Net Asset Value(s) & Interim Management Statement

RNS Number : 2765S

UK Commercial Property Trust Ltd

06 November 2013

 



6  November 2013

UK Commercial Property Trust Limited

Net Asset Value/ Interim Management Statement

For the three month period from 1 July 2013 to 30 September 2013

NAV GROWTH AND SOLID PERFORMANCE IN A RECOVERING MARKET

UK Commercial Property Trust Limited (LSE: UKCM), the largest Guernsey based, UK focused commercial property trust, today announces its Interim Management Statement for the three months to 30 September 2013 and unaudited quarterly Net Asset Value ("NAV") as at 30 September 2013.

Highlights

§ NAV per share* as at 30 September 2013 of 69.5p (30 June 2013: 68.9p), an increase of 0.9%; 

§ The portfolio is now valued at £1,028.4 million. This represents a like-for-like increase of 1.0% in the quarter before capital expenditure, marginally below the IPD Monthly Index, and primarily driven by capital value increases in the Company's South East Industrial and Central London Office markets;

§ The Company intends to declare a third interim dividend, in respect of the period from 1 July to 30 September 2013, of 1.3125p per Ordinary Share, with ex-dividend and payment dates of 13 November 2013 and 29 November 2013 respectively;

§ Based on an annual dividend of 5.25p and share price as at 30 September 2013 of 74.5p, the Company's shares currently yield 7.0%, which compares favourably to the IPD Monthly All Property Initial Yield of 6.3% and the FTSE All-Share Index yield of 3.4%;

§ Gearing of 21.5% (gross borrowings (excluding swaps) divided by total assets less current liabilities) remains the lowest in the Company's peer group.Net gearing (borrowings (excluding swaps) less cash divided by total assets less current liabilities and cash) was 16.8%;

§ In the nine months to 30 September 2013, the Company has produced a share price total return of 20.3%, markedly outperforming the 5.9% total return on the IPD Monthly Index. Over a five year period the Company has produced a share price total return of 47.6% and NAV total return of 22.7%, both outperforming the IPD Monthly Index (18.5%) and the FTSE Real Estate Investment Trusts Index (7.2%) over the same period;

§ Void rate of 6.1% (8.8% including tenants in administration), significantly below the IPD benchmark of 10.0%.

Christopher Hill, Chairman of UKCPT, commented:

"There is no doubt that confidence is returning to the UK real estate sector, both in investment and occupier markets, and this is beginning to be reflected in the valuation of our portfolio, which recorded growth of 1.0% for the third quarter. The retail sector continues to see the most challenges; however, our asset management team is focusing considerable attention on initiatives to grow income and I am optimistic that these will continue to be successful.

"The diversified nature of the Company's portfolio, with its South East bias, should benefit from this improved investor sentiment, particularly where there is evidence of a robust income profile and a firmer occupational backdrop. In these circumstances the Company, with its strong balance sheet, will be able to identify and implement income and capital enhancing asset management initiatives and invest further in sound income-producing institutional grade assets offering the potential to enhance income and capital value."

Set out below is a breakdown of the change to the unaudited net asset value per share calculated under IFRS over the period from 1 July 2013 to 30 September 2013. The property portfolio has been independently valued by CB Richard Ellis.

	Per  Share (p)	Attributable Assets (£m)
Net assets as at 1 July 2013	68.9	824.7
Realised/Unrealised gains on revaluation of investment properties	1.0	11.0	Like for like increase before capital expenditure of 1.0%. Void property at Raynes Park sold above valuation during quarter.
Capital expenditure during the period	(0.1)	(0.7)	Principally relates to asset management initiatives at Shrewsbury and acquisition costs for Newton's Court, Dartford
Net revenue	0.9	11.8	Resulting in dividend cover of 75%
Dividend paid on 30 August 2013	(1.3)	(15.7)
Interest rate swaps mark to market revaluation	0.1	1.4	Swap liabilities continuing to reduce as long term interest rates trend upwards
Net assets as at 30 September 2013	69.5	832.5

*The NAV per share is calculated under International Financial Reporting Standards ("IFRS") and is unaudited.  It includes all current period income and is calculated after the deduction of all dividends paid prior to 30 September 2013.  It does not include provision for any unpaid dividends relating to periods prior to 30 September 2013 i.e. the proposed dividend for the period to 30 September 2013.

The NAV per share at 30 September 2013 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).

The EPRA NAV (excluding swap liabilities) is 70.3p 

UK Commercial Property Trust Limited
Net Asset Analysis as at 30 September 2013	£m	%
Property Portfolio
Retail	508.8	61.0
Office	247.2	29.7
Industrial	221.1	26.6
Leisure	51.3	6.2
Total Property Market Value	1,028.4	123.5
Adjustment for lease incentives	(5.6)	(0.7)
Fair Value of Property Portfolio	1,022.8	122.8
Net Current Assets	48.1	5.8
Net Long Term Liabilities	(238.4)	(28.6)
Total Net Assets as at 30 September 2013	832.5	100.0

Economic and Property Market Review

With the recent confirmation of 0.8% GDP growth in the third quarter, optimism surrounding the UK economic recovery and thoughts of a sustainable period of healthy growth has increased.  Expectations for continued robust growth are high as the latest PMI and consumer indices have trended strongly upwards across a number of sectors, particularly the dominant services sector and also the housing market due to recent government policy. As a consequence, a number of commentators have increased their 2013 growth forecasts with Oxford Economics in particular increasing its forecast from 0.9% to 1.4%.

As ever, reasons for caution remain as demonstrated by the recent political machinations in the US, resulting in an enforced shut-down of Federal Government services and stockmarkets' reactions worldwide to the potential withdrawal of US monetary stimulus and the Bank of England forward guidance initiative. Nevertheless, there are now more reasons to be optimistic than there have been for some time. 

Property

The rate of capital value growth gained momentum throughout the quarter, increasing 1.2% according to the IPD Monthly Index, with all main sectors showing positive growth. Although this was once again driven principally by offices, industrials also experienced strong capital growth, underpinned by improved investor demand. For the first time since October 2011, retail capital values showed an increase, albeit modest, over the period. Improved valuation yields have been the principal driver as rental values remained stable, with any growth generally confined to London and the South East.

Although Central London office and retail continues to be at the forefront of this capital growth, what has been particularly notable is the strong demand for prime and good secondary assets in the regions from UK institutional and international investors, which has precipitated an improvement in yields across most sectors and locations.  For example, the South East office sector has benefited from this renewed investor interest as a result of emerging rental growth and improving occupational markets.

Portfolio Performance

The independent portfolio valuation as at 30 September 2013 is £1,028.4 million, a like-for-like increase of 1.0% on the quarter (Q2 2013: +0.4%) which is marginally behind the IPD benchmark Monthly Index of 1.2%.

Office

The Company's office holdings, primarily driven by Central London, continued to provide the portfolio's strongest capital growth this quarter. Outside London, investor sentiment has improved, particularly in the Company's South East assets, which enjoyed a 6% increase in value. This resulted in stability in the value of the overall regional office portfolio with the combined effect delivering an increase of 2.6% in capital value across the total office portfolio in the quarter (Q2 2013: +2.5%).

Industrial

With exposure recently increased to over 21% of the portfolio, it is encouraging to report this sector was the Company`s second best performer during the quarter. The combined effects of improved yields and stable rental values, boosted by the outcome of positive asset management at Dolphin Industrial Estate, Sunbury, resulted in an uplift in value within the Company's industrial holdings of 2.5% over the quarter (Q2 2013: +1.3%), comfortably outstripping the corresponding increase in industrial values within the IPD Monthly Index of 1.7%.

Retail

The Company's retail portfolio has begun to turn a corner, with capital value falls decelerating. Across this portfolio, values fell 0.5% this quarter compared with a much larger fall in the previous quarter (Q2 2013: -1.6%). 

The shopping centre portfolio continues to be the most challenging sub-sector with a 2.6% fall in value, mainly as a consequence of the reduction of income and estimated rental values at Shrewsbury and Weston-super-Mare. However, good progress has been made in improving the income levels at both centres.  The continued solid performance of the Company's largest asset in The Parade Shopping Centre, Swindon demonstrates that performance can be achieved for those shopping centre assets with a robust income profile, particularly where it is supported by ongoing asset management. 

Although overall the values within the Company`s retail warehouse portfolio held firm, the rebasing of rents and outward yield shift in one of the Company's retail warehouse investments were the principal reason for a 0.2% fall in that sub-sector. A number of initiatives are currently being undertaken that should counteract any further decline and, once realised, generate ongoing valuation improvement.

A positive factor within the retail portfolio is the performance of the Company's London retail assets, where a combination of successful rent review settlements and further yield compression based on recent transactions resulted in a 1.9% increase in value of the Company's South East retail holdings.

Leisure

With increasing investment demand for this sector, yields have sharpened and, having established the rental tone within the Company's one investment in this sector (the Rotunda in Kingston upon Thames) following a series of rent reviews, the value improved by 1.5% on the quarter (Q2 2013: No change).   

Income

There continues to be maximum effort and focus on the maintenance and retention of income within the Company's portfolio. 

At Dolphin Industrial Estate, Sunbury, a new lease was completed with one of the Company's principal, long term tenants.  The letting secured the tenant`s continued occupation within larger accommodation, resulting in an increase in rental income and lease length and a reduction in void levels within the estate.

In line with our strategy to stabilise and rebuild income for the Shrewsbury shopping centres, new leases were completed with The Entertainer, Ryman and Lorraine Johnston.  These lettings should support an increase in capital value as rent free periods expire. In Swindon, value improved as a result of successful asset management, in particular the letting to Schuh Ltd of Unit 2, The Parade.  

As at 30 September 2013, £18.6million of rental income is subject to lease expiry or tenant lease break in the next three years. Currently, it is estimated that £6.4million is expected not to renew. In certain cases, however, this will present asset management opportunities to improve future returns.

The Company's void position as at 30 September 2013 was 6.1%, compared to 5.6% in June 2013.  Allowing for tenant failures through administrations, the void rate increases to 8.8%. However, it should be highlighted that administrations do not always equate to a loss in income and both figures remain comfortably below the benchmark void rate of 10.0% which it should be noted does not include void units where temporary contracts are in place, unlike UKCPT.

Sales

On 11 July 2013 the Company completed the sale of the largest single void in the portfolio at 84-86 Bushey Road, Raynes Park for £7.25million. This was marginally ahead of the June valuation and also represented a significant uplift from the December 2012 valuation and the purchase price paid in October 2009 of £5.65million. Importantly, the sale reduced the Company`s void position by almost 1.0% and it was also in line with the Company`s strategy to limit portfolio development risk and sell assets where significant capital expenditure is required without the prospect of sufficient improved returns.

Market Outlook and Forecast

Our Manager`s most recent forecast for property total returns in 2013 is 8.3% which is significantly higher than the latest IPF consensus figure of 7.0%. That forecast improved over the previous quarter, reflecting a clear increase in the scale of yield compression that is expected to be recorded over the remainder of 2013, particularly in regard to year-end valuations. The intensity of competitive bidding witnessed for better quality assets that become available extends throughout the UK, not just Central London. It should also be remembered, however, that overall returns will continue to be underpinned by income.

The three year total return forecast (2013-15) of 8.2% p.a. assumes front-loaded investor demand supported by accelerating economic growth over the later part of that period. Whilst the downside risks for weaker secondary markets remain clear, the floor of achievable returns in these markets has increased and the market will see a convergence of headline returns. Our Manager continues, however, to forecast the outperformance of Central London markets relative to the wider UK in both offices and retail.

The principal downside risk to the UK commercial property market is the scale of investor demand pushing pricing beyond the level that can be justified by fundamental drivers of the asset class as we still remain in a world where tenant pricing power, shorter leases, obsolete stock and over-renting exists in many markets. This is, however, set against the London market accelerating, income return delivered on a consistent basis and a general improvement in business, consumer and investor sentiment. The medium term risks remain balanced but the short term outcome could well surprise on the upside.   

The diversified nature of the Company`s portfolio with its South East bias (representing 58% of the portfolio including Central London) should benefit from this improved investor sentiment, particularly where there is evidence of a robust income profile and a firmer occupational backdrop. In these circumstances the Company, with its strong balance sheet, will be able to identify and implement income and capital enhancing asset management initiatives and invest further in sound income producing institutional grade assets where latent value can be extracted through successful asset management initiatives. 

Sector Analysis

	Portfolio Value as at 30 Sep 2013 (£m)	Exposure as at 30 Sep	Capital Value Shift	Capital Value Shift (£m)
		2013 (%)	(%)
External valuation at 30 June 2013				1,025.1
Retail	508.8	49.5	(0.5)	(2.4)
High St - South East		9.8	1.9	1.9
High St- Rest of UK		2.6	(0.7)	(0.2)
Shopping Centres		12.8	(2.6)	(3.6)
Retail Warehouse		24.3	(0.2)	(0.5)
Offices	247.2	24.0	2.6	6.2
West End		10.1	3.6	3.6
South East		4.0	6.0	2.3
Rest of UK		9.9	0.0	0.3
Industrial	221.1	21.5	2.5	5.7
South East		14.5	2.3	3.7
Rest of UK		7.0	2.8	2.0
Leisure/Other	51.3	5.0	1.5	0.8
Sale of Bushey Road, Raynes Park				(7.0)
External valuation at 30 September 2013	1028.4	100.0	1.0	1,028.4

The Board is not aware of any further significant events or transactions which have occurred between 30 September 2013 and the date of publication of this statement which would have a material impact on the financial position of the Company.

Enquiries

Robert Boag / Graeme McDonald, Ignis Investment Services Limited

Tel: [phone]

Edward Gibson-Watt / Oliver Kenyon, J.P. Morgan Cazenove

Tel: [phone]

Stephanie Highett/Richard Sunderland/Will Henderson, FTI Consulting

Tel: [phone]

The above information is unaudited and has been calculated by Ignis Investment Services Limited. Further information can be found on the UKCPT website at www.ukcpt.co.uk.

 

END

 

 

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