TIDMAPI
Guernsey: 24 April 2023
LEI: 549300HHFBWZRKC7RW84
abrdn Property Income Trust Limited
("API" or the "Company")
FINAL RESULTS FOR THE YEARED 31 DECEMBER 2022
FINANCIAL REVIEW AS AT 31 DECEMBER 2022
* NAV TOTAL RETURN of -12.8% (2021: 28.6%) for the year, 7.0% over 3 years,
21.9% over 5 years and 159.5% over 10 years.
* SHARE PRICE TOTAL RETURN of -19.0% (2021: 43.4%) for the year, -18.5% over
3 years, -11.8% over 5 years and 90.4% over 10 years.
* SHARE BUYBACKS totalling £12.4m in 2022 at significant discounts to NAV
which are accretive to both NAV performance and earnings (NAV per share
0.2p higher).
* FINANCIAL RESOURCES of £57.8m as at 31 December 2022 (2021: £50m) available
for investment to enhance earnings.
* LOAN-TO-VALUE of 22.6% (2021: 19.2%) at the year end with scope to increase
gearing through available revolving credit facility.
* DIVIDS PAID of 4.0p in the year (2021: 3.7725p) equating to a yield of
6.4% based on the share price as at 31 December 2022.
* DIVID YIELD of 6.4% compared to the Dividend yield of the FTSE All-Share
Index (3.6%) and FTSE All-Share REIT Index (4.6%)
PORTFOLIO REVIEW AS AT 31 DECEMBER 2022
* PORTFOLIO TOTAL RETURN of -8.8% (2021: 22.6%) is marginally ahead of the
MSCI benchmark return of -8.9% and the Company has outperformed its
benchmark over all time periods.
* RENT COLLECTION for 2022 of 98.9% of rent due (2021: 96.0%).
* OCCUPANCY RATE of 90.2% (2021: 90.3%) compared to the MSCI rate of 90.0%
(2021: 90.0%)
* POSITIVE ASSET MANAGEMENT: A total of 6 lease renewals and restructurings
were undertaken, securing £567,954 p.a. in rent, and a total of 16 lettings
including agreements for lease securing £1,980,737 p.a.
* POSITIVE ASSET MANAGEMENT: 6 rent reviews were settled with uplifts in
rent, securing an additional £237,560 p.a. (an average increase of 11% on
previous rent)
* PORTFOLIO WELL POSITIONED - with a 55.7% weighting in Industrial, 21.6%
weighting in Office, 13.1% weighting in Retail and 9.6% weighting in
Other. Figures Excluding the Company's investment in 1,471 hectares of
open moorland at Far Ralia.
* PV SCHEMES - The company has 7 operational PV schemes totalling 1.5 MWp and
is actively engaged in 24 additional schemes that would add a further 16.0
MWp
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.abrdnpit.co.uk/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
Earnings, Dividends & Costs 31 December 31 December
2022 2021
IFRS Earnings per share (p) (13.11) 21.54
EPRA earnings per share (p) 2.94 3.69
(excl capital items & swap
movements) *
Dividends paid per ordinary 4.0 3.7725
share (p)
Dividend Cover (%) 73 98
Dividend Cover excluding 97 98
non-recurring items (%)
Dividend Yield (%) ** 6.4 4.6
FTSE All-Share Real Estate 4.6 2.6
Investment Trusts Index Yield
(%)
FTSE All-Share Index Yield 3.6 3.1
(%)
Ongoing Charges ***
As a % of average net assets 2.2 2.2
including direct property
costs
As a % of average net assets 1.1 1.2
excluding direct property
costs
Capital Values & Gearing 31 December 31 December Change
2022 2021 %
Total assets (£million) 444.9 526.6 (15.5)
Net asset value per share (p) 84.8 101 (16.0)
(note 21)
Ordinary Share Price (p) 62.4 81.5 (23.4)
(Discount)/Premium to NAV (%) (26.4) (19.3)
Loan-to-value (%) ^ 22.6 19.2
Total Return 1 year 3 year 5 year 10 year
% return % return % return % return
NAV # (12.8) 7.0 21.9 159.5
AIC Property Direct - UK (0.4) 20.9 39.6 32.1
Commercial (weighted average)
NAV Total Return
Share Price # (19.0) (18.5) (11.8) 90.4
AIC Property Direct - UK (15.8) (6.9) 12.5 17.8
Commercial (weighted average)
Share Price Total Return
FTSE All-Share Real Estate (31.6) (25.8) (15.0) 45.1
Investment Trusts Index
FTSE All-Share Index 0.3 7.1 15.5 88.2
Property Returns & Statistics 31 December 31 December
(%) 2022 2021
Portfolio income return 4.4 4.7
MSCI Benchmark income return 4.1 4.4
Portfolio total return (8.8) 22.6
MSCI Benchmark total return (8.9) 16.3
Void rate 9.8 9.7
* Calculated as profit for the period before tax (excluding capital items &
swaps costs) divided by weighted average number of shares in issue in the
period. EPRA stands for European Public Real Estate Association.
** Based on dividend paid of 4.0p and the share price at 31 December 2022 of
62.4p.
*** Calculated as investment manager fees, auditor's fees, directors' fees and
other administrative expenses divided by the average NAV for the year.
^ Calculated as bank borrowings less all cash as a percentage of the open
market value of the property portfolio as at the end of each year.
# Assumes re-investment of dividends excluding transaction costs.
Sources: abrdn, MSCI
CHAIR'S STATEMENT
Background
With the threat and disruption from COVID-19 abating, it would have been
reasonable to hope that 2022 would be a year of stability and recovery.
However, it turned out to be quite the contrary. The impact of Russia's
invasion of Ukraine was the prevalent issue in the early part of the year.
This led, in part, to a sustained surge in inflation and a corresponding
reaction by the Bank of England, and other Central Banks, to raise interest
rates. Gilt yields rose through the year until late September, but volatility
in the UK Government bond market reached unprecedented levels in late September
/early October when it reacted negatively to Liz Truss's "Growth Plan" which
triggered a slump in the UK commercial property market.
UK Real Estate Market
2022 was very much a year of two halves, with the first six months continuing
the positive capital growth recorded throughout 2021. The third quarter was the
tipping point at which the increase in inflation and interest rates, along with
unexpected government economic policy announcements, led to a spike in gilt
yields. With a rapid repricing of the "risk-free" rate, real estate values
reversed, resulting in the largest monthly capital declines ever recorded by
MSCI in October and November.
Perhaps surprisingly, the industrial sector was largely responsible for not
only the positive capital growth in the first half of the year, but also the
rapid decline in the second half. Historically low yields had been paid in the
expectation of high rental growth, by increasingly debt-backed buyers. The
increase in debt costs, coupled with fears of recession reducing confidence in
future rental growth, led to a sharp upward yield adjustment and a
corresponding decline in values.
Despite this, the dynamics of the industrial market remain reasonably robust
with continued low vacancy levels, limited new supply and good occupier demand.
There is still likely to be rental growth, albeit at more muted levels than
previous years, meaning the company's exposure to this sector should be
positive going forward.
The structural change in the office market was accelerated by the impact of
COVID-19. Whilst we are hopeful that the pandemic is firmly behind us, there
are few signs of confidence returning to the sector. The wide range of
approaches being taken by companies to get staff back into offices and to
manage hybrid working is fuelling this uncertainty. The Board and Investment
Manager remain convinced that overall office demand will reduce, with well
specified offices which provide good staff amenities faring best. Given this
uncertainty, and the likelihood of further capital declines, the Company
disposed of three office assets during the year.
We continue to expect the retail sector to experience challenges and headwinds,
particularly with the cost-of-living crisis and the spectre of recession
hanging over the UK. In such circumstances, the "discretionary" areas of the
market, such as fashion and non-essential retailers, will suffer most with
shopping centres and the high street bearing the brunt of this. The Company's
retail portfolio is focused in the retail warehouse sector, predominantly
occupied by discount or budget retailers, for whom we see a more positive
outlook.
Whilst there have been many changes in the property market over the year, one
constant has been the increasing importance of Environmental, Social and
Governance (ESG) factors. Both occupiers and investors have an increasing focus
on this aspect of assets, meaning that it is having a direct impact on value.
Fortunately, the Company's early and continuing work in this area has meant we
are well positioned, with the Board's Sustainability Committee overseeing
progress in this regard.
Portfolio and Corporate Performance
The NAV total return for the year was a loss of -12.8%. The real estate
investment portfolio returned -8.8%, which approximately matched the MSCI
Quarterly Property Index benchmark return of -8.9% over the same period. The
Company's portfolio has strongly outperformed the Index over 3, 5 and 10 years.
The share price total return for the year of -19.0% was disappointing, with the
Company's shares consistently trading on a discount which peaked with risk free
rates at the end of the third quarter. The Board pursued its share buyback
programme throughout most of the year buying a total of 15.7m shares at an
average discount of 26.8%. This contributed 0.2p to NAV per share. The Board
continues to monitor the discount of the share price against NAV.
IFRS earnings have decreased from 21.54p per share to -13.11p for 2022. This
reflects the drop in valuations recorded in the second half of the year. EPRA
earnings per share decreased from 3.69p to 2.94p per share as a result of the
one-off break costs associated with terminating the interest rate swap entered
into in October. Without the break costs the EPRA earnings per share would have
been 3.86p, an increase of 4.6% reflecting improved rental collection.
Rent Collection
Collection rates largely returned to more normal levels in 2022, with the
fourth quarter sitting at 99% and the year as a whole at 98.9%. This
improvement led to a reversal in bad debt provisions which made a contribution
to performance. Going forward, we believe that the portfolio is well
diversified in tenant risk. In addition, the positive tenant engagement
undertaken over the last couple of years should be beneficial particularly if
economic conditions deteriorate further.
Financial Resources & Renewal of the Debt Facility
The Company continues to be in a strong financial position with significant
unutilised financial resources of £55m available for investment in the form of
its revolving credit facilities ("RCF") net of existing cash and financial
commitments.
The low Loan-to-value ("LTV") ratio of 22.6% at the year end means the Company
is well placed to deploy capital into accretive assets which fit the portfolio
strategy.
The existing debt facility (which includes the RCF) of £165 million will come
to an end in April 2023. This was renewed at the end of the summer with our
existing lender at a three year tenor comprising an £85 million term loan and
an £80 million RCF. A swap contract to fix rates on the £85 million term loan
was also negotiated. At that time the politically induced gilt market
volatility was at its height.
We took the view that it was in the Company's best interests to secure the
re-financing for April 2023 as some lenders were beginning to withdraw from the
market. Furthermore, even if facilities had still been available, it was
possible that the Company could have been forced to renew at even higher rates
if markets had continued to deteriorate.
UK fixed interest markets began to improve shortly after new terms had been
agreed and, therefore with hindsight, our loan renewal timing proved to be
poor. Recognising this, and the income-orientated nature of the Company the
Board and Managers pro-actively reconsidered matters with the help of external
advice. As a result, the new swap contract was terminated in December and
replaced with an interest rate cap arrangement. This limits the interest cost
on the term loan to 5.46%, but if SONIA declines the Company's interest cost
will decline too.
These new arrangements have resulted in a one-off charge of £3.56 million to
terminate the swap, along with the payment of a premium of £2.5 million for the
cap arrangement. This premium will be amortised over the three years from April
2023. Although complex and costly, the Board believes these actions have placed
the Company on a better footing for the future.
Benchmark Change
Following a review undertaken by the Investment Manager's Investment Strategy
Team, the Board has decided to amend the benchmark against which the property
portfolio is measured. Going forward the MSCI UK Quarterly Property Index will
be referenced, as it has grown to become the largest and most relevant
benchmark covering the UK market. The Company previously used the MSCI UK
Monthly Index Funds Quarterly Property Index which has, in recent times, not
only reduced in size but is also now less reflective of the investment universe
in which the Company could acquire assets.
Dividends
The Board remains conscious that many of the Company's shareholders have
invested in the Company because of the attractive level of income it generates.
The Board aims to invest in good quality assets that have the potential to
provide an above market level of total return as well as an attractive level of
income that has scope to grow.
The Board has maintained the annual dividend of 4p per share, which was reached
at the end of 2021, for 2022. Dividend cover has decreased to 73%, down from
98% in 2021. Excluding one-off swap break costs, dividend cover was 97%.
The Board reaffirms its stated intention to maintain the current dividend
level, of 4p per share despite the increased financing costs for the next two
years.
Management Fee
A thorough review of costs was undertaken late in the year, which resulted in a
renegotiation of and 10bps reduction in the management fee. From 1st January
2023 abrdn will be paid 0.6% of Gross Asset Value (GAV) below £500m, and 0.5%
above £500m.
Annual General Meeting ("AGM")
The Annual General Meeting ("AGM") will be held at 2.30pm on Wednesday 14 June
2023 at Wallacespace, 15 Artillery Lane, London E1 7HA. The Board looks forward
to welcoming shareholders in person where they will have the opportunity to put
questions to the Board and/or the Manager. Shareholders are also invited to
submit questions by email to property.income@abrdn.com
The Board has decided to hold an interactive Online Shareholder Presentation at
2.30pm on Tuesday 13 June 2023. As part of the presentation, shareholders will
receive updates from the Chair and Manager as well as the opportunity to
participate in an interactive question and answer session. Further information
on how to register for the event can be found on www.workcast.com/register?cpak
=9811658259471291.
Outlook
2022 was a particularly challenging year for many companies including this one.
The high industrial weighting had a negative impact during the past year but we
believe the sector allocation and assets held will be beneficial in the near
future. The new debt facility provides the Company with certainty, albeit at a
higher interest rate than before. This increased cost will impact short-term
dividend cover, but the Board and Investment Manager are confident that the
portfolio offers a wide range of initiatives and opportunities to grow income.
In addition, the Company's strong financial footing provides the means to take
advantage of market conditions to acquire well-specified, attractively priced
assets which will enhance dividend cover.
We are anticipating a continued easing of inflation, with forecasts of a return
to lower levels later this year. Whether the slowing of the UK economy results
in a recession is still to be seen, but the diversification of the API tenant
base, the portfolio weighting to more favoured areas of the market, the quality
of the assets and our focus on ESG should leave us well-placed for the year
ahead.
21 April 2023
James Clifton-Brown
INVESTMENT MANAGER'S REPORT
Market Review
2022 was another year of unexpected challenges. The year started with optimism
of ongoing recovery in a post COVID-19 world, before the shock of the Russian
invasion of Ukraine changed the economic outlook globally with inflation and
rising interest rates becoming the main narrative. The UK had further
challenges with a very volatile political situation. This reached a climax in
September with a mini budget that led to a spike in inflationary and interest
rate expectations, with a sharp decline in Sterling.
During the first six months of the year, performance for UK real estate was
positive, with investment activity remaining robust. However, the narrative
changed in the second half of the year as government bond yields and inflation
rose and economic sentiment declined. The tightening monetary cycle increased
financing costs
for real estate, which acted as the catalyst for a broad decline in UK property
values. In addition, the spread between real estate and UK government bond
yields narrowed over the year as bond yields rose, making the asset class
relatively less attractive.
The UK real estate market recorded a total return of -8.9% in 2022, according
to the MSCI quarterly Index. The 7.8% positive total return recorded in the
first six months of the year was more than unwound during the second half of
the year with a -4.2% fall in capital values through the third quarter which
accelerated to a -12.0% decline in fourth quarter. The overall return of -8.9%
in 2022 masks significant divergence in returns at the sector level.
The UK industrial sector was the weakest performing sector, posting a total
return of -14.6% over the course of 2022, whilst the office and retail sectors
recorded returns of -9.8% 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 listed property sector
had a difficult 2022 with widening discounts to net asset values (NAV). 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%. Sector
specialists that had been trading on the biggest premiums saw rapid moves to
large discounts especially in the logistics sector, reflecting the change in
pricing of the underlying assets which had reached low levels of yield.
Specialist funds have been increasingly popular over the last few years,
however with logistics funds being hardest hit in terms of NAV falls in 2022
and several social housing funds having significant challenges, there is
potential for diversified funds to return more into favour. NAV declines in Q4
led to a narrowing of discounts for a while, but concerns over a new banking
crisis at the end of Q1 2023 mean discounts are back to similar levels as at
end 2022 despite the lower NAVs.
Offices
The office sector delivered a total return of -9.8% in the year 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 rose in response to increasing interest rates and a narrowing
spread over the UK 10-year gilt yield. Capital values rose by a modest 0.9%
during the first half of 2022, but they declined by -13.9% in the second half,
resulting in values declining by -13.2% for the year.
There was a polarisation in performance at the market level within the office
sector, with West End offices posting the strongest total return of -4.5%
during 2022. With total returns of -12.1% and -11.6% respectively during 2022,
the Rest of UK and the Rest of South East posted the weakest regional returns
within the office sector.
Despite structural headwinds facing the sector more generally, vacancy rates in
the West End office market declined to 3.7% in 2022, having hit 5.4% during
2020 according to CBRE data. The West End office market has benefitted from
more attractive fundamentals, including much higher office occupancy and a
lower vacancy level than the rest of the office sector. The COVID-19 pandemic
has created a longer-term structural headwind for the office sector in the UK,
largely as a result of the increased prominence of hybrid working. The
subsequent change to office occupation is reflected in higher vacancy rates
across most UK office markets. In the regional markets, a lack of availability
for best-in-class space is evident which should provide support for Grade A
rental growth.
In central London, the vacancy rate at the end of 2022 stood at 8.2%,
substantially higher than the ten-year
average of 5.1%. However, it is clear that occupier demand remains highly
polarised. Despite take-up of central London office space reaching 12.3 million
sq ft in 2022, in-line with the 10-year average, 80% of take-up was focused on
Grade A space. Indeed, we believe that occupier preference for the best quality
space will create an increasing wedge in rents between Grade A/best in class
space and the rest for the office sector. In central London for example, prime
rents grew by 4.6% in 2022 whilst market average rents grew by only 2.1%.
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 half of the year, but this was unwound in the
second half of the year when values declined by -13.9%. Most of the capital
value decline was recorded in the fourth quarter at -10.5%.
Polarisation across retail sub-sectors was acutely evident, with retail
warehousing posting the best performance in the retail sector, with a total
return of -0.8% and capital growth of -6.2% in 2022. Well positioned retail
warehouses with essential and discount retailers as anchor tenants continued to
attract investor interest at the expense of discretionary and non-essential
retail. Shopping centres delivered a total return of -5.3%, whereas
supermarkets delivered the lowest total return of -13.4%, heavily impacted by
the -17.5% capital value decline in the final quarter. The supermarket sector
was more sensitive to the rising interest rate environment given the generally
low yielding nature of the sector.
Industrial
The fortunes of the industrial and logistics sector turned 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 had 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% during 2022
according to the MSCI Quarterly Index, leading to it recording the weakest
performance across the UK real estate market, with a total return of -14.6%, a
stark contrast to the 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 its
largest quarterly capital value decline in the history of the MSCI Index of
-22.2% in the final quarter.
That being said, 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.
Demand was principally driven by the third party logistics ('3PL') sector,
while demand from the manufacturing sector saw continued growth, helping to
offset the fall in take-up from online retailers. While the level of take-up
fell in the second half of 2022, it remained well above the long term average.
'Big Box' take-up for the year reached 47.99m sq ft, the third highest level on
record according to Savills. Despite robust take-up, supply levels increased
during 2022, with the UK vacancy rate rising to 3.9%. This, however, remains
near historic lows and the existing development pipeline is unlikely to
materially alter the strong supply/demand dynamic which the sector currently
enjoys.
Alternatives
The UK real estate alternative sector, or "Other Property" as it is categorised
by MSCI, represents real estate which falls outside the traditional 'Retail',
'Office' or 'Industrial' definitions. The alternative sector recorded a total
return of -2.6% in 2022, outperforming the other sectors. 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%.
Despite the cost-of-living crisis placing pressure on UK Household 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 also
improved, supported by growing weekend leisure stays and a recovery in weekday
business demand. With a weaker pound, it is likely the return of international
visitors aided the recovery.
Investor appetite for the living sector continued 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, 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 asset yields rising by only 25bps over the second half of 2022, much
less than other areas of the commercial real estate market.
Market Outlook 2023
Given the magnitude and speed of correction we have seen in sectors including
supermarkets, industrial and logistics, and long duration income more
generally, we believe that the market pricing for these areas of UK real estate
will find a floor much quicker than we have seen in previous cycles. As such,
our outlook, and forecasts for these areas of the market have improved
materially, given the size of the corrections experienced.
Following the poor reception to the mini budget in September 2022 longer term
yields may have peaked in early 2023 and could reduce by year end if inflation
falls as predicted. Lower yields, and in particular forward swap rates, will
make utilising debt more accretive again and will likely increase investment
volumes as debt backed buyers re-enter the market.
It is never easy to call the bottom of a market cycle, however it appears that
the industrial sector may be bottoming out about now, with offices and retail
values having further to fall. The rapid repricing of the UK market means that
the prospective returns from today's levels look more attractive, along with
the likely improvement of the yield premium of growth assets over gilts as the
year develops. abrdn forecasts a market return of 4.3% over the 3 years from
April 2023.
The outlook is positive for the industrial sector and particularly for better
quality assets in strong locations, as both occupiers and investors narrow
their focus on best-in-class assets. The size and speed of value correction in
2022 means the sector now looks better value relative to other real estate
sectors and indeed, other asset classes. The sector continues to benefit from
structural tailwinds and a positive supply/demand dynamic, with the UK wide
vacancy rate remaining near historic lows and new supply levels likely to
remain muted due to higher development costs. Whilst we anticipate the
industrial vacancy rate to move higher this year, largely as a result of a
weaker economic backdrop, we expect occupational demand to remain robust as the
advent of 'onshoring' and continued demand for e-commerce supports demand for
good quality accommodation. As a result, further rental value growth is
expected and is likely to drive performance in the medium term. There is the
prospect for capital value growth for best-in-class assets, as investors once
again compete for good quality industrial accommodation with strong
occupational fundamentals.
The office sector continues to face real structural headwinds as working habits
remain altered following the COVID-19 pandemic. Indeed, the bifurcation between
best-in-class and secondary office space is acutely evident, becoming even more
entrenched during 2022. Secondary office accommodation is at risk of
obsolescence and asset stranding, while the capital requirements to ensure
assets meet minimum ESG standards is unlikely to lead to positive returns.
The office sector did not reprice as much as many other UK property sectors in
2022, predominantly due to limited transactional evidence. However, we expect
further pricing discovery to emerge over the course of 2023 and for secondary
accommodation, this is likely to 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.
Performance within the retail sector is expected to remain polarised in 2023.
Consumer spending habits will be driven by consumer cost considerations and as
such, non-discretionary led retailing is expected to be best placed.
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
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 as such, a focus on the
quality of the underlying real estate will remain crucial.
The outlook for 2023 feels a lot more positive than it did at the end of 2022.
Tenant demand remains resilient for good quality accommodation, and the impact
of high interest rates and gilt yields seems to be easing, although recent
turmoil in the banking sector is a timely reminder that risks still remain. If
the UK can experience some political stability and a soft landing, then it
feels as though real estate is well placed to benefit following the short sharp
correction of 2022.
Purchases:
As previously reported in our results to December 2021, we completed a purchase
in April 2022 for £5.0m. The asset was a car showroom in Stockton on Tees let
to Motorpoint for 25 years (with a tenant break in years 15 and 20), with the 5
yearly rent reviews linked to CPI. After the reporting period (in March 2023)
the Company acquired a food store in Welwyn Garden City let to Morrisons for £
18.3m, which reflected a yield of 6.35%. The store is a strong trader for
Morrisons and was acquired off market by way of a sale and leaseback with a new
25 year lease subject to indexation of rent.
Development:
During 2022 substantial progress was made on the pre-let development at St
Helens. Completion of the development occurred in April 2023 with a new 15 year
lease to the local Council commencing at a passing rent of £0.7m pa. The rent
is subject to 5 yearly rent reviews linked to CPI +1%. The property is sublet
to a not for profit research body investigating ways to manufacture low carbon
glass (the project is known as Glass Futures).
After the reporting period the Company completed the purchase of a development
site in Knowsley (Liverpool) for £4m following grant of planning permission. We
expect to start on site in the second quarter to construct a 110,000 sq ft
grade A logistics unit.
Sales:
A total of four assets were sold in 2022 for a total of £41.8m at a combined
realised loss of £0.2m based on the valuation as at 31 December 2021 and the
net proceeds as disclosed in note 7. Three of the assets were offices and the
decision to sell was taken as part of our general concern over the future of
offices. We also disposed of an industrial asset (the lowest yielding asset in
the company) just before the major correction in pricing.
Asset Management:
During the COVID-19 pandemic rent collection was a major focus for the asset
management team. In 2022 attention was able to return to more normal tenant
engagement, with rental collection back at 100% in the fourth quarter and the
rate for the year just over 99% with some rent still being collected.
Rent Collection Quarter % Received
2021 1 100%
2 98%
3 97%
4 99%
2021 FY 98%
2022 1 99%
2 99%
3 97%
4 100%
2022 FY 99%
The vacancy rate at the year-end was 9.8% (prior year 9.7%) which is above our
target level of 5%. As noted below, we have several units that are subject to
an agreement for lease, and when those leases complete along with some other
lettings under offer, the vacancy rate is expected to be close to around that
target level.
Ten lettings were completed during the year securing a total of £1.2m pa. In
addition, an agreement for lease (a contractual agreement to enter into a lease
once the landlord completes a refurbishment) securing a rent of £0.6m pa was
signed and we expect to complete the works mid 2023. Since the year end two
more lettings have completed securing £0.3m pa.
In addition to the asset lettings, four leases were completed with an operator
of EV charge points in some of our asset car parks. The combined base rent is
only £8,000pa (with a top up potential share of turnover) however we will be
undertaking more of these lettings where an operator has the cost of
installation and running the charge points, but our tenants benefit from the
service.
Six lease renewals or regears were completed over the year securing £0.6m pa,
along with six rent reviews, resulting in an additional £0.2m pa being secured
and since year end two more rent reviews with a total increase in rent of £0.1m
pa were agreed. The majority of the increase is from the industrial / logistics
sector although we are also seeing some increases in our office portfolio.
Portfolio Rent Reviews
Basis % of Current Weighted Average Weighted Average Weighted Average
Rent Roll Floor (value if Cap / Range of Unexpired Lease
fixed) Caps Term (years)
RPI Inflation 17.1% 1.0% 3.9 (ex-uncapped 8.4
linked % income)
CPI Inflation 4.0% 1.7% 3.7% 14.7
linked %
Fixed / Stepped 10.3% 2.6% n/a 10.6
Open Market 68.6% n/a n/a 2.6
Value
Total 100% n/a n/a 5.7 (FUND WAULT)
Income Growth Potential
The Company has a diversified portfolio of commercial real estate assets let to
occupiers under a variety of leases. The rent that tenants pay will vary over
time, and in the case of the current portfolio the rent received is below
market rates giving scope for increase over the next five years. This increase
will come from rent reviews and lease renewals on existing leases (£2.1m of
reversion present), completing development projects (£1.2m of rent) and
hopefully letting void units (£2.3m).
Rent reviews are a mixture of open market (negotiated), fixed or indexed. The
table below shows the Company mix.
Passing Rent (OMV) £17.4m
RPI Linked Income £4.3m
CPI Linked Income £1.0m
Fixed/Stepped Income £2.6m
Reversion in Let Portfolio £2.1m
Development Properties £1.2m
Void Properties £2.4m
Estimated Rental Value £31.1m
Debt
The Company's £110m term loan and £50m revolving credit facility (RCF) was to
mature in April 2023, and
given volatility in the lending market the company sought to secure an
extension in 2022, which it did in October. At year end the term loan was fully
drawn and subject to an interest rate swap giving an all in cost of 2.725%. The
RCF was undrawn following the sales undertaken in the year (also undrawn year
end 2021 although there was some utilisation in the intervening period).
The new facility is with the existing lender (RBSI), commences in April 2023
for three years and consists of a £85m term loan and an £80m RCF. The margin on
both is 150bps which is considered very competitive. At the time of agreeing
the new facility swap rates were very unattractive however there was
significant concern that rates would go even higher as a result of the then
Government policy. The Company decided to enter into a swap given the risks of
a worsening situation, which would have fixed the cost of debt at 7.0%.
With the rapid repricing of interest rate futures following the change of Prime
Minister and Chancellor the Company decided to break that swap in December 2022
and enter into an interest rate cap instead. This limits the upper rate the
Company could pay to 5.5% and allows the Company to benefit from lower rates if
they occur.
The costs associated with the debt restructure were, as detailed in the 2022
NAV and disclosed further in the accounts, £3.6m to break the swap and £2.5m to
replace this with an interest rate cap; the latter of which will be amortised
over the three-year tenor of the loan. The LTV as at year end was 22.6% (19.2%
prior year) which is a level the Investment Manager and Board are comfortable
with at this stage of the market cycle.
Outlook and Future Strategy
Although the economic outlook remains uncertain the portfolio consists of good
quality assets that are appealing to occupiers. The Investment Manager will
continue to focus on growing income through active asset management of the
assets, and ensuring the assets in the portfolio meet occupier needs. In the
first few months of 2023 new occupier interest is encouraging, and we expect
that to continue given the quality of accommodation the Company offers.
In order to have a reliable income stream with potential for growth we will
continue to focus on ESG and offering cost effective solutions for occupiers.
To reflect the importance of ESG, the Annual Report now includes a dedicated
section and we have also early adopted the Taskforce for Climate-related
Financial Disclosures.
Performance
There are a number of different measures of performance used by the Board, from
individual assets to shareholder return. These are detailed below:
Portfolio total MSCI UK Quarterly MSCI UK Monthly NAV total return
return (per Property Index Index Funds (per annum)
annum) return (per Quarterly
annum) Property Index
return (per
annum)
1 Year (8.8%) (8.9%) (10.8%) (12.8%)
3 Year 9.8% 3.9% 4.7% 7.0%
5 Year 24.9% 11.7% 13.7% 21.9%
10 Year 12.1% 89.0% 88.5% 159.5%
Portfolio Return:
The Company uses a MSCI Benchmark to measure performance of the underlying
assets against the general market. The portfolio is not constructed with
reference to the MSCI index, but it can be useful to measure the performance of
the Investment Manager. At the end of 2022 the Board and Manager changed the
benchmark index it uses for this comparison from the MSCI quarterly version of
monthly valued funds to the MSCI Quarterly index. The reason for this change
was that the quarterly index represents a much broader measure of the market
return, and is the main index used by commentators. For the purpose of this
year end report and accounts performance review the table above shows the
portfolio and NAV against both indices for clarity.
At a portfolio level the Company has continued to demonstrate performance above
that of the overall market over 1, 3, 5 and 10 years (see above). The improved
performance relative to the benchmark is a result from a combination of
structure (having a greater exposure to strongly performing sectors and low
exposure to poorly performing sectors), and the active approach to managing the
portfolio. Turnover in the portfolio has been higher than the market over most
time periods, indicating a willingness to take profits and reinvest in new
productive assets.
NAV Return:
The NAV total return is perhaps the best indication of the Company's
performance, rather than just the property portfolio, as it takes all costs and
manager controlled factors (such as borrowing) into account. The table above
shows NAV total returns alongside the portfolio and market returns. The table
below compares the NAV total return of the company against the AIC peer group,
and as a further source of comparison against the IA open ended fund sector
average.
NAV Total Returns to 31 December 2022
Source AIC, abrdn 1 year 3 years 5 years 10 years
% % % %
abrdn Property Income Trust Limited (12.8) 7.0 21.9 159.5
AIC Property UK Commercial (weighted (0.4) 20.9 39.6 32.1
average)
Investment Association Open Ended (7.7) (1.8) 1.1 35.5
Commercial Property Funds sector
Share Price:
For the investor, share price total return is the real measure of their
experience, measuring the share price performance along with the dividends they
received. The Company's market capitalisation at 31 December 2022 was £237.9m
against £323.5m a year earlier. The reduction in market capitalisation reflects
the wider discount and the share buy backs undertaken by the Company -
totalling £12.4m in 2022.
Share Price Total Returns to 31 December 2022
Source AIC, abrdn 1 year 3 years 5 years 10 years
% % % %
abrdn Property Income Trust Limited (19.0) (18.5) (11.8) 90.4
FTSE All-Share Index 0.3 7.1 15.5 88.2
FTSE All-Share REIT Index (31.6) (25.8) (15.0) 45.1
AIC Property Direct - UK Sector (15.8) (6.9) 12.5 17.8
(weighted Average)
Valuation
The portfolio is valued quarterly by Knight Frank LLP under the provisions of
the RICS Red Book. As at 31 December 2022 the portfolio, including the Ralia
Estate, was valued at £416.2m (£499.9m at 31 December 2021) and the Company
held cash of £15.9m (£13.8m at 31 December 2021). The portfolio consisted of 45
assets at year-end (48 assets at 31 December 2021).
Investment Strategy
The Company has a clearly stated investment strategy: "To provide investors
with an attractive income return, with the prospect of income and capital
growth, through investing in a diversified portfolio of commercial real estate
assets in the UK". The word "Income" features in both the Company's name, and
prominently in the investment strategy.
Our investment activities are centred around providing an attractive level of
income. However, you will read throughout the report about the importance of
ESG to future returns. The Investment Manager and Board want to provide a level
of income that is attractive to investors today, that is sustainable and has
scope to grow in the future. We also want to provide a reasonable total return
(i.e. not sacrifice capital value to deliver an unsustainable level of income).
Environmental Social and Governance (ESG)
ESG is central to API's investment philosophy and is fully incorporated into
our decision making and actions. We believe that ESG should form a central part
of decision making, and that in order to make the best decisions, we must build
our own expertise and knowledge through working with best in class consultants
to optimise the timing and impact of our investments in ESG improvements. We do
not aim to solve every problem overnight, rather we seek to find the optimum
point of intervention for each asset to maximise return for shareholders and
avoid waste (and with it embedded carbon).
To reflect the importance of ESG, the Annual Report now includes a dedicated
section and we have also early adopted the Taskforce for Climate-related
Financial Disclosures.
PROPERTY INVETMENTS
Top Ten Properties
Property Value (range) Sector % of total
portfolio
B&Q, Halesowen £22m - £24m Retail 5.7%
54 Hagley Road, Birmingham £22m - £24m Office 5.6%
Symphony, Rotherham £20m - £22m Industrial 5.0%
Atos Data Centre, Birmingham £16m - £18m Other 3.8%
Timbmet, Shellingford £14m - £16m Industrial 3.7%
Hollywood Green, London £14m - £16m Other 3.4%
Tetron 141, Swadlincote £12m - £14m Industrial 3.2%
CEVA Logistics, Corby £12m - £14m Industrial 3.2%
Walton Summit Industrial Estate, Preston £12m - £14m Industrial 2.9%
Badentoy North, Aberdeen £12m - £14m Industrial 2.9%
Top Ten Tenants
Tenant Passing Rent % of total contracted
rent
B&Q Plc £1,560,000 6.2%
Public Sector £1,346,186 5.3%
The Symphony Group Plc £1,225,000 4.8%
Schlumberger Oilfield UK Plc £1,138,402 4.5%
CEVA Logistics Limited £840,000 3.3%
Atos IT Services Limited £838,910 3.3%
Jenkins Shipping Co Ltd £819,390 3.2%
Timbmet Limited £799,683 3.2%
Thyssenkrupp Materials (UK) £643,565 2.5%
Ltd
Adexa Direct Limited £560,997 2.2%
Portfolio Allocation by region
Region Weighting
South East 21.2%
West Midlands 20.9%
North West 13.5%
East Midlands 13.4%
Scotland 12.0%
North East 10.5%
South West 3.4%
London City 2.7%
London West End 2.3%
Portfolio Allocation by Sector
Region Weighting
Rest of UK Industrial 45.5%
Retail Warehouses 11.0%
Rest of UK Offices 9.4%
Other Commercial 9.4%
South East industrial 9.1%
South East Offices 6.8%
London City Offices 2.7%
London West End 2.3%
Offices
South East Retail 1.9%
Land 1.8%
ENVIRONMENTAL, SOCIAL and GOVERNANCE (ESG)
ESG
It is now commonplace for investment managers to say that ESG is embedded in
their processes. It is not always clear what that really means. As a Company
investing in real assets we can have a direct impact on ESG outputs - and the
reason we have fully integrated ESG into our investment process and behaviour
is that we believe it is fundamental to achieving the Company's investment
objective. We do not consider ESG in isolation or as just a cost. We see it as
an opportunity for driving performance. It is for that reason it forms an
integral part of our decision making processes. We seek to implement ESG
initiatives in a planned, sensible, and measured way so as to maximise the
return on investment.
ESG Policy
ESG Strategy.
The Board has a separate Sustainability Committee that sets Key Performance
Indicators (KPIs) in order to measure the ESG performance of the real estate
portfolio and Investment Manager in delivering ESG improvements. The Committee
is relatively new, and demonstrates the increased importance of ESG in managing
risk and return for the Company.
The Investment Manager has an advanced and comprehensive framework of process,
oversight, and knowledge to incorporate and enhance ESG into the business and
to ensure practical implementation, which is evolving to keep pace with current
ESG trends and legislation.
Priorities.
The Company has identified two main areas of focus that have the most relevance
for the activities it undertakes - People and Planet.
People involves our tenants, the users of our properties and the local
community. It is a wide-ranging theme, covering supplier management, community
engagement, social values, tenant engagement and wellness.
Under Planet, the Company has a primary focus on (1) carbon and energy; (2)
climate resilience; and (3) biodiversity.
Hardly a week goes by without an extreme weather event occurring somewhere in
the world, bringing the need for climate action into focus. The Company has a
clear strategy for managing carbon emissions across the portfolio and has been
implementing energy efficiency improvements and renewable energy projects for
several years.
In 2021, we undertook work to establish the operational carbon footprint
baseline of the portfolio and model our pathway to net-zero.
This involved benchmarking the performance of each asset, modelling our future
footprint including embodied and operational carbon and identifying the types
of measures necessary to fully decarbonise the portfolio by 2050. From that
baseline we can measure progress annually - although it won't be a straight
line to net-zero. In 2022, we have been actioning our net-zero strategy to
improve on the baseline performance, with an initial focus on offices and also
a refurbishment to have our first operational net neutral carbon logistics
unit.
Transparency and Reporting
EPRA Sustainability Best Practice Recommendations Guidelines.
We have adopted the 2017 EPRA Sustainability Best Practice Recommendations
Guidelines (sBPR) to inform the scope of indicators we report against. We have
reported against all EPRA sBPR indicators that are material to the Company. We
also report additional data not required by the EPRA sBPR where we believe it
to be relevant (e.g. like-for-like greenhouse gas emissions).
A full outline of the scope of reporting and materiality review in relation to
EPRA sBPR indicators as explained above, is included in the full Annual
Accounts which can be found at the following link https://www.abrdnpit.co.uk/
en-gb/literature. These also provides disclosures required under Streamlined
Energy and Carbon Reporting (SECR).
2022 GRESB Assessment.
The GRESB Assessment is regarded as the leading global sustainability benchmark
for real estate vehicles. The Company has submitted data to GRESB since 2012.
Whilst GRESB is a useful tool for benchmarking ESG
performance, there are significant limitations with the default peer group
selection which the company does not believe represents its peers. Despite
providing this feedback, GRESB still does not benchmark the Company against
similar UK funds, however we continue to engage on this matter.
Our ESG Priorities
Climate Change.
The Company considers the risks and opportunities of climate change on the
portfolio. This is one of the most material ESG components to investment
performance. The Taskforce for Climate-related Financial Disclosures (TCFD) was
established to provide a standardised way to disclose and assess
climate-related risks and opportunities and defines two types of climate risks:
· Transition risks: those that relate to an asset, portfolio or company's
ability to decarbonise. An entity can be exposed to risks as a result of carbon
pricing, regulation, technological change and shifts in demand related to the
transition.
· Physical risks: those that relate to an asset's vulnerability to factors
such as increasing temperatures and extreme weather events as a result of
climate change. Exposure to physical risks may result in, for example, direct
damage to assets, rising insurance costs, health and safety or supply chain
disruption.
The Taskforce for Climate-related Financial Disclosures (TCFD) recommendations
are structured around four key topics: Governance, Strategy, Risk Management
and Metrics & Targets. The Company is committed to implementing the
recommendations of the TCFD to provide investors with information on climate
risks and opportunities that are relevant to the Company. We highlight our
commitments and progress against both transition and physical risks below with
formal TCFD disclosure in the full Annual Accounts which can be found via the
following link https://www.abrdnpit.co.uk/en-gb/literature.
Transition Risks: Targeting Net-Zero
Net-Zero Strategy.
The Company has set a target to be net-zero for emissions associated with
landlord-procured energy by 2030 and has determined that it will work with
tenants to establish a reasonable and realistic target for total carbon
emissions over the medium term.
The net-zero target was informed from the findings of a carbon modelling
exercise undertaken in 2021 to understand its current carbon footprint, and
what would be required to be net-zero by 2050. The key finding was that
landlord-controlled energy (i.e. responsible for scope 1 and 2 carbon
emissions) accounts for less than 6% of the Company's carbon footprint and we
have limited control over 94% of the output determined by tenants.
Our Net-Zero Principles.
Although the goal of net-zero may seem clear, definitions and standards and the
policy mix to support it remains immature. Accordingly, the Company has
established several key principles to ensure its strategy, is robust and
delivers value:
Practical:
· Asset-level action - focusing on energy efficiency and renewables is our
priority to ensure compliance with energy performance regulations. Our analysis
shows that meeting proposed future Energy Performance Certificate standards is
a sensible stepping stone towards net-zero. This improves the quality of assets
for occupiers and reduces the exposure to regulatory and market risk. Our
investment in nature-based carbon removal at Far Ralia is in addition to
asset-level decarbonisation.
· Timing - we aim to align improvements at our properties with existing
plant replacement cycles and planned refurbishment activities wherever
possible. This ensures we are not unnecessarily replacing functional plant
ahead of its useful life unless necessary, which in turn reduces cost and
embodied carbon.
Realistic:
· Target - long-term objectives must be stretching but deliverable and
complemented by near-term targets and actions.
· Policy support - to fully decarbonise before 2050 the real estate sector
requires a supportive policy mix to incentivise action and level the playing
field.
Measurable:
· Clear key performance indicators at the asset and portfolio level.
Collaborative:
· Occupiers - we cannot achieve net-zero for the portfolio in isolation. We
will work closely with occupiers, many of whom have their own decarbonisation
strategies covering their leased space.
· Suppliers - we will work collaboratively with our suppliers including
property managers and consultants in order to achieve net-zero.
Performance to Date
Baseline versus current performance:
Our operational carbon intensity for 2019 is shown below. We have used 2019 as
a baseline as it was unaffected by changes in occupancy due to COVID-19. The
2019 baseline was updated from that reported in the 2021 annual report due to
improved data coverage and the inclusion of F-gases.
Normalised Portfolio Carbon Intensity:
2019 63.4 kgCO2e /m2
2021 53.1 kgCO2e /m2
% Change (16%)
This shows a total operational footprint of 25,128 tonnes of carbon dioxide
equivalent (CO2e). Of this, 6% is associated with Scope 1 and 2 emissions that
are directly controlled by the Company, with 94% coming from Scope 3 emissions
from tenant procured energy. For 2019 we gathered energy consumption data for
31% of the portfolio by floor area with representative industry standard
benchmarks used to estimate the rest.
Based on these assumptions for 2019 the energy intensity at the portfolio level
was 286 kWh/m2 which has reduced by 7% to 266 kWh/m2 and the operational
emissions intensity was 63.4 kgCO2e /m2 across Scopes 1, 2 and 3 which has
improved by 16% to 53.1 kgCO2e /m2.
For more information around our commitment and approach to ESG, please see our
full Annual Accounts https://www.abrdnpit.co.uk/en-gb/literature.
PRINCIPAL RISKS AND UNCERTAINTIES
The Board ensures that proper consideration of risk is undertaken in all
aspects of the Company's business on a regular basis. During the year, the
Board carried out an assessment of the risk profile of the Company, including
consideration of risk appetite, risk tolerance and risk strategy. The Board
regularly reviews the principal and emerging risks of the Company, seeking
assurance that these risks are appropriately rated and ensuring that
appropriate risk mitigation is in place.
The group and its objectives become unattractive to investors, leading to
widening of the discount.
This risk is mitigated through regular contact with shareholders, a regular
review of share price performance and the level of the discount or premium at
which the shares trade to net asset value and regular meetings with the
Company's broker to discuss these points and address any issues that arise.
Geopolitical risk increased the volatility of the Company's share price and,
reflecting wider market sentiment, has resulted in the Company's shares trading
at a discount to prevailing NAV of 26.4% as at 31 December 2022, in-line with
other diversified peers in the Company's AIC peer group.
Net revenue falls such that the Company cannot sustain its level of dividend,
for example due to tenant failure, voids or increased costs.
This risk is mitigated through regular review of forecast dividend cover and of
tenant mix, risk and profile. Due diligence work on potential tenants is
undertaken before entering into new lease arrangements and tenants are kept
under review through regular contact and various reports both from the managing
agents and the Investment Manager's own reporting process.
Contingency plans are put in place at units that have tenants that are believed
to be in financial trouble. The Company subscribes to the MSCI Iris Report
which updates the credit and risk ranking of the tenants and income stream, and
compares it to the rest of the UK real estate market.
During 2022 the significantly heightened geopolitical uncertainty and cost of
living crisis have resulted in inflationary pressures and vulnerabilities in
supply chains being exposed. Government initiatives have eased some of these
pressures and we are yet to see the full impact which could impact upon our
tenants' ability to trade profitably.
Uncertainty or change in the macroeconomic environment results in property
becoming an undesirable asset class, causing a decline in property values.
This risk is managed through regular reporting from, and discussion with, the
Investment Manager and other advisers. Macroeconomic conditions form part of
the decision making process for purchases and sales of properties and for
sector allocation decisions.
The impact of geopolitical uncertainty and the cost of living crisis have
resulted in inflationary pressures which have impacted both property values and
the ability of tenants to pay rent.
Real estate holdings of good quality and rental growth prospects can appear
more attractive at such times to offer a partial hedge against inflationary
pressures.
Environmental.
Environmental risk is considered as part of each purchase and monitored on an
ongoing basis by the Investment Manager. However, with extreme weather events
both in the UK and globally becoming a more regular occurrence due to climate
change, the impact of the environment on the property portfolio and on the
wider UK economy is seen as an increasing risk.
Please see the Environmental, Social and Governance Policy section, our
Taskforce for Climate-related Financial Disclosures of our full Annual Accounts
and the Investment Manager's Review for further details on how the Company
addresses environmental risk, including climate change.
Other risks faced by the Group include the following:
· Tax efficiency - the structure of the Group or changes to legislation
could result in the Group no longer being a tax efficient investment vehicle
for shareholders.
· Regulatory - breach of regulatory rules could lead to the suspension of
the Group's Stock Exchange Listing, financial penalties or a qualified audit
report.
· Financial - inadequate controls by the Investment Manager or third party
service providers could lead to misappropriation of assets. Inappropriate
accounting policies or failure to comply with accounting standards could lead
to misreporting or breaches of regulations.
· Operational - failure of the Investment Manager's accounting systems or
disruption to the Investment Manager's business, or that of third party service
providers, could lead to an inability to provide accurate reporting and
monitoring, leading to loss of shareholder confidence.
· Business continuity - risks to any of the Company's service providers or
properties, following a catastrophic event e.g. terrorist attack, cyber-attack,
power disruptions or civil unrest, leading to disruption of service, loss of
data etc.
· Refinancing - risk that the Company is unable to renew its existing
facilities, or does so on significantly adverse terms, which does not support
the current business strategy.
The Board seeks to mitigate and manage all risks through continual review,
policy setting and enforcement of contractual obligations. It also regularly
monitors the investment environment and the management of the Group's property
portfolio, levels of gearing and the overall structure of the Group.
Details of the Group's internal controls are described in more detail in the
Corporate Governance Report in the full Annual Accounts which can be found via
the following link: https://www.abrdnpit.co.uk/en-gb/literature.
Emerging Risks
Emerging risks have been identified by the Board 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 and improved performance.
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 could lead to a
continuation of the already elevated inflationary environment, 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 is uncertain 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 the real estate valuations in 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-19 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-19 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.
Viability Statement
The Board considers viability as part of its programme of financial reporting
and monitoring risk. The Board regularly reviews the prospects for the Company
over the longer term taking into account the Company's current financial
position, its operating model, and the diversified constituents of its
portfolio. In addition the Board considers strong initial due diligence
processes, the continued review of the portfolio and the active asset
management initiatives. Given the above, the Board believes that the Company
has a sound basis upon which to continue to deliver returns over the long term.
In terms of viability, the Board has considered the nature of the Group's
assets and liabilities and associated cash flows and has determined that three
years is the maximum timescale over which the performance of the Group can be
forecast with a material degree of accuracy and so is an appropriate period
over which to consider the Group's viability. This timescale was assessed as
being more accurate than the previous five year period used by the Board and
also brings the Group more in line with its peer group and reflecting the term
of the long-term debt.
The Board has also carried out a robust assessment of the principal and
emerging risks faced by the Group, as detailed above. The main risks which the
Board considers will affect the business model are: future performance,
solvency, liquidity, tenant failure leading to a fall in dividend cover and
macroeconomic uncertainty.
These risks have all been considered in light of the financial and economic
impact that arose from COVID-19 and considering the emerging geopolitical
risks.
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 three year period under both normal and
stressed conditions;
· The Group's ability to pay its operational expenses, bank interest, tax
and dividends over a three year period;
· Future debt repayment dates and debt covenants, in particular those in
relation to LTV and interest cover;
· The ability of the Company to refinance its debt facilities in April 2023;
· Demand for the Company's shares and levels of premium or discount at which
the shares trade to NAV;
· Views of shareholders; and
· The valuation and liquidity of the Group's property portfolio, the
Investment Manager's portfolio strategy for the future and the market outlook.
The assessment for stressed conditions used a foreseeable severe but plausible
scenario which was modelled using the following assumptions:
* 25 per cent capital fall in the next 3 years
* Tenant defaults of 15 per cent for the next 3 years
* Sterling Overnight Index Average (SONIA) tracks 1.0 per cent above the
anticipated forward curve
Even under those scenarios 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 three years. This
assessment is based on the current financial position of the Company, its
performance track record and feedback it receives from shareholders.
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 Strategic Report.
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 over the going concern period. 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 significantly heightened geopolitical uncertainty and cost of living
crisis, 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 this Annual Report.
The Directors have satisfied themselves that the Group has adequate resources
to continue in operational existence and the Board believes it is appropriate
to adopt the going concern basis in preparing the consolidated financial
statements.
STATEMENT OF DIRECTOR'S RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Group
Consolidated Financial Statements for each year which give a true and fair
view, in accordance with the applicable Guernsey law and those International
Financial Reporting Standards ("IFRSs") as adopted by the European Union.
In preparing those 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 IFRSs 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 IFRSs 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 adequate 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 to
enable them to ensure that the Financial Statements comply with The Companies
(Guernsey) Law, 2008. They are also responsible for safeguarding the assets of
the Group and hence for taking reasonable steps for the prevention and
detection of fraud, error and non-compliance with law and regulations.
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 Consolidated Financial Statements, prepared in accordance with IFRSs
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
· 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.
Approved by the Board on
21 April 2023
James Clifton-Brown
Chair
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2022
12 months to 12 months to
Notes 31 Dec 2022 31 Dec 2021
£ £
Rental income 26,697,931 26,485,585
Service charge income 4 4,411,821 4,097,344
Service charge expenditure 4 (5,576,812) (4,938,920)
Net Rental Income 25,532,940 25,644,009
Administrative and other expenses
Investment management fees 4 (3,480,963) (3,301,074)
Other direct property expenses 4 (3,089,960) (2,564,156)
Impairment gain/(loss) on trade receivables 4 852,062 (406,475)
Other administration expenses 4 (1,134,919) (1,162,009)
Total Administrative and other expenses (6,853,780) (7,433,714)
Operating profit before changes in fair value 18,679,160 18,210,295
of investment properties
Valuation (loss)/gain from investment 7 (62,257,782) 72,188,550
properties
Valuation loss from land 8 (60,322) (501,550)
Loss on disposal of investment properties 7 (207,153) (634,368)
Operating (loss)/profit (43,846,097) 89,262,928
Finance income 5 27,543 763
Finance costs 5 (3,672,685) (3,530,870)
Loss on termination of interest rate swaps 14b (3,562,248) -
(Loss)/profit for the period before taxation (51,053,487) 85,732,821
Taxation
Tax charge - -
(Loss)/profit for the period, net of tax (51,053,487) 85,732,821
Other comprehensive income
Movement in fair value on existing swap 14a 1,470,570 3,167,218
Movement in fair value on interest rate cap 14c 43,292 -
Total other comprehensive gain 1,513,862 3,167,218
Total comprehensive (loss)/gain for the period, (49,539,625) 88,900,039
net of tax
Earnings per share 2022 (p) 2021 (p)
Basic and diluted earnings per share 19 (13.11) 21.54
All items in the above Consolidated Statement of Comprehensive Income derive
from continuing operations.
The notes below are an integral part of these Consolidated Financial
Statements.
CONSOLIDATED BALANCE SHEET
As at 31 December 2022
Assets 31 Dec 2022 31 Dec 2021
Notes £ £
Non-current assets
Investment properties 7 401,217,536 484,514,085
Lease incentives 7 8,357,036 8,802,294
Land 8 7,500,000 7,500,000
Interest rate cap 14c 2,211,007 -
Rental deposits held on behalf of 751,782 904,189
tenants
420,037,361 501,720,568
Current assets
Trade and other receivables 10 7,457,083 11,024,100
Cash and cash equivalents 11 15,871,053 13,818,008
Interest rate swap 14a 1,238,197 -
Interest rate cap 14c 339,462 -
24,905,795 24,842,108
Total assets 444,943,156 526,562,676
Liabilities
Current liabilities
Trade and other payables 12 10,880,310 13,618,457
Interest rate swap 14a - 546,526
10,880,310 14,164,983
Non-current liabilities
Bank borrowings 13 109,123,937 109,723,399
Interest rate swap 14a - 31,510
Obligations under finance leases 15 899,572 901,129
Rent deposits due to tenants 751,782 904,189
110,775,291 111,550,227
Total liabilities 121,655,601 125,715,210
Net assets 323,287,555 400,847,466
Equity
Capital and reserves attributable to
Company's equity holders
Share capital 17 228,383,857 228,383,857
Treasury share reserve 17 (18,400,876) (5,991,417)
Retained earnings 18 4,362,024 8,521,081
Capital reserves 18 11,084,178 72,095,573
Other distributable reserves 18 97,838,372 97,838,372
Total equity 323,287,555 400,847,466
Approved and authorised for issue by the Board of Directors on 21 April 2023
and signed on their behalf by James Clifton-Brown
The accompanying notes below are an integral part of these Consolidated
Financial Statements. Company Number: 41352 (Guernsey).
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2022
Notes Share Capital £ Treasury Shares £ Retained Earnings Capital Reserves Other Total Equity £
£ £ Distributable
Reserves £
Opening balance 1 January 2022 228,383,857 (5,991,417) 8,521,081 72,095,573 97,838,372 300,847,466
Loss for the year - - (51,053,487) - - (51,053,487)
Other comprehensive income - - - 1,513,862 - 1,513,862
Total comprehensive income for the period - - (51,053,487) 1,513,862 - (49,539,625)
Ordinary shares paced into treasury net of 17 - (12,409,459) - - - (12,409,459)
issue costs
Dividends paid 20 - - (15,610,827) - - (15,610,827)
Valuation loss from investment properties 7 - - 62,257,782 (62,257,782) - -
Valuation loss from land 8 - - 60,322 (60,322) - -
Loss on disposal of investment properties 7 - - 207,153 (207,153) - -
Balance at 31 December 2022 228,383,857 (18,400,876) 4,382,024 11,084,178 97,838,372 323,287,555
Notes Share Capital £ Treasury Shares £ Retained Earnings Capital Reserves Other Total Equity £
£ £ Distributable
Reserves £
Opening balance 1 January 2021 228,383,857 (1,450,787) 7,339,209 (604,214) 97,838,372 331,506,437
Profit for the year - - 85,732,820 - - 85,732,820
Other comprehensive income - - - 3,167,218 - 3,167,218
Total comprehensive income for the period - - 85,732,820 - - 88,900,038)
Ordinary shares paced into treasury net of 17 - (4,540,630) - - - (4,540,630)
issue costs
Dividends paid 20 - - (15,018,379) - - (15,018,379)
Other transfer between reserves 18 - - 1,520,063 (1,520,063) - -
Valuation gain from investment properties 7 - - (72,188,550) 72,188,550 - -
Valuation loss from land 8 - - 501,550 (501,550) - -
Loss on disposal of investment properties 7 - - 634,368 (634,368) - -
Balance at 31 December 2021 228,383,857 (5,991,417) 8,521,081 72,095,573 97,838,372 400,847,466
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2022
12 months to 12 months to
Cash flows from operating activities 31 Dec 2022 31 Dec 2021
Notes £ £
(Loss)/profit for the year before (51,053,487) 85,732,820
taxation
Movement in lease incentives (841,398) (2,966,033)
Movement in trade and other receivables 3,719,424 (270,226)
Movement in trade and other payables (3,237,151) 536,404
Finance costs 5 3,562,248 (5,877)
Finance income 5 3,672,685 3,530,870
Other transfer between reserves (27,543) (763)
Valuation loss/(gain) from investment 7 - 1,520,064
properties
Valuation loss from land 8 62,257,782 (72,188,550)
Loss on disposal of investment properties 7 60,322 501,550
Net cash inflow from operating activities 18,320,035 17,030,504
Cash flows from investing activities
Interest received 5 27,543 763
Purchase of investment properties 7 (5,501,321) (11,741,501)
Purchase of land 8 (60,322) (8,001,550)
Capital expenditure on investment 7 (13,524,813) (1,819,229)
properties
Net proceeds from disposal of investment 7 41,142,847 31,840,632
properties
Net cash inflow from investing activities 22,083,934 10,279,113
Cash flows from financing activities
Shares bought back during the year 17 (12,409,459) (4,540,630)
Drawn-down on RCF 13 17,000,000 -
Repayment of RCF 13 (17,000,000) -
Bank borrowing arrangement 13 (804,297) -
Interest paid on bank borrowings (2,959,023) (1,872,545)
Payments on interest rate swaps (473,425) (1,418,916)
Swap breakage costs 14b (3,562,248) -
Cap arrangement fees 14c (2,507,177) -
Finance lease interest 5 (24,468) (24,511)
Dividends paid to the Company's 20 (15,610,827) (15,018,379)
shareholders
Net cash outflow from financing (38,350,924) (22,874,981
activities
Net increase in cash and cash equivalents 2,053,045 4,434,637
Cash and cash equivalents at beginning of 11 13,818,008 9,383,371
year
Cash and cash equivalents at end of year 11 15,871,053 13,818,008
Notes TO the consolidated financial statements
1. General Information
abrdn Property Income Trust Limited ("the Company") and its subsidiaries
(together "the Group") carries on the business of property investment through a
portfolio of freehold and leasehold investment properties located in the United
Kingdom. The Company is a limited liability company incorporated in Guernsey,
Channel Islands. The Company has its listing on the London Stock Exchange.
The address of the registered office is
PO Box 255,
Trafalgar Court,
Les Banques,
St Peter Port,
Guernsey
These audited Consolidated Financial Statements were approved for issue by the
Board of Directors on 21 April 2023.
2. Accounting Policies
2.1. Basis of preparation
The audited Consolidated Financial Statements of the Group have been prepared
in accordance with International Financial Reporting Standards ("IFRS") as
adopted by the European Union and as issued by the International Accounting
Standards Board, and all applicable requirements of The Companies (Guernsey)
Law, 2008. The audited Consolidated Financial Statements of the Group have been
prepared under the historical cost convention as modified by the measurement of
investment property, land and derivative
financial instruments at fair value. The Consolidated Financial Statements are
presented in pounds sterling and all values are not rounded except when
otherwise indicated.
The Directors have considered the basis of preparation of the accounts given
the significantly heightened geopolitical uncertainty and cost of living crisis
and believe that it is still appropriate for the accounts to be prepared on the
going concern basis as further described in the Directors Report.
Changes in accounting policy and disclosure.
The following amendments to existing standards and interpretations were
effective for the year, but were deemed not applicable to the Group:
· Amendments to IFRS 3 Reference to the Conceptual Framework, Amendments to
IAS 37 Onerous Contracts Cost of Fulfilling a Contract, and IAS 16 Property,
Plant and Equipment - Proceeds before Intended Use
The IFRS Interpretations Committee issued the following Agenda Decision in
October 2022.
· IFRIC: Lessor forgiveness of lease payments (IFRS 9 'Financial
Instruments' and IFRS 16 'Leases')
The amendment is effective immediately, the directors of the Group are
determining the impact but don't expect it to be material.
Annual improvements to IFRS.
Annual Improvements to IFRS Accounting Standards 2018-2020 Cycle includes
amendments to four standards for the current year.
· IFRS 1 First-time Adoption of International Financial Reporting Standards
· IFRS 9 Financial Instruments
· IFRS 16 Leases
· IAS 41 Agriculture
The Directors have considered the amendments noted above and have deemed these
not applicable to the Group.
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
· Amendments to IAS 1 Presentation of Financial Statements-Classification of
Liabilities as Current or Non-current
· 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.
· Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors - Definition of Accounting Estimates
The amendments replace the definition of a change.
2.2 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 reported amounts of
revenues, expenses, assets and liabilities, and the disclosure of contingent
liabilities, at the reporting date. However, uncertainties about these
assumptions and estimates could result in outcomes that could require a
material adjustment to the carrying amount of the asset or liability affected
in future periods. The most significant estimates and judgements are set out
below. There were no critical accounting judgements.
Fair value of investment properties.
Investment properties are stated at fair value as at the Balance Sheet date.
Gains or losses arising from changes in fair values are included in the
Consolidated Statement of Comprehensive Income in the year in which they arise.
The fair value of investment properties is determined by external real estate
valuation experts using recognised valuation techniques. The fair values are
determined having regard to any recent real estate transactions where
available, with similar characteristics and locations to those of the Group's
assets.
In most cases however, the determination of the fair value of investment
properties requires the use of valuation models which use a number of
judgements and assumptions. The only model used was the income capitalisation
method. Under the income capitalisation method, a property's fair value is
judged based on the normalised net operating income generated by the property,
which is divided by the capitalisation rate (discounted by the investor's rate
of return).
Under the income capitalisation method, over (above market rent) and under-rent
situations are separately capitalised (discounted).
The sensitivity analysis in note 7 details the decrease in the valuation of
investment properties if equivalent yield increases by 50 basis points or
rental rates (ERV) decreases by 5% which the Board believes are reasonable
sensitivities to apply given historical movements in valuations.
Fair value of financial instruments.
When the fair value of financial assets and financial liabilities recorded in
the Consolidated Balance Sheet cannot be derived from active markets, they are
determined using a variety of valuation techniques that include the use of
mathematical models. The input to these models are taken from observable
markets where possible, but where this is not feasible, a degree of judgement
is required in establishing
fair value.
The judgements include considerations of liquidity and model inputs such as
credit risk (both own and counterparty's), correlation and volatility.
Changes in assumptions about these factors could affect the reported fair value
of financial instruments. The models are calibrated regularly and tested for
validity using prices from any observable current market transactions in the
same instrument (without modification or repackaging) or based on any available
observable market data.
The valuation of interest rate swaps used in the Balance Sheet is provided by
The Royal Bank of Scotland. These values are validated by comparison to
internally generated valuations prepared using the fair value principles
outlined above.
The sensitivity analysis in note 3 details the increase and decrease in the
valuation of interest rate swaps if market rate interest rates had been 100
basis points higher and 100 basis points lower.
Provision for impairment of receivables.
Provision for impairment of receivables 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 has
significantly increased the Group takes into account qualitative and
quantitative reasonable and supportable forward-looking information.
Due to the impact of the significantly heightened geopolitical uncertainty and
cost of living crisis on collection rates, there remains an elevated assessed
credit risk. 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 of and intelligence about the individual tenant and an
appropriate provision made.
2.3 Summary of significant accounting policies.
A Basis of consolidation.
The audited Consolidated Financial Statements comprise the financial statements
of abrdn Property Income Trust Limited and its material wholly owned subsidiary
undertakings.
Control is achieved when the Group is exposed, or has rights, to variable
returns from its involvement with
subsidiaries and has the ability to affect those returns through its power over
the subsidiary. Specifically, the Group controls a subsidiary if, and only if,
it has:
· Power over the subsidiary (i.e. existing rights that give it the current
ability to direct the relevant activities of the subsidiary)
· Exposure, or rights, to variable returns from its involvement with the
subsidiary
· The ability to use its power over the subsidiary to affect its returns
The Group assesses whether or not it controls a subsidiary if facts and
circumstances indicate that there are changes to one or more of the three
elements of control. Consolidation of a subsidiary begins when the Group
obtains control over the subsidiary and ceases when the Group loses control of
the subsidiary.
Assets, liabilities, income and expenses of a subsidiary acquired or disposed
of during the year are included in the consolidated statement of other
comprehensive income from the date the Group gains control until the date when
the Group ceases to control the subsidiary.
The financial statements of the subsidiaries are prepared for the same
reporting period as the parent company, using consistent accounting policies.
All intra-group balances, transactions and unrealised gains and losses
resulting from intra-group transactions are eliminated in full.
B Functional and presentation currency.
Items included in the financial statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates ("the functional currency"). The Consolidated Financial
Statements are presented in pound sterling, which is also the Company's
functional currency.
C Revenue Recognition.
Revenue is recognised as follows;
i) Bank interest.
Bank interest income is recognised on an accruals basis.
ii) Rental income.
Rental income from operating leases is net of sales taxes and value added tax
("VAT") recognised on a straight line basis over the lease term including lease
agreements with stepped rent increases. The initial direct costs incurred in
negotiating and arranging an operating lease are recognised as an expense over
the lease term on the same basis as the lease income. The cost of any lease
incentives provided are recognised over the lease term, on a straight line
basis as a reduction of rental income. The resulting asset is reflected as
a receivable in the Consolidated Balance Sheet.
Contingent rents, being those payments that are not fixed at the inception of
the lease, for example increases arising on rent reviews, are recorded as
income in periods when they are earned. Rent reviews which remain outstanding
at the year end are recognised as income, based on estimates, when it is
reasonable to assume that they will be received.
iii) Other income.
The Group is classified as the principal in its contract with the managing
agent. Service charges billed to tenants by the managing agent are therefore
recognised gross.
iv) Property disposals.
Where revenue is obtained by the sale of properties, it is recognised once the
sale transaction has been completed, regardless of when contracts have been
exchanged.
D Expenditure.
All expenses are accounted for on an accruals basis. The investment management
and administration fees, finance and all other revenue expenses are charged
through the Consolidated Statement of Comprehensive Income as and when
incurred. The Group also incurs capital expenditure which can result in
movements in the capital value of the investment properties.
E 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 other comprehensive income or in equity is recognised in other
comprehensive income and in equity respectively, and not in the income
statement. Positions taken in tax returns with respect to situations in which
applicable tax regulations are subject to interpretation, if any, are reviewed
periodically and provisions are established where appropriate.
The Group recognises liabilities for current taxes based on estimates of
whether additional taxes will be due. When the final tax outcome of these
matters is different from the amounts that were initially recorded, such
differences will impact the income and deferred tax provisions in the period in
which the determination is made.
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.
F Investment property.
Investment properties comprise completed property and property under
construction or re-development that is held to earn rentals or for capital
appreciation or both. Property held under a lease is classified as investment
property when the definition of an investment property is met.
Investment properties are measured initially at cost including transaction
costs. Transaction costs include transfer taxes, professional fees for legal
services and initial leasing commissions to bring the property to the condition
necessary for it to be capable of operating. The carrying amount also includes
the cost of replacing part of an existing investment property at the time that
cost is incurred if the recognition criteria are met.
Subsequent to initial recognition, investment properties are stated at fair
value. Fair value is based upon the market valuation of the properties as
provided by the external valuers as described in note 2.2. Gains or losses
arising from changes in the fair values are included in the Consolidated
Statement of Comprehensive Income in the year in which they arise. For the
purposes of these financial statements, in order to avoid double counting, the
assessed fair value is:
i) Reduced by the carrying amount of any accrued income resulting from the
spreading of lease incentives and/or minimum lease payments.
ii) Increased by the carrying amount of any liability to the superior
leaseholder or freeholder (for properties held by the Group under operating
leases) that has been recognised in the Balance Sheet as a finance lease
obligation.
Acquisitions of investment properties are considered to have taken place on
exchange of contracts unless there are significant conditions attached. For
conditional exchanges acquisitions are recognised when these conditions are
satisfied. Investment properties are derecognised when they have been disposed
of and no future economic benefit is expected from their disposal. Any gains or
losses on the disposal of investment properties are recognised in the
Consolidated Statement of Comprehensive Income in the year of retirement or
disposal.
Gains or losses on the disposal of investment properties are determined as the
difference between net disposal proceeds and the carrying value of the asset in
the previous full period financial statements.
G Investment properties held for sale.
Non-current assets (and disposal groups) classified as held for sale are
measured at the lower of carrying amount and fair value (except for investment
property measured using fair value model).
Non-current assets and disposal groups are classified as held for sale if their
carrying amount will be recovered through a sale transaction rather than
through continuing use. This condition is regarded as met only when the sale is
highly probable and the asset (or disposal group) is available for immediate
sale in its present condition. Management must be committed to the sale which
should be expected to qualify for recognition as a completed sale within one
year from the date of classification.
H Land.
The Group's land is capable of woodland creation and peatland restoration
projects which would materially assist the Group's transition to Net-Zero.
Land is initially measured at cost including transaction costs. Transaction
costs include transfer taxes and professional fees for legal services.
Subsequent expenditure is capitalised only if it is probable that the future
economic benefits associated with the expenditure will flow to the Group. Land
is not depreciated but instead, subsequent to initial recognition, recognised
at fair value based upon periodic valuations provided by the external valuers.
Gains or losses arising from changes in the fair values are included in the
Consolidated Statement of Comprehensive Income in the year in which they arise.
I Trade and other receivables.
Trade receivables are recognised and carried at the lower of their original
invoiced value and recoverable amount. Where the time value of money is
material, receivables are carried at amortised cost. A provision for impairment
of trade receivables is established when there is objective evidence that the
Group will not be able to collect all amounts due according to the original
terms of the receivables. Significant financial difficulties of the debtor,
probability that the debtor will enter bankruptcy or financial reorganisation,
and default or delinquency in payments (more than 30 days overdue) are
considered indicators that the trade receivable is impaired.
The amount of the provision is the difference between the asset's carrying
amount and the present value of estimated future cash flows, discounted at the
original effective interest rate. The carrying amount of the asset is reduced
through use of an allowance account, and the amount of the expected credit loss
is recognised in the Consolidated Statement of Comprehensive Income.
When a trade receivable is uncollectible, it is written off against the
allowance account for trade receivables. Subsequent recoveries of amounts
previously written off are credited in the Consolidated Statement of
Comprehensive Income.
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.
A provision for impairment of trade receivables is established where the
Property 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 Consolidated Balance Sheet and
any changes in provision recognised in the Statement of Comprehensive Income.
J 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.
K Borrowings and interest expense.
All loans and borrowings are initially recognised at the fair value of the
consideration received, less issue costs where applicable. After initial
recognition, all interest-bearing loans and borrowings are subsequently
measured at amortised cost. Amortised cost is calculated by taking into account
any discount or premium on settlement. Borrowing costs are recognised within
finance costs in the Consolidated Statement of Comprehensive Income as
incurred.
L Accounting for derivative financial instruments and hedging activities.
Interest rate hedges are initially recognised at fair value on the date a
derivative contract is entered into and are subsequently remeasured at their
fair value. The method of recognising the resulting gain or loss depends on
whether the derivative is designated as a hedging instrument, and if so, the
nature of the item being hedged. The Group documents at the inception of the
transaction the relationship between hedging instruments and hedged items, as
well as its risk management objective and strategy for undertaking various
hedging transactions. The Group also documents its assessment both at hedge
inception and on an ongoing basis of whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair values
or cash flows of hedged items.
The effective portion of changes in the fair value of derivatives that are
designated and qualify as cash flow hedges are recognised in other
comprehensive income in the Consolidated Statement of Comprehensive Income. The
gains or losses relating to the ineffective portion are recognised in operating
profit in the Consolidated Statement of Comprehensive Income.
Amounts taken to equity are transferred to profit or loss when the hedged
transaction affects profit or loss, such as when the hedged financial income or
financial expenses are recognised.
When a derivative is held as an economic hedge for a period beyond 12 months
after the end of the reporting period, the derivative is classified as
non-current consistent with the classification of the underlying item. A
derivative instrument that is a designated and effective hedging instrument is
classified consistent with the classification of the underlying hedged item.
M Service charge.
IFRS15 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 Group 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 managing 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.
N Other financial liabilities.
Trade and other payables are recognised and carried at invoiced value as they
are considered to have payment terms of 30 days or less and are not interest
bearing. The balance of trade and other payables are considered to meet the
definition of an accrual and have been expensed through the Income Statement or
Balance Sheet depending on classification. VAT payable at the Balance Sheet
date will be settled within 31 days of the Balance Sheet date with His
Majesty's Revenue and Customs ("HMRC") and deferred rental income is rent that
has been billed to tenants but relates to the period after the Balance Sheet
date. Rent deposits recognised in note 12 as current are those that are due
within one year as a result of upcoming tenant expiries.
3. Financial Risk Management.
The Group's principal financial liabilities are loans and borrowings. The main
purpose of the Group's loans and borrowings is to finance the acquisition and
development of the Group's property portfolio. The Group has rent and other
receivables, trade and other payables and cash and short-term deposits that
arise directly from its operations.
The Group is exposed to market risk (including interest rate risk and real
estate risk), credit risk, liquidity risk and capital risk. The Group is not
exposed to currency risk or price risk. The Group is engaged in a single
segment of business, being property investment in one geographical area, the
United Kingdom. Therefore the Group only engages in one form of currency being
pound sterling.
The Board of Directors reviews and agrees policies for managing each of these
risks which are summarised below.
Market risk.
Market risk is the risk that the fair values of financial instruments will
fluctuate because of changes in market prices. The financial instruments held
by the Group that are affected by market risk are principally the interest rate
swap and the new interest rate cap due to commence 27 April 2023.
i) Interest Rate risk.
As described on below the Group invests cash balances with RBS, Citibank and
Barclays. These balances expose the Group to cash flow interest rate risk as
the Group's income and operating cash flows will be affected by movements in
the market rate of interest. There is considered to be no fair value interest
rate risk in regard to these balances.
The bank borrowings as described in note 13 also expose the Group to cash flow
interest rate risk. The Group's policy has historically been to manage its cash
flow interest rate risk using interest rate swaps, in which the Group agreed to
exchange the difference between fixed and floating interest amounts based on a
notional principal amount (see note 14). The Group has floating rate borrowings
of £110,000,000. The full £110,000,000 of these borrowings has been fixed via
an interest rate swap.
The fair value of the interest rate swap is exposed to changes in the market
interest rate as their fair value is calculated as the present value of the
estimated future cash flows under the agreements. The accounting policy for
recognising the fair value movements in the interest rate swaps is described in
note 2.3 L.
The Group has completed an extension of its debt facilities that were due to
expire in April 2023 with new floating rate borrowings of £85,000,000
commencing on the same day as the existing facility ends. As discussed further
in note 14, the Group initially sought to manage its cash flow interest rate
risk using an interest rate swap. Due to subsequent changes in the interest
rate environment, the Group took the decision to break the swap and replace
this with an interest rate cap limiting the floating rate exposure (SONIA) to
3.959%.
Trade and other receivables and trade and other payables are interest free and
have settlement dates within one year and therefore are not considered to
present a fair value interest rate risk.
At 31 December 2022, if market rate interest rates had been 100 basis points
higher, which is deemed appropriate given historical movements in interest
rates, with all other variables held constant, the profit for the year would
have been £158,711 higher (2021: £138,180 higher) as a result of the higher
interest income on cash and cash equivalents. Other Comprehensive Income and
the Capital Reserve would have been £1,753,510 higher (2021: £1,657,653 higher)
as a result of an increase in the fair value of the derivative designated as a
cash flow hedge of floating rate borrowings.
At 31 December 2022, if market rate interest rates had been 100 basis points
lower with all other variables held constant, the profit for the year would
have been £158,711 lower (2021: £138,180 lower) as a result of the lower
interest income on cash and cash equivalents. Other Comprehensive Income and
the Capital Reserve would have been £1,404,933 lower (2021: £1,657,731 lower)
as a result of a decrease in the fair value of the derivative designated as a
cash flow hedge of floating rate borrowings.
The tables below set out the carrying amount of the Group's financial
instruments excluding the amortisation of borrowing costs as outlined in note
13 Bank borrowings have been fixed up to 27 April 2023 due to an interest rate
swap and as detailed further in note 14:
At 31 December 2022 Fixed Rate Variable Rate Interest Rate
£ £ £
Cash and cash equivalents - 15,871,053 0.000%
Bank borrowings 110,000,000 - 2.725%
At 31 December 2021 Fixed Rate Variable Rate Interest Rate
£ £ £
Cash and cash equivalents - 13,818,008 0.000%
Bank borrowings 110,000,000 - 2.725%
ii) Real estate risk.
The Group has identified the following risk associated with the real estate
portfolio. The risks following, in particular b and c and also credit risk have
remained high given the ongoing cost of living crisis and the resultant effect
on tenants' ability to pay rent:
a) 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.
b) Tenants may become insolvent causing a significant loss of rental income and
a reduction in the value of the associated property (see also credit risk
below). 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.
c) The exposure of the fair values of the portfolio to market and occupier
fundamentals. The Group aims to
manage such risks by taking an active approach to asset management (working
with tenants to extend leases and minimise voids), capturing profit (selling
when the property has delivered a return to the Group that the Group believes
has been maximised and the proceeds can be reinvested into more attractive
opportunities) and identifying new investments (generally at yields that are
accretive to the revenue account and where the Group believes there will be
greater investment demand in the medium term).
Credit risk.
Credit risk is the risk that a counterparty will be unable to meet a commitment
that it has entered into with the Group. In the event of default by an
occupational tenant, the Group will suffer a rental income shortfall and incur
additional related costs. The Investment Manager regularly reviews reports
produced by Dun and Bradstreet and other sources, including the MSCI IRIS
report, to be able to assess the credit worthiness of the Group's tenants and
aims to ensure that there are no excessive concentrations of credit risk and
that the impact of default by a tenant is minimised. In addition to this, the
terms of the Group's bank borrowings require that the largest tenant accounts
for less than 20% of the Group's total rental income, that the five largest
tenants account for less than 50% of the Group's total rental income and that
the ten largest tenants account for less than 75% of the Group's total rental
income. The maximum credit risk from the tenant arrears of the Group at the
financial year end was £4,713,145 (2021: £5,418,733) as detailed in note 10.
The Investment Manager also has a detailed process to identify the expected
credit loss from tenants who are behind with rental payments.
This involves a review of every tenant who owes money with the Investment
Manager using their own knowledge and communications with the tenant to assess
whether a provision should be made. This resulted in the provision for bad
debts decreasing to £2,137,972 at the year end (2021: £2,990,034).
With respect to credit risk arising from other financial assets of the Group,
which comprise cash and cash equivalents, the Group's exposure to credit risk
arises from default of the counterparty bank with a maximum exposure equal to
the carrying value of these instruments. As at 31 December 2022 £6,481,061
(2021: £1,392,240) was placed on deposit with The Royal Bank of Scotland plc
("RBS"), £786,166 (2021: £1,145,830) was held with Citibank and £8,603,826
(2021: £11,279,938) was held with Barclays.
The credit risk associated with the cash deposits placed with RBS is mitigated
by virtue of the Group having a right to off-set the balance deposited against
the amount borrowed from RBS should RBS be unable to return the deposits for
any reason. Citibank is rated A-2 Stable by Standard & Poor's and P-2 Stable by
Moody's. RBS is rated A-1 Stable by Standard & Poor's and P-1 Stable by
Moody's. Barclays Bank UK is rated A-1 Positive by Standard & Poor's and P-1
Stable by Moody's.
Liquidity risk.
Liquidity risk is the risk that the Group will encounter difficulties in
realising assets or otherwise raising funds to meet financial commitments. The
investment properties in which the Group invests are not traded in an organised
public market and may be illiquid.
As a result, the Group may not be able to liquidate its investments in these
properties quickly at an amount close to their fair value in order to meet its
liquidity requirements.
The following table summarises the maturity profile of the Group's financial
liabilities based on contractual undiscounted payments.
Year ended 31 On demand 12 months 1 to 5 years > 5 years Total
December 2022 £ £ £ £ £
Interest-bearing - 29,462,608 94,425,183 - 123,887,791
loans
Trade and other 5,284,559 26,068 104,271 2,580,717 7,995,615
payables
Rent deposits due to - 257,899 508,736 243,046 1,009,681
tenants
5,284,559 29,746,575 95,038,190 2,823,763 132,893,087
Year ended 31 On demand 12 months 1 to 5 years > 5 years Total
December 2021 £ £ £ £ £
Interest-bearing - 1,744,875 110,436,219 - 112,181,094
loans
Interest rate swaps - 1,252,625 313,156 - 1,565,781
(payable)
Trade and other 8,187,362 26,068 104,271 2,606,785 10,924,486
payables
Rent deposits due to - 65,720 550,084 354,105 969,909
tenants
8,187,362 3,089,288 111,403,730 2,960,890 125,641,270
The disclosed amounts for interest-bearing loans and interest rate swaps in the
below table are the estimated net undiscounted cash flows. As disclosed further
in note 14, on 12 October 2022 the Group announced that it had completed an
extension of its debt facilities and the disclosure below reflects the
repayment of the existing facility on 27 April 2023, offset against the new
facility being granted.
The Group's liquidity position is regularly monitored by management and is
reviewed quarterly by the Board
of Directors.
Capital risk.
The Group's objectives when managing capital are to safeguard the Group's
ability to continue as a going concern in order to provide returns for
shareholders and benefits for other stakeholders and to maintain an optimal
capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Group may adjust the
amount of dividends paid to shareholders, return capital to shareholders, issue
new shares, increase or decrease borrowings or sell assets to reduce debt.
The Group monitors capital on the basis of the gearing ratio. This ratio is
calculated as total borrowings divided by gross assets and has a limit of 65%
set by the Articles of Association of the Company. Gross assets are calculated
as non-current and current assets, as shown in the Consolidated Balance Sheet.
The gearing ratios at 31 December 2022 and at 31 December 2021 were as follows:
2022 2021
£ £
Total borrowings (excluding unamortised 110,000,000 110,000,000
arrangement fees)
Gross assets 444,93,156 526,562,676
Gearing ratio (must not exceed 65%) 24.72% 20.89%
The Group also monitors the Loan-to-value ratio which is calculated as gross
borrowings less cash divided by portfolio valuation. As at 31 December 2022
this was 22.6% (2021: 19.2%).
Fair values.
Set out below is a comparison by class of the carrying amounts and fair value
of the Group's financial instruments that are carried in the financial
statements at amortised cost.
Carrying Amount Fair Value
Financial Assets 2022 2021 2022 2021
£ £ £ £
Cash and cash equivalents 15,871,053 13,818,008 15,871,053 13,818,008
Trade and other receivables 7,457,083 11,024,100 7,457,083 11,024,100
Financial Liabilities
Bank borrowings 109,123,937 109,723,399 109,580,566 110,119,830
Trade and other payables 6,564,852 8,359,405 6,564,852 8,359,405
The fair value of trade receivables and payables are materially equivalent to
their amortised cost.
The fair value of the financial assets and liabilities are included at an
estimate of the price that would be received to sell a financial asset or paid
to transfer a financial liability in an orderly transaction between market
participants at the measurement date. The following methods and assumptions
were used to estimate the fair value:
· Cash and cash equivalents, trade and other receivables and trade and other
payables are the same as fair value due to the short-term maturities of these
instruments.
· The fair value of bank borrowings is estimated by discounting future cash
flows using rates currently available for debt on similar terms and remaining
maturities. The fair value approximates their carrying values gross of
unamortised transaction costs. This is considered as being valued at level 2 of
the fair value hierarchy and has not changed level since 31 December 2021.
· The fair value of the interest rate swap contract is estimated by
discounting expected future cash flows using current market interest rates and
yield curve over the remaining term of the instrument. This is considered as
being valued at level 2 of the fair value hierarchy and has not changed level
since 31 December 2021. The definition of the valuation techniques are
explained in the significant accounting judgements, estimates and assumptions
on above.
The table below shows an analysis of the fair values of financial assets and
liabilities recognised in the Balance Sheet by the level of the fair value
hierarchy:
Level 1 Quoted (unadjusted) market prices in active markets for identical
assets or liabilities.
Level 2 Valuation techniques for which the lowest level input that is
significant to the fair value measurement is directly or indirectly observable.
Level 3 Valuation techniques for which the lowest level input that is
significant to the fair value measurement is unobservable.
Year ended 31 December 2022 Level 1 Level 2 Level 3 Total fair
value
Financial assets
Trade and other receivables - 7,457,083 - 7,457,083
Cash and cash equivalents 15,871,053 - - 15,871,053
Interest rate swap - 1,238,197 - 1,238,197
Interest rate cap - 2,550,469 - 2,550,469
Rental deposits held on behalf 751,782 - - 751,782
of tenants
Right of use asset - 899,572 - 899,572
16,622,835 12,145,321 - 28,768,156
Financial liabilities
Trade and other payables - 6,564,852 - 6,564,852
Bank borrowings - 109,580,566 - 109,580,566
Obligations under finance - 899,572 - 899,572
leases
Rental deposits due to tenants 751,782 - - 751,782
751,782 117,044,990 - 117,796,772
Year ended 31 December 2021 Level 1 Level 2 Level 3 Total fair
value
Financial assets
Trade and other receivables - 11,024,100 - 11,024,100
Cash and cash equivalents 13,818,008 - - 13,818,008
Rental deposits held on behalf 904,189 - - 904,189
of tenants
Right of use asset - 901,129 - 901,129
14,722,197 11,925,229 - 26,647,426
Financial liabilities
Trade and other payables - 6,554,087 - 6,554,087
Bank borrowings - 568,036 - 568,036
Bank borrowings - 110,119,830 - 110,119,830
Obligations under finance - 901,129 - 901,129
leases
Rental deposits due to tenants 904,189 - - 904,189
904,189 118,143,082 - 119,047,271
Please see note 7 for details on the valuation of Investment properties.
4. Administrative and Other Expenses
Notes 2022 2021
£ £
Investment management fees 3,480,963 3,301,074
Other direct property expenses
Vacant Costs (excluding void service 600,561 987,406
charge)*
Repairs and maintenance 1,740,937 763,579
Letting fees 431,534 408,984
Amounts written off in the period 10 79,115 150,313
Other costs 237,813 253,874
Total Other direct property expenses 3,089,960 2,564,156
Impairment (gain)/loss on trade (852,062) 406,475
receivables
Other administration expenses
Directors' fees and subsistence 22 247,603 221,742
Valuers fees 94,256 77,457
Auditor's fees 131,280 111,540
Marketing 226,782 197,714
Other administration costs 434,998 553,556
Total Other administration expenses 1,134,919 1,162,009
Total Administrative and other expenses 6,853,780 7,433,714
Void Service charge costs for the year amounted to £1,164,991 (2021: £841,576).
These have been reclassified as Service charge expenditure in the current year.
2022 2021
£ £
Total service charge billed to tenants 4,492,780 3,984,327
Service charge due (to)/from tenants (80,959) 113,017
Service charge income 4,411,821 4,097,344
Total service charge expenditure incurred 4,411,821 4,097,344
Service charge billed to the Group in respect of 1,164,991 841,576
void units
Service charge expenditure 5,576,812 4,938,920
Investment management fees.
On 19 December 2003 Standard Life Investments (Corporate Funds) Limited ("the
Investment Manager") was appointed as Investment Manager to manage the property
assets of the Group. A new Investment Management Agreement ("IMA") was entered
into on 7 July 2014, appointing the Investment Manager as the AIFM
("Alternative Investment Fund Manager"). On 10 December 2018, the Investment
Manager's contract was novated on the same commercial terms to Aberdeen
Standard Fund Managers Limited (subsequently renamed abrdn Fund Managers
Limited in August 2022).
From 1 July 2019, under the terms of the IMA the Investment Manager is entitled
to investment management fees 0.70% of total assets up to £500 million; and
0.60% of total assets in excess of £500 million. The total fees charged for the
year amounted to £3,480,963 (2021: £3,301,074).
The amount due and payable at the year end amounted to £742,952 excluding VAT
(2021: £893,048 excluding VAT). In addition the Company paid the Investment
Manager a sum of £184,750 excluding VAT (2021: £160,250 excluding VAT) to
participate in the Managers marketing programme and Investment Trust share
plan.
The Group has agreed a 10bps reduction in the fee payable to the Investment
Manager, effective from 1 January 2023. The fee will reduce to 0.60% of total
assets up to £500m, and 0.50% of total assets in excess of £500 million.
Administration, secretarial and registrar fees.
On 19 December 2003 Northern Trust International Fund Administration Services
(Guernsey) Limited ("Northern Trust") was appointed administrator, secretary
and registrar to the Group. Northern Trust is entitled to an annual fee,
payable quarterly in arrears, of £65,000. Northern Trust is also entitled to
reimbursement of reasonable out of pocket expenses. Total fees and expenses
charged for the year amounted to £65,000 (2021: £65,000). The amount due and
payable at the year end amounted to £32,500 (2021: £16,250).
Valuer's fee.
Knight Frank LLP ("the Valuers"), external international real estate
consultants, was appointed as valuers in respect of the assets comprising the
property portfolio. The total valuation fees charged for the year amounted to £
94,256 (2021: £77,457). The total valuation fee comprises a base fee for the
ongoing quarterly valuation, and a one off fee on acquisition of an asset. The
amount due and payable at the year end amounted to £17,687 excluding VAT (2020:
£21,246 excluding VAT).
The annual fee is equal to 0.017 percent of the aggregate value of property
portfolio paid quarterly.
Auditor's fee.
At the year end date Deloitte LLP continued as independent auditor of the
Group. The audit fees for the year amounted to £131,280 (2021: £111,540) and
relate to audit services provided for the 2022 financial year. Deloitte LLP did
not provide any non-audit services in the year (2021: nil).
5. Finance Income and Costs
Of the finance costs shown below, £1,010,547 of the interest expense on bank
borrowings (offset against a net receivable £343,033 of payments on interest
rate swaps) were accruals at 31 December 2022 and included in Trade and other
payables.
2022 2021
£ £
Interest income on cash and cash equivalents 27,543 763
Finance income 27,543 763
Interest expense on bank borrowings 3,251,500 1,613,050
Non-utilisation charges on facilities 308,582 329,186
(Receipts)/payments on interest rate swaps (116,700) 1,383,547
Amortisation of arrangement costs (see note 13) 204,835 180,576
Finance lease interest 24,468 24,511
Finance costs 3,672,685 3,530,870
6. Taxation
UK REIT Status
The Group migrated tax residence to the UK and elected to be treated as a UK
REIT with effect from 1 January 2015. 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.
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 require 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 not recognised on temporary differences relating
to the property rental business.
The Company and its Guernsey subsidiary have obtained exempt company status in
Guernsey so that they are exempt from Guernsey taxation on income arising
outside Guernsey and bank interest receivable in Guernsey.
A reconciliation between the tax charge and the product of accounting profit
multiplied by the applicable tax rate for the year ended 31 December 2022 and
2021 is as follows:
2022 2021
£ £
Profit/(loss) before tax (51,053,487) 85,732,820
Tax calculated at UK statutory (9,700,163) 16,289,236
corporation tax rate of 19% (2021:
19%)
UK REIT exemption on net income (2,179,636) (2,789,236)
Valuation loss in respect of 11,889,779 (13,500,000)
investment properties not subject
to tax
Current income tax charge - -
7. Investment Properties
UK UK Office UK Retail UK Other Total
Industrial 2022 2022 2022 2022
2022 £ £ £ £
£
Market value at 1 January 273,565,250 126,275,000 56,525,000 36,050,000 492,415,250
Purchase of investment property 91,859 - - 5,409,462 5,501,321
Capital expenditure on investment properties 9,375,227 4,117,846 31,740 - 13,524,813
Opening market value of disposed investment (20,450,000) (20,900,000) - - (41,350,000)
properties
Valuation loss from investment properties (35,924,164) (20,993,533) (3,087,334) (2,252,751) (62,257,782)
Movement in lease incentives receivable 866,828 (49,313) 80,594 (56,711) 841,398
Market value at 31 December 227,525,000 88,450,000 53,550,000 39,150,000 408,675,000
Investment property recognised as held for - - - - -
sale
Market value net of held for sale at 31 227,525,000 88,450,000 53,550,000 39,150,000 408,675,000
December
Right of use asset recognised on leasehold - 899,572 - - 899,572
properties
Adjustment for lease incentives (4,871,218) (1,986,578) (888,782) (610,458) (8,357,036)
Carrying value at 31 December 222,653,782 87,362,994 52,661,218 38,539,542 401,217,536
The valuations were performed by Knight Frank LLP, accredited external valuers
with recognised and relevant professional qualifications and recent experience
of the location and category of the investment properties being valued. The
valuation model in accordance with Royal Institute of Chartered Surveyors
('RICS') requirements on disclosure for Regulated Purpose Valuations has been
applied (RICS Valuation - Professional Standards January 2014 published by the
Royal Institution of Chartered Surveyors). These valuation models are
consistent with the principles in IFRS 13.
UK UK Office UK Retail UK Other Total
Industrial 2021 2021 2021 2021
2021 £ £ £ £
£
Market value at 1 January 211,200,000 142,695,000 51,150,000 32,650,000 437,695,000
Purchase of investment property 11,690,631 - 50,870 - 11,741,501
Capital expenditure on investment properties 125,634 1,712,322 (35,227) 16,500 1,819,229
Opening market value of disposed investment (9,400,000) (20,425,000) (2,650,000) - (32,475,000)
properties
Valuation loss from investment properties 58,043,007 1,580,786 7,762,099 3,282,595 70,668,487
Movement in lease incentives receivable 1,905,978 711,892 247,258 100,905 2,966,033
Market value at 31 December 273,565,250 126,275,000 56,525,000 36,050,000 492,415,250
Investment property recognised as held for sale - - - - -
Market value net of held for sale at 31 273,565,250 126,275,000 56,525,000 36,050,000 492,415,250
December
Right of use asset recognised on leasehold - 901,129 - - 901,129
properties
Adjustment for lease incentives (4,405,288) (2,921,649) (808,188) (667,169) (8,802,294)
Carrying value at 31 December 269,159,962 124,254,480 55,716,812 35,382,831 484,514,085
The market value provided by Knight Frank at the year end was £408,675,000
(2021: £492,415,250) however an adjustment has been made for lease incentives
of £8,357,036 (2021: £8,802,294) that are already accounted for as an asset. In
addition, as required under IFRS 16, a right of use asset of £899,572 has been
recognised in respect of the present value of future ground rents. As required
under IFRS 16 an amount of £899,572 has also been recognised as an obligation
under finance leases in the balance sheet.
Valuation methodology.
The fair values of completed investment properties are determined using the
income capitalisation method.
The income capitalisation method is based on capitalising the net income stream
at an appropriate yield. In establishing the net income stream the valuers have
reflected the current rent (the gross rent) payable to lease expiry, at which
point the valuer has assumed that each unit will be re-let at their opinion of
ERV. The valuers have made allowances for voids where appropriate, as well as
deducting non recoverable costs where applicable.
Valuation gains and losses from investment properties are recognised in the
Consolidated Statement of Comprehensive Income for the period and are
attributable to changes in unrealised gains or losses relating to investment
properties held at the end of the reporting period.
In the Consolidated Cash Flow Statement, proceeds from disposal of investment
properties comprise:
2022 2021
£ £
Opening market value of disposed investment properties 41,350,000 32,475,000
Loss on disposal of investment properties (207,153) (634,368)
Net proceeds from disposal of investment properties 41,142,847 31,840,632
The appropriate yield is selected on the basis of the location of the building,
its quality, tenant credit quality and lease terms amongst other factors.
No properties have changed valuation technique during the year. At the Balance
Sheet date the income capitalisation method is appropriate for valuing all
investment properties.
The Investment Manager meets with the valuers on a quarterly basis to ensure
the valuers are aware of all relevant information for the valuation and any
change in the investment over the quarter. The Investment Manager then reviews
and discusses the draft valuations with the valuers to ensure correct factual
assumptions are made.
The management group that determines the Company's valuation policies and
procedures for property valuations is the Property Valuation Committee as
detailed in the full Annual Accounts. The Committee reviews the quarterly
property valuation reports produced by the valuers before they are submitted to
the Board, focusing in particular on:
· Significant adjustments from the previous property valuation report;
· Reviewing the individual valuations of each property;
· Compliance with applicable standards and guidelines including those issued
by RICS and the UKLA Listing Rules;
· Reviewing the findings and any recommendations or statements made by the
valuer;
· Considering any further matters relating to the valuation of the
properties.
The Chair of the Committee makes a brief report of the findings and
recommendations of the Committee to the Board after each Committee meeting. The
minutes of the Committee meetings are circulated to the Board.
The Chair submits an annual report to the Board summarising the Committee's
activities during the year and the related significant results and findings.
The table below outlines the valuation techniques and inputs used to derive
Level 3 fair values for each class of investment properties. The table
includes:
· The fair value measurements at the end of the reporting period.
· The level of the fair value hierarchy (e.g. Level 3) within which the fair
value measurements are categorised in their entirety.
· A description of the valuation techniques applied.
· Fair value measurements, quantitative information about the significant
unobservable inputs used in the fair value measurement.
· The inputs used in the fair value measurement, including the ranges of
rent charged to different units within the same building.
As noted above, all investment properties listed in the table below are
categorised Level 3 and are all valued using the Income Capitalisation method.
Country & Class 2022 UK Industrial Level 3 UK Office Level 3 UK Retail Level 3 UK Other Level 3 Total
Fair Value 2022 £ 227,525,000 88,450,000 53,550,000 39,150,000 408,675,000
Key Unobservable Input 2022 . Initial Yield . Initial Yield . Initial Yield . Initial Yield . Initial Yield
. Reversionary Yield . Reversionary Yield . Reversionary Yield . Reversionary Yield . Reversionary Yield
. Equivalent Yield . Equivalent Yield . Equivalent Yield . Equivalent Yield . Equivalent Yield
. Estimated rental . Estimated rental . Estimated rental . Estimated rental . Estimated rental
value per sq ft value per sq ft value per sq ft value per sq ft value per sq ft
Range (weighted average) 2022 0.00% to 8.78% 5.10% to 7.90% 4.39% to 8.33% 5.01% to 9.13%
(5.20%) (6.11%) (6.75%) (5.98%)
5.00% to 8.68% 6.25% to 10.45% 5.49% to 7.99% 4.79% to 9.40%
(6.35%) (8.76%) (6.16%) (5.85%)
5.00% to 8.23% 6.15% to 9.25% 5.76% to 9.67% 5.01% to 9.07%
(6.26%) (8.02%) (6.79%) (5.87%)
£4.50 to £9.00 (£ £17.01 to £45.47 (£ £8.74 to £30.61 (£ £6.00 to £20.00 (£
6.38) 26.78) 15.37) 14.71)
Country & Class 2021 UK Industrial Level 3 UK Office Level 3 UK Retail Level 3 UK Other Level 3 Total
Fair Value 2021 £ 273,565,250 126,275,000 56,525,000 36,050,000 492,415,250
Key Unobservable Input 2021 . Initial Yield . Initial Yield . Initial Yield . Initial Yield . Initial Yield
. Reversionary Yield . Reversionary Yield . Reversionary Yield . Reversionary Yield . Reversionary Yield
. Equivalent Yield . Equivalent Yield . Equivalent Yield . Equivalent Yield . Equivalent Yield
. Estimated rental . Estimated rental . Estimated rental . Estimated rental . Estimated rental
value per sq ft value per sq ft value per sq ft value per sq ft value per sq ft
Range (weighted average) 2021 0.00% to 7.49% 2.71% to 6.28% 4.56% to 8.43% 4.57% to 8.10%
(4.48%) (4.77%) (6.18%) (5.40%)
0.00% to 7.72% 5.25% to 9.23% 5.25% to 7.48% 4.39% to 7.90%
(5.11%) (7.28%) (5.83%) (5.22%)
0.00% to 7.00% 5.16% to 8.17% 5.52% to 8.12% 4.62% to 7.90%
(5.07%) (6.84%) (6.40%) (5.35%)
£4.00 to £9.50 (£ £17.00 to £46.09 (£ £8.74 to £29.32 (£ £9.24 to £18.68 (£
6.19) 26.19) 15.31) 15.09)
Descriptions and definitions.
The table above includes the following descriptions and definitions relating to
valuation techniques and key observable inputs made in determining the fair
values.
Estimated rental value (ERV).
The rent at which space could be let in the market conditions prevailing at the
date of valuation.
Equivalent yield.
The equivalent yield is defined as the internal rate of return of the cash flow
from the property, assuming a rise or fall to ERV at the next review or lease
termination, but with no further rental change.
Initial yield.
Initial yield is the annualised rents of a property expressed as a percentage
of the property value.
Reversionary yield.
Reversionary yield is the anticipated yield to which the initial yield will
rise (or fall) once the rent reaches the ERV.
The table below shows the overall ERV per annum, area per square foot, average
ERV per square foot, initial yield and reversionary yield as at the Balance
Sheet date.
2022 2021
ERV p.a. £31,048,945 £31,542,350
Area sq ft 3,416,291 3,517,993
Average ERV per sq ft £9.09 £8.97
Initial Yield 5.7% 4.8%
Reversionary Yield 7.1% 5.8%
The table below presents the sensitivity of the valuation to changes in the
most significant assumptions underlying the valuation of completed investment
property. The Board believes these are reasonable sensitivities given historic
movements in valuations.
2022 2021
£ £
Increase in equivalent yield of 50 bps (31,086,535) (41,659,430)
Decrease of 5% in ERV (15,879,151) (19,561,811)
Below is a list of how the interrelationships in the sensitivity analysis above
can be explained.
In both cases outlined in the sensitivity table the estimated fair value would
increase (decrease) if:
* The ERV is higher (lower)
* Void periods were shorter (longer)
* The occupancy rate was higher (lower)
* Rent free periods were shorter (longer)
* The capitalisation rates were lower (higher)
8. Land
Valuation methodology.
The Land is held at fair value.
The Group appoints suitable valuers (such appointment is reviewed on a periodic
basis) to undertake a valuation of the land on a quarterly basis. The valuation
is undertaken in accordance with the then current RICS guidelines by Knight
Frank LLP whose credentials are set out in note 7.
Reconciliation of carrying amount 2022 2021
Cost
Balance at the beginning of the year 8,001,550 -
Additions 60,322 8,001,550
Balance at the end of the year 8,061,872 8,001,550
Accumulated depreciation and amortisation
Balance at the beginning of the year (501,550) -
Valuation loss from land (60,322) (501,550)
Balance at the end of the year (561,872) (501,550)
Carrying amount as at 31 December 7,500,000 7,500,000
9. Investments in Subsidiary Undertakings
The Company owns 100 per cent of the issued ordinary share capital of abrdn
Property Holdings Limited (formerly known as Standard Life Investments Property
Holdings Limited), a company with limited liability incorporated and domiciled
in Guernsey, Channel Islands, whose principal business is property investment.
In 2015 the Group acquired 100% of the units in Standard Life Investments
SLIPIT Unit Trust, (formerly Aviva Investors UK Real Estate Recovery II Unit
Trust) a Jersey Property Unit Trust. The acquisition included the entire issued
share capital of a General Partner which held, through a Limited Partnership, a
portfolio of 22 UK real estate assets. The transaction completed on 23 December
2015 and the Group has treated the acquisition as a Business Combination in
accordance with IFRS 3.
The Group undertakings consist of the following 100% owned subsidiaries at the
Balance Sheet date:
· abrdn Property Holdings Limited (formerly known as Standard Life
Investments Property Holdings Limited), a property investment company with
limited liability incorporated in Guernsey, Channel Islands.
· abrdn (APIT) Limited Partnership (formerly known as Standard Life
Investments (SLIPIT) Limited Partnership), a property investment limited
partnership established in England.
· abrdn APIT (General Partner) Limited (formerly known as Standard Life
Investments SLIPIT (General Partner) Limited), a company with limited liability
incorporated in England. This Company is the GP for the Limited Partnership.
· abrdn (APIT Nominee) Limited (formerly known as Standard Life Investments
SLIPIT (Nominee) Limited), a company with limited liability incorporated and
domiciled in England.
On 20th May 2022, Hagley Road Limited, a subsidiary of the Group, was
liquidated.
10. Trade and Other Receivables
2022 2021
£ £
Trade receivables 6,851,117 8,408,767
Finance incomeless provision for impairment of trade (2,137,972) (2,990,034)
receivables
Trade receivables (net) 4,713,145 5,418,733
Rental deposits held on behalf of tenants 257,899 65,720
Other receivables 2,486,039 5,539,647
Total trade and other receivables 7,457,083 11,024,100
Reconciliation for changes in the provision for impairment of trade
receivables:
2022 2021
£ £
Opening balance (2,990,034) (2,583,559)
Credit/(charge) for the year 772,947 (556,788)
Reversal for amounts written-off 79,115 150,313
Closing balance (2,137,972) (2,990,034)
The estimated fair values of receivables are the discounted amount of the
estimated future cash flows expected to be received and approximate their
carrying amounts.
The trade receivables above relate to rental income receivable from tenants of
the investment properties. When a new lease is agreed with a tenant the
Investment Manager performs various money laundering checks and makes a
financial assessment to determine the tenant's ability to fulfil its
obligations under the lease agreement for the foreseeable future. The majority
of tenants are invoiced for rental income quarterly in advance and are issued
with invoices at least 21 days before the relevant quarter starts. Invoices
become due on the first day of the quarter and are considered past due if
payment is not received by this date. Other receivables are considered past due
when the given terms of credit expire.
Amounts are considered impaired when it becomes unlikely that the full value of
a receivable will be
recovered. Movement in the balance considered to be impaired has been included
in other direct property costs in the Consolidated Statement of Comprehensive
Income. As at 31 December 2022, trade receivables of £2,137,972 (2021: £
2,990,034) were considered impaired and provided for.
If the provision for impairment of trade receivables increased by £1 million
then the Company's earnings
and net asset value would decrease by £1 million. If it decreased by £1 million
then the Company's earnings and net asset value would increase by £1 million.
The ageing of the receivables provided for is as follows:
2022 2021
£ £
0 to 3 months (8,203) (162,132)
3 to 6 months (251,682) (451,417)
Over 6 months (1,878,087) (2,376,485)
(2,137,972) (2,990,034)
As of 31 December 2022, trade receivables of £3,099,355 (2021: £5,418,733) were
less than 3 months past due but considered not impaired.
11. Cash and Cash Equivalents
2022 2021
£ £
Cash held at bank 9,389,992 12,425,768
Cash held on deposit with RBS 6,481,061 1,392,240
15,871,053 13,818,008
Cash held at banks earns interest at floating rates based on daily bank deposit
rates. Deposits are made for varying periods of between one day and three
months, depending on the immediate cash requirements of the Group, and earn
interest at the applicable short-term deposit rates.
12. Trade and Other Payables
2022 2021
£ £
Trade and other payables 4,655,599 6,488,367
VAT payable 628,960 1,698,995
Deferred rental income 5,337,852 5,365,375
Rental deposits due to tenants 257,899 65,720
Closing balance 10,880,310 13,618,457
Trade payables are non-interest bearing and are normally settled on 30-day
terms.
13. Bank Borrowings
During the year, the Group drew down £17m on the Revolving Credit Facility.
This was fully repaid by the end of the year.
2022 2021
£ £
Loan facility and drawn down outstanding balance 110,000,000 110,000,000
Opening carrying value 109,723,399 109,542,823
Arrangement costs of additional facility (804,297) -
Amortisation arrangement costs 204,835 180,576
Closing carrying value 109,123,937 109,723,399
The London Interbank Offer Rate (LIBOR) was one of the main interest rate
benchmarks used in financial
markets to determine interest rates for financial contracts globally. In line
with announcements from the
Financial Conduct Authority (FCA), 24 of the 35 LIBOR settings ceased from 1
January 2022. The Group took steps, before the date of transition, to ensure
that any exposure to LIBOR was identified with actions taken to rebase and
redocument any financial contracts where LIBOR was previously used.
This led to minor amendments to operational processes to cater for this change
but there was not expected to be a material impact on the assets and
liabilities of the Group as a result of the phase out of LIBOR. The switch to
the Sterling Overnight Index Average (SONIA) benchmark took effect from the
first interest payment date following cessation of LIBOR (20th January 2022).
On 12 October 22 the Group entered into an agreement to extend its existing £
165 million debt facility with Royal Bank of Scotland International ("RBSI").
The facility (due to expire on 27 April 2023) consisted of a £110 million term
loan payable at 1.375% plus SONIA and two Revolving Credit Facilities ("RCF")
of £35 million payable at 1.45% plus SONIA and £20 million payable at 1.60%
plus SONIA. The amended and restated agreement was for a three year term loan
of £85 million and a single RCF of £80 million; both payable at 1.5% plus
SONIA. The new facility is due to commence on 27 April 2023. As at 31 December
2022 none of the RCF was drawn (2021: £nil); £17m was drawn down during the
year however this was fully repaid prior to 31 December 2022.
Analysis of movements Interest-bearing 2022 Cash & cash Interest-bearing 2021
in net debt Cash & cash loans net debt equivalents loans net debt
equivalents
£ £ £ £ £ £
Opening balance 13,818,008 (109,723,399) (95,905,391) 9,383,371 (109,542,823) (100,159,452)
Cash movement 2,053,045 804,297 2,857,342 4,434,637 - 4,434,637
Amortisation of - (204,835) (204,835) - (180,576) (180,576)
arrangement costs
Closing balance 15,871,053 (109,123,937) (93,252,884) 13,818,008 (109,723,399) (95,905,391)
Under the terms of the loan facilities there are certain events which would
entitle RBSI to terminate the loan facility and demand repayment of all sums
due. Included in these events of default is the financial undertaking relating
to the LTV percentage. The loan agreement notes that the LTV percentage is
calculated as the loan amount less the amount of any sterling cash deposited
within the security of RBSI divided by the gross secured property value, and
that this percentage should not exceed 60% for the period to and including 27
April 2021 and should not exceed 55% after 27 April 2021 to maturity. There
have been no changes to the covenant requirements as a result of the extension
to the facility noted above.
2022 2021
£ £
Loan amount 110,000,000 110,000,000
Cash (15,871,053) (13,818,008)
94,128,947 96,181,992
Portfolio valuation 416,175,000 499,915,250
LTV percentage 22.6% 19.2%
Other loan covenants that the Group is obliged to meet include the following:
· that the net rental income is not less than 150% of the finance costs for
any three month period;
· that the largest single asset accounts for less than 15% of the Gross
Secured Asset Value;
· that the largest ten assets accounts for less than 75% of the Gross
Secured Asset Value;
· that sector weightings are restricted to 55%, 45% and 55% for the Office,
Retail and Industrial sectors respectively;
· that the largest tenant accounts for less than 20% of the Group's annual
net rental income;
· that the five largest tenants account for less than 50% of the Group's
annual net rental income;
· that the ten largest tenants account for less than 75% of the Group's
annual net rental income.
During the year, the Group complied with its obligations and loan covenants
under its loan agreement.
The loan facility is secured by fixed and floating charges over the assets of
the Company and its wholly owned subsidiaries, abrdn Property Holdings Limited
and abrdn (APIT) Limited Partnership.
During the year, the Group complied with its obligations and loan covenants
under its loan agreement.
The loan facility is secured by fixed and floating charges over the assets of
the Company and its wholly
owned subsidiaries, abrdn Property Holdings Limited and abrdn (APIT) Limited
Partnership.
14. Interest Rate Swap and Cap
In order to mitigate any interest rate risk linked to their debt facilities,
the Group's policy has been to manage its cash flow using hedging instruments.
The following hedging instruments were effective during the year:
14a Existing Interest Rate Swap.
The Group has previously taken out an interest rate swap of a notional amount
of £110,000,000 with RBS as part of a refinancing exercise in April 2016. The
interest rate swap effective date is 28 April 2016 and has a maturity date of
27 April 2023. Under the swap the Company agreed to receive a floating interest
rate linked to SONIA and pay a fixed interest rate of 1.35%.
2022 2021
£ £
Opening fair value of interest rate swap at 1 January (568,036) (3,735,254)
Reclassification of interest accrual (247,093) -
Valuation gain on interest rate swaps 1,470,570 3,167,218
Reclassified to Profit & Loss 582,756 -
Closing fair value of interest rate swap at 31 December 1,238,197 (568,036)
2022 2021
£ £
Current assets/(liabilities) 1,238,197 (546,526)
Non-current assets/(liabilities) - (21,510)
Interest rate swap with a start date of 28 April 2016 1,238,197 (568,036)
maturing on 27 April 2023
14b Terminated Interest Rate Swap.
As disclosed in note 13, on 12 October 2022 the Group announced that it had
completed an extension of its debt facilities which included an interest rate
swap of a notional amount of £85,000,000 (due to commence 27 April 2023). At
the time, there was heightened volatility and swap rates were high, exacerbated
by political uncertainty, and the all-in cost of the term loan amounted to
6.97%. In light of the change in interest rate environment since completion,
the Group took the decision to break the swap at a cost of £3,562,248 on 12
December 2022.
2022 2021
£ £
Opening fair value of interest rate swap at 1 January - -
Valuation loss on interest rate swaps (3,562,248) -
Swaps breakage costs 3,562,248 -
Closing fair value of interest rate swap at 31 December - -
14c Interest Rate Cap.
Simultaneously to the breaking of the £85,000,000 swap, the Group agreed an
interest rate cap against a notional amount of £85,000,000 (due to commence 27
April 2023) with a cap level (SONIA) set at 3.959%. The cost of purchasing this
cap was £2,507,177.
2022 2021
£ £
Opening fair value of interest rate cap at 1 January - -
Cost of interest rate cap 2,507,177 -
Valuation gain on interest rate cap 43,292 -
Closing fair value of interest rate cap at 31 December 2,550,469 -
2022 2021
£ £
Current assets/(liabilities) 339,462 -
Non-current assets/(liabilities) 2,211,007 -
2,550,469 -
15. Obligations Under Finance Leases
The table below shows the present value of future lease payments in relation to
the ground lease payable at Hagley Road, Birmingham as required under IFRS 16.
A corresponding asset has been recognised and is part of Investment properties
as shown in note 7.
Minimum lease Interest Present value of
payments minimum lease
payments
2022 2022 2022
£ £ £
Less than one year 26,068 (24,468) 1,600
Between two and five years 104,271 (97,426) 6,845
More than five years 2,580,717 (1,689,590) 891,127
Total 2,711,056 (1,811,484) 899,572
Minimum lease Interest Present value of
payments minimum lease
payments
2021 2021 2021
£ £ £
Less than one year 26,068 (24,511) 1,557
Between two and five years 104,271 (97,607) 6,664
More than five years 2,606,785 (1,713,877) 892,908
Total 2,737,124 (1,835,995) 901,129
16. Lease Analysis
The Group has granted leases on its property portfolio. This property portfolio
as at 31 December 2022 had an average lease expiry of 5 years and 8 months.
Leases include clauses to enable periodic upward revision of the rental charge
according to prevailing market conditions. Some leases contain options to break
before the end of the lease term.
Future minimum rentals receivable under non-cancellable operating leases as at
31 December are as follows:
2022 2021
£ £
Within one year 24,457,032 24,857,300
Between one and two years 21,677,762 22,613,540
Between two and three years 16,236,484 19,869,754
Between three and four years 12,375,936 14,371,388
Between four and five years 8,695,218 10,352,802
More than five years 45,075,463 44,233,215
Total 128,517,895 136,297,999
The largest single tenant at the year end accounts for 6.0% (2021: 6.1%) of the
current annual passing rent.
17. Share Capital
Under the Company's Articles of Incorporation, the Company may issue an
unlimited number of ordinary shares of 1 pence each, subject to issuance limits
set at the AGM each year. As at 31 December 2022 there were 381,218,977
ordinary shares of 1p each in issue (2021: 396,922,386). All ordinary shares
rank equally for dividends and distributions and carry one vote each. There are
no restrictions concerning the transfer of ordinary shares in the Company, no
special rights with regard to control attached to the ordinary shares, no
agreements between holders of ordinary shares regarding their transfer known to
the Company and no agreement which the Company is party to that affects its
control following a takeover bid.
Allotted, called up and fully paid:
2022 2021
£ £
Opening balance 228,383,857 228,383,857
Shares issued - -
Issue costs associated with new ordinary shares - -
Closing balance 228,383,857 228,383,857
Treasury Shares.
In 2022, the Company undertook a share buyback programme at various levels of
discount to the prevailing NAV. In the period to 31 December 2022 15,703,409
shares had been bought back (2021: 7,394,036) at a cost of £12,409,459 after
costs (2021: £4,540,630) and are included in the Treasury share reserve.
2022 2021
£ £
Opening balance 5,991,417 1,450,787
Bought back during the year 12,409,459 4,540,630
Closing balance 18,400,876 5,991,417
The number of shares in issue as at 31 December 2022/2021 are as follows:
2022 2021
Number of Number of
shares shares
Opening balance 396,922,386 404,316,422
Issued during the year - -
Bought back during the year and put into Treasury (15,703,409) (7,394,036)
Closing balance 381,218,977 396,922,386
18. Reserves
The detailed movement of the below reserves for the years to 31 December 2022
and 31 December 2021 can be found in the Consolidated Statement of Changes in
Equity above.
Retained earnings.
This is a distributable reserve and represents the cumulative revenue earnings
of the Group less dividends paid to the Company's shareholders.
During 2021, it was identified that there were historic leases dating back to
2016 where required rent smoothing adjustments had not been applied. The total
of these adjustments up to the end of the year ending 31 December 2020 amounted
to £1,520,063. Having considered the key financial measures of the Group, and
the accumulated profile of this balance, the Directors were satisfied that the
appropriate correction was a transfer of the identified adjustment from Capital
Reserves to Retained Earnings in the year ended 31 December 2021.
This adjustment had no effect on the previously reported NAVs of the Group.
Capital reserves.
This reserve represents realised gains and losses on disposed investment
properties and unrealised valuation gains and losses on investment properties
and cash flow hedges since the Company's launch.
Other distributable reserves.
This reserve represents the share premium raised on launch of the Company which
was subsequently converted to a distributable reserve by special resolution
dated 4 December 2003.
19. Earnings per Share
Basic earnings per share amounts are calculated by dividing profit for the year
net of tax attributable to ordinary equity holders by the weighted average
number of ordinary shares outstanding during the year. As there are no dilutive
instruments outstanding, basic and diluted earnings per share are identical.
The earnings per share for the year is set out in the table below. In addition
one of the key metrics the Board considers is dividend cover.
This is calculated by dividing the net revenue earnings in the year (surplus
for the year net of tax excluding all capital items and the swaps breakage
costs) divided by the dividends payable in relation to the financial year. For
2022 this equated to a figure of 97% (2021: 98%).
The following reflects the income and share data used in the basic and diluted
earnings per share computations:
2022 2021
£ £
Surplus for the year net of tax (51,053,487) 85,732,820
2022 2021
£ £
Weighted average number of ordinary shares outstanding 389,565,276 398,041,380
during the year
Loss/earnings per ordinary share (pence) (13.11) 21.54
Profit for the year excluding capital items 11,471,770 14,680,188
EPRA earnings per share (p) 2.94 3.69
20. Dividends and Property Income Distributions Gross of Income Tax
12 months to Dec 22 12 months to Dec 21
Dividends PID Non-PID Total PID Non-PID PID Non-PID Total PID Non-PID
pence pence Pence £ £ pence pence Pence £ £
Quarter to 31 December of prior year 0.7910 0.2090 1.0000 3,139,656 829,568 0.7140 - 0.7140 2,878,508 -
(paid in February)
Top-up for prior year (paid in May) - - - - - 0.3810 - 0.3810 1,512,274 -
Quarter to 31 March (paid in May) 1.0000 - 1.0000 3,969,224 - 0.8925 - 0.8925 3,542,532 -
Quarter to 30 June (paid in August) 1.0000 - 1.0000 3,860,190 - 0.8925 - 0.8925 3,542,532 -
Quarter to 30 September (paid in 0.1806 0.8194 1.0000 688,481 3,123,708 0.2519 0.6406 0.8925 999,848 2,542,685
November)
Total dividends paid 2.9716 1.0284 4.0000 11,657,551 3,953,276 3.1319 0.6406 3.7725 12,475,694 2,542,685
Quarter to 31 December of current year - 1.0000 1.0000 - 3,812,190 0.7910 0.2090 1.0000 3,139,656 829,568
(paid after year end)
Prior year dividends (per above) (0.7910) (0.2090) (1.0000) (3,139,656) (829,568) (0.7140) - (0.7140) (2,878,508) -
Total dividends paid for the year 2.1806 1.8194 4.0000 8,517,895 6,935,898 3.2089 0.8496 4.0585 12,736,842 3,372,253
On 24 February 2023 a dividend in respect of the quarter to 31 December 2022 of
1.0 pence per share was paid purely as Non Property Income Distribution.
21. Reconciliation of Consolidated NAV to Published NAV
The NAV attributable to ordinary shares is published quarterly and is based on
the most recent valuation of the investment properties.
2022 2021
Number of ordinary shares at the reporting date 381,218,977 396,922,386
2022 2021
£ £
Total equity per audited consolidated financial 323,287,555 400,847,466
statements
NAV per share (p) 84.8 101.0
22. Related Party Disclosure
Directors' remuneration
The Directors of the Company are deemed as key management personnel and
received fees for their services. Further details are provided in the
Directors' Remuneration Report (unaudited) in the full Annual Accounts. Total
fees for the year were £247,603 (2021: £221,742) none of which remained payable
at the year end (2021: nil).
abrdn Fund Managers Limited (formerly known as Aberdeen Standard Fund Managers
Limited), as the Manager of the Group from 10 December 2018, received fees for
their services as investment managers. Further details are provided in note 4.
2022 2021
Huw Evans 17,124 36,000
Mike Balfour 41,500 40,000
Mike Bane 34,059 -
James Clifton-Brown 50,000 47,000
Jill May 37,000 36,000
Sarah Slater 37,000 36,000
Employers national insurance 22,885 17,338
contribution
239,568 212,338
Directors expenses 8,035 9,404
247,603 221,742
23. Segmental Information
The Board has considered the requirements of IFRS 8 'operating segments'. The
Board is of the view that the Group is engaged in a single segment of business,
being property investment and in one geographical area, the United Kingdom.
24. Capital Commitments
The Group had contracted capital commitments at 31 December 2022 of £17.3m (31
December 2021: £11.9m). This comprises the remaining capital expenditure
required to complete the pre-let development funding in St Helens (achieved
Practical Completion in April 2023), and the committed expenditure for the
speculative industrial development in Knowsley. The Knowsley development will
commence in April 2023 and is anticipated to complete in December 2023.
25. Events After the Balance Sheet Date
On 23 February 2023, the Company completed the purchase of a piece of land at
Knowlsey for £4m with
the aim of developing an industrial site throughout 2023.
On 24 March 2023, the Company completed the purchase of a Morrison's foodstore
in Welwyn Garden City by way of a sale and leaseback for £18.3m.
On 24 February 2023 a dividend in respect of the quarter to 31 December 2022 of
1.0 pence per share was paid purely as Non Property Income Distribution.
This Annual Financial Report announcement is not the Company's statutory
accounts for the year ended 31 December 2022. The statutory accounts for the
year ended 31 December 2022 received an audit report which was unqualified.
Please note that past performance is not necessarily a guide to the future and
that the value of investments and the income from them may fall as well as
rise. Investors may not get back the amount they originally invested.
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
Jason Baggaley - Real Estate Fund Manager, abrdn
Tel: 07801039463 or jason.baggaley@abrdn.com
Mark Blyth - Real Estate Deputy Fund Manager, abrdn
Tel: 07703695490 or mark.blyth@abrdn.com
Craig Gregor - Fund Controller, abrdn
Tel: 07789676852 or craig.gregor@abrdn.com
END
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