McKay Securities (MCKS) is planning to raise around £86.7m from a share placing of 45.67m shares at 189p to capitalise on the growing demand for office space in the south-east of England. The property real-estate investment trust has 43 per cent of its portfolio by value in the south-east, and a combination of planning constraints and investor uncertainty has acted as a drag in recent years on the supply of new floor space.
Increasing demand meant that lettings for 2013 at 1.4m square feet in the south-east were almost double the previous year and the highest since 2007. Adding to the scarcity of high-quality office space, an estimated 16.8m sq ft of lease breaks and expiries will take place in the next three years. And with increasing levels of obsolescence in older buildings, tenants will be more inclined to upgrade their properties at lease break or expiry.
To meet this demand, McKay completed eight open market lettings in the four months to the end of January totalling 31,340 sq ft and with a combined contracted rent of £500,000 a year. It also bought 1 Crown Square in Woking for £6m, which, with an annual net rent of £588,150, equates to an initial yield of 9.3 per cent. And while the average net rental value is low at £11.60 per sq ft - it’s nearer £27 in the surrounding area - there is scope for substantial refurbishment or redevelopment in the medium term at which point rents would be increased.
To accompany the share placing, McKay also initiated an independent valuation of the portfolio, which, after acquisition costs and capital expenditure, resulted in a 1.4 per cent uplift to £236.3m, while the initial yield rose from 5.6 per cent last September to 5.8 per cent, although this increases to 6.8 per cent on contracted rents once letting incentives expire.
The group currently has £155m of loan facilities secured until at least 2016, with drawn-down debt of £107m, and while there is the option of using some of the new funds to reduce gearing, chief executive Simon Perkins stressed that the principal use of the funds will be to bring forward refurbishment and redevelopment projects.
