Performance for the period
The Company’s net asset value (‘NAV’) total return for the six month period ended 30 June 2016 was 1.4 per cent and the ungeared total return from the property portfolio was 2.0 per cent. This compares with a total return of 2.6 per cent from the Investment Property Databank (‘IPD’) All Quarterly and Monthly Valued Funds.
The changes to Stamp Duty announced in March 2016 reduced the value of the portfolio by 0.8 per cent and the period saw income becoming the main driver of total return. Although overseas buyers remained active, institutions became net sellers as the period progressed. The yield compression that had previously driven the market became less pronounced and restricted to a smaller part of the market.
The share price total return for the period was -13.3 per cent. The share price had been trading at a premium to NAV for more than two years until the final quarter of 2015 when it fell to a discount of 0.6 per cent by the end of December. As at 30 June 2016, the share price was 113.8p, a discount of 17.8 per cent on the June NAV, but it subsequently recovered, closing the discount to 8.1% by 22 August 2016.
The initial share price fall was primarily due to lower expectations for capital growth in UK commercial property values. Subsequent weakness followed the announcement of the referendum in February and Stamp Duty changes in March, with sharp falls across the sector in the immediate aftermath of the Brexit vote in the last week of June. This was followed by recovery in July and August when a number of open-ended funds re-opened for business after temporary closure and several property market transactions took place on lower discounts to pre-Brexit prices than expected.
With the referendum vote occurring so near to the quarter end, valuers struggled to determine the impact of the outcome on both the property investment and lettings markets. Our valuer has explicitly stated that the uncertainty following the UK’s decision to exit the EU has reduced the probability of valuations coinciding with prices received were the properties to be sold.
The period saw a moderating level of investment activity in the property market. While the market continued to deliver a positive total return, Central London retail and the industrials sectors out-performed alongside South East and West End offices. The retail market outside London continued to under-perform.
The Company’s underperformance of the IPD benchmark came primarily from the office sector of the portfolio where there were significant voids at Thames Valley Park One, Reading and Watchmoor Park, Camberley. There was also a mark down in the valuation of the Aberdeen properties. On the upside, all the other sectors in the portfolio produced positive total returns and were ahead of the benchmark.
There were no purchases or sales during the period and the focus has continued to be on driving income and value-creating asset management within the existing portfolio. Further detail on the various property and asset management activities undertaken during the period and a breakdown of the performance are shown in the Managers’ Review.
The Directors have also considered it appropriate to prepare the financial statements on the going concern basis, as explained in note 1 to the condensed financial statements.
The following table provides an analysis of the movement in the NAV per share for the period:
| Pence | |
| NAV per share as at 31 December 2015 | 135.2 |
| Unrealised decrease in valuation of direct property portfolio | (0.6) |
| Movement in interest rate swap valuation | (0.2) |
| Other revenue | 2.7 |
| Dividends paid | (3.0) |
| ——— | |
| NAV per share as at 30 June 2016 | 134.1 |
| ——— |
Dividends
Monthly dividends of 0.5p per share were paid during the period, maintaining the annual dividend rate of 6.0p per share. The annualised dividend yield at the end of the period was 5.3 per cent on a closing share price of 113.8p per share.
Barring unforeseen circumstances, it is the Board’s intention that the dividend will continue to be paid monthly at the same rate. Dividend cover for the period (excluding capital gains on properties and the loss on redemption of the interest rate swap) was 88.7 per cent, an improvement on the cover achieved for the last financial year which was 80.6 per cent.
Borrowings
As announced in June 2016, the Group agreed amended financing arrangements with Barclays Bank PLC in respect of the existing £50 million term loan facility repayable in June 2017. This included extending the repayment date to June 2021. The Board also agreed an additional revolving credit facility of £50 million over the same period for ongoing working capital purposes and to provide the Group with the flexibility to acquire further property should the opportunity arise.
Following this refinancing, the Group’s available borrowings comprise a £260 million term loan with Legal & General Pensions Limited, maturing on 31 December 2024, and both a £50 million term loan facility and an undrawn £50 million revolving credit facility with Barclays. The Group’s drawn down borrowings currently total £310 million. The Group’s total loan to value, net of cash, was 19.9 per cent at the end of the period.
The Group terminated, at a cost of £1.3 million, the interest rate hedging arrangements linked to the previous Barclays facility. This had been accounted for as a liability, net of accrued interest, of £1.5 million as at 31 December 2015. The Group has entered into a new £50 million interest rate swap to cover the extended Barclays term facility. This has a fixed interest payable at 2.5 per cent. per annum, a substantial reduction on the previous 4.9 per cent per annum. The weighted average interest rate on the Group’s total current borrowings is 3.3 per cent which is 0.3 per cent lower than before the refinancing.
Board Composition
Brian Sweetland, who has been a Director of the Company from the beginning in 2005, retired from the Board at the Annual General Meeting on 2 June 2016. I recorded in the annual report, published in April this year, our appreciation for the time, experience and effort he has given to the Company over the years.
The Board continues the programme of refreshment of the Board which was outlined in the 2014 annual report. As a consequence of this, Peter Niven, who has served the Company since inception, both as a Director and Chairman, will retire at the 2017 AGM. The board has engaged a recruitment agent to begin the process of seeking a replacement.
Outlook
Following the EU referendum vote at the end of June there are unresolved political and economic issues which will continue to contribute to a climate of uncertainty in the property market. While the next few months should begin to see greater clarity on economic policy and Brexit strategy, a prolonged period of negotiation is likely before the final outcome is known.
This uncertain state of affairs will have some effect on both occupier and investor demand over both the short and medium-term, especially concerning City offices, secondary stock and development activity all of which the Company has a limited exposure to. Prime property in core locations may prove more resilient. Investors seeking an income stream should be attracted to an asset class with long-term contractual income yielding at least 4 per cent per annum, particularly if low interest rates limit profitable investment opportunities in other asset classes.
Brexit is important but is only one element in the outlook for property. There are wider global economic and political factors which will come into play and the UK remains a large, mature and relatively transparent market for UK and overseas investors. Following the fall in both sterling and gilt yields, and given the prospect of a prolonged period of low interest rates, well located and let property remains attractively priced against the current risk free rate of interest.
Chris Russell
Chairman