Helical hits sweet spot

The emphasis over recent years has been to reduce Helical's exposure to shopping centres and high-street retail. Almost 90 per cent of the £160m of sales made between the start of October and mid-February came from these two sectors. Meanwhile, £133m was invested in new investment assets, including distribution units, retail warehouses, regional and London offices where there should be better prospects for rental growth and valuation gains.

Veteran chief executive Mike Slade believes there are still a good few years left before the recent renaissance in property values starts to level off, and the company is keen to push through in the meantime development projects that should unlock significant. Helical reckons development projects could boost book value by up to 20 per cent over the next three years.

All this should be good news for NAV growth. Broker Oriel Securities believes the investment portfolio on its own can produce capital growth of 4.6 per cent in the second half of the current financial year followed by 6 per cent in 2016 and 6.4 per cent in 2017. Adding in development projects, the broker is pencilling a 12.5 per cent NAV compound annual growth rate up to the end of March 2017.

As developments are completed the focus of the portfolio should shift towards established recurring revenue streams from investment properties. At the moment, there is roughly a 75:25 balance between an income-producing portfolio and development stock. Sensibly, any future larger development projects will probably involve a joint-venture partner who will be expected to put up a greater part of the investment capital shielding Helical from the risk of a turn in the property market. Such deals involve Helical receiving a 'waterfall payment' whereby it takes a greater profit share than the initial investment depending on the profitability of the project.

An example of this approach is a mixed-use development at Barts Square in London which is a joint venture with The Baupost Group. The first phase comprises 144 residential units, and nearly two thirds of the first 88 units released to the market have already been sold. The group is also keeping an eye for properties with redevelopment potential, contracts were exchanged in December on a long-leasehold interest in Charterhouse Square in London for £16m.

Lumpy headline profits reflect the impact of portfolio revaluations. What's crucial, though, is rental income. This is forecast to grow from £24.4m last year to £37.7m by 2016. Rental growth should benefit from the fact that at the half-year stage the portfolio's yield of 6 per cent compared with an estimated yield at market rates of 7.3 per cent, which suggests plenty of upside from future rent reviews.

Net debt is high in relation to market capitalisation, but this is likely to moderate as investment in the development arm falls. The group has also taken advantage of the benign interest rate climate to secure a new £81m 10-year investment facility with Aviva Commercial Finance at a fixed rate of 3.48 per cent. The funds have been used to refinance an existing £27m loan, while the balance has been used to boost cash reserves.