Net Asset Value(s) & Interim Management Statement

RNS Number : 6838F

UK Commercial Property Trust Ltd

29 April 2014

 



NOT FOR PUBLICATION, RELEASE, OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN, OR INTO THE UNITED STATES, CANADA, AUSTRALIA, JAPAN, SOUTH AFRICA OR ANY JURISDICTION IN WHICH THE SAME WOULD BE UNLAWFUL OR TO U.S. PERSONS (WITHIN THE MEANING OF REGULATION S UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED).

29 April 2014

UK Commercial Property Trust Limited

Net Asset Value/ Interim Management Statement

For the three month period from 1 January 2014 to 31 March 2014

UK Commercial Property Trust Limited (LSE: UKCM), the largest Guernsey based, UK focused commercial property trust, today provides its Interim Management Statement for the three months to 31 March 2014 and unaudited quarterly Net Asset Value ("NAV") as at 31 March 2014.

Highlights

§ NAV per share* as at 31 March 2014 of 74.7p (31 December 2013: 73.1p), an increase of 2.2% over the quarter; 

§ Portfolio value of £1,078.4 million representing a like-for-like increase of 2.2% in the quarter before capital expenditure, in line with the IPD Monthly Index;

§ Continued strong performance over the longer term with a share price total return of 96.7% over five years compared to IPD Monthly Index return of 60.5% over the same period;

§ Void rate of 4.9% as at 31 March 2014 (5.3% including tenants in administration), significantly below the IPD benchmark of 7.3%^;

§ The Company intends to declare a first interim dividend in respect of the period from 1 January to 31 March 2014 of 0.92p per Ordinary Share, with ex-dividend and payment dates of 7 May 2014 and 30 May 2014 respectively;

§ In the coming months the Company is aiming to issue its 41,445,142 shares currently held in Treasury in response to market demand at an acceptable premium to the Company's net asset value. 

§ The Board continues to monitor the situation relating to the sale of the Company's managers, Ignis Investment Services, to Standard Life plc and will update shareholders as appropriate.

^ as at 31 December 2013

Christopher Hill, Chairman of UKCPT, commented:

"The NAV growth in the first quarter of the year reflects the successful work undertaken by our asset management team and the continuing improvement of sentiment in the UK commercial real estate market. Recent acquisitions have increased the Company's exposure to the industrial sector which we believe offers excellent risk adjusted income and potential for valuation growth, while letting activity has mitigated challenging conditions in our retail portfolio. The Company, with its high quality portfolio of properties across the country, is well positioned to benefit from the positive current environment and we look forward with cautious optimism."

Breakdown of NAV movement

Set out below is a breakdown of the change to the unaudited Net Asset Value per share calculated under International Financial Reporting Standards ("IFRS") over the quarter from 1 January 2014 to 31 March 2014. The property portfolio has been externally valued by CBRE.

UK Commercial Property Trust Limited	Per  share (p)	Attributable assets (£m)	Comment
Net assets as at 31 December 2014	73.1	875.7
Unrealised increase in valuation of property portfolio	1.9	22.9	Ungeared increase of 2.2% in portfolio. Geared increase of  2.6%
Capital expenditure during the period	(0.1)	(0.5)	Principally relates to asset management initiatives
Income earned for the period	1.5	18.1	Equates to dividend cover of 80% for the quarter based on dividend of 1.3125p paid in Feb 2014
Expenses for the period	(0.4)	(5.6)
Dividend paid on 28 February 2014	(1.3)	(15.7)
Interest rate swaps mark to market revaluation	(0.0)	(0.3)	Marginal decrease in longer term interest rates over the quarter has resulted in swap liabilities remaining fairly static.
Net assets as at 31 March 2014	74.7	894.6

* NAV per share is calculated under IFRS and is unaudited.  It includes all current period income and is calculated after the deduction of all dividends paid prior to 31 March 2014.  It does not include provision for any unpaid dividends relating to periods prior to 31 March 2014 i.e. the proposed dividend for the period to 31 March 2014.

NAV per share at 31 March 2014 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 (IFRS NAV but excluding swap liabilities) is 75.3p

UK Commercial Property Trust Limited
Net Asset Analysis as at 31 March 2014	£m	%
Property Portfolio
Retail	524.8	58.7
Office	250.1	28.0
Industrial	248.5	27.8
Leisure	55.0	6.1
Total Property Market Value	1,078.4	120.6
Adjustment for lease incentives	(6.2)	(0.7)
Fair Value of Property Portfolio	1,072.2	119.9
Net Current Assets	58.2	6.5
Net Long Term Liabilities	(235.8)	(26.4)
Net Assets as at 31 March 2014	894.6	100.0

Economic Review

The UK economy continued to improve in the first quarter of 2014. Although market indicators are perhaps not as strong currently as in previous months, they remain positive and provide optimism for an economic recovery that is much better balanced with emerging signs of expansionary business investment leading to improving occupier demand.

While retail sales were muted in the first quarter, the recent fall in inflation to 1.6% has resulted in wages rising at a faster rate than prices. Combined with continued falling unemployment, the economic recovery is now firmly entrenched and gaining momentum.  Underpinning this growing confidence is an improving housing market, with house prices rising 9.1% over the twelve months to February 2014, although the strong house price increases in some areas of the South East is beginning to cause concern.

The current level of employment suggests there is spare capacity which remains a key consideration for the Bank of England in determining any increase in interest rates. For now, there are no signs of monetary policy tightening with consensus forecasts suggesting only modest increases in interest rates in 2015 at the earliest.

Such a positive economic outlook is a very encouraging environment for commercial property with improved investor confidence and low interest rates supporting further yield compression and rental growth.

Property Market Review

UK commercial property values continued to improve in the first quarter of 2014 although at a slower rate than the very strong growth evident in the closing months of 2013. The IPD Monthly Index ("IPD") recorded 2.2% capital growth over the quarter. Whilst values have risen by 6.8% since the market turned up in the last 10 months, they remain 33% below their peak of 2007.

London remains to be at the forefront of this growth, with further strong investment from both overseas and domestic investors attracted by strong rental growth. There is now also momentum in the value of a number of regional markets which, although initially yield-led, are starting to be underpinned by improving occupational fundamentals.

Offices continued to be the strongest sector with a 3.7% capital value uplift in the quarter. This was driven not only by the strong fundamentals in London and the South East but also by an ongoing improvement in investor demand throughout the UK, which has perhaps been the most notable theme in 2014.

Sustained investor demand and improving occupier markets also boosted the industrial sector, which enjoyed a 3.2% uplift in values over the quarter.

Capital value growth in the retail sector remains lower than other sectors, but still positive, at 1.0% as it continues its slow recovery. A more diverse range of investors has been seeking to invest in retail warehouses and shopping centres, often supported by an improving debt market, resulting in increased values for these two sub sectors. This improved demand, combined with a limited availability of stock, should maintain pricing momentum in these two important sub sectors.

Portfolio Performance

The independent portfolio valuation as at 31 March 2014 was £1,078.41million, a like-for-like increase of 2.2% in the quarter (Q4 2013: 4.3%), in line with IPD.

Industrial

The Industrial sector was the Company`s best performer during the quarter with an overall increase of 4.0% (Q4 2013:5.1%) excluding Aberdeen Gateway, which was purchased in February 2014. This strong performance reflected the impact of improved yields, buoyed by strong investor demand not only for well let assets, but also for certain assets with shorter lease lengths in core locations where occupier demand is considered to be healthy. This growth comfortably outstripped the corresponding increase in industrial values within IPD of 3.2%.

Leisure

With many leisure tenants in expansionary mode providing a supportive outlook for rents, investor demand within this family-orientated sector remains strong.  With the benefit of some recent letting activity, this helped to support a 3.8% (4.7%: Q4 2013) increase in the value of the Company`s only leisure asset, the Rotunda in Kingston-upon-Thames. IPD recorded a 2.5% improvement in value for the sector.

Offices

The Company`s Central London (West End) offices showed a healthy 3.3% increase in the quarter with continued investment and occupier demand providing evidence of further increases in valuation. Investment demand also continues to be strong in the regions and has arguably improved in the last quarter, with 25-35 bps yield improvement on those assets with a more robust income profile, further boosted by increased valuations from asset management. The office portfolio outside London improved in value by 3.1%. Overall, offices increased in value by 3.2% (Q4 2013: 7.9%) over the same period. IPD produced 3.7% capital value growth.

Retail

There continue to be signs of stability and increased investor demand for prime and good secondary assets in the retail sector.  However, capital returns in the sector remain diverse, with South East High Street Retail providing 4.7% increase over the quarter, in contrast to a 1.1% fall in shopping centres. This was largely due to a reduction in valuation at The Parade, Swindon owing to a loss of income arising in part from an asset management initiative which should lead to a significant letting within the ownership and an enhancement in capital value. The Company`s High Street and Shopping Centres produced a combined positive capital increase of 1.4% (Q4 2013: 1.2%).

Although there is strong investor sentiment within the retail warehouse sector, evidence is hard to come by and as a result there was only a modest 0.2% increase in the value of the retail warehouse portfolio. There is a widely held expectation within the market that  evidence will emerge in coming months which should support further increases in value for the Company`s retail warehouse portfolio.

Overall the Company's retail assets increased by 0.8% in the quarter compared to a 1.0% increase in IPD.

Income

Whilst the extent of the recovery in occupier markets across Region and Sector will dictate whether the asset management initiatives are defensive or progressive in nature, the Company continues to retain a firm focus on the retention and enhancement of income. 

Reflecting the continued expansion of restaurant operators within the retail landscape, the Company has let a 4,400 sq. ft. unit in London's Kensington High Street to Yo Sushi on a 20 year lease at an annual rent of £200,000. This letting was the culmination of an asset management initiative where vacant possession of this prominent corner unit was pursued in order to improve tenant mix and has, as a consequence, improved value.

Further evidence of progressive asset management  can be found in the Company`s regional office portfolio at Colmore Row, Birmingham, where  a lease re-gear with  a key tenant within the building extended the lease length for the building and maintained rental income at £252,000 per annum.

In line with our strategy to stabilise and rebuild income for the Shrewsbury shopping centres, the Company has completed a number of lettings within the ownership. Although mainly of a temporary nature, these lettings will ensure that net operating income is maintained whilst the Company continues to conduct lease renewal discussions with a number of tenants, many of whom wish to remain in occupation.

The Company's void position as at 31 March 2014 was 4.9%, compared to 4.4% in December 2013. Following the completion in early April of two leases of the former Comet unit at Junction 27 Retail Park, Leeds ("J27"), the void rate reduced to 4.3%.

Allowing for tenant failures through administrations, the void rate increases to 5.3% (5.1% post J27 lettings).  However, it should be highlighted that administrations do not always equate to a loss in income and both figures remain comfortably below the last announced IPD quarterly void rate of 7.3%.

Sales and Acquisitions

On 4 February 2014, the Company announced the purchase of 265,000 sq. ft. of business space at Aberdeen Gateway Business Park, Aberdeen. Construction of the three buildings that comprise this acquisition is well underway and on schedule, with the acquisition of the land and first payment drawdown in relation to Site A now completed and included in the valuation. Should all conditions within the relevant agreements be completed as anticipated, £3.0million in annual rent will be added to the Company's income by the end of 2014. Under the terms of the purchase, the total commitment will not exceed £48.3million.

The Company's current cash levels are £70million of which £42million is required for the Aberdeen forward purchase transaction.  Whilst the Investment Manager is cautious on pricing of certain assets in the market, there remain particular opportunities in the market into which it can deploy capital at attractive prices.  Accordingly, in the coming months, the Company is aiming to issue its 41,445,142 shares currently held in Treasury as and when there is demand in the market at an acceptable premium to the Company's net asset value and when the directors believe it is advantageous to the Company's shareholders to do so. 

Market Outlook and Forecasts

Our Manager`s latest forecast for total returns in 2014 stands at 15.5%. The total return forecast is driven by an acceleration of capital value growth supplemented by a slightly lower level of income return. Capital value growth continues to be driven in the main by yield compression. Over the medium term, these forecasts suggest that all major sectors generate capital value growth over a three-year horizon pushing the all property total return average to 10.7% per annum. The rates of capital growth will be front-loaded as the impact of yield compression is expected to be greatest in 2014.

The Manager`s latest All-Property rental value forecast in respect of 2014 shows a modest improvement to 2.3% . It also suggests that growth will accelerate to 3.4% per annum over the period 2014-18. This increase is in line with the anticipated expansion in output growth across the broader economy, which is expected to continue into the medium term.

The hierarchy of segment performance over the next three years is maintained. Offices are expected to deliver the highest performance of the broad sectors, followed by Leisure, Industrial and Retail. The forecast level of performance across the sectors over three years has, however, increased across the board. Demand for Central London assets, both retail and offices, will remain strong in 2014. The acceleration of the leasing market, with the prospect of significant rental growth, is expected to attract new entrants who will more than compensate for any global investors seeking to exit at this time.

Yield compression in regional office markets is expected to continue and the scale will depend on the extent that buyers, unable to secure assets in Central London, switch their focus to these alternative locations. Both UK and overseas investors are searching for opportunities beyond London and the South East, with funds in particular focusing on stock offering potential for active asset management.

The retail sector also appears to be stabilising and is expected to see some limited rental growth in 2014, although this will be patchy, as rents may have further to fall in a few poorer quality secondary locations. The limited pipeline expected in both the out-of-town market and shopping centres will continue to support the better locations. Supermarkets also offer a reasonable risk-adjusted return through solid covenants that provide indexation. They are, however, fully priced and the headline returns available will reflect this. Ignis forecasts retail total returns of 9.8% per annum for 2014-2016.

Industrial markets are forecast to deliver total returns of 10.2% per annum over 2014-2016 with all regional markets having seen expectations upgraded in the short term. To some extent this reflects improving economic prospects for manufacturing growth but a far greater impact remains the heavy demand from institutional investors who continue to buy into the sector through targeting the stable, long term income story, with a stated preference for distribution sites and multi-let estates in London and the South East. 

Whilst London continues to a be a firm focus for a broad range of investors and occupiers, the continued improvement in regional markets across all sectors, where improving occupier fundamentals are emerging, should provide the Company, with its diversified, UK-wide, prime portfolio, the opportunity to increase income and value through asset management.

The regional focus of many investors may also provide the Company with the opportunity to realise sales in line with strategy. In addition, the recent change in dividend policy, allied to a strong balance sheet, puts the Company in a position to acquire income focused assets that will complement the prime nature of the portfolio and offer the potential for capital and income growth over the medium/long term.

	Portfolio Value as at 31 Mar 2014 (£m)	Exposure as at 31 Mar	Capital Value Shift	Capital Value Shift (£m)
		2014  (%)	(%)
External valuation at 31 Dec 2013				1,048.7
Retail	524.8	48.7	0.8	4.1
High St South East		10.2	4.7	4.9
High St Rest of UK		2.4	0.0	0.0
Shopping Centres		11.9	(1.1)	(1.4)
Retail Warehouse		24.2	0.2	0.6
Offices	250.1	23.2	3.2	7.7
West End		11.3	3.3	3.9
South East		1.8	3.4	0.6
Rest of UK		10.1	3.0	3.2
Industrial	242.0	22.4	4.0	9.4
South East		15.3	4.6	7.3
Rest of UK		7.1	2.8	2.1
Leisure/Other	55.0	5.1	3.8	2.0
Aberdeen Gateway development	6.5	0.6		6.5
External valuation at 31 March 2014	1078.4	100.0	2.2	1,078.4

Other Matters

The Board noted the announcement by Phoenix Group Holdings on 26 March 2014 that it has agreed terms with Standard Life plc for the sale of Ignis Asset Management. The Board notes that the sale is conditional upon regulatory approval and is expected to be completed by end of the second quarter of 2014.

The Company has, since its inception in 2006, retained Ignis Investment Services, a subsidiary of Ignis Asset Management, as its external investment manager. The Board will continue to monitor the situation carefully and update shareholders as appropriate.

The Board is not aware of any further significant events or transactions which have occurred between 31 March 2014 and the date of publication of this statement which would have a material impact on the financial position of the Company.

Enquiries

Robert Boag / Lucy Williams/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.

This Announcement does not constitute an offer to sell or the solicitation of an offer to buy or subscribe for shares in any jurisdiction. In particular, this Announcement is not for distribution, directly or indirectly, in or into the United States (including its territories and possessions, any State of the United States and the District of Columbia), Canada, Australia, Japan, South Africa or any other jurisdiction where local law or regulations may result in a risk of civil, regulatory, or criminal exposure or prosecution if information or documentation concerning the Placing or this Announcement is sent or made available to a person in that jurisdiction (a "Restricted Jurisdiction"), or to any resident of the United States, Canada, Australia, Japan, South Africa or any other Restricted Jurisdiction or to any U.S. Person as defined in Regulation S of the US Securities Act of 1933, as amended (the "Securities Act"). Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction. 

 

END

 

 

MSCEALLPAFFLEFF