Helical's valuation drops and vacancy rises

You can add Helical (HLCL) to the growing list of real-estate investment trusts (Reits) which posted a drop in pre-tax profit this month. Helical and several other Reits – including fellow London office landlords British Land (BLND) and Landsec (LAND) – all recorded a downturn with BLND and LAND both swinging to a loss. In all those cases, the story has been the same: rising interest rates have put off buyers and led to a fall in property values.

Speaking to Investors Chronicle on the morning of its results for the six months to 30 September, Helical chief executive Gerald Kaye said that both Helical and the wider property industry had become “complacent” when it came to the low interest rate environment. “When something goes on for so long, not enough people think it’s going to change,” he said.

Yet, it isn’t just falling valuations that have hit Helical. The Reit’s like-for-like vacancy rate has increased from 6 per cent to 7 per cent. If you take into account the addition of the recently completed JJ Mack building into its portfolio, the vacancy rate jumps to 19.2 per cent. Kaye is confident that the building will lease soon because of the lack of top-quality London office stock, but investors have every right to question the strength of demand for even the highest quality space considering the looming threat of recession and the existential questions around the post-Covid future of the office.

There are reasons to be bullish about this Reit. It is lowly geared and owns good assets in strong locations and are let to blue-chip tenants. However, falls in portfolio valuation and occupancy rate alongside a drop in revenues and average lease length cannot be ignored. Hold.

Last IC View: Buy, 454p, 23 Nov 2021