A lot can change in six months, and for property group Redefine International (RDI), most of the changes have been for the good. Of primary importance is the shift in investor demand to beyond the confines of the expensive London property market and into secondary assets situated elsewhere. The obvious reason for this is that yield compression in London to 3-4 per cent makes it sensible to look at quality regional assets offering double this.
- Substantial revaluation expected
- Attractive yield
- Debt restructuring complete
- Early signs of rising rental income
- Consumer spending still not fully recovered
- Exposure to currency risk
Happily, Redefine is now better-placed to take advantage of the trend, having spent a long time restructuring itself, which includes becoming a real-estate investment trust (Reit) in December last year, achieving a dual listing on the Johannesburg Stock Exchange, and launching an American Depository Receipt programme (ADR) to accommodate overseas investment demand for UK real estate.
As demand pushes up property prices, management expects half-year figures towards the end of April to see an encouraging revaluation of the portfolio, which, according to broker Peel Hunt, is 56 per cent located in the UK by value, 29 per cent in Europe and 14 per cent through a holding in an Australian company. Together with the restructuring, this is expected to reduce the loan-to-value rate from 82 per cent in August 2012 and 57 per cent last August to nearer the 50 per cent target.
And to take advantage of the uptick in regional valuations, the group has been working its portfolio hard by recycling capital into income-generating investments. Redefine bought a lot of property during the financial crises and is now set to benefit as some of the return on these investments is crystallised. Most recently, two adjoining sites in Harrow were sold to Redrow Homes (RDW) for £13.8m, which works out at a 12.4 per cent premium to book value, and the group has also secured a share of sales revenue above an agreed aggregate threshold. More sales can be expected, too, assuming an acceptable rate of return on book value.
Redefine has also been busy adding selected properties to the portfolio. For example, the group spent £84m on the 305,000 sq ft Weston Favell enclosed shopping centre on the edge of Northampton, reflecting a net initial yield of 7.5 per cent. Crucially, the centre is anchored by one of the largest Tesco supermarkets in the UK, occupying just under half the retail space, and with a 14-year unexpired lease.
And there are signs of an improvement in rents, too, with a rental review uplift at Newington House in Southwark, for example, resulting in a 5 per cent rise in rent to £807,520 a year.
| REDEFINE INTERNATIONAL (RDI) | ||||
|---|---|---|---|---|
| ORD PRICE: | 50.25p | MARKET VALUE: | £638m | |
| TOUCH: | 50-50.25p | 12-MONTH HIGH: | 61p | LOW: 34p |
| FORWARD DIVIDEND YIELD: | 6.4% | TRADING PROPERTIES: | £57.3m | |
| FORWARD PREMIUM TO NAV: | 14% | NET DEBT: | 221% | |
| INVESTMENT PROPERTIES: | £644m | |||
| Year to 31 Aug | Adjusted net asset value (p) | Net operating income (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 39 | 83.0 | 4.4 | 4.4 |
| 2013 | 39 | 62.8 | 3.1 | 3.1 |
| 2014* | 40 | 70.5 | 3.2 | 3.1 |
| 2015* | 42 | 73.9 | 3.3 | 3.2 |
| % change | +5 | +5 | +3 | +3 |
Normal market size: 5,000 Matched bargain trading Beta: 0.39 *Peel Hunt forecasts | ||||
Rental income is also expected to rise as more refurbishments start to contribute to the bottom line. At St Georges in Harrow, the final refurbishment is expected to be completed by Easter this year, while a 50,000 sq ft extension at Birchwood in Warrington has now been completed. However, while consumer sentiment is clearly improving, footfall remains in decline, and Redefine believes a full recovery will not return until consumers experience real wage growth.
The company also has a stake in Australian-based Cromwell Property, and while its performance has been solid enough, Redefine's exposure is unhedged, and the Australian dollar has declined by nearly 6 per cent since last August. Sensibly, Redefine sold a further 8.46m shares in December, taking its stake down to 13.2 per cent. Group net asset value in the short term could also come under pressure from weakness in the euro, with the group's shopping centres and government-let offices in Germany and the Netherlands accounting for around 16 per cent of gross rental income.
Group finances have been boosted by a placing at 47.5p last month, expanded due to strong demand from 7.5 per cent to 9.9 per cent of the share capital, raising £54.7m before expenses and priced at a 6.4 per cent discount.
