40 global cities by 2025 with 10 million + populations.1 The focus on Winning Cities with faster growth in jobs and locations where people wish to live and work.
We are living longer and moving closer to cities.2 The focus is on real estate which attracts multiple types of uses and benefits from structural changes, e.g. hotels, care homes, office and retail.
The locations which attract the TMT sector and demand for e-commerce will capture high growth.3
Global demand for power and infrastructure is increasing.4 Locations with better infrastructure, resources and power will thrive.
The shift of economic growth from West to East is changing demand. The focus is on locations that attract businesses which benefit from increasing demand from the East, such as luxury goods and education. 5
Positively impacting the environment, society, and investment returns.
Source: 1: IDC (2017), 2: International Energy Agency (2017), 3: Oxford Economics (2018), 4: United Nations (2016), 5: World Bank (2017).
Active Asset Management
Share Buyback Programme
|£95m disposals (sales of properties) were completed in 2019 at an average net initial yield of 3.0%
Disposals meant that profits from the sale of the assets were made and this supported SREIT’s performance
Further disposals of non-core assets will be considered
|Refinancing of £129.6m reduced the cost of the debt on the facility by £2.5m per annum
Extended the term of the Company’s borrowing to 13 and 20 years
More flexibility with respect to the terms of the Company’s borrowing
|Immediate Covid-19 response focused on safety and wellbeing of all stakeholders
Continued activity with 46 new lettings, renewals and reviews since 31 March 2020
This activity increased contracted rental income by £2.0m per annum
|Disciplined acquisition strategy focused on Winning Cities and resilience of income
Focused on rental income resilience
£60m of acquisitions at 6.5% means over c. £4m of potential extra rental income
Now no urgency to invest due to market being weaker
|Commenced on 8 September 2020
The Company’s shares at the prevailing price and discount to NAV offers attractive value for its shareholders
£5m share buybacks to date added 1.4% of NAV and also improves dividend cover 1 - the company’s ability to pay dividends to its shareholders.
Strong balance sheet with low LTV
Positioned to reinvest after market correction
Reduced cost of debt
Improved flexibility for borrowing
Improved defensive qualities of the portfolio
Improved net income
Potential for £4m+ of rental income
Adds to NAV
Income saving on dividend
The pandemic has caused a sharp fall in activity across the UK real estate market. However, following a record 22% decline in UK GDP in the first half of 2020, the third quarter saw a record 15% recovery as Covid-19 lockdown measures were lifted. However, some parts of the economy, and as a result certain types of real estate, have proven more resilient than others. The industry-wide material valuation uncertainty clauses, which have now been removed, also created negative sentiment and uncertainty during the period.
Although investment volumes have begun to recover over the past three months, the market is polarised. There is strong demand for prime assets offering safe haven qualities. Also, the strength of the industrial and logistics sectors have contrasted with weak demand for retail properties, which is compounded by rising corporate failures. The rise in home working has also led to a careful assessment of the future of the office sector. Whilst it is reasonable to assume that the pandemic will lead to a permanent increase in home working, there are concerns that remote working damages productivity by reducing informal team work, creativity, training, the exchange of new ideas and the most efficient execution of certain tasks. Furthermore, rental cost as a percentage of corporate costs for a typical office user are small relative to other costs such as compensation. This in part explains higher rental collection rates in the office sector compared with the other traditional sectors. We therefore expect the majority of occupiers to return to offices in due course, with businesses operating with greater flexibility. We also expect increased demand for office accommodation that promotes collaboration and a working environment which promotes employee health and wellbeing.
One of the structural changes accelerated by Covid-19 is the challenge to physical retail (shops and stores), with increased growth in online sales, reducing footfall and increasing structural vacancy. Shopping centres, where the Company has no exposure, and leisure assets have been the most negatively impacted by the lockdown measures. However, retail warehousing, which represents over 50% of the Company’s retail exposure, have performed well relative to other parts of the retail market due to rents and service charges being more affordable and there continues to be strong demand from food and discount retailers. Moreover, social distancing is easier on retail parks and this year has seen a revival in DIY and furniture sales.
The increase in online retail sales has boosted demand for warehousing as occupiers increase their supply and storage network. Despite the strong take up in the second quarter of 2020, average industrial rental growth has slowed to around 1% per annum for all but the best multi-let estates situated in the most economically active locations. The Company’s industrial exposure is predominantly across multi-let industrial estates in these urban locations which have experienced high levels of activity over the period. During the period 22 new industrial lettings, rent reviews and renewals completed. These totalled £1.6 million in annualised rental income and generate an additional £640,000 of annualised rent above the previous level. Reflecting the strong occupier demand, the average uplift on the previous passing rent on new lettings was 23% and 30% on lease renewals.
The recovery in investment transaction levels, as investors were able to inspect buildings following the initial lockdown, allowed valuers to remove the material uncertainty clauses mentioned above. Most open-ended real estate funds subsequently lifted deferrals on redemptions at the end of September leading to increased sales and activity. Whilst the second lockdown will depress activity levels and affect sentiment, average real estate yields remain at a large discount to bonds and are attractive compared with real estate yields in Europe and Asia, where income returns are lower. In addition, unlike in the Global Financial Crisis, there is little pressure on investors to cut their real estate allocations. Despite this, the market remains fragile and exposed to both Covid-19 developments and headwinds arising from the UK’s departure from the European Union.
|12 months to Sep-2020||12 months to Sep-2019||12 months to Sep-2018||12 months to Sep-2017||12 months to Sep-2016|
|Net Asset Value total return2||-12.6||2.8||8.9||11.8||4.4|
|SREIT Real Estate Total Return3||-1.1||5.4||11.0||12.2||6.6|
|MSCI UK Balanced Monthly and Quarterly Funds Quarterly Property Index3||-2.3||2.7||8.6||9.8||4.4|
Investments in real estate are relatively illiquid and more difficult to realise than equities or bonds.
Yields may vary and are not guaranteed.
The use of gearing is likely to lead to volatility in the Net Asset Value ("NAV") meaning that a relatively small movement either down or up in the value of the Company's total assets will result in a magnified movement in the same direction of that NAV.
There is no guarantee that the market price of shares in a UK Real Estate Investment Trust such as SREIT will fully reflect their underlying NAV.
The value of real estate is a matter of a valuer's opinion rather than fact.
This UK Real Estate Investment Trust should be considered only as part of a balanced portfolio, of which it should not form a disproportionate part.