TIDMUKCM
Guernsey: 14/04/2022
LEI: 213800JN4FQ1A9G8EU25
UK Commercial Property REIT Limited
("UKCM" or the "Company")
FINAL RESULTS FOR THE YEARED 31 DECEMBER 2021
About Us
UK Commercial Property REIT Limited ("UKCM") is a listed Real Estate Investment
Trust (REIT) with a net asset value of £1.3 billion as at 31 December 2021.
UKCM is one of the largest diversified REITs in the UK and is a component of
the FTSE 350 index made up of the largest 350 companies with a primary listing
on the London Stock Exchange.
Objective
The objective of the Company is to provide ordinary shareholders with an
attractive level of income, together with the potential for capital and income
growth from investing in a diversified portfolio of UK commercial properties.
This objective is achieved by:
. Constructing a portfolio that is diversified across the four main commercial
property sectors - Industrial, Offices, Retail and Alternatives.
. Investing in assets with a strong earnings and income focus.
. Delivering value through a proactive approach to acquisitions, sales and
asset management.
. Selectively developing or funding developments, mostly pre-let.
. Employing modest levels of gearing.
. Considering Environmental, Social and Governance factors as integral parts of
the investment process.
Board & Management
The Company has a Board of five experienced Non-Executive Directors who have
significant expertise in property, accounting, risk and tax (see page 48-49 for
further details). UKCM is managed by abrdn, a top 20 global real estate manager
that manages over 1,300 properties in 23 countries.
Visit our website at: ukcpreit.com to learn more
2021 FINANCIAL REVIEW AND KEY PERFORMANCE INDICATORS
· NET ASSET VALUE
NAV of £1.3 billion as at 31 December 2021 (2020: £1.1 billion) representing a
NAV total return* in the year of 21.5% (2020: -0.9%) as valuations recovered
strongly in the sectors where the Company is strongly positioned. Over the
longer term (10 years) the Company has delivered a NAV total return of 114.9%
(2020: 85.6%) compared to the Association of Investment Companies ("AIC") peer
group of 54.6% (2020: 32.4%).
· EPRA EARNINGS PER SHARE
EPRA Earnings per Share of 2.65p* (2020: 2.71p) as earnings were impacted by
the timing of transactions with rent reduced through strategic sales in late
2020 / early 2021 and reinvestment during the final third of 2021.
· SHARE PRICE TOTAL RETURN
A total return of 12.5%* (2020: -19.7%) as the share prices of diversified
REITs improved during the year.
· WELL-POSITIONED PORTFOLIO
Industrial weighting of 63% (Benchmark: 34%). Portfolio strategy continues to
be implemented with the portfolio well aligned to sectors which are expected to
outperform.
· INCREASING LEVERAGE
Gearing* of 13.5% (2020: 6.4%) following net acquisitions in the year, with
additional resources available to increase gearing levels further.
· FURTHER RESOURCES AVAILABLE
£88 million* at the year-end (2020: £218 million) to invest into the portfolio
and enhance earnings, reflecting the undrawn revolving credit facilities net of
development commitments.
· IFRS EARNINGS PER SHARE
IFRS Earnings per Share of 18.18p (2020: -0.79p) following the strong capital
gains achieved on the portfolio.
· PORTFOLIO TOTAL RETURN*
Portfolio produced a total return of 21.4% (2020: 1.1%), significantly
outperforming the 16.8% (2020: -0.9%) from the MSCI benchmark as the Company's
portfolio positioning provided continued outperformance.
· EPC BY ERV
75% (2020: 66%) of the property portfolio's Estimated Rental Value ("ERV") has
an Energy Performance
Certificate ("EPC") rating of A, B or C, where subject to the Minimum Energy
Efficiency Standards.
· ACQUISITIONS
£180 million (2020: £74m) of acquisitions that are accretive and will generate
secure income.
· RENT COLLECTION*
Rent collection of 97% in 2021 (compared to 83% for 2020) as rent collection
rates normalise to pre-COVID-19 levels.
· OCCUPANCY RATE
Occupancy rate of 97.9% (2020: 93.5%), with voids a third of the prior year
level and the portfolio has a stable income expiry profile. Also compares
favourably to the MSCI benchmark occupancy rate of 92.3% (2020: 92.6%).
· NET ZERO CARBON TARGET 2030
for landlord operational emissions.
· NET ZERO CARBON TARGET 2040
for all emissions.
* Alternative Performance Measures (see page 6 and glossary on pages 116-117
for further details)
PERFORMANCE SUMMARY
CAPITAL VALUES AND GEARING 31 December 31 December % Change
2021 2020
Total assets less current liabilities (excl Bank 1,573,554 1,324,825 18.8%
loan) £'000
IFRS Net asset value (£'000) 1,325,228 1,126,976 17.6%
Net asset value per share (p) 102.0 86.7 17.6%
Ordinary Share Price (p) 74.7 69.0 8.3%
Discount to net asset value (%) (26.8) (20.4) n/a
Gearing (%)*: 13.5 6.4 n/a
1 year 3 year 5 year
% return % return % return
TOTAL RETURN
NAV ? 21.5 20.6 41.5
Share Price ? 12.5 0.6 7.8
UKCM Direct Portfolio 21.4 24.4 47.9
MSCI Benchmark 16.8 17.7 38.8
FTSE Real Estate Investment Trusts Index 29.4 41.8 39.3
FTSE All-Share Index 18.3 27.2 30.2
31 December 31 December
2021 2020
EARNINGS AND DIVIDS
Net profit/(loss) for the year £'000 236,233 (10,282)
EPRA Earnings per share (p) 2.65 2.71
IFRS Earnings per share (p) 18.18 (0.79)
Dividends declared per ordinary share (p) 2.923 2.3
Dividend Yield (%)# 3.9 3.3
MSCI Benchmark Yield (%) 4.1 4.7
FTSE Real Estate Investment Trusts Index Yield (%) 2.6 3.1
FTSE All-Share Index Yield (%) 3.1 3.4
ONGOING CHARGES AND VACANCY RATE
As a % of average net assets including direct 1.3 1.5
property costs
As a % of average net assets excluding direct 0.8 0.8
property costs
Vacancy rate (%) 2.1 6.5
* Calculated, under AIC guidance, as gross borrowings less cash divided by
portfolio value.
See alternative performance measures on page 116 for further details.
? Assumes re-investment of dividends excluding transaction costs.
# Based on dividend paid in 2021 of 2.923p and the share price at 31 December
2021.
Alternative Performance Measures are defined in the glossary on pages 116 and
117, and include: Discount to net asset value, Gearing, NAV and Share price
total returns, EPRA Earnings per share, Dividend yield, Ongoing charges and
Vacancy rate.
Sources: abrdn, MSCI
CHAIR'S STATEMENT
Dear Shareholder,
UKCM delivered a NAV total return of 21.5% for the year and once again
outperformed the benchmark as we carefully managed the portfolio throughout the
pandemic, further strengthened the Company's balance sheet and continued
disposing of early stage risk assets. Importantly, we also deployed the
Company's remaining cash, investing in a number of significant strategic
acquisitions that are well aligned to the fundamentals of the UK economy.
The Company has also announced a further increase in its dividend to reflect
the Board's optimism about the outlook for the business. The economic recovery
has created stark differences in the UK commercial real estate market. It has
been well documented that the industrial sector is performing well, a sector in
which UKCM has positioned itself strongly over the past few years. However
structural splits are prominent within the other property sectors with, for
example, the positive performance of retail warehousing versus the challenges
faced by many shopping centres being a clear case in point.
It is within these other sectors that investment has to be more discerning, and
we believe that the existing portfolio is well-positioned against this context.
As we head into the year with a feeling of cautious optimism, we remain alert
to the challenges that remain. The spectre of COVID-19 still looms large,
despite the continued easing of many restrictions, and the effects of the
pandemic - not just economic, but personal, social and political - will be with
us for years to come. That said, the position in which we find ourselves is
significantly improved from that of a year ago, and that gives cause for
confidence as we move forward. We are also witnessing the harrowing scenes from
the war in the Ukraine. Apart from the human tragedy and upheaval which is
unfolding, the effect on energy costs and higher commodity prices will increase
inflationary pressure for some time to come.
Portfolio Activity
As stated in our Interim Report, the Company has a clear portfolio strategy of
reducing specific retail exposure and realising profits on properties where
successful asset management initiatives have been completed, while reinvesting
in assets that will provide attractive but secure levels of income.
During 2021, the Company sold £74 million of property, disposing of its final
high street retail exposure as well as of Kew Retail Park, the latter at a
price which reflected the residential opportunity presented on this site. UKCM
also took the opportunity to sell two offices - Hartshead House, Sheffield and
Network House, Hemel Hempstead, due to concerns around tenant covenant, and to
remove the largest void that existed within the portfolio
Portfolio Weighting
63.4% Industrial
14.3% Offices
12.1% Retail
10.2% Alternatives
Using the proceeds generated, together with existing available resources, the
Company has committed £216 million through five acquisitions which were
completed during the year. The market is becoming increasingly competitive in a
narrower range of asset classes but the Company has been able to source deals
off-market as well as creating value through forward-funding development
acquisitions. At the year end, the Company has three ongoing developments; two
student residential developments in Exeter and Edinburgh, as well as an
industrial development near Gatwick. All are expected to be completed in the
second half of 2022. These assets have been accretive to the performance of the
Company and are expected to provide sustainable income streams for the years
ahead.
Further details on all investment transactions and significant lettings are
given in the Investment Manager Review.
Portfolio and Corporate Performance
UKCM has continued to outperform against its MSCI UK Balanced Portfolios
Quarterly Index benchmark across all time periods.
For 2021, the Company's portfolio total return significantly outperformed the
benchmark of 16.8%. This performance was driven by the strategic positioning of
the portfolio, which is well aligned to those parts of the economy that are
supported by strong structural drivers. UKCM has a 63.4% holding in the
industrial sector against the benchmark of 33.9%, a sector where returns have
been particularly strong. The Company has also grown its holdings in retail
warehousing to 9.9% which has also delivered strong returns in 2021 and is
expected to be a top performer in the medium term. Further details on the
Company's portfolio performance are given in the Investment Manager Review.
The strength of the portfolio performance was the main driver behind the 21.5%
NAV total return for the period. The share price return, taking into account
dividends paid over the period, was 12.5%.
The Board also monitors the discount at which the Company's shares trade versus
their net asset value, which increased from 20.4% at the end of December 2020
to 26.8% at 31 December 2021. Whilst noting our Q4 2021 NAV performance was our
strongest in the year, the Board are actively considering options to narrow the
discount.
Over the longer term, the Company has outperformed the AIC peer group on both a
NAV and share price total return basis, delivering 114.9% and 75.1%
respectively over ten years, compared to the 54.6% and 40.9% returns from the
peer group.
Financial Resources
UKCM has built up a strong balance sheet, with a NAV as at 31 December of £1.3
billion and gearing growing to 13.5% though it still remains one of the lowest
geared companies in the AIC peer group and the wider REIT sector. At the year
end, the Company had fully invested its free cash but still had available
resources of £88 million due to the £100 million which remains undrawn of its
low cost, flexible revolving credit facility and will allow UKCM to grow its
gearing levels further.
Through its Investment Manager, the Company is always looking at transaction
opportunities in order to deploy these resources. However, acquisitions must be
aligned to the portfolio strategy as we look to invest our available funds
carefully.
The Company continues to be comfortably within the covenants on its three debt
facilities, and has more than £462 million of unencumbered assets which provide
further significant headroom and flexibility with respect to the Company's
covenants and overall gearing strategy.
Rent Collection
The Board has taken its role as a responsible landlord very seriously
throughout the pandemic and is pleased that we are now seeing the positive
outcomes from working with our tenants. During 2020, and continuing into 2021,
tenant requests for rental assistance were considered on a case-by-case basis,
and also with a view to securing a future benefit for the Company. As a result,
UKCM has put in place a number of rent deferrals and monthly lease payment
structures for tenants which were designed to assist both the tenant and the
Company, with a number of these leading to lease renegotiations, creating value
through securing longer lease commitments in return for short-term rent
incentives/support.
The Board is pleased that, by the end of 2021, rent collection levels were
starting to normalise and returning to levels of 97% for the four quarters of
2021, in line with pre-pandemic numbers.
The Company has a bad debt provision of £5.3 million as at 31 December 2021,
having undertaken a prudent review of its arrears, but will pursue collection
of all arrears by continuing to work closely with its tenants.
Dividends
The Board remains cognisant that the payment of an attractive, sustainable
dividend is of primary importance to many shareholders. In our 2020 Annual
Report, we stated that there was the potential for progressive dividend growth
as we deployed our available resources and the impact of COVID-19 began to
stabilise.
We have increased the dividend from the 0.46p per share paid in February 2021
to 0.644p per share from Q1 2021, before announcing a further increase to 0.75p
per paid in February 2022, representing a 63% increase over the period.
Additionally, we paid out a top-up dividend in respect of 2020 of £6.9 million.
This increase is against a backdrop of 111% dividend cover, 91% when including
the impact of the top-up dividend.
The Board considers the new dividend level of 0.75p per share to be sustainable
but with the aim to grow as earnings increase as the Company deploys its
remaining capital and we start to see the completion of ongoing developments
within the portfolio.
Environmental, Social and Governance ("ESG")
ESG is embedded within the processes of UKCM and underpins every Board
discussion and decision.
As highlighted on rent collection, we have engaged with tenants and sought to
balance their circumstances with those of the Company in order to secure
long-term, mutually beneficial outcomes.
The Company has announced two significant targets as part of its Net Zero
Carbon Strategy following a bottom-up asset-level review across the entire
portfolio. By 2030, we aim to achieve Net Zero Carbon for landlord operational
emissions and extend this to all emissions by 2040. These targets are in
advance of the UK Government's target of 2050 but we are committed to setting a
target which we consider to be both challenging and achievable, and we look
forward to providing progress updates against these targets going forward.
Investment Management Fee
The Board notes the Investment Manager's continued commitment of resources to
the Company, particularly as seen throughout the pandemic. It is particularly
appreciative, therefore, to have negotiated a reduction in the investment
management fee. From 1 April 2022, the annual fee charged to the Company will
be reduced from a rate of 0.60% of Total Assets up to £1.75 billion, to 0.525%
of Total Assets. The rate of 0.475% remains unchanged for Total Assets above £
1.75 billion. In addition, the Company will not be charged for fees on
excessive cash balances.
Board Composition
During the year, Robert Fowlds and Sandra Platts retired from their roles as
Non-Executive Directors having served the Company for three and eight years
respectively. During this time, they made an invaluable contribution to the
Board and both leave with our sincere thanks and best wishes for the future.
As part of our continuing Board succession programme, we were delighted that
Fionnuala Hogan joined the Board as a Non-Executive Director in August 2021.
Fionnuala brings over 25 years' experience of corporate advisory, investment
and financing, with a particular emphasis on commercial real estate and
innovation, and we are very pleased to welcome her to the Company. Fionnuala's
wealth of knowledge and range of key skills have already proven to be a
valuable addition to the Board.
I have now served just over nine years on the Board and would be due to retire
this year. The Board however, as outlined in the Corporate Governance Report on
page 55, have asked me to continue in my role as Chair for a limited time,
which I have agreed to subject to my election at the AGM, while it considers
and completes its succession planning. This more flexible approach to my tenure
as Chair will help manage the Company's succession plans in the short term and
achieve a sensible balance between continuity and re-invigoration in compliance
with the AIC Code for investment companies.
Outlook
2022 has begun with a successful COVID-19 vaccine booster programme, and an
ongoing easing of restrictions necessary to navigate the pandemic. At the same
time, the situation in Ukraine, the ongoing pandemic and the spectre of
inflation and Brexit, present additional layers of uncertainty.
It is expected that the divergence in UK commercial property performance will
be prevalent both across and within the property sectors. The extremely strong
capital growth achieved by industrials is unlikely to continue at the same
level, but total returns are expected to remain robust for the year ahead. The
bifurcation within the office market is expected to deepen over the course of
2022 with a clear distinction between the best, with strong ESG credentials,
and the rest. Retail performance is showing signs of improvement, but this will
be driven by retail warehouse assets, particularly discount-led schemes.
The expected UK commercial property trends show UKCM to be in an excellent
position, with its significant holdings in the sectors, and sub-sectors, that
are expected to remain amongst the best performing. The Company has further
available resources, with scope to increase gearing and a strong pipeline of
developments which are due to complete in 2022 and enhance earnings further.
Overall, the Company is strongly positioned with its clear investment strategy
delivering a well-structured portfolio and solid financial footing as we aim to
increase earnings, drive shareholder value and enhance UKCM's status as one of
the UK's largest diversified REITs.
Ken McCullagh
Chair
13 April 2022
INVESTMENT MANAGER REVIEW
2021 Review
2021 was a year once again characterised by the COVID-19 pandemic, but the key
theme for the year was recovery. As the year progressed and the vaccine roll
out continued apace, economic positivity returned, despite temporary periods of
hiatus with the emergence of the Delta variant, and then the Omicron variant
towards the end of the year. However, the economy did recover and, by November
2021, UK GDP was above the level seen pre-pandemic. Overall, the UK economy
grew by 7.5% over the course of the year.
The UK real estate market also recovered in 2021, with a total return of 16.5%
according to the MSCI Quarterly Index (this is different from the Company's
benchmark which is the MSCI UK Balanced Portfolios Quarterly Property Index
benchmark), a level of performance not seen since 2014. Transaction volumes
reached £73.9 billion over the course of the year, which was 37% 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. However, this recovery was
highly polarised and the spread between the best and worst performing sectors
is now at the highest level on record.
The industrial and logistics sector again produced the best performance,
achieving total returns of 36.4%, whereas shopping centres achieved a total
return of -5.2% and was the worst performing sector over the course of 2021.
The office sector continued to underperform, achieving 5.3% total return as
structural sector concerns persist. However, best in class office assets
continued to generate positive sentiment, particularly with overseas investors.
Cross-border capital remained a dominant force in the UK market and accounted
for 58% of all investment in the UK market during the year.
Following a poor year in 2020, the FTSE UK REIT index returned to positive
territory and recorded a strong total return of 28.9% in 2021. This
outperformed the FTSE UK All-Share Index, which recorded a total return of
18.3%, demonstrating that the UK real estate market remains an attractive
investment destination. Following a significant sell off in September 2021, UK
REITs broadly recovered and finished the year at, or close to, all-time highs.
The hierarchy of favoured sectors again remains broadly the same, with the
industrial and logistics sector leading the way. However, overall sentiment was
positive for all sectors towards the end of the year, with the exception of
secondary offices with which there are broad structural concerns. New capital
raising has predominantly been tilted towards the industrial sector and,
increasingly, the alternatives sector. Environmental, Social & Governance
("ESG") issues continued to grow in prominence in investor and occupier
decision-making and this trend will no doubt continue.
Within the UK real estate market, retail continues to be the sector most
negatively affected by the pandemic, as restrictions and changing consumer
habits have accelerated the pace of structural change already present prior to
the outbreak. However, whilst high street and discretionary based retailers
have struggled, retail warehouse assets showed a significant recovery in the
latter half of the year. Polarisation within sectors is evident elsewhere,
including within the office sector. As occupiers and investors have become more
mindful of ESG considerations, their focus has increasingly narrowed on
best-in-class assets and, as a result, we have seen demand for secondary
accommodation weaken. While we are hopefully now coming to the end of the
pandemic, it is likely we will be living with the structural changes it has
expedited for many years to come.
Review by Sector
21.5% NAV TOTAL RETURN in 2021
Office
The office sector delivered a total return of 5.3% to December 2021 according
to the MSCI Quarterly Index, an improvement on the -1.7% recorded in 2020.
However, office capital values were relatively stagnant over the course of
2021, with growth of just 1.3%. The most profound fall occurred in the North
East office market, with capital values falling by -3.6%. Once again, the
performance of the office market was significantly impacted by the COVID-19
pandemic. As restrictions eased over the course of 2021, occupiers had begun
returning to workplaces. However, the outbreak of the Omicron variant and the
subsequent reintroduction of working from home guidance has further emphasised
the pressure which the sector faces.
The rise of hybrid working has led occupiers to revaluate their office
accommodation requirements and, whilst vacancy rates did begin to show signs of
stabilisation, levels of occupation remain far below pre-pandemic levels.
Central London availability by Q3 2021 remained 64% higher than the 10-year
average, at 25.2m sq ft versus the 10-year average of 15.4m sq ft, although
take up in Central London did recover with 7.4m sq ft let in the year to
November 2021. This was 54% above the annual total for 2020, but down 22% on
the long-term average. However, polarisation within the sector is becoming ever
more apparent as occupier focus narrows on best-in-class assets with strong ESG
and wellbeing credentials. Second hand availability in Central London has
almost doubled from pre-pandemic levels and in Q3 2021 accounted for nearly 75%
of total office supply. As a result, we expect this trend to drive an
increasing wedge between rental value growth for the best, and the rest with
investor appetite following a similar pattern, and those assets not meeting
current occupational demand at risk of significant value erosion.
Retail
After a number of years of poor performance, the retail sector showed some
signs of recovery in 2021 despite continued structural headwinds. However, we
believe this to be primarily driven by market factors and a product of the
market cycle, rather than sector-specific confidence. As a result, performance
was highly polarised within the sector.
As was expected, those assets deemed as essential retail use showed strong
performance over the year, whereas discretionary retailers and those
susceptible to greater online penetration, once again struggled against the
backdrop of the pandemic. Whilst retail warehouse assets underwent a strong
recovery, particularly in the second half of the year, recording a total return
of 21.9% for retail parks, shopping centres continued to drag on the sector and
provided a total return of -5.2% in 2021.
High street shops also showed continued poor performance as retailers struggled
with ongoing restrictions and a consumer shift to e-commerce. Capital values
for retail assets within Central London fell by 5.8%, continuing the trend seen
in 2020. The reintroduction of restrictions towards the end of the year also
put further pressure on high streets causing another fall in footfall.
Supermarkets, however, once again provided a robust performance due to an
increase in consumer spending and their relative insulation from online
shopping. Supermarkets provided a total return of 15.7%, predominantly driven
by yield compression, as investors were attracted by secure, index linked, long
income.
Consumer habits have changed over the course of the pandemic and it is clear
from footfall data that many now prefer to visit units which provide 'drive to
convenience' and perceived safety from COVID-19. As a result, investor
attention also turned to retail warehouse accommodation, with those assets led
by discount or DIY operators of principal interest. In response, yields within
this sector have moved in between 150-250bps during 2021. However, schemes with
significant exposure to fashion-led retailers have generated less interest as
occupational concerns remain. From an occupational perspective, the situation
remains fragile as government support is withdrawn and the risk of further
retailer defaults remains elevated. With the rate of inflation also expected to
continue to rise in 2022, there is likely to be pressure on consumer disposable
income in the short/medium term, further impacting on retailer trading
performance, particularly for luxury/ discretionary goods and services. As a
result, the prospect for rental growth across the sector is considered remote.
Moving forward, the sector is likely to remain highly polarised but overall
retail sector performance is anticipated to improve when compared to 2021 as
shopping centres and high street retail stabilise.
Industrial
Once again, the industrial and logistics market retained its position as the
best performing UK commercial real estate sector. The sector delivered a total
return of 36.4%, which compares to an all property total return over the same
period of 16.5%.
Sentiment remained extremely positive over the course of the year as investors
were attracted by a strong supply-demand imbalance and subsequent rental value
growth across the sector. This is most keenly felt in supply constrained
locations such as London, which remained the best performing market, with total
return for London industrial achieving 43.1% over the year. As investors have
sought to buy into the sector, transactional volumes totalled £20.8 billion,
the highest level ever recorded and 117% higher than the total transacted in
2020. As a result, transactions involving the sector accounted for 28.3% of
total UK real estate investment activity.
From an occupational perspective, demand for accommodation remains extremely
high, with take up in 2021 totalling over 55m sq ft, another all-time record.
Distribution and online retailers continue to dominate take up and, with the UK
wide vacancy rate now below 2.0%, the market fundamentals remain supportive for
continued strong rental value growth.
Moving forward, rental value growth is likely to be the predominant driver of
returns as further yield compression, which has been the key driver over the
course of 2021, is unsustainable and particularly so in the prime sector of the
market. Yields moved in between 50-125bps during 2021 across the sector, and
prime London estates are now commanding yields of around 3.0%. Sentiment
remains very strong for the industrial and logistics market and the sector is
well placed structurally to see continued robust growth.
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. Investor interest in the alternatives
sector has increased and a total of £22.3 billion was recorded to have
transacted over the course of 2021, which was up 34.3% on 2020 and 39.9% above
the 10-year average. Total return within this sector was 9.2% which, whilst
below the all property total return of 16.5%, was a significant improvement on
the total return achieved in 2020 of -5.3%. The reasons for this are largely as
a result of ongoing restrictions and a change in consumer habits as a result of
the COVID-19 pandemic.
The leisure and hotel sectors, which form a large component of the "other
property" sector within the MSCI sample, suffered at the beginning of 2020 due
to strict government restrictions, with many operators not reopening until Q2
at the earliest. However, over the remainder of the year the sectors underwent
gradual recovery and regional hotels in particular experienced record bookings,
as international travel restrictions boosted the demand for domestically driven
'staycations'. As a result, total returns in the hotel and leisure sectors for
2021 were 7.7% and 7.8% respectively.
Healthcare also finished the year in a strong position and recorded a total
return of 9.5%. Investor appetite for the Build to Rent (BTR) residential
sector also continued its strong trajectory and a record of £4.1 billion was
invested into the sector over the course of 2021, beating the previous record
of £3.5 billion achieved in 2020.
The Purpose Built Student Accommodation (PBSA) sector also performed well in
2021, despite a muted start to the year. Large platform deals have placed
further downward pressure on yields, with those assets with index linked leases
now commanding yields of 3.0% according to CBRE. However, performance is
polarised, with those assets serving the UK's top universities best placed to
outperform.
Moving forward, the 'alternatives' sector is likely to become more 'mainstream'
as it grows in prominence in investor thinking due to continued resilient
performance.
Market Outlook
It is clear that we have entered 2022 in a period of uncertainty, as
geopolitical concerns weigh on the global economy. Whilst it appears we have
now passed the worst of the COVID-19 pandemic, the outbreak of conflict in
Ukraine in February 2022 has sent shockwaves throughout the world. Whilst the
conflict has not materially altered our outlook for UK real estate in 2022, new
considerations have emerged as a result. The initial impacts on UK commercial
real estate of the Russian invasion of Ukraine, and the subsequent sanctions
placed on the Russian economy, are expected to be negligible, primarily as a
result of Russian capital having little exposure to UK commercial real estate.
This should mean there is a limited impact on market liquidity and a low risk
of depressed asset values as a result. In fact, due to increased volatility in
other financial markets, UK real estate may benefit due to being viewed as a
'safe haven' investment destination.
However, the Ukraine conflict is likely to have wider consequences and the
position of UK real estate must be set in the context of the macroeconomic
environment. Prior to the outbreak of conflict, the year was already likely to
be dominated by concerns over inflation and subsequent changes to monetary
policy, and the conflict has skewed risks to the upside. The rate of inflation
reached 6.2% in February and is likely to continue to grow throughout the first
half of 2022, before peaking at around 8% as rising energy prices and supply
chain issues take hold.
We forecast that the UK CPI rate for 2022 will be roughly 6.2%, illustrating
that inflationary pressures are likely to moderate in the latter half of the
year, but remain significantly above the Bank of England's target rate. There
are also significant risks that inflation could remain higher for a more
prolonged period of time, particularly as the war in Ukraine, and sanction
measures on the Russian economy, impact on pricing in the energy sector and on
key raw materials. The high inflation environment is likely to have an effect
on households across the UK and we expect consumer sentiment and real wage
growth to suffer as a result; however, a build-up in household savings over the
course of the previous two years will help to cushion this impact. That said,
the distribution of these savings tends to be very heavily skewed towards high
income households, with increased pressure on low income households possibly
translating to weakening overall consumer consumption.
In response to these inflationary factors, the Bank of England increased the
base rate to 0.75% in March 2022 and is expected to continue tightening
monetary policy over the course of the year, with the base rate expected to
reach 1.25% by the end of 2022. The base rate is then expected to peak at 1.75%
in 2023, but there is an elevated risk that this could surprise the upside and
peak above 2.00%. Although low in a historical context, base rates and the feed
through to the bond market has the potential to act as a natural cap on any
further yield compression, particularly for the lower yielding areas of the
real estate market. Despite this, a healthy margin between bonds and real
estate will be maintained, and we believe investors will continue to view UK
real estate as an attractive investment destination, but will become more
selective when approaching investment decisions at both the sector and asset
level.
There are sectors which are more negatively exposed to the cost-push inflation
we are experiencing in the UK at present, in particular the retail sector,
given the increasing squeeze on household disposable incomes. There is also
evidence to suggest that material cost inflation in the UK is resulting in the
delay of some development projects. This could be viewed as negative, but for
some sectors this may be beneficial. In the industrial and logistics sector,
for example, national vacancy is approximately 3% and project delays are likely
to stifle any supply response, supporting continued rental growth.
In general, UK commercial real estate has a much looser link with inflation and
a much stronger correlation with economic growth. Although we are experiencing
elevated levels of inflation at present as a result of cost-push factors, we do
expect inflation to subside from April 2022 onwards, but remain significantly
above the target rate.
Prior to the Russian invasion of Ukraine, GDP growth was forecast to be closer
to 4.4% in 2022 but we now expect the rate of economic growth to slow to 3.8%
for the year. This leads to the possibility that we face an environment of
weakening economic growth at a time when inflation is running considerably
above target. Such an environment is likely to impact more heavily on,
particularly, the office and retail sectors as a result of depressed job growth
and falling disposable incomes.
As such, the bifurcation of the office sector is likely to become more
pronounced. 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 considerations
become ever more prominent in investor decision making. The industrial and
logistics market is anticipated to remain robust in 2022 but unlikely to match
the extremely strong performance achieved over the course of 2021. The prospect
of further yield compression, particularly on prime assets, is limited and
rental growth is expected to be the main driver of performance in this sector.
Demand continues to outstrip supply and, although there has been a pickup in
supply in the sector, increasing land values, a shortage of suitable
development sites, and increasing build costs mean there are no signs of a
correction in the short term.
We still expect the recovery in the retail sector to continue, primarily driven
by market factors rather than sector specific confidence. Demand will remain
focused on discount and food-led retail warehouse schemes whilst the
occupational market will continue to be heavily impacted by the
pandemic-induced change in consumer habits and the continued growth of
e-commerce. As discussed, the impact of inflation on household disposable
incomes is also likely to weigh heavily on the retail sector, and particularly
on discretionary-based retailers, throughout the course of 2022 and the
prospect of rental value growth remains remote. The alternatives sector will
build on strong transactional volumes achieved in 2021 and will grow more
prominent in investor focus. We expect the hotel sector to recover over the
course of 2022 as restrictions ease. The PBSA and Build-to-Rent residential
sectors should also continue their positive momentum.
Overall, we expect a positive year for UK real estate but the spread in
performance seen in 2021 is unlikely to be repeated and sector performance will
begin to converge in 2022, predominantly as a result of where we are in the UK
real estate cycle. Geopolitical events, inflationary and base rate pressures
are likely to weigh and, as a result, more care will be required when assessing
any investment decisions in the year ahead.
Portfolio Performance
During the reporting period the Company's portfolio delivered strong
outperformance against its benchmark with a total return of 21.4% versus 16.8%
for its MSCI benchmark, predominantly attributable to the Company's overweight
industrial position.
Since inception and over one, three and five years, the Company's portfolio has
also outperformed its MSCI benchmark.
The adjacent table sets out the components of these returns for the year to 31
December 2021 with all valuations undertaken by the Company's external valuer,
CBRE Limited.
Weighting Total Return Income Return Capital Growth
%
Fund % Benchmark UKCM % Benchmark UKCM % Benchmark
% % %
Industrial 63.4% 31.7 36.4 3.5 3.9 27.3 31.4
Office 14.3% -4.2 6.0 5.3 3.8 -9.0 2.1
Retail 12.1% 24.3 11.7 6.0 5.7 17.4 5.7
Alternatives 10.2% 3.2 8.4 3.0 4.1 0.1 4.2
Total 100% 21.4 16.8 4.0 4.3 16.8 12.0
Source: MSCI UK Balanced Portfolios Quarterly Property Index
MSCI calculation note: Multi-period capital growth and income return may not
sum perfectly to total return due to the cross
product that occurs as income is assumed to be reinvested on a monthly basis
and is subject to capital value change.
Total Capital Growth
16.8% UKCM
12.0% Benchmark
Industrial
A key driver of the portfolio's outperformance over the last 12 months was its
structural overweight position towards the industrial sector which was, again,
the strongest performing sector of the market, continuing a theme we have
witnessed as we have built up this portfolio over the last few years. The
portfolio has a 63% exposure to the industrial sector at the end of Q4 2021,
comparing favourably to 34% for the benchmark. The portfolio industrial
weighing has increased over the period from 58% at the end of Q4 2020.
The industrial assets delivered a strong performance of 31.7% over 2021 albeit
this was behind the benchmark return of 36.4%. This was primarily due to lower
capital growth in the portfolio than the benchmark.
The largest contributor to portfolio performance over the year was the Dolphin
Industrial Estate in Sunbury-on-Thames which delivered a total return of 40.8%
and saw capital growth of 36.5%. All of the top five assets by weighted
contribution to portfolio performance were industrial assets. In addition to
Dolphin Industrial Estate, the others were the multi-let industrial estate at
Ventura Park, Radlett, Hannah Close Neasden, which is let to Amazon, X Dock 377
at Magna Park, Lutterworth let to Armstrong Logistics and the Ocado
distribution unit in Hatfield.
Office
The Company's office portfolio had a disappointing year delivering a total
return of -4.2% compared to the benchmark return of 6.0%. Although the income
return was significantly ahead of the benchmark, this was offset by a capital
decline of 9.0%. Three of the largest detractors to the wider portfolio
performance were office buildings which reflects CBRE's prudent approach, as
our valuers, where income is at risk. This is particularly illustrated in the
performance of The White Building, a Grade A office in Reading, where a
significant proportion of income was potentially at risk due to tenant break
options and the capital value declined by 11% as the valuer penalised this
short income. In reality we have not seen the majority of break options
exercised and we would expect to see some of this capital loss recovered. The
other two assets within the bottom five performers in 2021 were 9 Colmore Row,
Birmingham and Central Square, Newcastle. Given the shift in occupier demands
which has been accelerated by the COVID-19 pandemic, all the office assets are
subject to a detailed review against strict criteria to ensure they are
future-proofed. Furthermore, there is an expectation that high-quality regional
office assets will benefit from changing working habits.
The Company sold Network House in Hemel Hempstead within the period. The asset
was not of sufficient quality to justify the necessary capital expenditure to
re-let it and once the tenant had vacated the asset was the largest void in the
portfolio. We disposed of the property for residential redevelopment, finishing
the year with a low exposure of 14% to the office sector, compared to 27% in
the benchmark.
Retail
Performance of the Company's retail portfolio, which made up 12% of the total
by value at the year end, significantly outperformed the benchmark delivering a
total return of 24.3% while the benchmark was 11.7%.
This reflects the composition of the Company's retail portfolio being bulky
goods and discount-led retail warehouses and supermarkets. These assets have
proven to be resilient during the COVID-19 pandemic and have attracted very
strong investor attention leading to yield compression.
The strong performance of the retail warehouse sector is reflected in the
returns generated at the Company's two retail parks held throughout the period
being Junction 27, Leeds and St George's Retail Park, Leicester, which
generated returns of 36.4% and 42.8% respectively. Both have been subject to
significant asset management and now have the attractive fundamentals investors
are focussed upon, namely strong locations, rents rebased to the current market
level and robust tenants fit for their catchment. These same characteristics
can be applied to the newly acquired Trafford Retail Park in Manchester which
saw an 11% capital uplift from purchase in September to 31 December 2021.
UKCM has no shopping centres and no pure high street retail exposure.
Alternatives
The Company's alternative sector assets delivered a positive total return of
3.2%. This was behind the benchmark return of 8.4% but showed a recovery from
the strongly negative returns of 2020 reflecting the stabilisation of the
sector and the reopening of the economy.
The alternatives portfolio is dominated by three cinema-anchored leisure
schemes - The Rotunda in Kingston, Cineworld in Glasgow and Regent Circus in
Swindon. These assets have been largely out of favour with investors but the
stabilisation of the sector has translated into improved rent collection rates
within the portfolio.
The Company's 10% weighting to the sector is forecast to increase with the
completion of two student housing schemes being developed in Exeter and
Edinburgh, which are both due to complete in time for the new academic term in
August 2022.
Investment Activity
The year saw strong activity in relation to transactions, selling out of risk
assets and recycling into accretive assets. Taking care to invest only in
compelling and accretive opportunities the majority of sales took place in the
first third of the year and, the majority of purchases occurred in the final
third. Four sales totalling £74m completed and five purchases completed,
committing a total of £216 million.
Sales
In February, Hartshead House, an office building let entirely to Capita on the
fringes of Sheffield City Centre, was sold to Arella Property Holding Limited
for £17 million in line with its valuation. The sale reflected our concerns
over the durability of the income stream as well as the potential for long-term
disruption in many parts of the office sector as a result of COVID-19.
The most significant disposal of the year was the sale in March of Kew Retail
Park in Richmond for £41 million to a leading London residential developer.
Securing an unconditional sale at this level represented an excellent exit
opportunity from the 4.7 acres the Company owned out of the complete 10-acre
Retail Park.
The Company's element comprised 61,765 sq ft of gross lettable area across five
units which were let at the time on short leases to a range of tenants
including Boots, Sports Direct, Gap and TK Maxx.
For some time, given its location and neighbouring residential use, despite any
formal planning consent, this asset had been valued with an eye to its
underlying residential conversion value and therefore provided a very low
income return. The Company would not undertake a development of this scale and
nature itself and therefore sought to maximise value through a sale to a
credible purchaser. The price agreed was marginally behind its latest valuation
at the time but well ahead of its value for retail warehouse use and at a
strong level in the context of the residential market.
Shortly after, in April, the Company sold its last pure high street retail
asset at 140-146 King's Road, London, for £9.9 million in line with its
valuation. Predominantly let to French Connection, a tenant that had
experienced issues in its performance which we believed were likely to increase
and, exacerbated by COVID-19, it presented significant risk of income
disruption. This, coupled with the potential for non-accretive capital
expenditure alongside our pessimistic outlook for the high street fashion
sector, led us to sell.
Finally, in September, Network House, Hemel Hempstead, a standalone and vacant
office pavilion, was sold for £6.3 million taking advantage of interest for
residential development and significantly reducing the Company's overall
vacancy rate.
Purchases
The five acquisitions completed over the year were varied by sector, income and
risk profile and show a blended net initial yield of 5.0%.
As reported last year, we exchanged on the purchase of a site in Edinburgh,
which completed in January, and entered into a development funding agreement to
create a 230-bed purpose built student accommodation scheme. The property is
very well-located for both Edinburgh and Napier Universities and is on track
for completion ahead of the 2022/2023 academic year.
At the end of September, we purchased Trafford Retail Park in Manchester for £
33 million at a net initial yield of 6.9%. It is strategically located, close
to the Trafford Centre and a motorway junction. The park is anchored by a
robust line up of food and discount anchored retailers and extends to 142,000
sq ft, providing good critical mass. It is let at rebased, sustainable rents
and is therefore well-placed for growth.
Through the funding of a development known as Sussex Junction, close to Gatwick
airport, the Company is creating three well-specified units totalling 107,000
sq ft with strong ESG credentials, adding to its heavy industrial exposure at
an attractive yield, compared to that of an up-and- let investment. Following
the pre-letting of two units to CGG Services, a global leader in geoscience
technology, the site was purchased in early November and the development is due
for completion in Q3 2022. When fully let, the investment is expected to yield
over 5.0%.
The £35 million purchase of an office on Hanger Lane, London completed at the
end of November. It is a 2.8-acre site prominently situated in an area
designated as a Strategic Industrial Location, close to Park Royal, one of
Europe's largest urban industrial areas. The medium term business plan is to
redevelop the site to create high quality industrial product but, in the
meantime, the Company benefits from a robust and growing income stream by
virtue of a 10-year lease of the existing 98,000 sq ft office building let to
Kantar, a global data consulting company. It currently yields 5.1% and is
subject to a five year rent review linked to CPI.
In December, we purchased a multi-faceted investment with a life sciences and
technology focus in Leamington Spa. It comprises two refurbished distribution
warehouses totalling 380,000 sq ft, let to The Secretary of State for the
Department of Health and Social Care and Iron Mountain plc. A 65,000 sq ft
refurbished office building is let to Tata Consulting Services Limited and a
global social network provider while the asset also comprises an oven-ready
development site with planning consent for 68,000 sq ft of flexible industrial
accommodation. The income-producing industrial and office properties are
delivering a net initial yield of 4.3% and the development of the new units is
underway, with an expected development yield of 4.8%.
Asset Management Activity
The reopening of the economy and return to strong growth has been reflected in
our rent collection rates which are approaching normalised pre-COVID-19 levels
and have improved on a quarter-by-quarter basis throughout the year.
A summary of rent collection for the year to 31 December 2021, as at 28
February 2022, is provided below and includes those tenants who have paid, by
agreement, on a monthly basis:
March 2021 95%
June 2021 96%
September 2021 98%
December 2021 98%
TOTAL 97%
Additionally, significant progress has been made on collecting arrears incurred
in previous quarters. Within last year's report and accounts up to 31 December
2020 we reported a rent collection rate of 83% for the year. This 2020 figure
has since increased to 94%. We continue to engage proactively with tenants
which have incurred rental arrears.
The average weighted unexpired lease term of the portfolio has decreased
slightly to 8.3 years compared to 9.0 years at 31 December 2020. This compares
to the benchmark unexpired term of 9.3 years. At 31st December 2021, 26% of
portfolio income was subject to either index linked rental uplifts or fixed
increases.
The following asset management activity, grouped by sector with percentage
occupancy shown as at 31 December 2021, represents a summary of noteworthy
transactions:
Industrial / Logistics Distribution - 97% occupied
Ventura Park, Radlett
A flurry of leasing activity in the first quarter of the year produced five
lettings which secured £2.45 million of annual rent in aggregate, 4.4% ahead of
the combined units Estimated Rental Value ("ERV"). In detail, Unit 7 and Unit B
have been let to an existing global occupier on the park on two year leases at
a rent of £1,234,000 per annum. Unit A, 34,502 sq ft, was let to GL Events at a
new rent of £373,000 per annum, secured for a five-year term certain with a
nine-month lease incentive given as reduced rent for a two-year period. Unit 6A
has been let to Stand & Deliver, a subsidiary company of an existing occupier,
Forward Trucking Services Limited, for a 10-year term certain at a rent of £
480,879 per annum. A lease incentive of 10 months' rent free was granted on
this 44,734 sq ft unit. Unit E has been let to Planners Services & Sundries on
a 10-year lease at a rent of £357,400 per annum.
In early summer, as part of its ongoing ESG initiatives, the Company welcomed
several hundred new tenants to the park in the form of bees. Two bee hives were
installed and in addition to their positive environmental impact, honey
produced will be sold to raise funds for charity.
Newton's Court, Dartford
In the first quarter a new five-year lease was agreed with MedDeX Solutions
Limited at Unit 2, Newton's Court, Dartford at a rent of £165,000 per annum, 2%
ahead of the ERV of the unit. And then in the final quarter of the year, a
letting of the 6,643 sq ft Unit 7 to Dartford & Gravesham NHS Trust Unit
completed. The NHS Trust committed to a 10-year term with a break option at
year five at a rent of £84,111 per annum.
Dolphin Trading Estate, Sunbury-on-Thames
Several significant deals completed in quarter four at Dolphin Industrial
Estate, the Company's multi-let industrial estate in Sunbury-on-Thames. Trans
Global Freight Management Limited let 10,000 sq ft at Unit A2 on a new 5-year
lease at a rent of £140,000 per annum, ahead of the unit's ERV. At the same
time Trans Global extended its existing lease over Units D1/2 (63,900 sq ft) on
a coterminous basis with Unit A2 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.
Howard Tenens Limited extended its lease over the 49,000 sq ft Unit B on a new
10-year lease, subject to a break option in year five, ahead of ERV at a rent
of £628,702 per annum.
Unit C1 was re-let to Goldstar Heathrow following the insolvency of the
previous tenant. No void period occurred between the old and new tenant and
Goldstar have signed a 10-year lease, subject to a break option in Year 5, at a
rent of £306,733 per annum for the 21,000 sq ft unit.
Office - 98% occupied
9 Colmore Row, Birmingham
The Company has a relatively low exposure to the office sector. In the first
quarter, the completion of new cycle and shower facilities at this building
helped facilitate a new 10-year lease to be signed with Clarke Wilmott. The
lease covers the entire 4,222 sq ft 7th floor at a rate of £26.50 psf, with a
five year break option and a £150,000 landlord capital contribution to complete
fit out.
Network House, Hemel Hempstead
As mentioned under the section on sales, the successful disposal of the
Company's 68,300 sq ft vacant office in Hemel Hempstead, Network House, removed
what would otherwise have been a difficult vacancy allowing proceeds to be
productively reallocated.
Retail & Leisure - Retail 99% occupied / Leisure 98% occupied
Encouraging progress was made over the year on both the leisure and retail
elements of the portfolio. Focused on the first half of the year, but
continuing into the second, the Company had a string of successes securing new
tenants to its large-format leisure properties reflecting growing optimism of
sustained recovery in the sector. This momentum moved into the retail park
portion of the Company's portfolio in the second half of the year with multiple
accretive new lettings reflecting the positioning of assets primarily in
non-fashion and convenience-led segments of the market.
Regent Circus, Swindon
In the second quarter of the year a significant letting was secured to Boom
Battle Bars, a specialist operator in competitive socialising. The 15,000 sq ft
letting will see units 4, 5, 7 & 8 let on a new 15-year lease at an annual rent
of £150,000 per annum in line with the units' combined ERV. In addition, Unit 3
was let to DSM Holdings Limited t/a Korean BBQ on a new 15-year lease. The
restaurant extends to approximately 3,500 sq ft and the agreed rental equates
to an average rent of £45,000 per annum over the first five years of the lease.
Moving into the third quarter, Unit 1 was let to pizza restaurant Dough & Co on
a 15-year lease at an annual rent of £75,000 per annum ahead of the unit's ERV.
As a result of this significant leasing activity the asset was 99% let by the
final quarter of the year.
The Rotunda, Kingston upon Thames
In the second quarter the Company secured a new restaurant tenant for Unit 6 at
the Rotunda signing Aegon Limited, trading as Kung Fu, on a 10-year lease at a
base rent of £80,000 per annum, ahead of ERV, with a 10% turnover top up.
St George's Retail Park, Leicester
Next entered into a new five-year lease over Unit 3 in the third quarter
agreeing a turnover based rent which is expected to provide the Company with
approximately £150,000 of annual rent. The store, a Next clearance outlet, will
further improve the Park's tenant mix and is expected to drive footfall.
Two new 10-year leases were signed in the fourth quarter. The first, which is
subject to break options, was agreed to One Below, a discount retailer, over
unit 8A at a rent of £100,000 per annum, exceeding the unit's ERV by over 5%.
An Agreement for Lease was also exchanged over Unit 11 with Belron UK Limited,
trading as Autoglass, at a rent of £52,000 per annum, again in excess of the
unit's ERV.
Trafford Retail Park, Manchester
Shortly after purchase in September the Company completed a new 15-year lease
with fast food operator Five Guys over a former Carphone Warehouse unit at an
annual rent of £66,000 per annum. The restaurant will significantly enhance the
already strong F&B offering this asset provides.
Junction 27 Retail Park, Leeds
In the final quarter of the year a new 10-year lease was agreed with existing
tenant Currys Group Limited at a new rent of £806,440 per annum, more than 30%
ahead of ERV. Currys is a key anchor tenant at this property, as well as its
largest tenant by contracted rent, and its unbroken 10-year lease commitment
reflects the retail park's strength and its importance to this valuable anchor.
Environmental, Social and Governance (ESG)
Whilst real estate investment provides valuable economic benefits and returns
for investors it has - by its nature - the potential to affect environmental
and social outcomes, both positively and negatively. The Company adopts the
Investment Manager's expansive policy and approach to integrating ESG in all
areas of its investment process, and this has been used as the basis for
establishing the Company's ESG objectives. Both the Investment Manager and
Board view ESG as a fundamental part of their business.
Given the significance, and at times quite technical content of ESG and its
application, we have dedicated a separate section of our report to the topic
which follows. This covers our commitments and process in detail together with
some interesting practical examples of the application of our ESG principles.
Perhaps most significant is our response to climate change with our twin new
commitments to achieve Net Zero Carbon following work completed in 2021:
2030 - Achieve Net Zero Carbon across all portfolio emissions under the control
of the Company as landlord.
2040 - Achieve Net Zero Carbon across all portfolio emissions - both those
controlled by the Company as landlord and all the emissions of its tenants and
embodied carbon from development activity.
Further details of our Net Zero Carbon Strategy can be found on page 24.
It is also worth noting that Energy Performance Certificates (EPCs), which each
property receives, form a powerful regulatory stick by which government can
encourage the UK property industry to decarbonise. Draft legislation applying
to England and Wales indicates that by 2027 all property must have an EPC of
class A, B, or C and A or B by 2030. The legislation and rating scale in
Scotland is different and there are currently no similar minimum standards
based on EPC rating. Currently 75% of the Company's portfolio by ERV in England
(it does not own in Wales) attracts an A, B, or C rating and, whilst a good
figure today, it is one which we, and the Board, keep under constant review to
ensure we are on track to comply with the expected legislation. This statistic
is anticipated to grow through the completion of the Company's developments in
Exeter, Sussex Junction and Leamington Spa which are all being delivered
throughout 2022 and to a high energy-efficiency standard, as well as through
other ongoing refurbishment projects within the portfolio.
KEY STRATEGIC GOALS
PURCHASE DISPOSAL PROTECT & CREATE VALUE
- Use debt facility to - Exit risk assets - Grow income
purchase accretive assets - Potential to - Generate
- Target basket of profit-take through outperformance
assets with range of selected sales - Review quality of
investment characteristics office assets
and a variety of income and
risk profiles
- Lot size £30m-150m
EMBEDDED ESG STRATEGY
Portfolio Strategy
Following significant reshaping over the last few years, the Company has a high
conviction portfolio, heavily weighted to the industrial sector and underweight
to the retail sector, in particular shopping centres and traditional high
street, where the exposure is nil. Due to the extreme polarisation between the
sectors in recent years, this portfolio positioning has been very beneficial to
performance.
The bulk of the portfolio comprises a solid bedrock of assets with strong
fundamentals, durable income streams and a low risk profile. This affords us
the ability to purchase assets that have opportunities for the team to add
value through active management and development, to help drive superior
returns. The Company has available funds for further investment via its
low-cost Revolving Credit Facility and will target a basket of assets with a
range of income and risk profiles across sectors that are accretive and
complementary to the existing portfolio. We anticipate that purchases will be
opportunity led although they are likely to emerge from within the recovering
hotel sector, discount and food-led retail warehousing and best-in-class
offices.
Looking forward we expect the divergence in returns to narrow and, whilst we
intend to maintain a strong weighting to the industrial sector, the focus of
new investment will be in other areas of the market that are benefitting from
the structural changes seen in the economy and society. We do, however, expect
to continue to see polarisation within the sectors, much of which is being
accelerated by the COVID-19 pandemic. A recent example of this is the
considerable change in fortunes of retail warehousing, which saw significant
yield compression last year, although not uniformly across the sector. We are
attracted to those parks in strong locations with rebased rents, let to
convenience and discount-led retailers, most of whom were open during lockdowns
and are trading profitably, thereby delivering sustainable income streams.
Whilst the office sector is in a state of flux due to the changing ways in
which businesses occupy buildings, bringing uncertainty over the impact on the
various occupational markets, we see opportunity to invest in best-in-class
offices with strong ESG and wellness credentials, as well as good technological
capability. We believe that occupiers will be very discerning in their choice
of building and demand will be focused on a very narrow area of the market,
where high-quality product is scarce and the prospects for rental growth
strong. In light of these changes, the Company is also rigorously reviewing its
own office holdings to ensure they meet, or could economically meet, these high
standards. If they cannot, we are likely to exit them alongside the small
number of assets we consider pose risk to future performance or are at an
optimal point in their life cycle to crystallise profits.
Given the increased demand from both occupiers and investors for the biomedical
industry, which was further fuelled by the pandemic, we may seek to add to our
life sciences exposure where we can do so in a manner that is prudent and
accretive to the portfolio. We are seeing opportunities in the regions as well
as the leading markets of Oxford, Cambridge and London.
With UK real estate becoming more operational, we are keen to continue to
partner with reputable and experienced operators to widen the universe of
investments available to us in the alternative sector, particularly student
accommodation and hotels. In the operational space we can obtain enhanced
returns versus traditional leasing models and have taken exposure through our
student housing developments. We expect to grow this exposure in the short to
medium term.
In tandem with execution of our ESG strategy, the key priorities within the
current portfolio are to continue to grow income and to generate capital
outperformance. At the end of 2021 the portfolio had a void rate of only 2.1%
and so, in addition to letting the limited vacancy, the focus for income growth
is on capturing the reversionary potential of the portfolio and to target
future rental improvements.
This is particularly the case for the Company's industrial assets given that we
believe there is limited scope for further yield compression across the sector
in aggregate and that future returns will be driven by rental growth.
We believe the industrial sector is best placed in the current inflationary
environment as we have seen rental growth significantly outstrip inflation in
strong locations. Alongside this, 26% of the portfolio's income benefits from
index-linked or fixed rental increases.
There are several opportunities being explored across the portfolio where asset
management should drive outperformance, such as the development of the site
acquired within Precision Park, Leamington Spa, which has consent for 68,000 sq
ft of industrial space. At the end of the year the Company was also underway on
three developments - student housing projects in Edinburgh and Exeter, and an
industrial development at Sussex Junction, Bolney, south of Gatwick. We believe
that selective development of high-quality real estate, which is well placed in
its market, offers the opportunity for the Company to access best-in-class real
estate whilst offering returns in excess of those received from standing
investments. We will therefore continue to explore further such development
opportunities.
The Company has invested the majority of its available funds over the last year
and expects to utilise the remainder of its revolving bank facility to invest
in accretive assets. Gearing is amongst the lowest in the context of the
Company's peers. We believe that the Company's well-let portfolio of scale,
heavily weighted towards performing sectors, and with good share liquidity,
should have a broad reaching appeal and is well placed to continue delivering
strong performance with good potential for future earnings growth.
Will Fulton & Kerri Hunter
abrdn
13 April 2022
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG)
Approach to ESG
The Company adopts the Investment Manager's policy and approach to integrating
ESG and this has been used as the basis for establishing the Company's ESG
objectives. The Investment Manager and Board view ESG as a fundamental part of
their business. Whilst real estate investment provides valuable economic
benefits and returns for investors it has - by its nature - the potential to
affect environmental and social outcomes, both positively and negatively.
The Investment Manager's approach is underpinned by the following three
over-arching principles:
- Transparency, Integrity and Reporting: being transparent in the ways in
which we communicate and discuss the strategy, approach and performance with
investors and stakeholders.
- Capability and Collaboration: drawing together and harnessing the
capabilities and insights of platforms, with those of our investment, supply
chain and industry partners.
- Investment Process and Asset Management: integrating ESG into
decision-making, governance, underwriting decisions and asset management
approach. This includes the identification and management of material ESG risks
and opportunities across the portfolio.
A key element of the Investment Manager's approach is the employment of its ESG
Impact Dial which is a proprietary research framework supporting investment
strategies and asset management. Four major themes have been identified and
provide the basis of the Dial - Environment & Climate, Governance & Engagement,
Demographics and Technology & Infrastructure. Together with the Dial's scoring
system, assessing each asset based on its ESG characteristics across 21
indicators, these provide a framework against which the Company can set its ESG
objectives and monitor progress over time, as well as guiding the assessment of
materiality.
Of particular focus is responding to climate change, both in terms of
resilience to climate impacts and in reducing emissions from the Company's
activities. The Company has recently announced its pathway to achieving Net
Zero Carbon following work completed in 2021:
- 2030: achieve Net Zero Carbon across all portfolio landlord emissions
(Scope 1 & 2)
- 2040: achieve Net Zero Carbon across all portfolio emissions (Scope 1, 2 &
3).
Scopes 1 and 2 cover emissions that directly result from the landlord's
activities where there is operational control, either through the purchase and
consumption of energy or refrigerant losses. Scope 3 emissions are those that
occur in our supply chains and downstream leased assets (tenant spaces) over
which we have a degree of influence but limited control.
The Company's strategy for achieving Net Zero Carbon is fully detailed under
the heading, Net Zero Carbon - Energy efficiency and decarbonisation, on page
24.
THEME COMMITMENT CURRENT STATUS NEXT STEPS
Carbon reduction and Net Zero Carbon Carbon baseline Fully embed Net Zero
energy efficiency established. Target Carbon across asset
Net Zero Carbon in management,
2030 for landlord acquisition and
emissions and development/
2040 for all refurbishment
portfolio emissions. processes.
Improve tenant 25% data coverage in Seek to increase to
energy data coverage 2021 at least 50% in 2022
through targeted
engagement with key
occupiers and 'smart
meter' roll out.
Maximise solar Numerous feasibility Deliver on Company
PV capacity studies and surveys projects and
completed and key continue
target assets dialogue with
identified. tenants for occupied
Renewables included buildings.
within
refurbishments
and development
projects where
feasible.
EPC legislation - Detailed portfolio Make asset-level
plan for minimum review has been interventions at
B rating by 2030 completed appropriate lease
and every asset has events.
a plotted course to
compliance.
Resilience and Undertake scenario Study of all Review asset-level
physical analysis to better standing assets results in detail
climate risk understand future completed Q1 22 to and
risk establish value at define appropriate
risk under RCP8.5 next steps to
climate scenario. improve
climate resilience.
Land and water Maintain low The environmental Continue to review
contamination contamination risk status of properties environmental
is information as part
reviewed as part of of acquisition due
acquisition. Due diligence.
diligence and
records are
maintained on
current portfolio.
Value to society Implement house Work is in progress Review results and
methodology and to test and refine define actions to
report our improve social value
on progress by June methodology for generated by the
2022 social value based portfolio.
on the
ESG Impact Dial. We
now expect results
to be
available by H2
2022.
ESG Commitments
Within the Company's 'Dialling up the Integration of ESG' paper published in
2020 a number of key commitments were outlined. These fall under four broad
themes which form the basis for our actions at portfolio level. The four themes
are:
- Carbon reduction and energy efficiency
- Reliance and physical climate risk
- Land and water contamination
- Value to society
The preceding table presents an update on progress against these commitments
and ongoing activities.
EPC Legislation
Each property receives an Energy Property Certificate (EPC) ranging from A to
G. Draft legislation applying to England and Wales indicates that by 2027 all
properties must have an EPC of class A, B, or C and A or B by 2030. Currently
75% of the Company's portfolio by ERV in England (it does not own in Wales)
attracts an A, B, or C rating and, whilst a good figure today, it is one which
we and the Board keep under constant review to ensure we are on track to
complying with the expected legislation. The percentage of portfolio ERV in
England with an EPC of A-C is anticipated to grow through the completion of the
Company's developments in Exeter, Bolney and Leamington Spa, which are all
being delivered throughout 2022 and to a high energy-efficiency standard, as
well as through other ongoing refurbishment projects within the portfolio.
NET ZERO CARBON TARGET
2030 for landlord operational emissions.
2040 for all emissions.
CASE STUDIES
CREATING BENEFITS FOR THE COMMUNITY
The White Building, Reading
We recognise the importance of maximising the impact of communal space within
our multi-let assets and identified the opportunity to create a garden within
the roof terrace of The White Building in Reading. Working with JLL and our
landscaping contractor, the Tenant Community Garden was launched in 2021 to
support habitat creation, biodiversity, carbon sequestration and other social
benefits. We sought to give our tenants the opportunity to spend some time away
from their desk during their lunch or free time and to tend to their own
personal garden on the roof terrace with an aim to improving their mental
health and general wellbeing. The tenants were encouraged to grow organic
vegetables for their own consumption or to be donated to a local charity, to
grow bee-friendly plants and to fertilise soil with grounds from the coffee
machine. The project was extremely well received by the tenants and will be
repeated in 2022.
A number of other biodiversity focussed initiatives have been completed
throughout 2021 as we seek to make a positive impact through the portfolio.
These include the installation of beehives at our multi-let industrial estate
at Ventura Park, Radlett and installing bird boxes and 'bug hotels' at our
retail park at Junction 27, Leeds.
IMPROVING ENERGY EFFICIENCY
Unit 12, Dartford
In June 2021 the 71,000 sq ft Unit 12 at Newton's Court, Dartford, fell vacant.
The unit had been occupied as a headquarters building for a banana ripening
firm since the 1990s and, as a result, the property had many bespoke fixtures
and fittings requiring removal or upgrading. We therefore budgeted for a full
refurbishment of the unit with a total net investment of £2.6 million.
As part of the refurbishment a number of ESG considerations have been included
within the specification - installing a new energy-efficient air conditioning
system, replacing lights with LED fittings, increasing the roof thermal
insulation by over-cladding it entirely and installing a new ventilation system
with heat recovery. We are also installing photovoltaic (PV) solar panels on
the roof. The works completed in late February 2022 and the unit has achieved
an EPC of A, an improvement from the previous C rating. The refurbishment,
incorporating ESG improvements, has enhanced our leasing rental expectations
and with marketing underway the building is generating strong occupier
interest.
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 and
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, for example like-for-like greenhouse gas emissions.
A full outline of the scope of reporting and materiality review in relation to
EPRA sBPR indicators is included on pages 101-107 which also provides
disclosures required under Streamlined Energy and Carbon Reporting (SECR).
Operational Sustainability Performance Summary
Processes are in place to ensure operational sustainability performance is
monitored and actions are implemented to drive continual improvement. The
effect of COVID-19 on occupancy has had an impact on energy consumption and
greenhouse gas emissions. It is unfortunately not possible to fully
disaggregate this impact from improvement measures undertaken at assets and the
performance figures for 2020 and 2021 should be viewed in this context.
Like-for-like landlord-obtained electricity consumption reduced year-on-year
across the Company's assets by 8%. An increase at offices due to increased
occupancy in 2021 was offset by lower landlord consumption for vacant
industrial units. Landlord gas consumption increased due to an increase at
office assets. This resulted in a 7% increase in like-for-like greenhouse gas
emissions associated with landlord-procured energy. However, on an absolute
basis, emissions from landlord-procured energy and refrigerants reduced by 10%
in 2021.
Full details of performance against material EPRA sBPR indicators are included
in on pages 101-107.
2021 GRESB Assessment
The Company has submitted data to GRESB (formerly the Global Real Estate
Sustainability Benchmark) since 2014. It is the leading global sustainability
benchmark for real estate vehicles. In its 2021 assessment the Company was
rated second in its peer group, achieving a score of 73 and a three-star
rating, an improvement on the two-star rating and overall score of 67, which
were received in 2020.
Net Zero Carbon - Energy efficiency and decarbonisation
In 2021, COP26 served to further reinforce the need for the rapid
decarbonisation of the global economy. The real estate sector has made some
progress to date but the pace must accelerate from here.
The Company has an active approach to managing carbon emissions across the
portfolio and has been implementing energy efficiency improvements and
targeting 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.
Net Zero Strategy
Our Net Zero Principles
Although the goal may seem clear, definitions and standards on Net Zero and the
policy mix
to support it remain immature. In this context we have established several key
principles that
underpin our strategy to ensure it has integrity, robustness 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 exposure to regulatory and market risk.
- Timing: we aim to align improvements with existing plant replacement
cycles and planned refurbishment activities wherever possible. This ensures
functional equipment is not replaced well ahead of its end-of-life unless
necessary which in turn reduces cost and embodied carbon.
Realistic:
- Targets: long-term targets must be stretching but deliverable and
complimented by near-term targets and actions.
- Policy support: to fully decarbonise before 2050 the wider real estate
sector requires a supportive policy mix to incentivise action and level the
playing field.
Collaborative:
- Occupiers: we recognise that Net Zero will not be achieved in isolation.
We will work closely with occupiers on this journey, many of whom have their
own decarbonisation strategies covering their leased space. Many of the
Company's top 10 tenants have made their own Net Zero commitments already and
our interests are aligned on this issue.
- Suppliers: we will work with the Company's suppliers including property
managers and consultants in order that everyone is clear on their role in
achieving Net Zero.
Measurable:
- Clear key performance indicators at the asset and portfolio level.
Health & Safety Policy
Alongside these environmental principles the Company has a health & safety
policy which demonstrates commitment to providing safe and secure buildings
that promote a healthy working environment and a customer experience that
supports a healthy lifestyle. The Company, through the Investment Manager and
Managing Agent, manages and controls health & safety risks as systematically as
any other critical business activity using technologically advanced systems and
environmentally protective materials and equipment. By achieving a high
standard of health & safety performance, the Company aims to earn the
confidence and trust of tenants, customers, employees, shareholders and society
at large.
Bribery & Ethical Policy
It is the Company's Policy to prohibit and expressly forbid the offering,
giving or receiving of a bribe in any circumstances. This includes those
instances where it may be perceived that a payment, given or received, may be a
bribe. The Company has adopted this Anti-Bribery and Corruption Policy to
ensure robust compliance with The UK Bribery Act 2010. The Company has made
relevant enquiries of its Investment Manager and has received assurances that
appropriate anti-bribery and corruption policies have been formulated and
communicated to its employees. In addition the Board has adopted an ethical
policy which highlights the need for ethical considerations to be considered in
the acquisition and management of both new and existing properties.
Our baseline
Our operational carbon footprint for 2019 is shown in the adjacent pie chart.
We have used 2019 as a baseline for our work as it was unaffected by changes in
occupancy due to COVID-19. This shows a total operational footprint of 29,451
tonnes of carbon dioxide equivalent (Co2e). Of this, 9% is associated with
Scope 1 and 2 emissions that are in the direct control of the Company and 91%
is Scope 3 emissions from tenant-procured energy.
For 2019 we had actual energy consumption data for 20% 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 274kWh/m²
and the operational emissions intensity was 46 kgCO2e/m² across Scopes 1, 2 and
3. These will be key metrics as we progress with our delivery strategy.
Operational carbon footprint
Landlord Gas (7.5%) Scope 1
Landlord Electricity Scope 2
(1.5%)
Tenant Gas (40%) Scope 3
Tenant Electricity (51%) Scope 3
Landlord Waste (<0.1%) Scope 3
Landlord Water (<0.1%) Scope 3
Our delivery strategy
NEAR-TERM (TO 2030) LONG-TERM (2030-2050)
Targets Achieve net zero emissions Net zero across all
for Scope 1 and 2 by 2030. emission scopes by 2040
Managing carbon intensity
across all scopes in line
with
the long-term target.
Context The 2030 targets are a Buildings in the UK will
sensible stepping stone have to fully decarbonise
towards long-term by 2050 through energy
decarbonisation. In the efficiency and the
near term our activities decarbonisation of heat and
are focused on occupier electricity. We will aim to
engagement and compliance reach our long term target
with energy performance through these measures with
regulations which will mean as little use of offsets as
significant investment in possible.
energy efficiency, heat
decarbonisation and We believe that setting our
renewable energy. long term-target for 2040
is ambitious yet pragmatic.
We anticipate our actions This date also aligns with
to decarbonise heat before that chosen by several of
2030 will mean the company our largest occupiers.
has very low Scope 1
emissions at this date. We will keep our long term
target under review as
policy measures and market
drivers become clearer in
the coming years.
Near-term delivery actions STANDING PORTFOLIO:
- Increase coverage of tenant energy data through
improved engagement, lease agreements and smart
metering.
- Build improved understanding of tenant
decarbonisation strategies and extent of tenant
renewable energy procurement.
- Implement low-carbon refurbishments to ensure
regulatory compliance focussing on energy efficiency
and heat decarbonisation and start to quantify embodied
carbon.
- Continue to implement solar PV projects and
establish power purchase agreements with occupiers.
ACQUISITIONS AND DEVELOPMENTS:
- Benchmark assets pre-acquisition, understand
costs and build decarbonisation into asset management
plan from the start of ownership.
- Direct development and development fundings to be
designed to whole life net zero principles.
Measurement indicators - % data coverage
- Absolute portfolio emissions (tCO2e)
- Energy and emissions intensity (kwh/m2, year; kg
CO2e/m2/year)
- Installed solar capacity (MWp)
- Embodied carbon of development projects
TASKFORCE FOR CLIMATE-RELATED FINANCIAL DISCLOSURES
Taskforce for Climate-Related Financial Disclosures (TCFD)
TCFD was established to provide a standardised way to disclose and assess
climate-related risks and opportunities. 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 business.
TCFD covers risks and opportunities associated with two overarching categories
of climate risk; transition and physical:
- Transition risks are 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 are 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 or supply chain disruption.
There is still significant uncertainty and methodological immaturity in
assessing climate risks and opportunities and there is not yet a
widely-recognised net zero standard. Nonetheless, we have progressed already
with work to model the implications of decarbonising the portfolio in line with
a 1.5°C scenario and undertaken analysis to understand potential future
physical climate risks. This is the first year that the Company is reporting
against TCFD recommendations and we expect our disclosures to evolve over time
as methodologies improve and our work develops further.
TCFD RECOMMATION COMPANY APPROACH FURTHER INFORMATION
Governance
Board oversight of The Board consider Risk Management section on
climate-related risks and climate-related risks and pages 34-41.
opportunities opportunities alongside all
other Company risks which
fall under the remit of the
Risk Committee.
Management's role in At an operational level, The Company's approach is
assessing and managing the Manager is responsible set out in the
climate-related risks and for integrating Environmental, Social &
opportunities consideration of climate Governance (ESG) section on
risks and opportunities pages 22-25.
into the investment and
asset management process.
The Manager reports a
number of KPIs to the Board
on a quarterly and annual
basis.
Strategy
Climate-related risks As part of our investment
and opportunities and asset management
the organisation has process we consider
identified over the short, climate-related risks and
medium, and long term opportunities over a range
of timescales. A summary of
our initial assessment over
the short, medium and long
term is as follows.
In the short term (0-5
years) we anticipate
regulations affecting the
energy performance and
emissions of buildings to
tighten to align more
closely with Government
targets for economy-wide
decarbonisation. Whilst
this will provide clarity
of direction to the sector,
it is likely to increase
development and
refurbishment costs and
will start to affect
valuations. However, these
trends will also create
opportunities to benefit
from shifting occupier and
investor demand for
low-carbon, future-fit
assets.
Over the medium term (5-15
years) these trends will
continue and we expect
regulations and market
sentiment to further drive
energy efficiency and
decarbonisation. We
anticipate significant
technological change in
this period particularly in
relation to heat pump
solutions which will
improve the technical and
financial feasibility of
decarbonising heat in
buildings.
Over the long term (15+
years) we are likely to see
climate-related extreme
weather events increase in
frequency and severity
which may impact built
environment assets
depending on their location
and characteristics.
The impact of The Board recognises that The EPC profile of the
climate-related risks and climate change will affect Company's
opportunities on the the built environment, both properties is set out on
organisation's businesses, through decarbonisation and page 107.
strategy, and financial increased physical risks.
planning where material The trends summarised above
are therefore expected to
affect the Company's
strategy and operations in
the coming years.
Alongside our net zero
planning, a detailed
exercise has been completed
by the Manager to assess
the portfolio's compliance
with anticipated Minimum
Energy Efficiency Standards
legislation to ensure
assets are capable of
compliance and that any
necessary interventions can
be appraised and included
with the individual asset
plans.
We have also recently
completed an assessment of
value at risk as a result
of physical climate risks
under the RCP8.5 climate
scenario which implies a
4.3° C temperature rise by
2100. Initial results are
described on page 27.
The resilience of the We have set out our long Our delivery strategy is
organisation's strategy, term aim to be a net zero set out on
taking into consideration Company by 2040 with an page 25.
different climate-related interim target for
scenarios, including a 2°C operational emissions
or lower scenario within our direct control
by 2030. We will track
progress against our long
term aim using interim
energy and emissions
intensity targets at the
portfolio and asset levels.
Our work to establish a net
zero pathway for the
company is informed by
industry benchmarks
including the Carbon Risk
Real Estate Monitor (CRREM)
1.5°C Paris-aligned
emissions trajectories. As
part of this work we have
identified high-level cost
estimates for transitioning
assets to net zero. We
consider that the portfolio
and Company strategy is
well-positioned to
decarbonise in line with
this trajectory assuming
national energy and climate
policy is also supportive
of this goal.
We will continue to engage
with industry bodies such
as the Better Building
Partnership to standardise
net zero definitions across
the industry. We recognise
that we cannot act in
isolation and that
achieving this level of
decarbonisation will
require supportive climate
policy and the cooperation
of our occupiers and
suppliers.
Our recent work on
understanding value at risk
as a result of physical
climate risk has
highlighted the importance
of considering changes in
wind speeds and flood risk
over time as well as the
implications of rising
temperatures on cooling
loads. Our initial
assessment of these results
is that in general under
the RCP8.5 scenario,
physical climate risks do
not become material until
after 2040 and that most
potential cost is
associated with additional
cooling demand due to
rising temperatures. We
consider that our existing
portfolio and Company
strategy is resilient to
physical climate risks in
the short to medium term.
We will however keep this
under regular review as
methodologies for physical
risk assessment improve.
Risk Management
The Company's processes for Climate-related risks and Risk Management section on
identifying and assessing opportunities are pages 34-41.
climate-related risks considered and assessed by
the Company Risk Committee.
Metrics and Targets
The metrics used by the We disclose our emissions Data on emissions is set
organisation to assess in line with EPRA out on pages 101-106.
climate-related risks and Sustainability Best
opportunities in line with Practices Recommendations.
its strategy and risk As part of our
management process decarbonisation strategy we
will track progress against
our long-term aim using
interim energy and
emissions intensity targets
at the portfolio and asset
levels.
Scope 1, Scope 2 and, if We disclose our emissions Data on emissions is set
appropriate, Scope 3 in line with EPRA out on pages 101-106.
greenhouse gas (GHG) Sustainability Best
emissions and the related Practices Recommendations
risks (see pages 101-107). This
covers Scope 1 and 2
emissions associated with
landlord-procured energy as
well as Scope 3 emissions
from energy sub-metered to
occupiers. Our 2019
baseline emissions
including tenant
consumption (actual and
estimated) is presented on
page 25. We have used 2019
data as a baseline for our
measurements as this is
prior to any disruption to
measurement caused by the
COVID-19 pandemic.
The targets used by the We have set out our long Our delivery strategy is
organisation to manage term aim to be a net zero set out on page 25.
climate-related risks and Company by 2040 with an
opportunities and interim target for
performance against targets operational emissions
within our direct control
by 2030.
2021 PORTFOLIO & ANALYSIS (all figures as at 31 December 2021)
TOP 10 TENANTS BY RENT
% of MSCI risk band
contracted
rent
1 OCADO RETAIL LIMITED Industrial 5.1% Low
2 PUBLIC SECTOR Industrial & Office 5.0% Negligible
3 WARNER BROS LIMITED Industrial 4.6% Negligible
4 AMAZON UK SERVICES LIMITED Industrial 4.4% Negligible
5 TOTAL E&P UK LIMITED Industrial 3.4% Low/Medium
6 CINEWORLD ESTATES LIMITED Alternatives 3.1% Medium High
7 KANTAR Office 3.0% Low
8 B & Q PLC Retail Warehouse 3.0% Low
9 DALATA CARDIFF LIMITED Alternatives 2.5% Maximum
10 PALLETFORCE LIMITED Industrial 2.3% Low/Medium
PORTFOLIO SPLIT BY SUB SECTOR
Industrials - South East & 38.7%
London
Industrials - Rest of UK 24.7%
Retail Warehouses 11.1%
Alternatives 10.2%
Offices - Rest of UK 7.1%
Offices - Rest of South East 5.3%
Offices - West End 1.9%
Retails - South East 1.0%
PORTFOLIO SPLIT BY GEOGRAPHY
South East 35.8%
London 16.1%
West Midlands 14.2%
East Midlands 8.9%
South West 8.1%
Scotland 7.3%
North East 3.7%
Yorks and Humber 3.5%
North West 2.4%
SECTOR SPLIT V BENCHMARK
UKCM MSCI
Industrials 63.4% 33.9%
Offices 14.3% 26.7%
Retail 12.1% 22.4%
Alternatives 10.2% 17.0%
LEASE EXPIRY PROFILE
UKCM Benchmark
0-1 yr 8.2% 10.8%
1-2 yrs 5.4% 8.8%
2-3yrs 7.8% 8.8%
3-5 yrs 19.1% 16.0%
5-10yrs 26.3% 20.4%
10-15 yrs 21.4% 9.1%
>15 yrs 11.8% 26.1%
PROPERTY
Tenure Sector Principal Tenant Value Range
1 Ventura Park, Radlett Freehold Industrial Warner Bros Studios Over £70m
Limited (representing
36% of the
2 Dolphin Estate, Freehold Industrial Trans Global Freight portfolio
Sunbury-on-Thames Management Ltd capital
value)
3 Hannah Close, London, NW10 Leasehold Industrial Amazon UK Services
Limited
4 Ocado Distribution Unit, Freehold Industrial Ocado
Hatfield Business Area, Ltd
Hatfield
5 Newton's Court, Dartford Freehold Industrial Veerstyle Limited
6 XDock 377, Magna Park, Leasehold Industrial Armstrong Logistics £40m-£70m
Lutterworth Limited (representing
19% of the
7 Emerald Park East, Emersons Freehold Industrial Knorr-Bremse Systems portfolio
Green, Bristol Ltd capital
value)
8 Junction 27 Retail Park, Freehold Retail Barker & Stonehouse
Birstall, Leeds Warehouse Ltd
9 The White Building, Reading Freehold Office Barracuda Networks
Ltd
10 The Rotunda, Kingston upon Freehold Alternatives Odeon Cinemas Ltd
Thames
11 Centrum 260, Burton upon Freehold Industrial Palletforce plc
Trent
12 Axiom, Precision Park, Freehold Industrial Public Sector £20m-£40m
Leamington Spa (representing
35% of the
13 Hanger Lane, London Freehold Office Kantar UK Ltd portfolio
capital
14 Maldron Hotel, Newcastle Leasehold Alternatives Dalata Group plc value)
15 Trafford Retail Park, Freehold Retail Dunelm (Soft
Manchester Warehouse Furnishings Limited)
16 B&Q, Roneo Corner, Romford Freehold Retail B & Q Plc
Warehouse
17 Gatwick Gate Industrial Freehold Industrial International
Estate, Crawley Logistics Group Ltd
18 Total, Aberdeen Gateway, Freehold Industrial Total E&P UK Ltd
Aberdeen
19 Craven House, Fouberts Freehold Office Molinaire Ltd
Place, London, W1
20 Dalewood Road, Freehold Industrial TK Maxx Ltd
Newcastle-under-Lyme
21 Tetron Point, Swadlincote Freehold Industrial Clipper Logistics Plc
22 St Georges Retail Park, Freehold Retail Aldi Stores Limited
Leicester Warehouse
23 Cineworld Complex, Glasgow Freehold Alternatives Cineworld
24 81/85 George Street, Freehold Office Clydesdale Bank plc
Edinburgh
25 Integra, Precision Park, Freehold Industrial Iron Mountain (UK)
Leamington Spa plc
26 Colmore Court, 9 Colmore Leasehold Office BNP Paribas
Row, Birmingham
27 Whittle Road, Stoke-on-Trent Freehold Industrial Bestway Pharmacy NDC
Limited
28 Aura, Precision Park, Freehold Office Tata Technologies
Leamington Spa Europe Limited
29 Regent Circus, Swindon Freehold Alternatives WM Morrison
Supermarkets Plc
30 Central Square Offices, Freehold Office Ove Arup & Partners £0m-£20m
Forth Street, Newcastle upon (representing
Tyne 10% of the
portfolio
31 Interlink Way West, Bardon Freehold Industrial Roca Ltd capital
value)
32 No 2 Temple Quay, Bristol Freehold Office Public Sector
33 Asda, Torquay Freehold High St, Asda Stores Limited
Retail
34 14-22 West Street, Marlow Freehold High St, Sainsbury's
Retail Supermarket Ltd
35 Cannock Watling Street Freehold Industrial Rhenus Logistics
Limited
36 University of Edinburgh Freehold Alternatives Under Development
Student Accommodation -
Funding
37 University of Exeter Student Freehold Alternatives Under Development
Accommodation - Funding
38 Tetra, Aberdeen Gateway, Freehold Industrial Tetra Technologies UK
Aberdeen Ltd
39 Sussex Junction, Bolney - Freehold Industrial Under Development
Funding
40 Development Site, Precision Freehold Industrial Under Development
Park, Leamington Spa -
Funding
Overall number of properties 40
Total number of tenancies 213
Total average property value £38.4
million
Total floor area 8,043,000 sq
ft
Freehold/Leasehold (leases 85%/15%
over 100 years)
STRATEGIC OVERVIEW
Investment Strategy
The Group's investment strategy, and purpose, is set out in its investment
objective and policy below. It should be considered in conjunction with the
Chair's Statement and the Investment Manager Review which both give a more in
depth review of performance and future strategy.
The Group's investment objective is to provide ordinary shareholders with an
attractive level of income, together with the potential for capital and income
growth from investing in a diversified UK commercial property portfolio.
Investment Policy
The Company focuses on identifying and acquiring institutional-grade,
income-producing assets and looks to identify assets that benefit from wider
infrastructure improvements delivered by others where possible. The Company
also recognises that the experience of tenants is paramount and hence the
Investment Manager works closely with tenants to understand their needs through
regular communication and visits to properties. Where required, and in
consultation with tenants, the Company refurbishes and manages the owned assets
to improve the tenants' experience with the aim being to generate greater
tenant retention and hence lower voids, higher rental values and stronger
returns.
In addition, members of the Board visit properties and where appropriate engage
with tenants directly which enables the Board to have an enhanced understanding
of each property and the tenants' requirements. Further details of how the
Company engages with all its stakeholders is set out in the Stakeholder
Engagement section of the Annual Report encompassing section 172 of the UK
Companies Act 2006 on page 44.
On 18 April 2019, shareholders voted in favour of an amendment to the
investment policy to provide the Investment Manager with the flexibility to
invest across a wider spectrum of commercial property assets such as
healthcare, car parks and the commercially-managed private rental sector. The
Group's investment policy as approved on 18 April 2019 is as follows:
"Investment risks to the Group are managed by investing in a diversified
portfolio of freehold and long leasehold UK commercial properties. The Group
invests in income producing assets across the commercial property sectors
including industrial, offices, retail and other alternative commercial property
sector assets. The Group has not set any maximum geographic exposures within
the UK nor any maximum weighting limits in any of the principal property
sectors. No single property shall, however, exceed at the time of acquisition
15 per cent of the gross assets of the Group.
The Group is currently permitted to invest up to 15 per cent of its total
assets in indirect property funds including in other listed investment
companies. The Group is permitted to invest cash, held by it for working
capital purposes and awaiting investment, in cash deposits, gilts and money
market funds."
Although not part of the Company's formal investment policy, the Board intends
to limit the Company's investment into alternative sectors to 35 per cent of
the gross assets of the Group at the time of acquisition.
The Company's current gearing policy, as approved by shareholders, is as
follows: "Gearing, calculated as borrowings as a percentage of the Group's
gross assets, may not exceed 65 per cent. The Board intends that borrowings of
the Group at the time of draw down will not exceed 25 per cent of the total
assets of the Group. The Board receives recommendations on gearing levels from
the Investment Manager and is responsible for setting the gearing range within
which the Investment Manager may operate".
The Group restructured its debt facilities in February 2019 which increased the
weighted average maturity of the Group's debt profile, lowered the cost and
increased the debt available while still maintaining the 25 per cent debt cap
referred to above.
The Group's performance in meeting its objective is measured against key
performance indicators as set out on page 33. A review of the Group's returns
during the year, the position of the Group at the end of the year, and the
outlook for the coming year is contained in the Chair's Statement and the
Investment Manager Review.
The Board of Directors is responsible for the overall stewardship of the
Company, including investment and dividend policies, corporate strategy,
corporate governance, and risk management. Biographical details of the
Directors, all of whom are non-executive, can be found on pages 48-49 and
indicate their range of property, investment, commercial, professional,
financial and governance experience. The Company has no executive Directors or
employees.
Management of Assets and Shareholder Value
The Board has contractually delegated the management of the investment
portfolio and other services to Aberdeen Standard Fund Managers Limited.
The Group invests in properties which the Investment Manager believes will
generate a combination of long-term growth in income and capital for
shareholders. Investment decisions are based on analysis of, amongst
other things, prospects for future capital growth, sector and geographic
prospects, tenant covenant strength, lease length and initial yield. In the
year to 31 December 2021, the Group generated net cash outflows of £80.6
million (2020: net cash inflows of £73.8 million) following the deployment of
capital to acquire investment properties. The net profit for 2021 of £236.2
million contrasted against a net loss of £10.3 million for 2020, reflecting the
recovery of the UK commercial real estate sector in sectors where the Company
is well positioned. Revenue profits were £34.5 million for the year ended 31
December 2021, broadly in line with £35.2 million for the 2020.
Investment risks are spread through investing in a range of geographical areas
and sectors, and through letting properties to low risk tenants. A list of all
the properties held as at 31 December 2021 is contained on page 31 and further
analysis can be found in the Investment Manager Review.
At each Board meeting, the Board receives a detailed portfolio, financial, risk
and shareholder presentation from the Investment Manager together with a
comprehensive analysis of the performance of the portfolio during the reporting
period.
The Board and the Investment Manager recognise the importance of managing the
premium/discount of share price to net asset value in enhancing shareholder
value. One aspect of this involves appropriate communication to gauge investor
sentiment. The Investment Manager meets with current and potential new
shareholders, and with stockbroking analysts who cover the investment company
sector, on a regular basis. In addition, communication of quarterly portfolio
information is provided through the Company's website, ukcpreit.com, and the
Company also utilises a public relations agency to enhance its profile among
investors. In addition the Chair of the Board meets key shareholders on an
annual basis.
Key Performance Indicators/Alternative Performance Measures
The Company's benchmark is the MSCI UK Balanced Portfolios Quarterly Index.
This benchmark incorporates all monthly and quarterly valued property funds and
the Board believes this is the most appropriate measure to compare against the
performance of a quarterly valued property investment company with a
diversified portfolio. The Board uses a number of performance measures to
assess the Company's success in meeting its objectives. The key performance
indicators/ alternative performance measures are as follows:
- Net asset value and share price total return against a peer group of
similar companies
- Portfolio performance against the MSCI benchmark and other selected
comparators
- Premium/(Discount) of share price to net asset value
- Earnings, dividend cover and dividend yield
- Ongoing charges
Given the structure of the Company and the Company's knowledge of its
underlying shareholder base, it is believed the above measures are the most
appropriate for shareholders to determine the performance of the Company. These
indicators for the year ended 31 December 2021 are set out on pages 4-6. In
addition, the Board considers specific property KPIs such as void rates, rent
collection levels and weighted average lease length on a regular basis.
Risk Management
In accordance with the UK Corporate Governance Code and FRC Guidance, the Board
has established procedures to identify and manage risk, to oversee the internal
control framework and to determine the nature and extent of the principal risks
the Company is willing to take in order to achieve its long-term strategic
objectives.
The Board recognises its responsibility to carry out a robust assessment of the
Company's principal risks and emerging risks. Principal risks are defined as
those that could result in events or circumstances that might threaten the
Company's business model, future performance, solvency or liquidity and
reputation. Emerging risks are those that have not yet occurred but are at an
early stage of development or are current risks that are expected to increase
in significance and become more fundamental in the future.
The Board has appointed a Risk Committee to ensure that proper consideration of
risk is undertaken in all aspects of the Company's business on a regular basis.
The Risk Committee meets quarterly and comprises all members of the Board and
is chaired by Margaret Littlejohns.
Its duties include the assessment of the Company's risk appetite and the
regular review of principal and emerging risks, seeking assurance that these
risks are appropriately rated and that effective mitigating controls are in
place, where possible.
Risks are identified and weighted according to their potential impact on the
Company and to their likelihood of occurrence. The impact is evaluated in terms
of the effect on the Company's business, finances and reputation, the three of
which are usually interlinked. Each identified risk is assessed twice: first as
a "gross risk" before taking into consideration any mitigating controls and
secondly as a residual or "net risk" after reviewing the safeguards in place to
manage and reduce either the severity of its impact or the probability of its
event. The Risk Committee uses a detailed Risk Matrix to prioritise the
individual risks, allocating scores of 1 to 5 to each risk for both the
likelihood of its occurrence (ranging from very unlikely to almost certain) and
the severity of its impact (ranging from minimal to highly significant). The
combined scores for both the gross risks and net risks are then colour coded,
applying a traffic light system of green, amber and red to emphasise those
posing the greatest threats to the Company. Those with the highest gross rating
in terms of impact are highlighted as top risks within the matrix and are
defined here as principal risks.
The Risk Committee, with the help of the Investment Manager's extensive
research resources and market intelligence, surveys the full risk landscape of
the Company in order to identify increasing and emerging risks to which the
Company may be exposed in the future. In particular, the Risk Committee
questions which parts of the Company's business may be vulnerable to
disruption, including but not limited to the business models of its key tenants
and its outsourced third party suppliers. The Risk Committee not only reviews
the existing
portfolio of investments but also ensures that risk is considered in the case
of each property acquisition and disposal.
The Risk Committee works closely with the Audit Committee to examine the
effectiveness of the risk management systems and internal control systems upon
which the Company relies to reduce risk. This monitoring covers all material
controls, including financial, operational and compliance controls. All risks
and mitigating measures are reviewed by the Risk Committee at least quarterly,
and any significant changes to the Risk Matrix are presented to the Board.
Principal Risks
The Company's assets consist of direct investments in UK commercial property.
Its risks are therefore principally related to the commercial property market
in general and also to each specific property in the portfolio. Risks to the
Company fall broadly under the following six categories:
Strategy Risk: A
Management may fail to execute a clear corporate strategy successfully and the
strategic objectives and performance of the fund, both absolute and relative,
may become unattractive or irrelevant to its investors.
Investment & Asset Management Risk: B C
Ill-judged property investment decisions and associated redevelopment and
refurbishment may lead to health and safety dangers and environmental issues,
including climate change, and ultimately to poor investment returns.
Financial Risk: D E F G
Macro-economic changes (e.g. levels of GDP, employment, inflation and interest
rate movements), political changes (e.g. new legislation and regulation),
structural changes (e.g. disruptive technology, demographics) or global events
(e.g. pandemics, wars, terrorist attacks, oil price disruption) can all impact
the commercial property market, both its capital value and income generation,
its liquidity and access to finance and the underlying businesses of its
tenants. This risk encompasses real estate market risk, interest rate risk,
liquidity risk and credit risk, all of which are covered in more detail in note
18 to the accounts.
Operations Risk: H I
Poor service and inadequate control processes at the Company's outsourced
suppliers may lead to disruption, error and fraud, and increasingly,
cyberattacks. The Company's key service providers are the Investment Manager,
the Company Secretary, the Managing Agent, the Valuer and the Registrar and are
assessed at least annually through the Management Engagement Committee, or more
often during times of stress.
Regulation Risk: J
Failure to comply with applicable regulation and legislation could lead to
financial penalties and withdrawal of necessary permissions by governing
authorities. Changes to existing regulations could also result in suboptimal
performance of the Company.
Stakeholder Engagement Risk: K
Failure to communicate effectively and consistently with the Company's key
stakeholders, in particular shareholders and tenants, could prevent the Company
from understanding and responding to their needs and concerns.
Emerging Risks
Emerging risks have been identified by the Risk Committee 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.
COVID-19
COVID-19, identified in 2020 as the overarching emerging risk, has now fully
emerged in the form of a global pandemic causing significant loss of life and
global economic disruption. While remarkable progress has been made in
developing and rolling out effective vaccinations, offering the prospect of a
return to more normal times, there is still considerable uncertainty about the
repercussions of evolving variants of the virus and potential setbacks on the
road to recovery. The emerging risk is now COVID-19's legacy such as the
resulting economic damage and possible permanent structural changes to the way
that we work, live and consume.
Labour, energy and material shortages, manufacturing and transportation
difficulties and supply chain disruptions have all fuelled inflation and
concerns about its future persistence and strength have increased.
COVID-19 has affected to differing degrees all areas of risk to which the
Company is exposed, but particularly those relating to strategic risk,
macroeconomic risk, credit risk and accounting and valuation risk. COVID-19's
impact and the Company's response are provided in more detail in the Commentary
section of each of the following risk descriptions (pages 36 to 41).
Geopolitical Conflict
Russia's recent invasion of Ukraine and the subsequent refugee crisis has sent
shockwaves through the world and challenged the assumptions about the stability
of the post 1945 world order and Russia's territorial ambitions. The sanctions
imposed in response to Russia's aggression are likely to increase energy costs
and further disrupt international trade and supply chains, already under strain
from COVID-19, thereby adding to inflationary pressures and market volatility.
Technology
Technology is changing the processes and 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.
The decline of physical retailing and the increase in online shopping has been
further accelerated by social distancing measures in response to COVID-19. This
has created challenging conditions for many traditional retailers and their
landlords, with increased tenant defaults, reduced rents and empty buildings in
this sector. In addition, the increased use of video conferencing by businesses
may facilitate 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.
The principal risks, including their impact and the actions taken by the
Company to mitigate them, are provided on pages 36 to 41. The Changes to Risk
(Increased, Decreased or No Change) all relate to any material change from the
reporting provided in the 2020 Annual report that was finalised in April 2021.
Risk A - Strategic Risks: Widening Discount and Continuation Vote
Risks & The Company's strategic objectives and performance, both absolute and
Impact relative, could become unattractive to investors leading to a widening
of the share price's discount to net asset value, and potentially a
continuation vote. An inappropriate investment strategy could lead to
an erosion of shareholder value. This could include poor decisions on
purchases and
sales, sector allocation, tenant selection, levels of borrowing or
inadequate consideration of ESG etc.
Mitigation · The Company's strategy and objectives are regularly reviewed by
the Board to ensure they remain appropriate, effective and sustainable.
· The Board receives regular presentations from research analysts on
both the general economy but also the property market in particular to
identify structural shifts and threats, so the Board can adapt the
Company's strategy if necessary.
· The NAV and share price are constantly monitored and regular
analyses of the Company's performance are reviewed by the Board and
compared with the Company's benchmark and its peer group.
· Cash flow projections are prepared by the Investment Manager and
reviewed at least quarterly by the Board.
· Regular contact is maintained with shareholders and the Company's
broker.
Commentary · COVID-19 caused considerable market uncertainty and declining
property values and revenues, in those sectors most severely impacted
by the pandemic, namely certain parts of retail, leisure and
hospitality. However, the MSCI All Property Quarterly index performance
has improved considerably from a negative return of -0.9% in 2020 to
deliver 16.8% in 2021. This resulted in a significant increase in the
Company's net asset value of 17.6% but a widening of its discount from
20.4% to 26.8% at year end.
· The number of transactions effected in the property market overall
were limited in the year by social distancing restrictions and general
market uncertainty and disruption. Nonetheless, the Company continued
to execute its investment strategy with £180 million of purchases and £
74 million of sales in 2021.
· The property market has become even more polarised as a result of
COVID-19 with increased demand for property in the industrial sector,
particularly distribution and warehousing and with an oversupply of
retail premises. This trend supports the Company's evolving strategy of
investment in "future fit" properties in the modern economy that can
adapt and benefit from these current structural shifts in society.
· Shareholders overwhelmingly supported the Company's periodic
continuation vote held in March 2020, with the next periodic
continuation vote scheduled to be held in 2027 and seven yearly
thereafter.
· In addition, a continuation vote will be required if, after 18
March 2022 (being the second anniversary of the Company's most recent
continuation vote), the shares trade at a discount of over 5 per cent
for a continuous period of 90 dealing days or more.
Change NET RISK: MEDIUM - NO SIGNIFICANT CHANGE IN RISK BUT TRING UP
The severity and duration of the direct impact of COVID-19 on the
global economy, followed by the Russian invasion of Ukraine, are
unclear. The after-effects on the UK real estate sector and hence the
Company's ongoing strategy still remain uncertain.
See page 54 for details of the current discount control policy.
Risk B - Investment and Asset Management Risks: Health & Safety
Risks & The Company could fail to identify, mitigate or manage major Health &
Impact Safety issues potentially leading to injury, loss of life, litigation and
the ensuing financial & reputational damage.
Mitigation · Health & Safety checks are included as a key part of due diligence for
any new property acquisition.
· For existing multi-tenancy properties, the Group's Managing Agent
(Jones Lang LaSalle) is responsible for managing and monitoring Health &
Safety matters of each building.
· The Investment Manager monitors on an ongoing basis all identified
Health & Safety issues with strict deadlines for resolution by the Managing
Agent.
· The Investment Manager also engages S2 Partnership Limited who provide
an independent Health & Safety review and fire risk assessment of all
multi-let properties on an annual basis.
· The Risk Committee reviews the Company's Health & Safety performance
quarterly.
Commentary · COVID-19 increased focus on the safety and wellbeing of employees,
tenants and their customers within the Company's buildings.
· The Investment Manager worked closely with the Managing Agent to
ensure that each multi-let property operated securely, following advice and
complying with all the government restrictions relating to COVID-19.
· New procedures were introduced to ensure that tenants and their
customers could return safely to the Company's multi-let buildings when
permitted.
· All annual independent H&S audits due in 2021 were completed by S2
Partnership Ltd with minimal interruption and delays.
· No other major Health & Safety issues were noted in the year.
Change NET RISK: MEDIUM - NO SIGNIFICANT CHANGE IN RISK
See page 24 for further information on the Group's Health & Safety policy.
Risk C - Investment and Asset Management Risks: Environmental
Risks & Properties could be negatively impacted by an extreme environmental event
Impact (e.g. flooding) or the Company's own asset management activities could
create environmental damage. Climate change could accelerate more quickly
than anticipated, leading to legislative changes. Failure by the Company to
achieve existing or future environmental targets could adversely affect the
Company's reputation, resulting in penalties and increased costs and
ultimately in a reduction in the value of assets that are less energy
efficient. Access to capital
could be restricted: investors might avoid shareholdings in companies that
do not meet their environmental expectations and banks could limit funding
only to borrowers who fulfil pre-set environmental criteria.
Mitigation · The Company considers its impact on the environment and its local
communities in all its activities and works in partnership with its key
stakeholder groups - investors, occupiers, suppliers and communities - to
ensure that all parties share responsibility to achieve a more sustainable
property performance.
· In-depth research is undertaken on each property at acquisition with a
detailed environmental survey.
· The Investment Manager employs its own proprietary research framework,
the ESG Impact Dial, which assesses 4 major forces: Environment & Climate,
Governance & Engagement, Demographics & Technology and Infrastructure.
· Experienced advisers on environmental, social and governance matters
are also consulted both internally at the Investment Manager and externally
where required.
· The Investment Manager has adopted a thorough environmental policy
which is applied to all properties within the portfolio.
· EPC rating benchmarks have been set to ensure compliance with Minimum
Energy Efficiency Standards (MEES).
Commentary · The Company has recently set a net zero carbon target of 2040 for all
carbon emissions, including tenants' own emissions and also those embedded
in the fabric and construction of buildings. An interim target of 2030 has
also been set to reach net zero for all landlord generated emissions.
· The Company has submitted to the Global Real Estate Sustainability
Benchmark ("GRESB") since 2015. It has been recognised as a top performer
in ESG coming second in the GRESB UK Diversified (listed) peer group. It
was awarded an 'A' score for Public Disclosure by GRESB against a peer
group average of B and received an EPRA "Gold" rating for European
Sustainability Best Practice Recommendations in 2021.
· A full review of EPC ratings across the Group's portfolio has been
undertaken and a strategy put in place to ensure compliance with all the
deadlines for increasingly strict standards between now and 2030. Three
units are currently rated as below standard and these are being actively
assessed and addressed.
· A number of asset management initiatives are underway to consider the
feasibility of installing solar panels at some of the Company's properties.
Change NET RISK: MEDIUM - NO SIGNIFICANT CHANGE IN RISK BUT TRING UP
The rapid emergence of COVID-19 as an unanticipated global disaster has
concentrated attention more acutely on other imminent dangers such as
climate change and the need for urgent response. Tenants and shareholders
now have greater expectations of their landlords to address environmental
issues and to set measurable targets and to report progress
against them regularly.
The 2021 Annual Report now includes a dedicated section for ESG on pages
22-25 and also Taskforce for Climate-Related Financial Disclosures on pages
26-27.
Risk D - Financial Risks: Macroeconomic
Risks & Macroeconomic changes (e.g. levels of GDP, employment, inflation, interest
Impact rate movements), political changes (e.g. Brexit, new legislation),
structural changes (e.g. new technology, demographics) or global events
(pandemics, wars, terrorist attacks, oil price disruption) could negatively
impact commercial property values and the underlying businesses of tenants
(market risk and credit risk). This may be reflected in a decline in the
share price, Net Asset Value per share and earnings per share of the
Company. Falls in the value of investments could also result in breaches of
loan covenants and solvency issues.
Mitigation · The abrdn Research team takes into account macroeconomic conditions
when collating property forecasts. This research is fed into the Investment
Manager's decisions on purchases and sales and sector allocations.
· The portfolio is UK based and diversified across a number of different
sectors and regions of the UK and also has a wide and diverse tenant base
to reduce any risk concentration where possible.
· There is a wide range of lease expiry dates within the portfolio in
order to minimise concentrated re-letting risk.
· The Company is lowly geared with a 25% limit on overall gearing.
· The Company has limited exposure to speculative development and is
generally only undertaken on a forward funded and pre-let basis.
· Rigorous portfolio reviews are undertaken by the Investment Manager
and presented to the Board on a regular basis.
· Annual asset plans are developed for each property, ensuring that
inherent value can be realised through active asset management.
· Individual investment decisions are subject to robust risk versus
return evaluation and approval. Each potential investment is scrutinised
and rigorously assessed, taking into account location, legal title, local
market dynamics, physical and environmental conditions and the quality and
soundness of the projected income stream.
· Every building has comprehensive insurance to cover both the property
itself and injury to associated third parties.
Commentary · The outlook for the UK economy and the UK real estate market is still
uncertain. Although the economy started to rebound in 2021 following the
effective roll-out of a vaccine programme in the UK, it is still difficult
to predict the extent of any lasting economic damage, particularly if
further variants of the virus emerge in the future.
· Concerns over more persistent inflation have increased due to
continued labour, supplies and energy shortages caused by the disruption of
COVID-19. This may affect consumer demand and corporate profit margins and
investment. Interest rate rises are more likely if inflation is no longer
considered transitory.
· The unprovoked Russian invasion of Ukraine in February 2022 has now
introduced further uncertainty and instability into the global economy,
increasing inflationary pressures and creating more turbulence in the
financial markets.
· The Bank of England and UK government have continued to provide
significant monetary and fiscal stimulus to insulate the economy which grew
by 7.5% over the year, above the levels seen prior to the pandemic. Our
investment manager's forecast for UK GDP growth for 2022 is lower,
initially at 4.4% reduced to 3.8% following the Russian invasion of
Ukraine.
· Portfolio continues to be diversified with investments in the four
main commercial property sectors and across a number of geographical
regions, but now with a much higher weighting to the industrial sector,
particularly logistics and distribution, which has benefitted from the
pandemic and outperformed the other sectors.
· 213 tenancies at the year end with top ten tenants accounting for
36.4% of contracted rental income. Although consumer facing businesses
suffered, particularly from the intermittent "lockdowns" imposed by
government, rent collection rates had begun to normalise by Q4 2021.
· Gearing of 13.5% at year end.
· Occupancy rate of 97.9% at year end.
Change NET RISK: MEDIUM - NO SIGNIFICANT CHANGE IN RISK BUT TRING UP
The roll-out of the COVID-19 vaccine programme has given cause for economic
optimism but the Company remains vigilant against likely future strains of
the virus.
In response to its invasion of Ukraine, significant sanctions have been
imposed on Russia, as punishment and to deter future acts of aggression and
isolate it globally. These are likely to have far reaching repercussions on
the global economy as sources of energy become more restricted and the
international transportation of goods and materials suffer disruption in
unexpected ways.
The UK has formally withdrawn from the EU, and some of the political and
economic uncertainty has been removed. However, much of the detail relating
to the terms of trade, particularly in the service industries, still has to
be finalised and the full impact of Brexit on the economy and on the UK
commercial property market is still unclear.
See further details on risk in note 18 to the accounts on pages 90-93.
Risk E - Financial Risks: Gearing
Risks & An inappropriate level of gearing, magnifying investment losses in a declining
Impact market, could result in breaches of loan covenants and threaten the Company's
liquidity and solvency. An inability to secure adequate borrowing with
appropriate tenor and competitive rates could also negatively impact the
Company.
Mitigation · Gearing is restricted to a maximum of 25% of gross assets. This low
gearing limit means that the Company should, barring exceptional circumstances,
have adequate resources to service and repay its debt.
· The Company's diversified, prime UK commercial property portfolio,
underpinned by its strong tenant base, should provide sufficient value and
income in a challenging market to meet the Company's future liabilities.
· The Company's relatively modest level of gearing attracts competitive
terms and interest rates from lenders for the Company's loan facilities.
· The Investment Manager has relationships with multiple funders and wide
access to different sources of funding on both a fixed and variable basis.
· Financial modelling is undertaken and stress tested annually as part of
Company's viability assessment, whenever new debt facilities are being
considered and whenever unusual events occur.
· Loan covenants are continually monitored and reported to the Board at
least quarterly and also reviewed as part of the disposal process of any
secured property.
Commentary · COVID-19's disruption on the property market, with declining capital
values in some business segments and reduced rental income, increased the risk
in general of potential loan covenant breaches and refinancing risk for some
property companies with short-term debt.
· At year end the Group had two fully drawn fixed rate facilities totalling
£200 million with different expiry dates (April 2027 & February 2031). The
Group had also drawn down £50 million of its £150 million revolving credit
facility, which is on a floating rate basis, and provides flexibility to make
timely acquisitions when opportunities arise. Together, the drawn down
facilities had a weighted maturity profile of 6.2 years, and an overall blended
interest of 2.68% per annum.
· At year end, gearing was 13.5%, relatively low for its peer group.
· During COVID-19, the Group's bank covenants have been regularly monitored
and stress tested under different value and revenue scenarios. There is
considerable headroom before any loan covenants would be breached.
· Over £462 million of property remains unencumbered, providing additional
cushion if needed.
· The Company benefits from good long-term relationships with supportive
lenders and has engaged in constructive dialogue with them during this period.
Change NET RISK: LOW - DECREASED RISK
The Group has increased gearing levels to 13.5% which is still relatively low
against its peers and has scope to increase further with an additional £100
million of undrawn revolving credit facility.
Improved rent collection and recovering asset valuations provide significant
headroom on loan covenants and minimise the possibility of loan breaches. The
Company's level of gearing is low and there is a comfortable cushion of
unpledged property should current valuations fall.
See further details on risk in note 18 to the accounts on pages 90-94.
Risk F - Financial Risks: Liquidity
Risks & The Company may be unable to dispose of property assets in order to meet its
Impact financial commitments or obtain funds when required for asset acquisition or
payment of expenses or dividends. Investments in property are generally
illiquid, in that they may be difficult to sell quickly and may have to be sold
at a discount to the recorded valuation.
The Company's shares could become illiquid due to lack of investor demand,
market events or regulatory intervention and the Company's shareholders may be
unable to sell their shares due to lack of liquidity in the market.
Mitigation · The Company has a diversified portfolio of good quality, marketable
properties.
· After allowing for capital commitments on ongoing developments, the
Company has significant capital resources at year end of £88 million due to the
undrawn £100 million of its revolving credit facility. The closed ended
structure of the Company ensures that it is not a forced seller of assets.
· The Company is listed on the London Stock Exchange and a component of the
FTSE 350 Index made up of the largest 350 companies in the UK by market
capitalisation.
· Financial commitments are limited by the Company's relatively low level of
gearing.
· Liquidity risk is managed on an ongoing basis by the Investment Manager
and reviewed at least quarterly by the Board.
· Cash is placed in liquid deposits and accounts with a high credit rating.
Commentary · Real estate market liquidity has decreased as a result of COVID-19 but
nonetheless the Company implemented its investment strategy by completing four
sales and five purchases during 2021.
· Having a closed-ended structure, the Company was better able to withstand
market movements as it is not subject to investor redemptions and forced
property disposals.
· All financial commitments were comfortably met during the year.
· £1.8m shares on average were traded daily in 2021 highlighting the ongoing
liquidity of the Company's shares.
· Shareholders are able to sell their shares in a highly regulated and
liquid secondary market.
Change NET RISK: LOW - NO SIGNIFICANT CHANGE IN RISK
See further details on risk in note 18 to the accounts on pages 90-94.
Risk G - Financial Risks: Credit Risk of Tenants
Risks & Income might be adversely affected by macroeconomic factors. Financial
Impact difficulties could cause tenants to default on their rents and could lead to
vacant properties. This might result in falling dividend cover for the Company
and potential dividend cuts.
Mitigation · Dividend cover is forecast and considered at each Board meeting.
· The property portfolio has a balanced mix of tenants and reflects
diversity across business sectors, limiting reliance on a single tenant or
industry.
· The Group has 213 tenants, with the top 10 tenants representing 36.4% of
the Company's contracted rental income, and no single tenant accounting for
more than 5.1%.
· Rigorous due diligence is undertaken on all prospective tenants and their
financial performance continues to be monitored during their lease.
· Rent collection from tenants is closely monitored so that early warning
signs can be detected.
· Contingency plans are put in place where tenants with financial
difficulties have been identified.
· Board approval is necessary for any material lettings.
Commentary · As anticipated, COVID-19's intermittent lockdowns have affected some
tenants' ability to pay their rent. In particular, retail and leisure have been
severely impacted by COVID-19, but some businesses in other sectors have also
suffered depending on their business models, customers, workforce and
suppliers.
· For the four key rent invoicing dates for quarterly payment in advance in
2021 (March, June, Sept, Dec 2020) 97% of rent had been collected by the end of
February 2022.
· The Investment Manager has engaged closely with all tenants to understand
better their financial positions and where possible has responded to requests
for rental assistance. This has resulted in some rent deferrals, monthly
payment plans and, in some instances, commercial re-gear arrangements with
rent-free periods in return for longer leases.
· Retail sector continues to be of concern with further administrations in
this sector in the last 12 months and more likely to follow the longer the
pandemic continues.
· Ongoing reduction in Company's retail holdings which now represent 12% of
the portfolio at the year end.
· The Company has a bad debt provision of £5.3m for ultimate non-payment of
rent by some tenants but still continues its concerted efforts to recover
outstanding amounts due.
· Reflecting the net acquisitions undertaken by the Company, improving rent
collection rates and reduced market uncertainty, dividends were increased twice
during the year with 0.46p per share paid for Q4 2020 and 0.75p announced for
Q4 2021.
Change NET RISK: MEDIUM - NO SIGNIFICANT CHANGE IN RISK
Rent collection has improved from the levels experienced in 2020 and continues
to rise as the economy opens up again as the Company starts to see a
normalisation of collection rates. Although further tenant defaults may occur,
if new lockdowns are imposed and as a result of international sanctions linked
to the Ukraine conflict, the Company has already made prudent provisioning for
bad debts.
See further details on risk in note 18 to the accounts on pages 90-94.
Risk H - Operational Risks: Service Providers
Risks & Poor performance and/or inadequate procedures at key service providers i.e.
Impact Investment Manager, Company Secretary, Managing Agent, Registrar, could
lead to errors, fraud and non-compliance with their contractual agreements
and/or with relevant legislation. Failings in their data management
processes and disaster recovery and business continuity plans, including
cyber security safeguards, could lead to financial loss and business
disruption for the Company.
Mitigation · The Company has a strong control culture that is also reflected in its
partnerships with suppliers.
· All investment decisions are subject to a formal approval process with
specified authority limits.
· All third party service providers are carefully selected for their
expertise, reputation and financial standing. Service level agreements are
negotiated with all material suppliers and regularly monitored to ensure
that pre-agreed standards are met.
· Suppliers' business continuity and disaster recovery plans, including
safeguards against cyber-crime, are also regularly examined.
· The Management Engagement Committee ("MEC") formally reviews all key
service providers once a year and whenever necessary during times of
stress.
· Assurance reports on internal controls (ISAE 3402 reports) for both
the Investment Manager and the Managing Agent are received and reviewed
annually.
Commentary · Key service providers put their business continuity plans into
practice quickly during the pandemic and adapted successfully to working
remotely from their business premises.
· The Investment Manager updated the Board on a regular basis on its own
contingency arrangements and has demonstrated its operational resilience
throughout.
· The Investment Manager has also monitored regularly the ability of
other key service providers to conduct their business effectively. Service
quality has been maintained despite the restrictions and no material issues
of concern have been raised.
· Key service providers are on heightened alert of cyber attacks
following Russia's invasion of Ukraine and are monitoring intelligence
updates of potential threats and strengthening their cyber security
defences if needed.
· Section 172 statement in the accounts (pages 45-47) provides details
on the Company's collegial approach to stakeholders. No material issues
noted from the reviews of service providers in the year.
· Key service providers have not changed during 2021.
Change NET RISK: MEDIUM - NO SIGNIFICANT CHANGE IN RISK
See further details on pages 46-47.
Risk I - Operational Risks: Accounting and Valuation
Risks & Accounting records and financial statements could be incorrect or
Impact incomplete or fail to comply with current accounting standards. In
particular property valuations, income and expenses could be calculated
and recorded inaccurately. Limited transactions in the property market
could hinder price discovery and could result in out of date
valuations.
Mitigation · All properties within the portfolio are independently valued by
CBRE Limited on a quarterly basis and their year-end valuations
recorded in the Company's accounts. This is a rigorous assessment
process to which the Investment Manager also contributes information.
· CBRE, the independent valuer, is required to carry out a physical
inspection of each property at least annually.
· The Property Valuation Committee reviews thoroughly each quarter
this independent valuation process.
· Accounting control and reconciliation processes are in place at
the Investment Manager. These are subject to regular independent
assessment for their suitability and operating effectiveness by an
external auditor.
· Financial statements are subject to a year end audit by Deloitte
LLP.
Commentary · The Managing Agent (JLL) took over responsibility for the
collection of rent and service charges in 2020. This process is
operating smoothly and a high level of communication and collaboration
between both parties has continued during 2021.
· While there has been an increasing number of property transactions
completed during 2021, there are certain sub-segments of the leisure
market where there is limited liquidity and a lack of sufficient
evidence of current pricing which can make asset valuations more
difficult.
Change NET RISK: MEDIUM - NO SIGNIFICANT CHANGE IN RISK
See further details on valuations in note 1(h) on page 77 and note 10
to the accounts on pages 83-86.
Risk J - Regulatory Risks: Regulatory change
Risks & The Company could fail to comply with existing legislation or adapt to new
Impact or future regulation. In particular, the Company could fail to comply with
REIT legislation and ultimately lose its REIT status, thereby incurring
substantial tax penalties and reducing the amounts available for
distribution to shareholders. Other key relevant legislation and
regulations also include the Stock Exchange Listing Rules, Guernsey Company
Law and Guernsey Registry requirements.
Increased regulation and legislation concerning the environment is likely
as the climate continues to change. This could lead to increased compliance
costs for the Company and a revaluation of its less energy efficient assets
if they become less attractive to investors and tenants.
Mitigation · The Board receives regular updates on relevant regulatory changes from
its professional advisors.
· The highest corporate governance standards are required from all key
service providers and their reputation and performance are reviewed at
least annually by the Management Engagement Committee.
· The Company has appointed experienced external tax advisors to advise
on tax compliance matters.
· Processes have been put in place to ensure ongoing compliance with
REIT rules following the Company's conversion to a REIT on 1 July 2018.
· The Board reviews quarterly a REIT dashboard confirming compliance
with REIT regulations.
· The Company engages specialist consultants to advise on environmental
matters as part of acquisition due diligence and when considering
significant redevelopment work. Consultants are also engaged to monitor
environmental credentials throughout the ownership of each property.
Commentary · The Property Income Distributions (PIDs) announced for 2021 are in
compliance with REIT rules.
· The government's ongoing withdrawal of forfeiture in favour of
commercial property tenants during the pandemic may have encouraged a small
minority of tenants to withhold rent and avoid engagement with the
Investment Manager. This is scheduled to cease in March 2022 however the
vast majority of tenants continued to pay rent or agreed rent concessions.
Change NET RISK: MEDIUM - NO SIGNIFICANT CHANGE IN RISK
Risk K - Stakeholder Engagement Risks: Communication
Risks & A communication breakdown with key stakeholders, particularly
Impact shareholders and tenants, could prevent the Company from understanding
and responding to their needs and concerns. When required to fulfil
certain reporting requirements, the Company could fail to communicate
with regulatory authorities about its major shareholders. As a result
the Company could potentially suffer financial penalties and
reputational damage.
Mitigation · A high degree of engagement is maintained with both shareholders
and tenants.
· The Investment Manager regularly meets with shareholders and
periodically, the Chair of the Board also meets key shareholders.
· Quarterly Board reports include detailed shareholder analysis,
written and verbal reports from JP Morgan Cazenove, the Company's
Corporate Broker, and feedback from shareholder and analyst meetings
where appropriate.
· The Investment Manager works closely with tenants to understand
better their needs and to remodel and refurbish buildings to fit their
evolving requirements. This helps to reduce the risk of vacant
properties.
· The Company receives professional advice on its reporting
obligations regarding major shareholders to ensure that it complies
with regulations.
Commentary · Communication with all stakeholders has increased considerably as
a result of COVID-19 and has been a priority for the Company.
· Although many meetings with shareholders and analysts could not be
held face-to-face, extensive use was made of virtual meetings and
presentations to ensure clear messaging of strategy and to provide
accurate and timely updates.
· The continuation vote was overwhelmingly passed by proxy votes in
March 2020.
· Investment Managers have continued to visit properties when
possible to engage with tenants.
· As restrictions are lifted the Board of Directors will begin to
visit properties again, as part of a rolling programme to visit all
properties over a four-year period.
· Section 172 report highlights the collaborative nature of
interaction between the Company and its key stakeholders.
Change NET RISK: LOW - NO SIGNIFICANT CHANGE IN RISK.
See further details on pages 46-47.
Viability Statement
The Board considers viability as part of its ongoing programme of monitoring
risk and also has considered this in light of the ongoing COVID-19 pandemic and
heightening geopolitical risk. The Board continues to consider five years to be
a reasonable time horizon over which to review the continuing viability of the
Company.
The Board also considers viability over the longer term, in particular to key
points outside this time frame, such as the due dates for the repayment of
long-term debt. In addition, the Board considers viability in relation to
continuation votes. A periodic continuation vote held in March 2020 was passed
with the next one scheduled for 2027 and seven yearly thereafter. In addition,
under the discount control policy of the Company, a continuation vote may be
required if the Company's shares trade at a discount of over 5% for a
continuous period of 90 dealing days or more, beginning after the date of the
second anniversary of the
Company's most recent continuation vote. The second anniversary of the most
recent continuation vote is 18 March 2022. Further details on this are set out
on page 54 of the Report of the Directors. This specific risk is assessed in
light of the Company's most recent continuation vote which was passed with
99.9% of shareholders voting for continuation based on a 76% turnout. In
addition, feedback from shareholders in the last 12 months has not given rise
to any concerns over future continuation votes should they arise.
The Board has considered the nature of the Group's assets and liabilities and
associated cash flows both in a normal environment and also in relation to the
current environment as impacted by COVID-19 and the emerging geopolitical
risks. The Board has determined that five years is a reasonable 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 Company's
viability.
The Board has also carried out a robust assessment of the principal and
emerging risks faced by the Group, as detailed on pages 34-41. The main risks
which the Board considers will affect the business model, future performance,
solvency, and liquidity, are tenant failure leading to a fall in dividend
cover, macroeconomic uncertainty and ongoing discounts leading to continuation
votes. These risks along with other reported risks have also been considered in
relation to the COVID-19 pandemic and geopolitical landscape. 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 five year period under both normal and
stressed conditions;
- The Group's ability to pay its operational expenses, bank interest, tax
and dividends over a five year period;
- Future debt repayment dates and debt covenants, in particular those in
relation to LTV and interest cover;
- Demand for the Company's shares and levels of premium or discount at which
the shares trade to NAV;
- Views of shareholders;
- The valuation and liquidity of the Group's property portfolio, the
Investment Manager's portfolio strategy for the future and the market outlook
and;
- The potential for a further continuation vote in 2022 should the Company's
discount remain at over 5% for 90 business days following the second
anniversary of the previous continuation vote (18 March 2020).
Despite the uncertainty in the UK regarding both the COVID-19 pandemic and also
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
five years. This assessment is based on the results of the reviews mentioned
above and also the support of shareholders for the Company's continuation.
STAKEHOLDER ENGAGEMENT
Board's Obligations under Section 172 of the Companies Act
This section explains how the Directors have promoted the success of the
Company for the benefit of its members as a whole during the financial year to
31 December 2021, taking into account the likely long term consequences of
decisions, the need to foster relationships with all stakeholders and the
impact of the Company's operations on the environment, in accordance with the
provisions of the AIC Code on Corporate Governance.
The Role of the REIT Board
The Company is a REIT and has no executive directors or employees and is
governed by the Board of Directors. The Board considers the main stakeholders
in the Company are Shareholders, the Investment Manager, Tenants, Service
Providers, Debt Providers and the Environment and the Community. The Board
maintains that the Company should foster a culture where all of the Company's
stakeholders are treated fairly and with respect. The Board also recognises the
importance of acting fairly between stakeholders, which is a key consideration
in the Board's decision-making process. The Board also considers relations with
stakeholders very seriously and has cited Stakeholder Engagement as one of the
Company's principal risks. The mitigating actions to address the Stakeholder
Engagement risk are set out on page 41.
The Board, which comprises five independent Non-Executive Directors, whose
skills, experience and diversity are set out on pages 48 and 49, retains
responsibility for taking all decisions relating to the Group's investment
objective and policy, dividend policy, gearing, corporate governance and
strategy.
The Board delegates management functions to the Investment Manager and, either
directly or through the Investment Manager, the Company employs key suppliers
to provide services in relation to property management, health & safety,
valuation, legal and tax requirements, auditing, depositary obligations and
share registration, amongst others. The Board regularly reviews the performance
of the Investment Manager, and its other service providers, to ensure they
manage the Company and its stakeholders effectively and that their continued
appointment is, over the long-term, in the best interests of the shareholders
as a whole.
The Board seeks to maintain a constructive working relationship with its
stakeholders and prides itself on its transparent and collegiate culture. The
Board operates in a manner which is supportive, yet challenging, of the
Investment Manager and its other service providers, with the goal of overseeing
the Company's activities on behalf of all stakeholders.
As set out in the Board of Directors' Report, the Board reviews its performance
annually to ensure it is meeting its obligations to stakeholders. The
evaluation helps the Board to determine whether they have sufficiently
discharged their duties and responsibilities over the course of the financial
year. Engagement with key stakeholders is considered formally as part of the
annual evaluation process.
OUR STAKEHOLDERS' INTERESTS
Based on interactions with stakeholders, we consider the following interests to
be particularly salient:
Shareholders
· Attractive and sustainable level of income, earnings and dividends
· Potential for capital and income growth
· Diversification of portfolio
· Execution of investment objective
· Responsible capital allocation and dividend policy
· Value for money - low ongoing charges
· Liquidity in the Company's shares
Investment Manager
· Productive working relationship with the Board
· Clear and sustainable investment objective and policy
· Collaboration with all stakeholders
Tenants
· Positive working relationship with the Board and the Investment Manager
· Sustainable buildings - remodelled and refurbished to meet their
requirements
· A focus on the community, health & safety and the environment
Service Providers
· Productive working relationship with the Company
· Strong internal controls
· Collaboration
Debt Providers
· Responsible portfolio management
· Compliance with loan covenants
Environment and Community
· Sustainable investment policy
· Community engagement and socio-economic benefit
· A focus on consumption, emissions and resource efficiency
HOW WE ENGAGE WITH OUR STAKEHOLDERS
The Board considers its stakeholders at every Board meeting and receives
feedback on the Investment Manager's interactions with the Company's
Shareholders, tenants and service providers. The Board also engages directly
with its stakeholders.
Shareholders
Shareholders are key stakeholders and the Board places great importance on
communication with them. The Board's primary focus is to promote the long-term
success of the Company for the benefit of its shareholders as a whole. The
Board oversees the delivery of the investment objective, policy and strategy,
as agreed by the Company's Shareholders. The Board welcomes all shareholders'
views and aims to act fairly between all shareholders. The Investment Manager
and Company's Broker regularly meet with shareholders, and prospective
shareholders, to discuss Company initiatives and seek feedback. The views of
shareholders are discussed by the Board at every Board meeting, and action
taken to address any shareholder concerns. The Investment Manager provides
regular updates to shareholders and the market through the Annual Report,
Interim Report, Quarterly Net Asset Value announcements and Company Factsheets.
The Chair meets with key shareholders at least annually, and other Directors
are available to meet shareholders as required. This allows the Board to hear
feedback directly from Shareholders. During the financial year to 31 December
2021, the Investment Manager, undertook several virtual meetings with large
shareholders to provide reports on the progress of the Company and receive
feedback, which was then provided to the full Board. Shareholders are also
invited to vote on the continuation of the Company
at regular intervals and the Board encourages shareholders to participate in
this vote.
The Annual General Meeting (AGM) of the Company and also the annual and interim
results presentations provide a forum, both formal and informal, for
shareholders to meet and discuss issues with the Directors and Investment
Manager of the Company. The Board encourages as many shareholders as possible
to attend the Company's AGM to engage directly with the Board.
The AGM will be held on Thursday, 16 June 2022.
The Board encourages all shareholders to lodge their proxy votes in advance of
the AGM.
Investment Manager
The Chair's Statement and Investment Manager's Review on pages 8-20 detail the
key investment decisions taken during the year and subsequently. The Investment
Manager has continued to manage the Company's assets in accordance with the
mandate provided by shareholders, with the oversight of the Board. The Company
regularly reviews its performance against its investment strategy by reference
to its rolling five-year business plan to ensure it remains fit for purpose.
The Board undertakes an annual strategy meeting to test itself and ensure the
Company is positioned well for the future delivery of its objective for its
stakeholders. The Board receives presentations from the Investment Manager at
every Board meeting to help it to exercise effective oversight of the
Investment Manager and the Company's Strategy. The Board formally reviews the
performance of the Investment Manager at least annually.
Tenants
Prior to COVID-19, Board members regularly visited properties and, where
appropriate, engaged with tenants directly to enhance their understanding of
each property and the tenants' requirements. Following the outbreak of COVID-19
Directors were unable to visit any properties given the COVID-19 travel
restrictions but will resume visits now.
The day-to-day management of the portfolio and tenant interaction is delegated
to the Investment Manager. The Investment Manager takes a proactive approach to
its relationship with tenants, working closely alongside them to understand
their needs through regular communication, visits to properties and
collaboration on projects. The Investment Manager reports on its engagement
with tenants at every Board meeting.
The Company's Investment Manager has worked closely with tenants to understand
their needs during the pandemic. The Board firmly believes that by helping
tenants now and building better relationships, the Company will have better
occupancy over future months and years, which will in turn benefit the
Company's cash flow.
Service Providers
The Board seeks to maintain constructive relationships with the Company's
suppliers either directly or through the Investment Manager with regular
communications and meetings. On behalf of the Company's Shareholders, the
Management Engagement Committee conducts annual reviews of the Company's
Service Providers and their respective fees to ensure they are performing in
line with Board expectations and provide value for money.
The Investment Manager is responsible for the prompt settlement of supplier
invoices and the Investment Manager have a dedicated Accounts Payable team and
monitor the payment statistics of the managing agent, JLL, throughout the year.
Debt Providers
The Company maintains a positive working relationship with its debt providers,
Barclays Bank plc and Barings Real Estate Advisers, and provides regular
updates on business activity and compliance with its loan covenants. The
Company has an overall flexible debt profile to allow it to move quickly to
take advantage of any attractive opportunities that may occur in the present
uncertain economic environment.
Environment and Community
The Board and the Investment Manager are committed to investing in a
responsible manner. There are a number of geopolitical, technological, social
and demographic trends underway in the developed world that can, and do,
influence real estate investments - many of these changes fall under the
umbrella of the Environment and Community, or ESG, considerations. As a result,
the Investment Manager fully integrates ESG factors into its investment
decision-making and governance process.
The Board has adopted the Investment Manager's ESG Policy and associated
operational procedures and is committed to environmental management in all
phases of the investment process. The Company aims to invest responsibly, to
achieve environmental and social benefits alongside returns. By integrating ESG
factors into the investment process, the Company aims to maximise the
performance of the assets and minimise exposure to risk. Please see our
disclosures in the ESG section on pages 22-25 and within the Taskforce for
Climate-Related Financial Disclosures on pages 26 and 27 and the EPRA Financial
and Sustainability Reporting starting on page 97, for more information on the
Company's approach to ESG, including examples of Community Engagement during
2021.
Specific examples of stakeholder consideration during 2021
While the importance of giving due consideration to the Company's stakeholders
is not new, and is considered during every Board decision, the Board were
particularly mindful of stakeholder considerations during the following
strategic decisions undertaken during the financial year to 31 December 2021.
Payment of the Company's Dividend
The Company continued to pay interim dividends during the height of the
pandemic, despite the economic impact of COVID-19. As set out in the Chair's
Statement on page 10 and 11, the Company, as a responsible landlord, has worked
closely with tenants where they faced clear financial difficulties. The
benefits of this are now being seen, with rent collection rates normalising,
and the Board have taken this into account when announcing two dividend
increases this year in recognition of the importance placed by investors upon
income.
Examples of Tenant Interaction During 2021
Throughout the COVID-19 pandemic the Company offered support to many of its
tenants to assist them through this period of sustained disruption. However as
the economy has reopened and conditions have normalised our interactions have
refocused around mutually beneficial commercial opportunities. At two of our
large leisure assets The Rotunda, Kingston, and Regent Circus, Swindon, the
Company contributes towards the cost of a marketing company, Bewonder, to
promote tenant services via social media and the assets' own websites to drive
footfall at the properties and maximise tenant revenue.
Bewonder hold regular meetings with local representatives of the tenants as
well as discussions with their respective head offices to agree where we can
support our tenants and where appropriate to offer direct support from the
Company. A recent example is a promotion agreed with Cineworld at Regent
Circus, Swindon, to promote recovery of their business which was severely
impacted by government lockdown restrictions. We have agreed that customers
attending the cinema will be able to claim free car parking within the
Landlord's otherwise paid car park during their visit after validating their
parking ticket within the cinema.
Approval of Strategic Report
As set out above, the Board considers the long term consequences of its
decisions on its stakeholders to
ensure the long-term sustainability of the Company.
The Strategic Report of the Company comprises the following on pages 4-47
Financial and Portfolio Highlights, Performance Summary, Chair's Statement,
Investment Manager Review, Environmental, Social & Governance (ESG), Taskforce
for Climate-Related Financial Disclosures, Property Portfolio & Analysis and
Strategic Overview incorporating the risk management and stakeholder overview
section.
The Strategic Report was approved by the Board on 13 April 2022.
Ken McCullagh
Director
REPORT OF DIRECTORS
The Directors present the report and accounts of UK Commercial Property REIT
Limited, ("the Company") for the year ended 31 December 2021.
Results and Dividends
The Group generated an IFRS profit of £236.2 million (2020: loss of £10.3
million) in the year equating to an earnings per share of 18.18p (2020:
-0.79p). The Company had cash at the year end of £42.1 million (2020: £122.7
million). The Group paid out dividends totalling £38.0 million (2020: £29.9
million) in the year.
The Company has paid interim dividends in the year ended 31 December 2021 as
follows:
Payment date
Rate per share (p)
Fourth interim for prior period February 2021
0.460
Fifth interim for prior period May 2021
0.531
First interim May 2021
0.644
Second interim August 2021
0.644
Third interim November 2021
0.644
TOTAL
2.923
On 3 February 2022 the Company declared a fourth interim dividend of 0.75p per
ordinary share with an ex-dividend date of 11 February 2022, which was paid on
25 February 2022.
Principal Activity and Status
The Company is a Guernsey company and during the year carried on business as a
property investment company. The Group migrated tax residence to the UK and
elected to be treated as a UK REIT with effect from 1 July 2018.
The principal activity and status of the Company's subsidiaries is set out in
note 11 on page 86.
Strategy
The Company's purpose, objective and strategy is set out in detail in the
Strategic Report on page 32.
Listing Requirements
Throughout the period the Company complied (and intends to continue to comply)
with the conditions applicable to property investment companies set out in the
Listing Rules.
Share Capital
The issued share capital at 31 December 2021 consisted of 1,299,412,465
ordinary shares of 25p each. At 31 March 2022 the issued share capital was
unchanged. Each ordinary share of the Company carries one vote at general
meetings of the Company. Save for the provision of the articles of association,
there are no restrictions on the transfer of ordinary shares in the Company
other than certain restrictions which may from time to time be imposed by law
(for example, insider trading law).
Directors
The Directors who held office during the period and their interests in the
ordinary shares of the Company as at 31 December 2021 are:
Date of Appointment Shares as at 31 Shares as at 31
December 2021 December 2020
Chris Fry January 2020 46,445* 46,445*
Fionnuala Hogan August 2021 - n/a
Ken McCullagh February 2013 80,000 80,000
Margaret Littlejohns January 2018 40,000 40,000
Michael Ayre (held February 2016 92,000 42,000
jointly with Mrs
Ayre)
Robert Fowlds April 2018 n/a 50,000
retired 5 August
2021
Sandra Platts December 2013 - -
retired 31 December
2021
Including an indirect interest over 6,445 shares held through a pension fund
over which Mr Fry has discretion.
Between 31 December 2021 and 31 March 2022, Mr McCullagh has bought an
additional 30,000 shares, Mr Fry an additional 35,219 shares and Ms Hogan
26,207 shares.
The Directors are also Directors of UK Commercial Property Holdings Limited, UK
Commercial Property Estates Holdings Limited, UK Commercial Property Estates
Limited and UK Commercial Property Finance Holdings Limited which are all
wholly owned Guernsey-domiciled subsidiary undertakings.
The Group also wholly owns Duke Distribution Centres S.a.r.l. and Duke Offices
and Development S.a.r.l. both of which are Luxembourg resident entities.
These entities were acquired as part of the transaction to purchase the
Leamington Spa properties and the intention is to transfer the assets within
the Group and dissolve these entities. The Directors of these entities are
based in Luxembourg.
The Company maintains an appropriate level of insurance in respect of
Directors' & Officers' liabilities in relation to work undertaken on behalf of
the Company and all its subsidiaries. In addition, individual Directors may, at
the expense of the Company, seek independent professional advice on any matter
that concerns them in the furtherance of their duties.
As recommended by the AIC Code on Corporate Governance the Company's policy is
for all Directors to retire and offer themselves for election at the AGM
immediately following their appointment and for re-election annually
thereafter. Accordingly, the whole Board, with the exception of Ms Fionnuala
Hogan, will retire and offer themselves for re-election at the AGM. Ms
Fionnuala Hogan, having been appointed by the Board on 1 August 2021 and being
eligible, will stand for election by shareholders at the forthcoming AGM.
The Board, through the Nomination and Remuneration Committee, has carried out
an evaluation of the performance of the Board, the Committees and the
individual Directors.
Led by the Chair of the Nomination and Remuneration Committee, this review
sought to identify whether the Board demonstrates sufficient collective skill
and expertise, independence and knowledge of the Company and whether each
Director exhibits the commitment required for the Company to achieve its
objective. The evaluation, which was a desk-based review using online
questionnaires, concluded that the performance of the Board and Committees and
the individual Directors continues to be effective with each Director making a
positive contribution to the performance and long-term sustainable success of
the Company. No changes to Board composition were recommended. The action
points arising from the review have been addressed and, where appropriate,
revised policies have been adopted. Based on the results of the evaluation of
the performance of the individual Directors, and their individual skills and
expertise, as reflected in their biographies on pages 48-49, and contribution
to the long-term success of the Company, the re-election, or election, of all
the Directors who are being put forward is recommended to shareholders at the
2022 AGM. The Board last engaged and met with an external consultant, Boardroom
Review Limited, to undertake an external evaluation in March 2020.
Alternative Investment Fund Manager ("AIFM")
The Company's AIFM is Aberdeen Standard Fund Managers Limited.
Depositary
Up to 23 October 2021, Citibank Europe Plc were appointed as Depositary in
accordance with the requirements of AIFMD. On 23 October 2021, the contract was
novated to Citibank UK Limited. This novation arose as a result of UK
regulatory changes brought about by the UK's decision to leave the European
Union.
Substantial Interests in Share Capital
Company Number of Shares held as at % of the Company's Issued
31 December 2021 Share Capital
Phoenix Life Limited (PLL) 438,289,679 33.7
Phoenix Life Assurance 125,483,786 9.7
Limited (PLAL)
Investec Wealth Limited 142,068,464 10.9
Saunderson House 63,566,404 4.9
BlackRock 58,774,814 4.5
Baillie Gifford & Co Ltd 55,522,348 4.3
At 31 December 2021 the above entities had a holding of 3% or more of the
Company's share capital.
Phoenix Group is the largest specialist consolidator of heritage life assurance
funds in Europe. On launch the Company was managed by Ignis Investment Services
Limited ("Ignis"), a subsidiary of Phoenix. The Company's initial property
portfolio was purchased from the Phoenix Group in exchange for shares in the
Company, resulting in the Phoenix Group holding approximately 71 per cent of
the issued share capital of the Company through its subsidiaries. The Phoenix
Group shareholding is held via a number of with profits funds which are closed
to new investment and hence are in run-off over the medium to long term. Since
launch the Phoenix Group has therefore been reducing its shareholding in the
Company. On 24 February 2016 the Phoenix Group notified the Company that,
following the sale by the Phoenix Group of interests in the Company, the
Phoenix Concert Group's holding in the Company had fallen below 50 per cent.
The Phoenix Group shareholding in the Company is held through Phoenix Life
Assurance Limited ("PLAL") and four special purpose vehicles all of which own
under 10% and all of which are subsidiaries of Phoenix Life Limited ("PLL").
The holding is managed on an arms-length basis and by a separate team within
abrdn to the team who manage the Company. There is also a shareholder agreement
between the Company and PLL and PLAL which provides that PLL and PLAL and their
associates will not take any action which would be detrimental to the general
body of shareholders.
As at 31 March 2022, the shareholdings of PLL and PLAL remain the same.
Investec Wealth Limited is now 11.3%, Saunderson House 4.7% and BlackRock 4.3%.
Baillie Gifford & Co Ltd now hold below 3.0%. There are no new holders of 3.0%
or more.
The Takeover Code
In previous years, following the sale of abrdn's insurance business to the
Phoenix Group, in order to undertake share buybacks, a waiver from the Takeover
Panel was required as the Investment Manager was deemed to be part of the
Phoenix concert party under Rule 27 of the Takeover Code.
On 22 July 2020, the Phoenix Group completed the acquisition of the ReAsssure
Group. The increased size of the Phoenix Group resulted in the Investment
Manager of UKCM no longer being part of the Phoenix concert party and hence no
waiver is now required to be sought from the takeover panel should the Company
wish to undertake share buybacks.
Going Concern
The Company's business activities, together with the factors likely to affect
its future development, performance and financial position are set out in the
Strategic Overview on pages 32-47. In addition, note 18 to the financial
statements includes the Company's objectives, policies and processes for:
managing its capital, its financial risk management objectives, details of its
financial instruments, and its exposure to credit risk and liquidity risk. At
both the Company and Group levels comprehensive going concern assessments have
been performed. The Board has followed the Financial Reporting Council's
'Guidance on Risk Management, Internal Control and Related Financial and
Business Reporting 2014' when performing their going concern assessments and
also considered the AIC Code on Corporate Governance.
Specific consideration to the likelihood of a continuation vote in 2022 is
considered in the viability section on page 43.
The assessments performed include review of the valuation and liquidity of
investments as at the balance sheet date and forecasts of NAV, cash resources
and income under both normal and stressed conditions.
Having thoroughly considered the going concern assessment, the Board recognise
that there is undoubtedly an increase in risk in relation to the economy and
outlook for property arising from the COVID-19 pandemic and geopolitical
conflict. However, based on the information available to the Directors, the
Board do not believe there is significant doubt about the Company and Group's
ability to continue as a going concern over the next 12 months from the date of
the annual report. The Directors have a reasonable expectation that the Company
and Group will be able to continue in operational existence and to have
adequate resources to meet its liabilities as they fall due over the next 12
months. Therefore, the Board continues to adopt the going concern basis of
accounting when preparing the annual financial statements.
Non-Mainstream Pooled Investments
The Company currently conducts its affairs so that the shares issued by the
Company can be recommended by IFAs to ordinary retail investors in accordance
with the FCA's rules in relation to non-mainstream investment products, and
intends to continue to do so for the foreseeable future. The shares are
excluded from the FCA's restrictions which apply to non-mainstream investment
products because the Company has UK REIT status.
Annual General Meeting
At the AGM, to be held on 16 June 2022, the following resolutions will be
proposed:
Dividend policy
It is the Directors' intention, in line with the Company's investment
objective, to pay an attractive level of dividend income to shareholders on a
quarterly basis. The Directors intend to set the level of dividend after taking
into account the long-term income return of the Property Portfolio, the
diversity and covenant strength of the tenants and the length of the leases of
the Properties as well as solvency of the Company.
Dividends on the ordinary shares are expected to be paid in four instalments
quarterly in respect of each financial year in February, May, August and
November. All dividends will be in the form of property income distribution,
ordinary dividends or a mixture of both and paid as interim dividends.
Resolution 2, which is an ordinary resolution, seeks approval of the Company's
dividend policy to continue to pay four quarterly interim dividends with the
ability to pay further interim dividends should the need arise i.e. to comply
with the REIT rules.
Disapplication of Pre-emption Rights
Resolution 12 gives the Directors, for the period until the conclusion of the
AGM in 2023 or, if earlier, on the expiry of 15 months from the passing of
resolution 12, the necessary authority either to allot securities or sell
shares held in treasury, otherwise than to existing shareholders on a pro-rata
basis, up to an aggregate nominal amount of £32,485,312. This is equivalent to
approximately 10 per cent of the issued ordinary share capital of the Company
as at 31 March 2022. There are no shares currently held in treasury.
The Directors will allot new shares pursuant to this authority only if they
believe it is advantageous to the Company's shareholders to do so and the issue
price of new shares will be at a premium to the latest published net asset
value per share.
Directors' Authority to Buy Back Shares
The current authority of the Board granted to it by shareholders at the 2021
AGM to buy back shares in the Company expires at the end of the AGM to be held
in 2022. The Board intends to renew such authority to buy back shares up to
14.99 per cent of the number of ordinary shares in issue. This special
resolution (resolution 13), if approved, will enable the Company to buy back up
to 194,781,928 shares based on the current number of shares in issue (excluding
any treasury shares). Any buy back of ordinary shares will be made subject to
Guernsey law and within guidelines established from time to time by the Board,
which will take into account the income and cashflow requirements of the
Company, and the making and timing of any buy backs will be at the absolute
discretion of the Board.
Purchases of ordinary shares will only be made through the market for cash at
prices below the prevailing published net asset value of an ordinary share (as
last calculated, adjusted downwards for the amount of any dividend declared by
the Company upon the shares going ex-dividend), where the Directors believe
such purchases will enhance shareholder value. Such purchases will also only be
made in accordance with the rules of the UK Listing Authority which provide
that the price to be paid must not be more than the higher of (i) five per cent
above the average of the middle market quotations for the ordinary shares for
the five business days before the purchase is made and (ii) the higher of the
last independent trade and the highest current independent bid on the London
Stock Exchange. The minimum price (exclusive of expenses) that may be paid is
25p a share.
The Company may retain any shares bought back as treasury shares for future
re-issue, or transfer, or may cancel any such shares. During the period when
the Company holds shares as treasury shares, the rights and obligations in
respect of those shares may not be exercised or enforced by or against the
Company. The maximum number of shares that can be held as treasury shares by
the Company is 10 per cent of the aggregate nominal value of all issued
ordinary shares. Ordinary shares held as treasury shares will only be
re-issued, or transferred at prices which are not less than the published net
asset value of an ordinary share.
It is the intention of Directors that the share buy back authority may be used
to purchase ordinary shares
in the Company, (subject to the income and cash flow requirements of the
Company) if the level of discount represents an opportunity that will generate
risk-adjusted returns in excess of that, which could
be achieved by investing in real estate opportunities at a particular time.
The discount control policy of the Company provides that in the event that the
share price discount to prevailing published NAV (as last calculated, adjusted
downwards for the amount of any dividend declared by the Company upon the
shares going ex-dividend) is more than five per cent for 90 dealing days or
more, following the second anniversary of the Company's most recent
continuation vote, the Directors will convene an Extraordinary General Meeting
("EGM") to be held within three months to consider an ordinary resolution for
the continuation of the Company. If this continuation resolution is not passed,
the Directors will convene a further EGM to be held within six months of the
first EGM to consider the winding up of the Company or a reconstruction of the
Company which offers all shareholders the opportunity to realise their
investment. If any such continuation resolution is passed, this discount
policy, save in respect of share buy backs, would not apply for a period of two
years thereafter. The last continuation vote was held on 18 March 2020.
Auditors
Deloitte LLP has expressed its willingness to continue in office as the
Company's auditor and a resolution proposing its re-appointment will be put to
the AGM.
So far as each of the Directors is aware, there is no relevant audit
information of which the Company's auditor is unaware, and each has taken all
the steps he/she ought to have taken as a Director to make himself/herself
aware of any relevant audit information and to establish that the Company's
auditor is aware of that information.
Recommendations
The Directors believe that the resolutions to be proposed at the AGM are in the
best interests of the Company and its shareholders as a whole, and recommend
that shareholders vote in favour of the resolutions, as the Directors intend to
do in respect of all their own beneficial shareholdings.
Statement Regarding the Annual Report and Accounts
Following a detailed review of the Annual Report and Accounts by the Audit
Committee, full details of which can be found in the Audit Committee Report,
the Board consider that when taken as a whole, it is fair, balanced and
understandable and provides the transparency necessary for shareholders to
assess the Company's position and performance, business model and strategy.
The Board welcomes views from shareholders and company analysts on the Annual
Report & Accounts and, where practical, will incorporate any suggestions that
will improve the document. Shareholders are invited to correspond directly with
the Board at:
commercial.property@abrdn.com
Approved by the Board on 13 April 2022.
Ken McCullagh
Director
DIRECTORS' RESPONSIBILITY STATEMENT
The Directors are responsible for preparing the Annual Report and the Group
financial statements in accordance with applicable Guernsey law and those
International Financial Reporting Standards ("IFRS") as adopted by the European
Union and as issued by the International Accounting Standards Board. They are
also responsible for ensuring that the Annual Report includes information
required by the Rules of the UK Listing Authority.
The Directors are required to prepare Group financial statements for each
financial year which give a true and fair view of the financial position of the
Group and the financial performance and cash flows of the Group for that
period. In preparing those Group 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;
- 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 IFRS 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 IFRS, subject to any material
departures disclosed and explained in the financial statements; and
- Prepare the financial statements on a going concern basis unless it is
inappropriate to presume that the Group will continue in business.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Group and enable them to ensure that the Group 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 and other irregularities.
The Directors are also responsible for ensuring that the Group complies with
the provisions of the Listing Rules and the Disclosure Rules and Transparency
Rules of the UK Listing Authority which, with regard to corporate governance,
require the Group to disclose how it has applied the principles, and complied
with the provisions, of the AIC Code on Corporate Governance applicable to the
Group.
We confirm that to the best of our knowledge:
- The Group financial statements, prepared in accordance with the IFRS, give
a true and fair view of the assets, liabilities, financial position and profit
or loss of the Group and comply with the Companies Law;
- That in the opinion of the Board, the Annual Report & Accounts taken as a
whole, is fair, balanced and understandable and it provides the information
necessary to assess the Group's position and performance, business model and
strategy; and
- The Strategic Report includes a fair review of the progression and
performance of the business and the position of the Group together with a
description of the principal risks and uncertainties that it faces.
On behalf of the Board
Ken McCullagh
Director
13 April 2022
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME
For the year ended 31 December 2021
Year ended Year ended
31 December 2021 31 December
Notes £'000 2020
£'000
REVENUE
Rental income 2 58,307 64,656
Impairment reversal/(loss) on trade receivables 412 (4,784)
Service charge income 3 6,063 6,500
(Losses)/gains on investment properties 10 201,753 (45,485)
Interest income 116 236
Total income 266,651 21,123
EXPITURE
Investment management fee 4 (8,500) (8,063)
Direct property expenses 5 (5,343) (4,845)
Service charge expenses 5 (6,063) (6,500)
Other expenses 5 (3,229) (3,800)
Total expenditure (23,135) (23,208)
Operating profit/(loss) before finance costs 243,516 (2,085)
FINANCE COSTS
Finance costs 6 (7,283) (8,197)
Operating profit/(loss) after finance costs 236,233 (10,282)
Net profit/(loss) from ordinary activities 236,233 (10,282)
before taxation
Taxation on profit/(loss) on ordinary 7 - -
activities
Net profit/(loss) for the year 236,233 (10,282)
Total comprehensive income/(deficit) for the 236,233 (10,282)
year
Basic and diluted earnings per share 9 18.18p (0.79p)
The accompanying notes are an integral part of this statement.
All of the profit and total comprehensive income for the year is attributable
to the owners of the Company. All items in the above statement derive from
continuing operations. Additional EPRA performance measures are on pages 97-99.
CONSOLIDATED BALANCE SHEET
As at 31 December 2021
Year ended Year ended
31 December 2021 31 December 2020
Notes £'000 £'000
NON-CURRENT ASSETS
Investment properties 10 1,508,368 1,172,812
1,508,368 1,172,812
CURRENT ASSETS
Investment properties held for sale 10 - 10,000
Trade and other receivables 12 50,763 47,432
Cash and cash equivalents 42,121 122,745
92,884 1,352,986
Total assets 1,601,252 1,352,986
CURRENT LIABILITIES
Trade and other payables 13 (27,698) (28,161)
(27,698) (28,161)
NON-CURRENT LIABILITIES
Bank loan 14 (248,326) (197,849)
Total liabilities (276,024) (226,010)
Net assets 1,325,228 1,125,976
REPRESENTED BY
Share capital 15 539,872 539,872
Special distributable reserve 568,891 572,392
Capital reserve 216,465 14,712
Revenue reserve - -
Equity shareholders' funds 1,325,228 1,126,976
Net asset value per share 16 102.0p 86.7p
The accompanying notes are an integral part of this statement.
The accounts on pages 72-95 were approved and authorised for issue by the Board
of Directors on 13 April 2022 and signed on its behalf by:
Ken McCullagh
Director
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2021
Special Equity
Share Distributable Capital Revenue shareholders'
Capital Reserve Reserve Reserve funds
Notes £'000 £'000 £'000 £'000 £'000
At 1 January 2021 539,872 572,392 14,712 - 1,126,976
Total comprehensive income - - - 236,233 236,233
Dividends paid 8 - - - (37,981) (37,981)
Transfer in respect of 10 - - 201,753 (201,753) -
gains on investment
property
Transfer from special - (3,501) - 3,501 -
distributable reserve
As 31 December 2021 539,872 568,891 216,465 - 1,325,228
For the year ended 31 December 2020
Special Equity
Share Distributable Capital Revenue shareholders'
Capital Reserve Reserve Reserve funds
Notes £'000 £'000 £'000 £'000 £'000
At 1 January 2020 539,872 567,075 60,197 - 1,167,144
Total comprehensive income - - - (10,282) (10,282)
Dividends paid 8 - - - (29,886) (29,886)
Transfer in respect of 10 - - (45,485) 45,485 -
losses on Investment
property
Transfer from special - 5,317 - (5,317) -
distributable reserve
As 31 December 2020 539,872 572,392 14,712 - 1,126,976
The accompanying notes are an integral part of this statement.
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2021
Year ended Year ended
31 December 2021 31 December 2020
Notes £'000 £'000
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit/(loss) for the year before 236,233 (10,282)
taxation
Adjustments for:
Losses/(gains) on investment properties 10 (201,753) 45,485
Movement in lease incentives 10 (5,877) (4,805)
Movement in provision for bad debts 12 412 (4,784)
(Decrease)/Increase in operating trade 2,134 (7,582)
and other receivables
(Decrease)/Increase in operating trade (464) 5,321
and other payables
Finance costs 6 7,283 8,197
Cash generated by operations 37,968 31,550
Tax paid - (293)
Net cash inflow from operating activities 37,968 31,257
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment properties 10 (179,861) (24,669)
Sale of investment properties 74,181 158,194
Capital expenditure 10 (18,077) (3,570)
Net cash inflow/(outflow) from operating (123,757) 129,955
activities
CASH FLOWS FROM FINANCING ACTIVITIES
Facility fee charges from bank financing (1,020) (864)
Dividends paid 8 (37,981) (29,886)
Bank loan drawdown/(repaid) 14 50,000 (50,000)
Bank loan interest paid (5,831) (6,704)
Net cash outflow from financing 5,168 (87,454)
activities
Net increase/(decrease) in cash and cash (80,621) 73,758
equivalents
Opening cash and cash equivalents 122,742 48,984
Closing cash and cash equivalents 42,121 122,742
REPRESENTED BY
Cash at bank 22,879 39,599
Money market funds 19,242 83,143
42,121 122,742
The accompanying notes are an integral part of this statement.
Notes to the Accounts
1. ACCOUNTING POLICIES
A summary of the principal accounting policies, all of which have been applied
consistently throughout the
year, is set out below.
(a) Basis of Accounting
The consolidated accounts have been prepared in accordance with International
Financial Reporting Standards issued by the International Accounting Standards
Board (the IASB), interpretations issued by the IFRS Interpretations Committee
that remain in effect, and to the extent that they have been adopted by the
European Union, applicable legal and regulatory requirements of Guernsey law
and the Listing Rules of the UK Listing Authority. The audited Consolidated
Financial Statements of the Group have been prepared under the historical cost
convention as modified by the measurement of investment property. The
consolidated financial statements are presented in pound sterling.
The Directors have considered the basis of preparation of the accounts and
believe that it is still appropriate for the accounts to be prepared on the
going concern basis.
(b) 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 amounts recognised in the
financial statements. However, uncertainty about these judgements, assumptions
and estimates could result in outcomes that could require a material adjustment
to the carrying amount of the asset or liability affected in the future. In
applying the Group's accounting policies, there were no critical accounting
judgements.
Key estimation uncertainties
Fair value of investment properties: Investment property is stated at fair
value as at the balance sheet date as set out in note 1(h) and note 10 to these
accounts.
The determination of the fair value of investment properties requires the use
of estimates such as future cash flows from the assets and unobservable inputs
such as capitalisation rates. The estimate of future cash flows includes
consideration of the repair and condition of the property, lease terms, future
lease events, as well as other relevant factors for the particular asset. These
estimates are based on local market conditions existing at the balance sheet
date.
Provision for bad debts 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 takes into
account qualitative and quantitative reasonable and supportable forward-looking
information.
Due to the impact of COVID-19 on collection rates there remains a high assessed
credit risk, albeit rent collection rates were beginning to normalise at the
end of the reporting period. 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 and intelligence of the individual tenant and
an appropriate provision made. Further analysis with respect to the bad debt
provision has been set out in note 12 to these accounts.
(c) Basis of Consolidation
The consolidated accounts comprise the accounts of the Company and its
subsidiaries drawn up to 31 December each year. Subsidiaries are consolidated
from the date on which control is transferred to the Group and cease to be
consolidated from the date on which control is transferred out of the Group.
The Jersey Property Unit Trusts ("JPUTS") are all controlled via voting rights
and hence those entities are consolidated.
(d) Functional and Presentation Currency
Items included in the financial statements of the Group are measured using the
currency of the primary economic environment in which the Company and its
subsidiaries operate ("the functional currency") which is pounds sterling. The
financial statements are also presented in pounds sterling. All figures in the
financial statements are rounded to the nearest thousand unless otherwise
stated.
(e) Revenue Recognition
Rental income, excluding VAT, arising from operating leases (including those
containing stepped and fixed rent increases) is accounted for in the
Consolidated Statement of Comprehensive Income on a straight line basis over
the lease term. Lease premiums paid and rent-free periods granted, are
recognised as assets and are amortised over the non-cancellable lease term.
IFRS 15 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 Partnership 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.
Interest income is accounted on an accruals basis and included in operating
profit.
(f) Expenses
Expenses are accounted for on an accruals basis. The Group's investment
management and administration fees, finance costs and all other expenses are
charged through the Consolidated Statement of Comprehensive Income.
(g) 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 equity is
recognised in equity and not in profit or loss. Positions taken in tax returns
with respect to situations in which applicable tax regulations are subject to
interpretation are periodically evaluated and provisions established where
appropriate.
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.
(h) Investment Properties
Investment properties are initially recognised at cost, being the fair value of
consideration given, including transaction costs associated with the investment
property. Any subsequent capital expenditure incurred in improving investment
properties is capitalised in the period during which the expenditure is
incurred and included within the book cost of the property.
After initial recognition, investment properties are measured at fair value,
with the movement in fair value recognised in the Consolidated Statement of
Comprehensive Income and transferred to the Capital Reserve. Fair value is
based on the external valuation provided by CBRE Limited, chartered surveyors,
at the Balance Sheet date. The assessed fair value is reduced by the carrying
amount of any accrued income resulting from the spreading o lease incentives
and/or minimum lease payments.
On derecognition, gains and losses on disposals of investment properties are
recognised in the Statement of Comprehensive Income and transferred to the
Capital Reserve.
Recognition and derecognition occurs when the significant risks and rewards of
ownership of the properties have transferred between a willing buyer and a
willing seller.
Investment property is transferred to current assets held for sale when it is
expected that the carrying amount will be recovered principally through sale
rather than from continuing use. For this to be the case, the property must be
available for immediate sale in its present condition, subject only to terms
that are usual and customary for sales of such property and its sale must be
highly probable.
The Group has entered into forward funding agreements with third party
developers in respect of certain properties. Under these agreements the Group
will make payments to the developer as construction progresses. The value of
these payments is assessed and certified by an expert.
Investment properties are recognised for accounting purposes upon completion of
contract. Properties purchased under forward funding contracts are recognised
at certified value to date.
Management considers each property transaction separately, with an assessment
carried out to determine whether the transaction represents an asset
acquisition or business combination. In making its judgement on whether the
acquisition of property through the purchase of a corporate vehicle represents
an asset acquisition or business combination, management consider whether the
integrated set of assets and activities acquired contain both input and
processes along with the ability to create outputs.
(i) Operating Lease Contracts
The Group has entered into commercial property leases on its investment
property portfolio.
The Group as lessor
When the Group acts as a lessor, it determines at lease commencement whether
each lease is a finance lease or an operating lease. The Group has assessed all
leases where it acts as a lessor, based on an evaluation of the terms and
conditions of the arrangements, and has determined that the Group retains all
the significant risks and rewards of ownership of these properties therefore,
the leases are accounted for as operating leases. Where the Group does not
retain all the significant risks and rewards of ownership these leases would be
classified as finance leases.
Initial direct costs incurred in negotiating and arranging an operating lease
are added to the carrying amount of the leased asset and recognised as an
expense on a straight-line basis over the lease term.
The Group as intermediate lessor
When the Group is an intermediate lessor, it accounts for its interest in the
head lease and the sub-lease separately. The Group has assessed all leases
where it acts as an intermediate lessor, based on an evaluation of the terms
and conditions of the arrangements, and has identified that all head leases
have low value at the lease commencement date.
The Group has elected not to recognise right-of-use assets and lease
liabilities for leases of low-value assets. The Group classifies the sub-leases
as operating leases and accounts for the lease payments on a straight-line
basis over the lease terms.
(j) Share Issue Expenses
Incremental external costs directly attributable to the issue of shares that
would otherwise have been avoided are written off to capital reserves.
(k) Segmental Reporting
The Directors are of the opinion that the Group is engaged in a single segment
of business being property investment in the United Kingdom. The Directors are
of the opinion that the four property sectors analysed throughout the financial
statements constitute this single segment, and are not separate operating
segments as defined by IFRS 8 Operating Segments.
(l) 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. Cash invested in the abrdn global liquidity fund can be
accessed on the same business day.
(m) Trade and Other Receivables
Trade receivables are recognised initially at their transaction price unless
they contain a significant financing component, when they are recognised at
fair value. Trade receivables are subsequently measured at amortised cost using
the effective interest method.
Other receivables are initially recognised at fair value plus any directly
attributable transaction costs and subsequently measured at amortised cost
using the effective interest method.
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.
The Group considers a financial asset to be in default when the borrower is
unlikely to pay its credit obligations to the Group in full. The Group writes
off trade receivables when there is no reasonable expectation of recovery.
A provision for impairment of trade receivables, principally in relation to
rent and service charge billings, 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 Statement of
Financial Position and any changes in provision recognised in the Statement of
Comprehensive Income.
(n) Trade and Other Payables
Rental income received in advance represents the pro-rated rental income
invoiced before the year end that relates to the period post the year end. VAT
payable is the difference between output and input VAT at the year end. Other
payables are accounted for on an accruals basis and include amounts which are
due for settlement by the Group as at the year end and are generally carried at
the original invoice amount. An estimate is made for any services incurred at
the year end but for which no invoice has been received.
(o) Reserves
Share Capital
This represents the proceeds from issuing ordinary shares.
Special Distributable Reserve
The special reserve is a distributable reserve to be used for all purposes
permitted under Guernsey law, including the buyback of shares and the payment
of dividends. Dividends can be paid from all of the below listed reserves.
Capital Reserve
The following are accounted for in this reserve:
· Gains and losses on the disposal of investment properties;
· Increases and decreases in the fair value of investment properties held at
the year end.
Revenue Reserve
Any surplus arising from the net profit on ordinary activities after taxation
and payment of dividends is taken to this reserve, with any deficit charged to
the special distributable reserve.
Treasury Share Reserve
This represents the cost of shares bought back by the Company and held in
Treasury. The balance within this reserve is currently nil.
(p) Interest-bearing Borrowings
All bank loans and borrowings are initially recognised at cost, being the fair
value of the consideration received net of arrangement costs associated with
the borrowing. After initial recognition, all interest-bearing loans and
borrowings are subsequently measured at amortised cost. Amortised cost is
calculated by taking into account any loan arrangement costs and any discount
or premium on settlement.
On maturity, bank loans are recognised at par, which is equivalent to amortised
cost. Bank loans redeemed before maturity are recognised at amortised cost with
any charges associated with early redemptions being taken to the Statement of
Comprehensive Income.
The Group has applied the following amendments for the first time for their
annual reporting period commencing 1 January 2021:
Interest Rate Benchmark Reform (Phase 2).
Phase 1 of these reforms pertain to hedge accounting and is not relevant to the
Company which does not have any derivative instruments.
In the current year, the Group adopted the Phase 2 amendments Interest Rate
Benchmark Reform - Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16.
Adopting these amendments enables the Group to reflect the effects of
transitioning from interbank offered rates (IBOR) to alternative benchmark
interest rates (also referred to as 'risk free rates' or RFRs) without giving
rise to accounting impacts that would not provide useful information to users
of financial statements.
The Group has not restated the prior period. Instead, the amendments have been
applied retrospectively with any adjustments recognised in the appropriate
components of equity as at 1 January 2021.
The Group amended its contracts that referenced IBORs prior to the year end and
further information is available in note 14.
Annual Improvements to IFRS
The Group has made no adjustments to its financial statements in relation to
IFRS Standards detailed in the annual Improvements to IFRS 2018-2020 Cycle
(effective for annual reporting periods beginning on or after 1 January 2022).
The Group will consider these amendments in due course to see if they will have
any impact on the Group.
2. RENTAL INCOME
Year ended Year ended
31 December 2021 31 December 2020
£'000 £'000
Rental Income 58,307 64,656
3. SERVICE CHARGE INCOME
Year ended Year ended
31 December 2021 31 December 2020
£'000 £'000
Service Charge Income 6,063 6,500
Service charges on rented properties are detailed in note 5.
Service charge expenses are recharged to tenants.
The service charge paid by the Group in respect of void units was £0.7 million
(2020: £0.8 million) and is included within note 5 Direct Property Expenses.
4. INVESTMENT MANAGEMENT FEES
Year ended Year ended
31 December 2021 31 December 2020
£'000 £'000
Investment Management Fees 8,500 8,063
The Group's Investment Manager is Aberdeen Standard Fund Managers Limited.
The Investment Manager received an aggregate annual fee from the Group at an
annual rate of 0.60 (2020: 0.60) per cent of the Total Assets.
From 1 April 2022, the Investment Manager will receive an annual fee from the
Group at a revised rate of 0.525 per cent on Total Assets up to £1.75 billion,
excluding any cash held over £50 million. The fee rate for Total Assets over £
1.75 billion, adjusted for the £50 million cash tier, will remain at 0.475 per
cent.
In 2021, the Company paid the Investment Manager £396,000 (2020: £240,000) for
marketing services which is included in other expenses. The Investment
Management agreement is terminable by either of the parties to it on 12 months'
notice.
5. EXPENSES
Year ended Year ended
31 December 2021 31 December 2020
£'000 £'000
Direct Property Expenses 5,343 4,845
Service charge expenses 6,063 6,500
OTHER EXPENSES
Professional fees (including valuation 2,182 2,919
fees)
Directors' fees and expenses 326 272
Marketing fees 396 240
Administration and company secretarial 115 85
fees
Regulatory fees 80 156
Auditor's remuneration for:
Statutory audit 130 128
Non audit services - -
3,229 3,800
6. FINANCE COSTS
Year ended Year ended
31 December 2021 31 December 2020
£'000 £'000
Interest on principal loan amount 5,835 6,952
Facility fees 963 842
Amortisation of loan set up fees 485 403
7,283 8,197
7. TAXATION
Year ended Year ended
31 December 2021 31 December 2020
£'000 £'000
NET PROFIT FROM ORDINARY ACTIVITIES 236,233 (10,282)
BEFORE TAX
UK Corporation tax at a rate of 19 44,884 (1,953)
per cent (2020: 19%)
Effect of:
Capital losses/(gains) on (38,333) 8,642
Investment properties not
taxable
UK REIT exemption on net income (6,551) (6,689)
Total tax charge - -
The Group migrated tax residence to the UK and elected to be treated as a UK
REIT with effect from 1 July 2018. 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. From 1 April
2023, the rate of UK Corporation Tax will increase to 25%.
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 are required 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 no longer recognised on temporary differences relating to the property
rental business or income tax losses previously built up.
The Company owns five Guernsey tax exempt subsidiaries, UK Commercial Property
Finance Holdings Limited (UKCPFHL), UK Commercial Property GP Limited (GP), UK
Commercial Property Holdings Limited (UKCPHL), UK Commercial Property Estates
Limited (UKCPEL) and UK Commercial Property Estates Holdings Limited (UKCPEHL).
The GP and UKCPHL are partners in a Guernsey Limited Partnership ("the
Partnership"). UKCPFHL
and UKCPHL own two JPUTS. UKCPEL and UKCPEHL also own two JPUTS. The Company
and its Guernsey subsidiaries 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.
On the 21 December 2021 the Company purchased two Luxembourg resident
companies, Duke Distribution Centres Sarl and Duke Offices & Developments Sarl.
On acquisition these companies automatically fall within the REIT group
exemption, as such there is no UK corporation tax liabilities associated with
these companies.
8. DIVIDS
DIVIDS ON ORDINARY SHARES Year ended Year ended
31 December 31 December 2020
2021 £'000
£'000
Interim dividends paid per ordinary share:
2020 Fourth interim: property income dividend 5,977 11,955
("PID") of 0.46p per share paid 26 February 2021
(2019 Fourth interim: PID of 0.506p and Ordinary
dividend ("Non-PID") of 0.414p)
2020 Fifth interim: PID of 0.531p per share paid 6,900 -
21 May 2021
(2020 Fifth interim: nil)
2021 First interim: PID of 0.644p paid 28 May 8,368 5,977
2021
(2020 First interim: PID of 0.46p)
2021 Second interim: PID of 0.644p paid 27 August 8,368 5,977
2021
(2020 Second interim: PID of 0.46p)
2021 Third interim: PID of 0.423p and Non-PID of 8,368 5,977
0.221p paid 26 November 2021
(2020 Third interim: PID of 0.46p)
37,981 29,886
A fourth interim, PID of 0.466p, Non-PID of 0.284p was paid on 25 February 2022
to shareholders on the register on 11 February 2022. Although this payment
relates to the year ended 31 December 2021, under International Financial
Reporting Standards it will be accounted for in the year ending 31 December
2022.
9. BASIC AND DILUTED EARNINGS PER SHARE
Year ended Year ended
31 December 2021 31 December 2020
Weighted average number of shares 1,299,412,465 1,299,412,465
Net Profit/(Loss) (£) 236,232,720 (10,281,506)
Basic and diluted Earnings per share 18.18 (0.79)
(pence)
EPRA earnings per share (pence)1 2.65 2.71
1 A breakdown of the calculation is detailed in the table A. EPRA Earnings on
page 97.
As there are no dilutive instruments outstanding, basic and diluted earnings
per share are identical. Earnings per share are based on the net profit of the
year divided by the weighted average number of Ordinary Shares in issue during
the period.
10. INVESTMENT PROPERTIES
FREEHOLD AND LEASEHOLD PROPERTIES Year ended 31 Year ended 31
December 2021 December 2020
£'000 £'000
Opening valuation 1,182,812 1,358,391
Purchase at cost 179,861 24,669
Capital expenditure 18,077 3,570
(Loss)/Gain on revaluation to market value 209,635 (39,187)
Disposals at prior year valuation (76,140) (159,826)
Lease incentive movement (5,877) (4,805)
Total fair value at 31 December 1,508,368 1,182,812
Less: reclassified as held for sale - (10,000)
Fair value as at 31 December 1,508,368 1,172,812
GAINS/(LOSSES) ON INVESTMENT PROPERTIES AT FAIR
VALUE COMPRISE
Valuation (losses)/gains 209,635 (39,187)
Movement in provision for lease incentives (5,877) (4,805)
Loss on disposal (2,005) (1,493)
201,753 (45,485)
LOSS ON INVESTMENT PROPERTIES SOLD
Original cost of investment properties (76,483) (161,109)
Sale proceeds less sales costs 74,478 158,194
Loss on investment properties sold (2,005) (2,915)
Recognised in previous periods (2,285) (8,623)
Recognised in current period 280 5,708
(2,005) (2,915)
Given the objectives of the Group and the nature of its investments, the
Directors believe that the Group has only one asset class, that of Commercial
Property.
CBRE Limited, (the "Property Valuer") completed a valuation of Group investment
properties as at 31 December 2021 on the basis of fair value in accordance with
the requirements of the Royal Institution of Chartered Surveyors (RICS) 'RICS
Valuation - Global Standards 2017 (the 'Red Book'). For most practical purposes
there would be no difference between Fair Value (as defined in IFRS 13) and
Market Value. The Property Valuer, in valuing the portfolio, is acting as an
'External Valuer', as defined in the Red Book, exercising independence and
objectivity. The Property Valuer's opinion of Fair Value has been primarily
derived using comparable recent market transactions in order to determine the
price that would be received to sell an asset in an orderly transaction between
market participants at the valuation date. The fair value of these investment
properties amounted to £1,537,450,000 (2020: £1,206,780,000).
The difference between the fair value and the value per the consolidated
balance sheet at 31 December 2021 consists, in the main, to accrued income
relating to the pre-payment for rent-free periods recognised over the life of
the lease totalling £30,181,000 (2020: £24,304,000) which is separately
recorded in the accounts as a current asset. In addition a balance of £321,000
(2020: £336,000) has been offset against the lease incentive representing the
reduction in the lease incentive provided for as part of the provision for bad
debts giving a net lease incentive balance of £29,860,000 (2020: £23,968,000).
In addition, an accrued development sum of £778,000 (2020: nil) is recognised
in arriving at the total fair value of £1,508,368,000 (2020: £1,182,812,000).
The Group has entered into leases on its property portfolio as lessor (See note
20 for further information).
- No one property accounts for more than 15 per cent of the gross assets of
the Group.
- All leasehold properties have more than 60 years remaining on the lease
term.
- There are no restrictions on the realisability of the Group's investment
properties or on the remittance of income or proceeds of disposal.
However, the Group's investments comprise UK commercial property, which may be
difficult to realise.
The property portfolio's fair value as at 31 December 2021 has been prepared
adopting the following assumptions:
- That, where let, the Estimated Net Annual Rent (after void and rent free
period assumptions) for each property, or part of a property, reflects the
terms of the leases as at the date of valuation. If the property, or parts
thereof, are vacant at the date of valuation, the rental value reflects the
rent the Property Valuer considers would be obtainable on an open market
letting as at the date of valuation.
- The Property Valuer has assumed that, where let, all rent reviews are to
be assessed by reference to the estimated rental value calculated in accordance
with the terms of the lease. Also there is the assumption that all tenants will
meet their obligations under their leases and are responsible for insurance,
payment of business rates, and all repairs, whether directly or by means of a
service charge.
- The Property Valuer has not made any adjustments to reflect any liability
to taxation that may arise on disposal, nor any costs associated with disposals
incurred by the owner.
- The Property Valuer assumes an initial yield in the region of 1.48 to 7.73
per cent, based on market evidence. For the majority of properties, the
Property Valuer assumes a reversionary yield in the region of 3.11 to 11.70 per
cent.
- The Property Valuer takes account of deleterious materials included in the
construction of the investment properties in arriving at its estimate of Fair
Value when the Investment Manager advises of the presence of such materials.
The majority of the leases are on a full repairing basis and as such the Group
is not liable for costs in respect of repairs or maintenance to its investment
properties.
The following disclosure is provided in relation to the adoption of IFRS 13
Fair Value Measurement. All properties are deemed Level 3 for the purposes of
Fair Value measurement and the current use of each property is considered the
highest and best use. There have been no transfers from Level 3 in the year.
The Fair Value of completed investment property is determined using a yield
methodology. Under this method, a property's Fair Value is estimated using
explicit assumptions regarding the benefits and liabilities of ownership over
the asset's life including an exit or terminal value. As an accepted method
within the income approach to valuation, this method involves the projection of
a series of cash flows on a real property interest. To this projected cash flow
series, an appropriate, market-derived discount rate (capitalisation rate) is
applied to establish the present value of the cash inflows associated with the
real property.
The duration of the cash flow and the specific timing of inflows and outflows
are determined by events such as rent reviews, lease renewal and related void
or rent-free periods, re-letting, redevelopment, or refurbishment. The
appropriate duration is typically driven by market behaviour that is a
characteristic of the class of property. In the case of investment properties,
periodic cash flow is typically estimated as gross income less vacancy,
non-recoverable expenses, collection losses, lease incentives, maintenance
cost, agent and commission costs and other operating and management expenses.
The series of periodic net cash inflows, along with an estimate of the terminal
value anticipated at the end of the projection period, is then discounted. Set
out below are the valuation techniques used for each property sector plus a
description and quantification of the key unobservable inputs relating to each
sector. There has been no change in valuation technique in the year.
Fair value by sector as at 31 December 2021
Sector Fair Value at 31 Valuation Unobservable inputs Range (weighted
December 2021 (£m) Techniques average)
Industrial 960.4 Yield methodology Annual rent per sq £4-£19 (£9)
ft 3.0%-7.0% (3.7%)
Capitalisation rate
Office 215.9 Yield methodology Annual rent per sq £21-£51 (£29)
ft 3.4%-7.3% (5.8%)
Capitalisation rate
Retail 163.7 Yield methodology Annual rent per sq £11-£25 (£17)
ft 4.4%-6.9% (5.5%)
Capitalisation rate
Alternatives 168.4 Yield methodology Annual rent per sq £0-£18 (£15)
ft 6.2%-7.8% (5.5%)
Capitalisation rate
Fair value by sector as at 31 December 2020
Sector Fair Value at 31 Valuation Unobservable inputs Range (weighted
December 2020 (£m) Techniques average)
Industrial 685.4 Yield methodology Annual rent per sq £5-£16 (£8)
ft 3.8%-6.7% (4.8%)
Capitalisation rate
Office 167.7 Yield methodology Annual rent per sq £16-£57 (£20)
ft 3.3%-8.7% (5.3%)
Capitalisation rate
Retail 199.6 Yield methodology Annual rent per sq £16-£265 (£27)
ft 3.6%-7.7% (5.7%)
Capitalisation rate
Alternatives 130.1 Yield methodology Annual rent per sq £0-£25 (£15)
ft 5.5%-6.3% (5.8%)
Capitalisation rate
Sensitivity analysis
The table below presents the sensitivity of the valuation to changes in the
most significant assumptions underlying the valuation of investment property,
which could be caused by a number of factors, including Brexit. The movement of
50 basis points is based on past observed data.
As at 31 December 2021
Sector Assumption Movement Effect on valuation
Industrial Capitalisation + 50 basis points Decrease £122.3 million
rate - 50 basis points Increase £163.4 million
Office Capitalisation + 50 basis points Decrease £20.5 million
rate - 50 basis points Increase £24.8 million
Retail Capitalisation + 50 basis points Decrease £15.6 million
rate - 50 basis points Increase £18.8 million
Alternatives Capitalisation + 50 basis points Decrease £6.7 million
rate - 50 basis points Increase £7.8 million
As at 31 December 2020
Sector Assumption Movement Effect on valuation
Industrial Capitalisation + 50 basis points Decrease £73.3 million
rate - 50 basis points Increase £92.7 million
Office Capitalisation + 50 basis points Decrease £15.6 million
rate - 50 basis points Increase £19.1 million
Retail Capitalisation + 50 basis points Decrease £15.6 million
rate - 50 basis points Increase £18.8 million
Alternatives Capitalisation + 50 basis points Decrease £9.4 million
rate - 50 basis points Increase £10.8 million
Investment property valuation process
The valuations of investment properties are performed quarterly on the basis of
valuation reports prepared by independent and qualified valuers and reviewed by
the Property Valuation Committee of the Company.
These reports are based on both:
- Information provided by the Investment Manager such as current rents,
terms and conditions of lease agreements, service charges and capital
expenditure. This information is derived from the Investment Manager's
financial and property management systems and is subject to the Investment
Manager's overall control environment.
- Assumptions and valuation models used by the valuers - the assumptions are
typically market related, such as yields. These are based on their professional
judgment and market observation.
The information provided to the valuers and the assumptions and valuation
models used by the valuers are reviewed by the Investment Manager. This
includes a review of Fair Value movements over the period.
Asset held for sale
At the current year end there are no assets categorised as held for sale. At
the prior year end, there was one asset held for sale, 140-145 King's Road,
London. The asset was shown at Fair Value in the Balance Sheet as a held for
sale asset and included within the investment property table shown in this
note.
11. SUBSIDIARY UNDERTAKINGS
The Company owns 100 per cent of the issued share capital of UK Commercial
Property Estates Holdings Limited (UKCPEHL), a company incorporated in Guernsey
whose principal business is to hold and manage investment properties for rental
income. UKCPEHL Limited owns 100 per cent of the issued share capital of UK
Commercial Property Estates Limited, a company incorporated in Guernsey whose
principal business is to hold and manage investment properties for rental
income. UKCPEHL also owns 100% of Brixton Radlett Property Limited and UK
Commercial Property Estates (Reading) Limited, both are UK companies, whose
principal business is that of an investment and property company. During the
financial year UKCPEHL purchased 100 per cent of the issued share capital of
Duke Distribution Centres Sarl and Duke Offices & Developments Sarl, both
companies are incorporated in Luxembourg with the principal business being to
hold and manage investment properties for rental income.
The Company owns 100 per cent of the issued ordinary share capital of UK
Commercial Property Finance Holdings Limited (UKCPFHL), a company incorporated
in Guernsey whose principal business is to hold and manage investment
properties for rental income. UKCPFHL owns 100 per cent of the issued share
capital of UK Commercial Property Nominee Limited, a company incorporated in
Guernsey whose principal business is that of a nominee company. UKCPFHL owns
100 per cent of the issued ordinary share capital of UK Commercial Property
Holdings Limited (UKCPHL), a company incorporated in Guernsey whose principal
business is to hold and manage investment properties for rental income.
UKCPT Limited Partnership, (LP), is a Guernsey limited partnership, whose
principal business is to hold and manage investment properties for rental
income. UKCPHL and GP, have a partnership interest of 99 and 1 per cent
respectively in the LP. The GP is the general partner and UKCPHL is a limited
partner of the LP.
In addition, the Group controls four JPUTS namely Junction 27 Retail Unit
Trust, St George's Leicester Unit Trust, Kew Retail Park Unit Trust and Rotunda
Kingston Property Unit Trust. The principal business of the Unit Trusts is that
of investment in property.
As at 31 March 2021, Brixton Radlett Property Limited, UK Commercial Property
Estates (Reading) Limited, the GP, Nominee and the Limited Partnership were all
placed in the hands of liquidators as part of a solvent liquidation process and
the conclusion of this process is due to conclude in the first half of 2022.
12. TRADE AND OTHER RECEIVABLES
Year ended 31 Year ended 31
December 2021 December 2020
£'000 £'000
Trade receivable 15,090 20,634
Lease incentives 30,181 24,304
Other debtors and prepayments 5,492 2,494
50,763 47,432
Provision for bad debts as at 31 5,739 955
December 2020/2019
Movement in the year (412) 4,784
Provision for bad debts as at 31 5,327 5,739
December 2021/2020
The ageing of these receivables is as follows:
Year ended 31 Year ended 31
December December
2021 2020
£'000 £'000
Less than 6 months 953 2,725
Between 6 and 12 months 1,403 2,192
Over 12 months 2,971 822
5,327 5,739
Other debtors include tenant deposits of £2,439,000 (2020: £2,518,000) and a
net VAT receivable position of £2,549,000 (2020: VAT payable), a direct result
of the VAT refund due on the purchase of Kantar House, London.
All other debtors are due within one year. No other debts past due are impaired
in either year.
13. TRADE AND OTHER PAYABLES
Year ended 31 Year ended 31
December 2021 December 2020
£'000 £'000
Rental income received in advance 12,161 13,512
Investment Manager fee payable 2,327 1,993
Other payable 13,210 12,656
27,698 28,161
Other payables include tenant deposits of £2,439,000 (2020: £2,518,000), bank
loan interest payments of £1,637,000 (2020: £1,646,000) and transaction cost
accruals totalling £4,120,000 (2020: £482,000). The level of accrued
transaction costs reflect the timing of portfolio acquisitions near the end of
2021.
The Group's payment policy is to ensure settlement of supplier invoices in
accordance with stated terms.
14. BANK LOAN AND INTEREST RATE SWAPS
Year ended 31 Year ended 31
December 2021 December 2020
£'000 £'000
Total facilities available 350,000 300,000
Drawn down:
Barclays facility 50,000 -
Barings facility 200,000 500,000
Set up costs incurred (6,628) (6,628)
Accumulated amortisation of set up costs 4,954 4,477
Total due 248,326 197,849
As at 31 December 2021
Movements in bank loan and interest At 1 Jan Cash Other At 31 Dec
rates 2020 flows changes 2021
swaps arising from financing activities
£'000 £'000 £'000 £'000
Bank Loan 197,849 50,000 477 248,326
(i) Barclays Facility
The Group has a £150 million revolving credit facility ("RCF"), maturing in
April 2024, with Barclays Bank plc. Initially this facility was granted at a
margin of 1.70 per cent above LIBOR, however as part of the interest rate
reform guidelines this facility transitioned to a risk-free rate (RFR), SONIA,
interest basis prior to the financial year end. The RCF was taken out by UKCPEH
and is cancellable at any time. The RCF was initially taken out by UKCPEL as a
£50 million RCF in April 2015 at a margin of 1.50 per cent above LIBOR and was
increased and extended in February 2019. On the 16 December 2021 UKCPEL drew
down £50 million from the facility (2020: a repayment of £50 million was made).
The RCF has a non-utilisation fee of 0.68 per cent per annum (0.60 per cent per
annum prior to February 2019) charged on the proportion of the RCF not utilised
on a pro-rata basis.
As at 31 December 2021, £100 million (2020: £150 million) remained unutilised.
The RCF is secured on the property portfolio held by UKCPEH. Under bank
covenants related to the RCF, UKCPEH is to ensure that at all times:
- The loan to value percentage does not exceed 60 per cent.
- Interest cover at the relevant payment date is not less than 175 per cent
and projected over the course of the proceeding 12 months is not less than 175
per cent.
UKCPEH met all covenant tests during the year for the RCF.
Transition to SONIA from LIBOR
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. The low volume of underlying transactions since the global
financial crisis in 2008/2009 made LIBOR unsustainable and as a result, and in
line with announcements from the Financial Conduct Authority (FCA), 24 of the
35 LIBOR settings ceased from 1 January 2022. Various risk-free rates are
available as an alternative to LIBOR including the Sterling Overnight Index
Average (SONIA) benchmark. The Directors have taken steps, before the deadline
date for
transition, to ensure that any exposure to LIBOR was identified and actions
taken to rebase and re-document any financial contracts where LIBOR was
previously used. This led to minor amendments to operational processes to cater
for this change but there is no material impact on the assets and liabilities
of the Group as a result of the phasing out of LIBOR.
(ii) Barings Facility
The Group has a £100 million facility, maturing in April 2027, with Barings
Real Estate Advisers, a member of the MassMutual Financial Services Group. The
loan was taken out by UKCFH. As at 31 December 2021, the facility was fully
drawn (31 December 2020: Fully drawn). The bank loan is secured on a portfolio
of seven
properties held within UKCFH. Under bank covenants related to the loan UKCFH is
to ensure that at all times:
- The loan to value percentage does not exceed 75 per cent.
- Interest cover at the relevant payment date and also projected over the
course of the proceeding 12 months is not less than 200 per cent.
UKCFH met all covenant tests during the year for this facility.
Interest is payable by UKCFH at a fixed rate equal to the aggregate of the
equivalent 12-year gilt yield, fixed at the time of drawdown and a margin. This
resulted in a fixed rate of interest payable of 3.03 per cent per annum. There
are no interest rate swaps in place relating to this facility.
The Group took out a second £100 million facility in February 2019, maturing in
February 2031, with Barings Real Estate Advisers. The loan was taken out by
UKCFH. As at 31 December 2021, the facility was fully drawn (31 December 2020:
Fully drawn). The bank loan is secured on a portfolio of seven properties held
within UKCFH. This facility has the same covenant tests as the 2027 facility
outlined above. UKCFH met all covenant tests during the year for this facility.
Interest is payable by UKCFH at a fixed rate equal to the aggregate of the
equivalent 12 year gilt yield, fixed at the time of drawdown and a margin. This
resulted in a fixed rate of interest payable of 2.72 per cent per annum. There
are no interest rate swaps in place relating to this facility.
In the event that the Barings facilities were repaid in advance of their
maturity date would incur an early repayment charge. Although the Company has
no intention of doing so, as at 31 December 2021, the charge would be £
20,509,000.
15. SHARE CAPITAL ACCOUNTS
Year ended 31 Year ended 31
December 2021 December 2020
£'000 £'000
SHARE CAPITAL
Opening balance 539,872 539,872
Share capital as at 31 December 539,872 539,872
Number of shares in issue and fully paid at the year end being 1,299,412,465
(2020: 1,299,412,465) of 25p each.
Ordinary shareholders participate in all general meetings of the Company on the
basis of one vote for each share held. The Articles of Association of the
Company allow for an unlimited number of shares to be issued, subject to
restrictions placed by AGM resolutions. There are no restrictions on the shares
in issue.
16. NET ASSET VALUE PER SHARE
Year ended 31 Year ended 31
December 2021 December 2020
Ordinary Shares 1,299,412,465 1,299,412,465
Net assets (£'000) 1,325,228 1,126,976
NAV per share (pence) 102.0 86.7
EPRA Net Tangible Assets per share1 102.0 86.7
1 A breakdown of the calculation is detailed in the table B EPRA NAV in the
Annual Report. EPRA Net Tangible Assets on page 98.
17. RELATED PARTY TRANSACTIONS
No Director has an interest in any transactions which are or were unusual in
their nature or significant to the nature of the Group.
Aberdeen Standard Fund Managers Limited, as the Manager of the Group from 10
December 2018, previously Standard Life Investments (Corporate Funds) Limited,
received fees for their services as investment managers. Further details are
provided in note 4. The total management fee charged to the Statement of
Comprehensive Income during the year was £8,500,385 (2020: £8,062,742) of which
£2,326,894 (2020: £1,993,4550) remained payable at the year end. The Investment
Manager also received
£396,000 (£330,000 plus VAT) for marketing services incurred during the year of
which £396,000 (2020: £240,000) remained payable at the year end.
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) on pages 61-62. Total fees for the
year were £325,225 (2020: £272,226) none of which remained payable at the year
end (2020: nil). As a result of COVID-19, Directors reduced their fees by 20%
from 1 April 2020-31 December 2020.
The Group invests in the abrdn Liquidity Fund which is managed by abrdn. As at
31 December 2021 the Group had invested £19.2 million in the Fund (2020: £83.1
million). No additional fees are payable to abrdn as a result of this
investment.
18. FINANCIAL INSTRUMENTS AND INVESTMENT PROPERTIES
The Group's investment objective is to provide ordinary shareholders with an
attractive level of income together with the potential for income and capital
growth from investing in a diversified UK commercial property portfolio.
Consistent with that objective, the Group holds UK commercial property
investments. The Group's financial instruments consist of cash, receivables and
payables that arise directly from its operations and loan facilities. The main
risks arising from the Group's financial instruments are credit risk, liquidity
risk, market risk and interest rate risk. The Board reviews and agrees policies
for managing its risk exposure. These policies are summarised below and
remained unchanged during the year.
Fair value hierarchy
The following table shows an analysis of the fair values of investment
properties recognised in the balance sheet by level of the fair value
hierarchy:
Explanation of the fair value hierarchy:
· Level 1 Quoted prices (unadjusted) in active markets for identical assets
or liabilities that the entity can access at the measurement date.
· Level 2 Use of a model with inputs (other than quoted prices included in
level 1) that are directly or indirectly observable market data.
· Level 3 Use of a model with inputs that are not based on observable market
data.
31 December 2021 Level 1 Level 2 Level 3 Total fair
£'000 £'000 £'000 value
£'000
Investment properties - - 1,537,450 1,537,450
31 December 2020 Level 1 Level 2 Level 3 Total fair
£'000 £'000 £'000 value
£'000
Investment properties - - 1,206,780 1,206,780
The lowest level of input is the underlying yield on each property which is an
input not based on observable market data.
The following table shows an analysis of the fair value of bank loans
recognised in the balance sheet by level of the fair value hierarchy:
31 December 2021 Level 1 Level 2 Level 3 Total fair
£'000 £'000 £'000 value
£'000
Bank loans - 257,486 - 257,486
31 December 2020 Level 1 Level 2 Level 3 Total fair
£'000 £'000 £'000 value
£'000
Bank loans - 220,484 - 220,484
The lowest level of input is the interest rate applicable to each borrowing as
at the balance sheet date which is a directly observable input.
The following table shows an analysis of the fair values of financial
instruments and trade receivables and payables recognised at amortised cost in
the balance sheet by level of the fair value hierarchy:
31 December 2021 Level 1 Level 2 Level 3 Total fair
£'000 £'000 £'000 value
£'000
Trade and other receivables - 50,763 - 50,763
Trade and other payables - 27,698 - 27,698
31 December 2020 Level 1 Level 2 Level 3 Total fair
£'000 £'000 £'000 value
£'000
Trade and other receivables - 47,432 - 47,432
Trade and other payables - 28,161 - 28,161
The lowest level of input was the three-month LIBOR yield curve, which has now
changed to SONIA for 31 December 2021, both of which are a directly observable
input.
The carrying amount of trade and other receivables and payables is equal to
their fair value, due to the short-term maturities of these instruments.
Expected maturities are estimated to be the same as contractual maturities.
The fair value of investment properties is calculated using unobservable inputs
as described in note 10.
The fair value of the bank loans are estimated by discounting expected future
cash flows using the current interest rates applicable to each loan.
There have been no transfers between levels in the year for items held at fair
value.
Real Estate Risk
The Group has identified the following risks associated with the real estate
portfolio:
- 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.
- A major tenant may become insolvent causing a significant loss of rental
income and a reduction in the value of the associated property (see also credit
risk overleaf). 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;
- The exposure of the fair values of the portfolio to market and occupier
fundamentals such as tenants' financial position.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or
unwilling to meet a commitment that it has entered into with the Group.
At the reporting date, the maturity of the Group's financial assets was:
Financial Assets 2021 3 months or less More than 3 months More than
but less than one one year Total
year
£'000 £'000 £'000 £'000
Cash 42,121 - - 42,121
Trade receivables 15,090 - - 15,090
Other debtors 5,492 - - 5,492
62,703 - - 62,703
Financial Assets 2020 3 months or less More than 3 months More than
but less than one one year Total
year
£'000 £'000 £'000 £'000
Cash 122,742 - - 122,742
Trade receivables 20,634 - - 20,634
Other debtors 2,494 - - 2,494
145,870 - - 145,870
In the event of default by a tenant, the Group will suffer a rental shortfall
and incur additional costs, including legal expenses, in maintaining, insuring
and re-letting the property until it is re-let. The Board receives regular
reports on concentrations of risk and any tenants in arrears. The Investment
Manager monitors such reports in order to anticipate and minimise the impact of
defaults by tenants and provides for rent due by tenants that are assessed to
be unlikely to pay through the process set out on page 59.
The Company has a diversified tenant portfolio. The maximum credit risk from
the trade receivables of the Group at 31 December 2021 is £15,090,000 (2020: £
20,634,000). The Group holds rental deposits of £2,439,000 (2020: £2,518,000)
as potential collateral against tenant arrears/defaults. All tenant deposits
are in line with market practice. There is no residual credit risk associated
with the financial assets of the Group. Other than those included in the
provision for bad debts, no financial assets which are due for settlement are
impaired. COVID-19 has impacted the ability of tenants to pay rents and hence
the credit risk associated with trade receivables has increased during this
time. The provision for bad debts is adjusted, on a tenant-by-tenant basis, to
reflect the evolving risk position. During the year this provision decreased by
£0.412 million to £5.327 million (2020: increased £4.78 million to £5.739
million).
All of the cash is placed with financial institutions with a credit rating of A
or above. £19.2 million (2020: £83.1 million) of the year end cash balance is
held in the abrdn Liquidity Fund, which is a money market fund and has a triple
A rating. Bankruptcy or insolvency of a financial institution may cause the
Group's ability to access cash placed on deposit to be delayed or limited.
Should the credit quality or the financial position of the banks currently
employed significantly deteriorate, the Investment Manager would move the cash
holdings to another financial institution subject to restrictions under the
loan facilities.
Fair value of trade and other receivables and payables are materially
equivalent to their amortised cost.
Liquidity Risk
Liquidity risk is the risk that the Group will encounter difficulty in
realising assets or otherwise raising funds to meet financial commitments.
While commercial properties are not immediately realisable, the Group has
sufficient cash resources to meet liabilities.
The Group's liquidity risk is managed on an ongoing basis by the Investment
Manager investing in a diversified portfolio of prime real estate and placing
cash in liquid deposits and accounts. This is monitored on a quarterly basis by
the Board. In certain circumstances, the terms of the Group's bank loan
entitles the lender to require early repayment, and in such circumstances the
Group's ability to maintain dividend levels and the net asset value
attributable to the ordinary shares could be adversely affected.
As at 31 December 2021 the cash balance was £42,121,000 (2020: £122,742,000).
At the reporting date, the contractual maturity of the Group's liabilities,
which are considered to be the same as expected maturities, are outlined in the
table below:
Financial Liabilities 2021 3 months or less More than 3 months More than
but less than one one year Total
year
£'000 £'000 £'000 £'000
Bank loans 51,438 4,313 236,351 292,102
Other creditors 25,371 - - 25,371
76,809 4,313 236,351 317,473
Financial Liabilities 2020 3 months or less More than 3 months More than
but less than one one year Total
year
£'000 £'000 £'000 £'000
Bank loans 1,438 4,313 241,400 247,151
Other creditors 26,515 - - 26,515
27,953 4,313 241,400 273,666
The amounts in the table are based on contractual undiscounted payments.
Interest rate risk
The cash balance as shown in the Balance Sheet, is its carrying amount and has
a maturity of less than one year.
Interest is receivable on cash at a variable rate ranging from 0.2 per cent to
0.6 per cent at the year end and deposits are re-priced at intervals of less
than one year.
Reflecting current expectations around interest, an increase of 1 per cent in
interest rates as at the reporting date would have increased the reported
profit by £0.42 million (2020: increased the reported profit by £1.2 million).
A decrease of 1 per cent would have reduced the reported profit £0.42 million
(2020: decreased the reported profit by £1.2 million). The effect on equity is
nil (excluding the impact of a change in retained earnings as a result of a
change in net profit).
Interest rate risk arises on the interest payable on the RCF only, as the
interest payable on the other facilities are at fixed rates. At 31 December
2021, the drawdown on the RCF was £50 million (2020: Nil) so an increase of 1%
on the year-end SONIA rate would have a £500,000 decrease on the reported
profit (2020: Nil). A decrease of 1% on the year-end SONIA rate would have a £
500,000 increase on the reported profit (2020: Nil). Assumptions are based on
the RCF drawdown remaining at £50 million for the full year (2020: Nil), based
on the exposure to interest rates at the reporting date, and all other
variables being constant. During the year, the Group amended its bank
facilities in line with Interest Rate Benchmark Reform with the RCF now
referencing SONIA and further details are provided in note 1(p).
The other financial assets and liabilities of Group are non-interest bearing
and are therefore not subject to interest rate risk.
Foreign currency risk
There was no foreign currency risk as at 31 December 2021 or 31 December 2020
as assets and liabilities of the Group are maintained in pounds sterling.
Capital management policies
The Group considers that capital comprises issued ordinary shares, net of
shares held in treasury, and long-term borrowings. The Group's capital is
deployed in the acquisition and management of property assets meeting the
Group's investment criteria with a view to earning returns for shareholders
which are typically made by way of payment of regular dividends. The Group also
has a policy on the buyback of shares which it sets out in the Directors'
Authority to Buyback Shares section of the Directors' Report.
The Group's capital is managed in accordance with its investment policy which
is to hold a diversified property portfolio of freehold and long leasehold UK
commercial properties. The Group invests in income producing properties. The
Group will principally invest in four commercial property sectors: office,
retail, industrial and alternatives. The Group is permitted to invest up to 15
per cent of its Total Assets in indirect property funds and other listed
investment companies. The Group is permitted to invest cash, held by it for
working capital purposes and awaiting investments, in cash deposits, gilts and
money market funds.
The Group monitors capital primarily through regular financial reporting and
also through a gearing policy. Gearing is defined as gross borrowings divided
by total assets less current liabilities. The Group's gearing policy is set out
in the Investment Policy section of the Report of the Directors. The Group is
not subject to externally imposed regulatory capital requirements but does have
banking covenants which it monitors and reports on a quarterly basis. Included
in these covenants are requirements to monitor loan to value ratios which is
calculated as the amount of outstanding debt divided by the market value of the
properties secured. The Group's loan-to-value ratio is shown below. The Group
did not breach any of its loan covenants, nor did it default on any other of
its obligations under its loan arrangements in the year to 31 December 2021.
Year ended 31 Year ended 31
December 2021 December 2020
£'000 £'000
Carrying amount of interest-bearing loans and 248,326 197,849
borrowings
External valuation of completed investment 1,537,450 1,206,780
property and assets held for sale (excluding
lease incentive adjustment)
Loan to value ratio 16.2% 16.4%
The Group's capital balances are set out on page 73 and are regarded as the
Group's equity and net debt.
19. CAPITAL COMMITMENTS
The Group had contracted capital commitments as at 31 December of £41.8 million
in relation to three developments.
The Company has committed to forward fund a new 230-bed student accommodation
development in Edinburgh together with a student residential development in
Exeter. The completion of both is expected to match the start of the 2022/23
academic year.
The Company also acquired, during 2021, a forward funding three warehouse unit
site known as "Sussex Junction". This development is fully underway and
completion is expected towards the end of 2022.
20. LEASE ANALYSIS
The Group leases out its investment properties under operating leases.
The future income under non-cancellable operating leases, based on the
unexpired lease length at the year end was as follows (based on total rentals):
Year ended 31 Year ended 31
December 2021 December 2020
£'000 £'000
Within one year 68,672 51,523
Between one and two years 66,842 57,149
Between two and three years 62,038 53,776
Between three and four years 55,589 49,168
Between four and five years 50,049 43,923
Over five years 316,141 316,534
Total 619,331 572,073
The largest single tenant at the year end accounted for 5.1 per cent (2020: 5.4
per cent) of the annualised rental income at 31 December 2021. The unoccupied
property expressed as a percentage of annualised total rental value was 2.1 per
cent (2020: 6.5 per cent) at the year end. The Group has entered into
commercial property leases on its investment property portfolio. These
properties, held under operating
leases, are measured under the fair value model as the properties are held to
earn rentals. The majority of these non-cancellable leases have remaining
non-cancellable lease terms of between 5 and 15 years. Analysis of the nature
of investment properties and leases are provided in the Property Portfolio &
Analysis section on pages 29-31.
21. EVENTS AFTER BALANCE SHEET DATE
A fourth interim dividend comprised of, PID of 0.466p and Non-PID of 0.284p was
paid to shareholders on the 25 February 2022.
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
END
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