CLS and the question of vacancy rates

• Increased portfolio valuation 
• Strong rental collections

Commercial landlords would have cast a nervous eye at events unfolding in China’s Jilin province, where officials have instituted lockdown measures to contain the spread of a Covid-19 outbreak. The pandemic has given way to Russia’s invasion of Ukraine in the news cycle, but landlords will still be wary of any further coronavirus-linked disruption.

The financial performance of CLS (CLI), in common with industry peers, was constrained by the lockdown restrictions, although it’s worth noting that it still grew estimated rental values (ERV) across the portfolio in 2020. A year on from the height of the pandemic and the group revealed that statutory profits fell due to lower gains from disposals, but favourable tax treatment fed through to improved net earnings.

It’s too early to determine what long-term impact the pandemic will have on occupancy levels, although shareholders will be pleased to learn that rent collection remained strong through 2021 at 99 per cent. Net rental income at £108mn was marginally down on the prior year due to redevelopment and leasing expirations, while the vacancy rate increased by 70 basis points to 5.8 per cent due to a “deliberately acquired vacancy” in the 2021 German purchases. It remains above management’s target of 5 per cent, but it’s worth noting that the overall rate narrowed significantly since midway through last year as rental opportunities gathered pace.

The value of the property portfolio rose by 5 per cent to £2.3bn, partly thanks to £142mn of acquisitions net of disposals. Valuations increased across all its locales, with an average 1.6 per cent uplift in local currencies, although the overall figure was held in check by £66.3mn linked to the strengthening of sterling through the period (half of the group’s portfolio is in Germany and France).    

Chief executive Fredrik Widlund admits that “hybrid working is here to stay”, but he went on to explain that “offices need to be attractive and sustainable”, so many “existing offices will become obsolete, as it is uneconomic to upgrade them to meet rising environmental standards”. Time will tell whether the CLS portfolio will capture future occupier demand, yet Widlund can take heart from the fact that the vacancy rate beat the consensus estimate for 2021. Analysts have set a target price of 291p, representing a 31 per cent discount to net asset value. That seems a little steep given that restrictions have eased significantly, but the macro picture is far from rosy and there is a chance that flexibility, rather than the more nebulous sustainability mantra, will become the chief determinant in occupancy rates. Hold.

Last IC View: Hold, 249p, 11 Aug 2021