Interim Management Statement

RNS Number : 0529V

UK Commercial Property Trust Ltd

27 October 2010

 



UK Commercial Property Trust Limited

("UKCPT" or the "Company")

Interim Management Statement and Quarterly Net Asset Value announcement

UK Commercial Property Trust Limited (LSE: UKCM), the largest UK focused commercial property trust, today provides its Interim Management Statement for the three months to 30 September 2010 and unaudited quarterly Net Asset Valuation ("NAV") as at 30 September 2010.

§ NAV per share* as at 30 September 2010 was 76.6p, representing a decrease of 0.3% compared to 76.8p as at 30 June 2010.

§ Property portfolio as at 30 September 2010 was valued at £888.1 million up 0.64% compared to £872.0 million at 31 May 2010 on a like for like basis, having benefited from active asset management initiatives  (Equivalent IPD monthly benchmark was +1.00%).

§ The Company intends to declare a fourth interim dividend, in respect of the period from 1 July 2010 to 30 September 2010, of 1.3125p per Ordinary Share, with expected ex-dividend and payment dates of 10 November 2010 and 30 November 2010 respectively.

§ The total adjusted NAV per share, after deducting the above 1.3125p interim dividend, is 75.3p, representing a decrease of 0.3% from the equivalent NAV per share as at 30 June 2010.

§ Void rate (excluding pre-lets) as a percentage of income was 4.10% at 30 September 2010 (30 June: 4.24%), ahead of the industry average of 9.94%.

*The net asset value per share is calculated under International Financial Reporting Standards ("IFRS").  It includes all current period income and is calculated after the deduction of all dividends paid prior to 30 September 2010.  It does not include provision for any unpaid dividends for the periods prior to 30 September 2010, including the dividend for the period to 30 September 2010.  The 30 June 2010 NAV, as previously announced on the 9 June 2010     was based on the 31 May 2010 CBRE property valuations. 

At the start of the period, the Company had 1,185,098,858 Ordinary Shares of 25p each in issue (excluding 41,445,142 shares held in treasury). On 7 July 2010, the Company issued 12,250,000 additional Ordinary Shares of 25p each in relation to the conditional agreement to acquire the Heritable property at 122/132 Argyll Street, Glasgow, as announced on 6 July 2010, as the conditions relating to that agreement were satisfied at that date.

The NAV per share at 30 September 2010 is based on 1,197,348,858 shares of 25p each, being the total number of shares in issue at that time (excluding 41,445,142 shares held in treasury).

Breakdown of NAV movement

Set out below is a breakdown of the change to the unaudited NAV per share calculated under IFRS over the period from 1 July 2010 to 30 September 2010.

UK Commercial Property Trust Limited	Per  Share*  (p)	Attributable Assets (£m)
Net assets as at 30 June 2010	76.8	910.3
Unrealised increase in valuation of property portfolio	0.6	7.5
Capital expenditure during the period	(0.2)	(2.9)
Income earned for the period	1.3	15.0
Expenses for the period	(0.3)	(3.6)
Dividends paid on 27 August 2010	(1.3)	(15.7)
Costs incurred in connection with FCPT aborted deal	(0.1)	(1.0)
Interest rate swap mark to market revaluation	(0.1)	(0.7)
Issue of Ordinary Shares on 7 July 2010	(0.1)	8.3
Net assets as at 30 September 2010	76.6	917.2

* Movements in NAV above are based on the average number of shares in issue during the period. Opening and Closing NAVs are based on actual shares in issue at the reporting dates.

UK Commercial Property Trust Limited
Net Asset Analysis	30 Sept 2010 £m	%	30 June 2010 £m	%
Property Portfolio
Retail (includes Glasgow property acquired in July)	496.3	54.1	477.0	52.4
Office	257.2	28.0	260.1	28.6
Industrial	134.6	14.7	134.9	14.8
Total Property	888.1	96.8	872.0	95.8
Net Current Assets	29.1	3.2	38.3	4.2
Total Net Assets as at 30 September 2010	917.2	100.0	910.3	100.0

Total Expense Ratio

The TER for the period ended 30 September 2010, based on the average net assets as at 30 September 2010 and on annualised expenses, was 0.9% compared to 0.9% for the period to 30 June 2010. For the purposes of this calculation, "expenses" includes the costs of running the Company, including the investment management fee, administration fees, Directors' fees, insurance costs, Board costs, registrar costs and any irrecoverable VAT, but excludes capital expenditure, and refurbishment and irrecoverable property running costs.

Debt

As at 30 September 2010, the Company had borrowings of £42.1 million with Lloyds Banking Group. On 4 March 2010, the Company entered into an interest rate swap agreement with Lloyds which set the interest rate at 3.55%.  This is part of the £80 million seven year loan facility currently in place.

Market Review

The economic outlook for the UK remains uncertain with the focus of concern turning towards the potential impact on the economy and on consumer spending of planned cuts in public services, as well as other government austerity measures, which were announced in the recent comprehensive spending review.  Opinion on the necessity for the severe cuts is split between those who believe that cutting back at this stage places the recovery, however modest, in jeopardy and those who believe that the risk to the UK's credit rating and consequent impact on servicing the current record Public Sector Borrowing Requirement takes precedence.  With this backdrop, the consensus over the quarter has seen a downward revision to UK GDP forecasts, with further revisions likely.

CPI inflation has remained at above 3% over the year to date and expectations for inflation in 2011 have risen.  Although this would normally have implications for interest rates, they look likely to remain at current levels for the foreseeable future and, as concerns remain over the economy, a re-introduction of quantitative easing is anticipated.

In the property market, yield-driven capital appreciation slowed considerably over the summer months and appears to have come to a halt at the end of the third quarter, with the IPD Monthly Index recording a 0.2% rise in September, providing a total 0.5% capital growth for the quarter.  For the year to date, capital values have increased 6.96% with the IPD initial yield now 6.12% compared to 7.01% at the beginning of the year.

Against the uncertain economic outlook, property demand from investors, occupiers and lenders remains very quality conscious.  Investors, whether institutional, private or overseas, are all keen to invest capital in prime, income-producing stock which remains in short supply and to many, when contrasted against a backdrop of falling bond yields, is still attractively priced.

On the positive side, there are signs of improved sentiment towards prime occupational markets, with rental decline having all but stopped in the wider markets. There is, however, a strong variation between sub-sectors. Although offices were the strongest sector, with 0.2% rental growth over the quarter, this was solely driven by the strength of central London markets and is in contrast to the underperformance evident in the rest of the country, where rental growth continues to decline.  In saying that, however, there are now signs that the availability of Grade A office accommodation is falling in some major regional business centres, resulting in a notable hardening of attitudes by some landlords regarding the level of rental incentives for such accommodation.

Similarly, whilst net lending by the banks remains negative, the availability of finance is polarised, with affordable finance available for the right product and right borrower at terms which are increasingly attractive. At the secondary end, however, where the risks are, or are perceived to be, greater, the ability to borrow is still very weak as bank requirements remain demanding. In many cases the banks are now beginning to take steps to re-organise their own debts; this, in turn, is expected to increase the supply of secondary stock, particularly in the shopping centre sub-sector. 

In the retail market, prime real estate, both in and out of town, remains resilient, with retail parks and high street vacancies declining and investor demand for prime assets outstripping supply.  There is clear evidence of a strong south east bias for retail performance with occupier requirements focused on this region as well as major cities/shopping centres.  Retailers do, however, remain cautious, given the outlook for consumer spending in light of the impending austerity measures.  

The majority of secondary locations remain under particular pressure, with the level of vacancies/incentives seeing no signs of decreasing.  In addition, the recent announcement that 40% of the former Woolworths' stores remain unoccupied both serves as a timely reminder of the challenges that remain for small secondary towns and high streets and helps hold back any recovery in the level of retail rents in a sector which also experienced negative growth over the quarter.

The industrial sector appears to have played the part of poor relation in recent months, with rental levels falling over the quarter. One notable positive is that there are some shortages of large distribution sheds, which are in demand from retailers and waste energy contractors.  However, generally speaking, rents are still under pressure, particularly in areas of oversupply.  The industrial sector also witnessed falls in capital values, the first sector do so for over a year, since offices in August 2009. 

Across the wider real estate sector, a decline in capital values is not impossible over the next year or so, particularly as the banks start to increase the supply of secondary stock on the market at a faster rate than has been the case to date. The consensus is, however, that capital values, particularly for prime stocks, will remain broadly stable until well into 2012, with performance primarily driven by income returns.

Portfolio Review

The underlying capital value of the portfolio recorded a 0.64% increase to £888.08 million over the quarter (31 May 2010: £871.98 million).  The IPD monthly benchmark figure over the same period increased by 1.0%, with this slightly higher return reflecting the greater weighting in central London offices.  Capital growth for the year to date for the portfolio on a like for like basis was 6.96% (31 December 2010: £710.49 million).  Latest available quarterly benchmark figures from IPD confirm top decile performance for the portfolio over three years.

The Company's retail holdings again provided the strongest performance over the quarter, with a 1.85% capital uplift. This was supported by rental and capital value growth in the company's central London high street holdings and, even more encouragingly, by the completion of a number of asset management initiatives across its shopping centre, high street and retail warehouses assets, including lease re-gears at High Street Exeter, Broadbridge Retail Park Horsham and 6 Arlington St., St James, London. This very strong performance in retail holdings overshadowed the negative impact of the fall in capital values for both the office and industrial sectors.

In the case of offices, the overall capital growth for central London properties was 1.85% and, in common with wider markets, outperformed the rest of the country.

Although the rate of rental falls in the Company`s regional office portfolio seems to have stabilised, reflecting the overall prime nature of these assets, there are signs of yields weakening, which resulted in a 1.81% fall over the quarter within this sub-sector.  The 3.39% fall in south east office portfolio values is a reflection of the shorter income in the Company's properties, compounded by the recent announcement that Coca-Cola will be relocating its UK headquarters from one of the company's properties at Charter Place, Uxbridge, at lease expiry in December 2012. The Company is working on a strategy to ensure that this space is re-let as soon as practically possible in a market where there is expected to be limited supply of high quality space in the medium term.

Yields for the Company's distribution warehouses, which represent the majority of its industrial holdings, remain stable. However, the drop in estimated rental values, reflecting the weaker markets in some of its multi-let assets, has resulted in an overall capital value fall of 0.21% for that sector.

It is encouraging to see that, overall, the estimated rental value ("ERV") for the portfolio increased marginally over the quarter, with the company's central London office and retail holdings showing some strong growth. Modest growth in retail warehousing and high street properties is also evident, mainly generated from asset management initiatives. 

Whilst there has been a modest fall in rental income over the quarter primarily due to a number of factors such as incentives granted on new leases, there are a number of lettings in solicitors' hands which, if completed, will increase income after rent-free periods and decrease holding costs, to the ultimate benefit of the company and its shareholders. As at 30 September, voids (excluding pre-lets) represented 4.10% of portfolio ERV compared to 4.24% at 30 June 2010. The equivalent IPD void rate at 30 September 2010 was 9.94% as a percentage of income.

As at 30 September 2010, the Company had a total portfolio valuation of £888.1 million, with an initial yield of 6.57% (31 May 2010 £872.0 million and 6.60% respectively).  Gearing represents 4.4% of gross assets (period to maturity 4 years 9 months). At 30 September 2010, the Company has £85 million of cash together with £38 million of undrawn loan facilities available and continues to monitor the market for suitable investment opportunities. However, quality assets at the right price remain difficult to source.

UK Commercial Property Trust Limited	Exposure % as at 30 Sep 2010	Capital Value Shift ( %)	£m
External Valuation at  31 May 2010			871.98
Retail	54.70	1.85	8.81
High St - South East High St - Rest of UK	10.38           3.54	2.62 4.20	2.34 1.27
Shopping Centres	17.60	1.99	3.05
Retail Warehouses	23.18	1.06	2.15
Offices	28.96	(1.12)	(2.92)
West End	8.98	1.85	1.45
South East	7.47	(3.39)	(2.33)
Rest of UK	12.51	(1.81)	(2.04)
Industrial	15.16	(0.21)	(0.29)
South East	9.82	(0.33)	(0.29)
Rest of UK	5.34	0.00	0.00
Adjustment for acquisitions	1.18		10.50
External valuation at 30 September 2010	100.00	1.85	888.08

Material Events

The Board is not aware of any significant events or transactions which have occurred between 30 September 2010 and the date of publication of this statement which would have a material impact on the financial position of the Company.

Outlook

Although there is caution about the near term outlook for the economy and the property market, the prime qualities of the Company's portfolio and its strong balance sheet combined with the strength and skills of its asset management team allow us to remain confident about the Company's prospects.

Enquiries

Robert Boag/Gerry Brady, Ignis Investment Services Limited

Tel: [phone]

Stephanie Highett/Richard Sunderland/Will Henderson/Olivia Goodall, Financial Dynamics, Financial PR Adviser to UKCPT

Tel: [phone]

Important Note

The above information is unaudited and has been calculated by Ignis Investment Services Limited.

 

END

 

 

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