitted to invest up to 15 per cent of its Total Assets in indirect property funds and other listed investment companies. The Group is permitted to invest cash, held by it for working capital purposes and awaiting investments, in cash deposits, gilts and money market funds.
The Group monitors capital primarily through regular financial reporting and also through a gearing policy. Gearing is defined as gross borrowings divided by total assets less current liabilities. The Group’s gearing policy is set out in the Investment Policy section of the Report of the Directors. The Group is not subject to externally imposed regulatory capital requirements but does have banking covenants which it monitors and reports on a quarterly basis. Included in these covenants are requirements to monitor loan to value ratios which is calculated as the amount of outstanding debt divided by the market value of the properties secured. The Group’s loan-to-value ratio is shown below. The Group did not breach any of its loan covenants, nor did it default on any other of its obligations under its loan arrangements in the year to 31 December 2022.
| Year ended 31 December 2022 | Year ended 31 December 2021 | |
| £000 | £000 | |
| Carrying amount of interest-bearing loans and borrowings | 291,686 | 248,326 |
| External valuation of completed investment property and assets held for sale (excluding lease incentive adjustment) | 1,308,025 | 1,537,450 |
| Loan to value ratio | 22.3% | 16.2% |
19. CAPITAL COMMITMENTS
The Group had contracted capital commitments as at 31 December 2022 of £54.2 million in relation to five developments.
The Group committed to forward fund a new 230-bed student accommodation development in Edinburgh together with a student residential development in Exeter. Gilmore Place, both developments are complete and in retention phase.
The Group continued to forward fund the development of a three warehouse unit site known as “Sussex Junction”, completion took place in Q1-23.
Immediately prior to the 2021 year-end the Group acquired a multi asset site in Leamington Spa, Warwick. Precision Park is a multi asset site which includes, two industrial distribution units, office accommodation and land for development. Contractors commenced work on site during 2022 to develop the land into a third industrial distribution site, completion is expected during Q2-23.
During 2022 the Group acquired land located at Sovereign Square, Leeds, with the purpose to forward fund the development of a Hyatt Hotel. Total commitment is expected to be £62.7m, with £43.3m of
that commitment outstanding at the year end. Completion is targeted during 2024.
20. LEASE ANALYSIS
The Group leases out its investment properties under operating leases.
The future income under non-cancellable operating leases, based on the unexpired lease length at the year end was as follows (based on total rentals):
|
Year ended 31 December 2022
£000 |
Year ended 31 December 2021
£000 |
|
| Within one year | 71,373 | 68,672 |
| Between one and two years | 67,990 | 66,842 |
| Between two and three years | 61,523 | 62,038 |
| Between three and four years | 54,581 | 55,589 |
| Between four and five years | 46,519 | 50,049 |
| Over five years | 308,269 | 316,141 |
| Total | 610,254 | 619,331 |
The largest single tenant at the year end accounted for 5.8 per cent (2021: 5.1 per cent) of the annualised rental income at 31 December 2022. The unoccupied property expressed as a percentage of annualised total rental value was 2.0 per cent (2021: 2.1 per cent) at the year end. The Group has entered into commercial property leases on its investment property portfolio. These properties, held under operating
leases, are measured under the fair value model as the properties are held to earn rentals. The majority of these non-cancellable leases have remaining non-cancellable lease terms of between 5 and 15 years.
21. EVENTS AFTER BALANCE SHEET DATE
On 10 January 2023, UKCPEHL extended the rolling credit facility with Barclays for a period of three years, the facility remains at £180 million and is now due to expire in January 2026 and at a slightly increased margin of 1.90%.
A fourth interim, PID of 0.680p per share, Non-PID of 0.170p per share was paid on 28 February 2023 to shareholders on the register on 10 February 2023.
All enquiries to:
The Company Secretary
Northern Trust International Fund Administration Services (Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
Tel: 01481 745001
Fax: 01481 745051
Will Fulton / Jamie Horton, abrdn
Via FTI consulting
William Simmonds, J.P. Morgan Cazenove
Tel: 020 7742 4000
Richard Sunderland / Emily Smart / Andrew Davis, FTI Consulting
Tel: 020 3727 1000
UKCM@fticonsulting.com
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