3 February 2022

UK Commercial Property REIT Limited (“UKCM” or “the Company”)

Net Asset Value at 31 December 2021


Net Asset Value

·      7.9% growth in NAV per share to 102.0p (30 September 2021: 94.5p) for the fourth quarter, reflecting a 17.6% increase for the year ended 31 December 2021. This has resulted in a NAV total return of 21.5% for the year and 8.7% for the fourth quarter. The MSCI monthly index increased 7.9% over the quarter.

·      Strong investment activity has increased gearing1 to 13.5% from 4.4%.

·      7.6% increase in like-for-like property valuation, net of capital expenditure, outperforming the 6.6% uplift in the MSCI monthly index over the quarter, and helping to grow the total portfolio to £1.5 billion, of which 63% is industrials.

·      Rent collection for billings raised in the fourth quarter of 2021 (collectively the 25 December and 1 January, English, and 28 November, Scottish, quarterly billing dates) stood at 96% after allowing for agreed rent deferrals and including those tenants who have paid, by agreement, on a monthly basis. This figure is in line with the improved rental collection rates experienced throughout 2021 reflecting the improved economic environment, with total rent collection for 2021 standing at 96%.

·      7.9% increase in EPRA Net Tangible Assets per share to 102.0p (30 September 2021: 94.5p).

·      52.5% increase in EPRA earnings per share for the quarter to 0.90p (30 September 2021: 0.59p).

·      Quarterly dividend increased by 16.4% to 0.75p per share.

·      Dividend cover for 2021 of 111% (91% when including the top-up dividend for 2020).

1 Gearing – presented in line AIC Property Disclosure Guidance and calculated as debt less cash dividend by investment property value.

Cash fully invested following strong investment activity

·    UKCM fully invested its remaining cash during the quarter, committing £154 million to the following three acquisitions:

o  In December, the Company purchased a multi-faceted investment with a life sciences and technology focus in Leamington Spa, comprising two warehouses of 223,936 sq ft and 156,203 sq ft, an office building of 65,442 sq ft and a 3.7 acre development site with planning for two industrial units totalling 67,700 sq ft.  The larger of the two warehouse units is let to the NHS, who have invested heavily in fitting it out as the UK’s first mega lab, and the second warehouse is let to Iron Mountain, who are an IT service management company.  The office is let to Tata Consultancy Services and a global social networking provider.  We anticipate that the development of the site will commence in the near future.  This asset has many attractive attributes: it has strong ESG credentials, offers solid income from tenants in robust business sectors, has identifiable asset management angles and strong potential for rental growth, as well as the ability to create immediately further investment grade industrial space, whilst taking development profit.

o  The £35 million purchase of West Gate, Hanger Lane in West London completed at the end of November.  It is a prominent 2.8 acre site, located in Hanger Lane, London, very close to Park Royal, one of Europe’s largest urban industrial areas.  It currently houses a 98,000 sq ft office building, which is fully let to Kantar UK Limited for a period of 10 years, delivering a net initial yield of 5.1% p.a. and there is built-in income growth due to an inflation-linked rent review at year 5. The business plan is to deliver an industrial redevelopment at lease end to release latent value that is expected to grow over the coming years.

o  Further bolstering the portfolio’s industrial bias, at the start of November, UKCM entered into the forward funding of a 107,000 sq ft multi let industrial development on the A23 south of Gatwick Airport, known as Sussex Junction.  With strong ESG credentials the development is due to complete Q3 this year and has been substantially de-risked though the pre-letting of 62,470 sq ft across two units to CGG Services, a global leader in geoscience technology.

·    These acquisitions are in line with the Company’s strategy to invest in modern economy, future fit property sectors which are supported by structural changes in both the economy and society. The combined acquisitions have added £8.4 million to the portfolio’s ERV based upon Q4 2021 valuations and internal development appraisal assumptions at Leamington.

Asset management driving occupancy and value

The Company has further reduced its already very low void rate to 2.1% (3.1% at Q3 2021) as the asset management team continues to make excellent progress on growing the portfolio’s income. 

Notable transactions over the last quarter include:

·    Several significant deals completed at Dolphin Industrial Estate, the Company’s multi-let industrial estate in Sunbury-on-Thames. Trans Global Freight Management Ltd let 10,000 sq ft at Unit A2 on a new 5 year lease at a rent of £140,000 p.a., ahead of the unit’s ERV. At the same time Trans Global extended their existing lease over Units D1/2 (63,900 sq ft) on a coterminous basis securing an annual rent of £704,000 until the new lease expiry in October 2026. The rent over Units D1/2 is subject to review in June 2023.

·    Also at Dolphin Industrial Estate Howard Tenens Ltd extended its lease over the 49,000 sq ft Unit B on a new 10 year lease, subject to a break option in Year 5, at an above ERV rent of £628,702 p.a. Unit C1 was relet, without void, following the insolvency of the previous tenant, to Goldstar Heathrow on a 10 year lease, subject to a break option in Year 5, at a rent of £306,733 per annum. The agreed rent reflects £14.50 per sq ft and the unit extends to 21,000 sq ft.

·    At Junction 27 Retail Park, Leeds a new 10 year lease was agreed with existing tenant Currys Group Ltd at a new rent of £806,440 p.a., over 30% ahead of ERV. Currys are a key anchor tenant at this property and the largest tenant by contracted rent at Junction 27 and their unbroken 10 year lease commitment reflects the strength of the Retail Park. 

·    The strong letting momentum seen throughout the year at St George’s Retail Park, Leicester continued with a new 10 year lease, subject to break options, agreed to One Below over unit 8A at a rent of £100,000 p.a., exceeding the unit’s ERV by over 5%. An Agreement for Lease was also exchanged with Belron UK Ltd t/a Autoglass over Unit 11, at a rent of £52,000 p.a., again in excess of the unit’s ERV and on completion the lease will run for 10 years subject to a tenant break option at Year 5.

·    At Newton’s Court, Dartford a letting over Unit 7 (6,643 sq ft) completed with Dartford & Gravesham NHS Trust.  The NHS Trust entered into a new 10 year lease, with a tenant break at Year 5, at a rent of £84,111 p.a. (£12.75 per sq ft). 

Strong balance sheet with significant covenant headroom and further resources available

·     Robust balance sheet with increased gearing following the acquisitions during Q4. Further financial resources of £88 million are available, comprising the £100 million available from the low cost, revolving credit facility plus existing cash and allowing for future capital commitments and the dividend payable in February 2021. Together, these resources provide the Company with significant liquidity and flexibility at both a corporate and portfolio level to fund further acquisitions.

·     The Company’s gearing is 13.5% as at 31 December 2021. The drawn debt has an overall blended interest rate of 2.68% per annum with a weighted maturity of 6.2 years.

Rent Collection remains robust

·    Rent collection has remained robust, improving for rents billed in the fourth quarter against the same period for Q3. Payments received so far for Q4 billings (covering January to March 2022) rent reflect 96% of rents due as at close of business on 31 January 2021, (collectively the 25 December and 1 January English, and 28 November Scottish, quarterly billing dates) after allowing for agreed rent deferrals and including those tenants who have paid, by agreement, on a monthly basis. 

The table below sets out the third quarter’s rent collection, split between sectors:

% of Q4 2021 rent demanded % collected
Industrial  53% 97%
Office  17% 93%
Retail  18% 97%
Other   12% 97%
Total 100% 96%

The Company has a diverse tenant mix with a number of high quality occupiers, the largest five of which comprise COVID-19 resilient businesses such as Ocado (5.1% of rent), Public Sector (5.0%) Warner Brothers (4.6%), Amazon (4.4%) and Total (3.4%).

Overall rent collection rates have remained robust and have notably improved throughout 2021. This includes at the Company’s leisure assets despite the further disruption caused by the emergence of the Omicron variant. The Team continues to work closely with tenants to collect rents and arrears accrued in previous quarters.

The fourth quarter dividend has been increased by 16.4% to 0.75p per share, from 0.644p per share, reflecting the Board’s recognition of the importance of income to shareholders as well as its continued confidence in the Company’s performance and the economic environment as the impact of the pandemic continues to dissipate.Dividend cover is 111% (91% when including the top-up for 2020 paid in May 2021) and is at a level that the Board believes is appropriate, offering the potential for future growth as and when the Company’s available financial resources are invested and key developments are completed later in 2022.

Ken McCullagh, Chair of UKCM, commented: “The Company had a strong final quarter, continuing the trend seen throughout the year.  In addition to the increases to the portfolio valuation, which continues to be driven by our industrial assets, and some very positive leasing activity, all of UKCM’s uncommitted cash has now been invested.  This is an important step which removes the cash drag on our performance, improves the efficiency of our balance sheet and creates further long term income streams to support dividends to shareholders. The acquisitions further increase our industrial and logistics weighting and provide us with opportunities to create shareholder value through development in the future, while meeting our criteria of investing in modern economy assets which complement our diversified UK portfolio.  With the lifting of Covid-19 restrictions in the UK and the strong performance of the Company in the final quarter, we are also pleased to further increase the dividend, reflecting our confidence in the year ahead.”

Kerri Hunter, Interim Lead Manager of UKCM at abrdn, commented: “Over the period we have successfully deployed a significant proportion of our investment firepower into a collection of assets with differing investment characteristics and risk profiles, expected to deliver performance at various timepoints.  Supported by positive, pro-active asset management and strong rent collection across our portfolio, these latest accretive acquisitions have delivered strong returns. Looking ahead, we intend to use undrawn debt to purchase further assets where we see opportunity to enhance income and capital returns, targeting modern economy, future fit, property assets that are underpinned by economic and societal structural changes, as well as assets offering tactical risk to drive performance.”

Breakdown of NAV movement

Set out below is a breakdown of the change to the unaudited net asset value per share calculated under International Financial Reporting Standards ("IFRS") over the period from 30 September 2021 to 31 December 2021:

UK Commercial Property REIT Limited Per Share (p) Attributable Assets (£m) Comment
Net assets as at 30 September 2021 94.5 1,227.4
Unrealised increase in valuation of property portfolio 18.5 240.7 Predominantly acquisitions and the like for like increase of 7.6% in property portfolio. Includes accounting adjustments for lease incentives.
Gain on sale 0.0 0.7 Settlement of contingent sums in relation to historic disposals.
Capex -11.3 -146.9 Predominantly relates to the acquisitions of Kantar House, Leamington Spa (as SPV acquisitions) and Sussex Junction together with the capex for the ongoing student accommodation developments at Exeter and Edinburgh and the industrial unit development at the acquired Sussex site.
Income earned for the period 1.2 15.4 Equates to dividend cover of 140%.
Expenses for the period
Dividend paid on 26 November 2021 -0.6 -8.4
Net assets as at 31 December 2021 102.0 1,325.2

The EPRA Net Tangible Assets per share is 102.0p (30 September 2021: 94.5p) with EPRA earnings per share for the quarter being 0.90p (30 September 2021: 0.59p).

Sector Analysis

Portfolio Value as at 31 Dec 21 (£m) Exposure as at 31 Dec 21 (%) Like for Like Capital Value Shift (excl sales, purchases & CAPEX) Capital Value Shift (including sales & purchases)     (£m)
Valuation as at 30 Sep 21 1,295.3
Industrial 975.1 63.4 10.4 163.5
South East 38.7 11.8 71.2
Rest of UK 24.7 7.9 92.4
Retail 186.2 12.1 8.5 14.6
High St – South East 1.0 3.4 0.5
High St- Rest of UK 1.2 1.9 0.4
Retail Warehouse 9.9 9.9 13.7
Offices 219.1 14.3 -0.8 57.3
West End 1.9 0.0 0.0
South East 5.3 0.9 38.1
Rest of UK 7.1 -1.9 19.2
Alternatives 157.1 10.2 0.3 6.8
External valuation at 31 Dec 21 1537.5 100.0 7.6 1,537.5

The independent valuation as at 31 December 2021 was carried out by CBRE Ltd.

Net Asset Value analysis as at 31 December 2021 (unaudited)

       £m % of net assets
Industrial 975.1 73.6%
Retail 186.2 14.0%
Offices 219.1 16.5%
Alternatives 157.1 11.9%
Total Property Portfolio 1,537.5 116.0%
Adjustment for lease incentives and accruals -29.1 -2.2%
Fair value of Property Portfolio 1,508.4 113.8%
Cash 42.1 3.2%
Other Assets 48.1 3.6%
Total Assets 1,598.6 120.6%
Current liabilities -25.1 -1.9%
Non-current liabilities (bank loans) -248.3 -18.7%
Total Net Assets 1,325.2 100.0%

The NAV per share is based on the external valuation of the Company’s direct property portfolio as at 31 December 2021. It includes all current period income and is calculated after the deduction of all dividends paid prior to 31 December 2021.

The NAV per share at 31 December 2021 is based on 1,299,412,465 shares of 25p each, being the total number of shares in issue at that time.

Investment Manager’s Market Commentary

Economic outlook

·      Despite the emergence of Omicron and the subsequent increase in economic and social restrictions, the Bank of England (BoE) increased interest rates from 0.1% to 0.25% in December. This was in response to strong inflation and labour market data. Policymakers took note of the tight labour market, with rising pressures on wages. Unemployment fell to 4.2% in the three months to October, while inflation surged to 5.1% y/y in November. This exceeded expectations, with rising energy prices, supply chain disruption and a low base effect from last year contributing to inflation, which is expected to continue during 2022.

·      UK GDP expanded by 0.9% month on month in November, well above consensus of 0.4%. This means the economy is now 0.7% above its pre-pandemic level on a monthly output series. However, this is of course before Omicron emerged, which has likely exacerbated shortages and caused a short run hit to demand. A combination of greater restrictions, voluntary behavioural changes, and workers shielding or isolating is likely to have pushed the economy temporarily into contraction, with the leisure and hospitality sector especially weak.

·      With cases looking to have peaked and the government starting to roll back restrictions, the abrdn Research Institute (aRI) expects activity to rebound relatively quickly through the rest of the quarter.  Full-year 2021 growth is still expected to be relatively robust at 6.8%, with any slowdown in late-2021 and early-2022 likely to be compensated for by slightly stronger growth in late-2022.

·      aRI expects interest rates to reach 1% by the end of 2022. This is low in a historical context, but the risks remain skewed towards a faster tightening cycle. aRI now expects inflation to peak slightly above 6% in April 2022, because of rising energy prices and ongoing supply bottlenecks. It is possible that government intervention blunts the degree to which energy prices are pushed through into household bills, but we expect a further pick-up in inflation during the first quarter of 2022. Inflation is then expected to fall during the rest of the year, as challenging base effects drag inflation lower. Real income growth will be squeezed by inflation, but the build-up in household savings over the last two years should cushion this impact.

Occupier trends

·      Offices: Occupiers started to return to workplaces over the course of 2021 as Covid-19 restrictions eased. Vacancy rates showed signs of stabilising towards the end of 2021, but levels of occupation remain far below pre-pandemic levels. Take-up has been recovering, with Central London offices recording take-up of 7.4 million sq ft to November 2021. This was 54% above the annual total for 2020, but down 22% on the long-term average.

·      The long-term impact on office occupation remains difficult to assess, but we expect occupiers to focus more on best-in-class accommodation, with strong ESG and wellbeing credentials. Poorer-quality accommodation will struggle to attract interest. This is seen in the most recent take-up statistics, which show that over 90% of tenants are taking space in Grade A offices. We expect this trend to drive an increasing wedge between rental value growth for the best and the rest in the office sector.

·      Industrial and logistics: Occupier demand for industrial and logistics space continues unabated and we expect this to endure over the course of 2022. Supply remains tight and the level of new development is unlikely to satisfy demand. According to CBRE data, the UK-wide vacancy rate has fallen to below 2% and, as a result, we anticipate robust rental value growth to continue within this sector.

·      Retail: As with the office sector, retail footfall was recovering over the course of 2021. But with the emergence of Omicron, footfall across all UK destinations fell 6% in the week to 8 January 2022, versus the previous week. Footfall fell by 10.9% in high streets and by 4.4% in shopping centres, while footfall rose by 2.9% in retail parks. We expect footfall to remain weak in the short term, as restrictions deter consumers. Rising inflation and National Insurance contributions are also likely to affect consumer spending over the course of the first half of 2022. As such, we anticipate weaker occupier sentiment and downward pressure on rental values across the retail sector over the first quarter of 2022. Demand will be concentrated on well-located and well-specified retail warehouse accommodation where footfall has remained more resilient.

Investment trends

·      The UK investment market recovered over the course of 2021, with transaction volumes reaching £62.8 billion over the course of the year. This was 37% ahead of 2020 and 16% ahead of 2019 (prior to the outbreak of the pandemic). Indeed, the fourth quarter of 2021 was the strongest quarter since the same period in 2019. Clearly, UK real estate remains a popular investment location.

·      Overseas capital continues to dominate accounting for 58% of all investment in the UK market during 2021. Investors have a narrow focus, particularly within the office sector, where demand is primarily concentrated on prime Central London assets.

·      The industrial and logistics sector remains popular, with investment volumes exceeding £17.3 billion in 2021. This is the highest level ever recorded in the sector and it is 80% higher than in 2020. The sector recorded a total return of 32.3% over the 12 months to November 2021. This compares with an all property total return of 16.5%. The retail warehouse sector also continued its recovery over the year, with a 21% total return over the same period. This helped to lift the overall retail total return to 11.9%, which was ahead of the office sector at 4.3%.

·      Alternatives gained greater investor attention, with over £15.7 billion of transactions in 2021. The build-to-rent sector continues its positive trajectory and a record £4.1 billion was invested into the sector over 2021. With the sector demonstrating incredibly strong income resilience during the pandemic, we expect this important characteristic will result in greater investment over the course of 2022.

Performance outlook and risk tolerance

·      We expect the polarisation in the office market to deepen over the course of 2022. Demand for prime assets should remain robust but weaken for secondary accommodation. Those office assets not deemed to be ‘future-fit’ are likely to see limited occupational and investor demand as ESG requirements become ever more important. This will result in value erosion and a heightened risk of asset obsolescence. As a result, we expect the office sector to underperform in 2022, with a greater wedge between prime and secondary rents.

·      Overall retail performance is showing signs of improvement. However, we believe this to be primarily driven by market factors and a product of the market cycle, rather than sector-specific confidence. From an occupational perspective, there is still significant risk of further retailer defaults and the prospect for rental growth remains remote. The sector remains polarised with retail warehouse assets, particularly discount-led schemes, expected to drive performance.

·      While the industrial sector is unlikely to match the extremely strong performance achieved in 2021, total returns are expected to remain robust in 2022. There is little scope for further yield compression and sector performance is likely to be driven by the occupational market. Demand continues to outstrip supply, allowing for upward pressure on rental values. Prime industrial and distribution assets are best placed to capture this reversionary potential. Although the industrial sector has experienced a pick-up in supply, increasing land values and a shortage of suitable development sites will help to keep supply levels in check.

·      Despite the Bank of England’s recent interest rate rise to 0.25% in December 2021, and anticipated further rises over the course of 2022, rates will remain low in a historical context. This ensures a healthy margin between bonds and real estate. Rising inflation may also attract further investment into the UK real estate market from investors seeking to hedge their inflation risks. Assets providing long-term, secure, index-linked cash flows are in line to benefit.

Investment themes                                                                                

·      In 2021, UK real estate performance reached levels not seen since 2015, with the industrial sector outperforming the all property average by a significant margin. Indeed, the spread between the best and worst performing sectors reached the highest level on record in 2021. However, we anticipate that the spread in performance between sectors will begin to converge, predominantly as a result of where we are in the UK real estate cycle.

·      The industrial sector will remain the key sector call, with the cycle likely to be more prolonged given the significant supply and demand imbalance. But following a period of sustained yield compression, rental value growth will be the primary performance driver for the sector. Prime industrial and logistics units will be best placed to capture rental value growth in this environment.

·      The office sector was the worst performing sector in 2021. We think that the structural headwinds facing the sector will result in offices underperforming the wider market in 2022. But there will be a clear polarisation in performance between Grade A and secondary office buildings. A divergence in performance by quality is beginning to emerge, particularly in markets where vacancy rates are not significantly above historical averages. Premiums are being paid for Grade A office stock that is truly ‘future-fit’ and possesses the necessary credentials: flexibility, amenity, connectivity, technology and sustainability. Assets that score strongly on these metrics will be best placed to capture and retain tenants during a period of significant structural change for the sector. 

·      ESG considerations are crucial for all UK real estate sectors. This has become increasingly pertinent following the implementation of the government’s Minimum Level of Energy Efficiency standard (MEES). By 2025, MEES will make it unlawful for commercial landlords to lease space with an EPC rating below E. By 2030, all commercial properties must have a rating of EPC B or higher. This requires landlords to place a greater emphasis on the ESG credentials of their commercial properties.

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014). Upon the publication of this announcement via Regulatory Information Service this inside information is now considered to be in the public domain.

Details of the Company may also be found on the Company’s website which can be found at: www.ukcpreit.com

For further information please contact:
Kerri Hunter / Gregg Carswell, abrdn
Tel: 0131 528 4261
William Simmonds, J.P. Morgan Cazenove
Tel: 020 7742 4000
Richard Sunderland / Claire Turvey / Emily Smart / Andrew Davis, FTI Consulting
Tel: 020 3727 1000

The above information is unaudited and has been calculated by abrdn.


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