Real estate investment trusts (Reits) are showing tentative signs of recovery following last year’s bruising downturn after a raft of first-quarter updates revealed stronger tenant demand for some and flattening valuations for all. However, not all the Reits’ positions as of 31 March were stellar, with some reporting a drop in operational performance and increases in net debt.
Generalist Reits Custodian Property Income Reit (CREI), UK Commercial Property Reit (UKCM), and Picton Property Income (PCTN), as well as residential landlord Grainger (GRI), all boasted an improved operational performance. Picton’s occupancy ticked up to 91 per cent from 90 per cent last quarter while Custodian’s rose to 90.3 per cent from 89.9 per cent last quarter as new rental income secured increased from £800,000 in the final quarter of 2022 to £2.5mn in the first quarter (Q1) of this year.
UKCM’s occupancy rate was flat across both quarters at 98 per cent, but it too pointed to a greater value of new rental income as well as a greater number of deals than in the final three months of 2022. It highlighted nine new leases equating to £2.89mn in Q1 2023 compared to just three amounting to £680,000 in Q4 2022.
Meanwhile, in its results for the six months to 31 March, Grainger posted a 12 per cent increase in net rental income compared with the previous year as occupancy also nudged up. This allowed it to increase dividend payments by 10 per cent.
Others did not fare as well. Generalist Reit Balanced Commercial Property Trust (BCPT) saw its occupancy dip slightly while warehouse landlord Segro’s (SGRO) operational performance was weaker than this time last year, indicating that demand for warehouse space is not as acute as it once was.
The average rental uplift Segro managed to negotiate with its tenants dropped 9 percentage points from 23 per cent in Q1 2022 to 14 per cent in Q1 2023. Total rental income, pre-lets and occupancy were also all down compared with the same period last year.
The good news for Segro was its valuation, which fell just 2 per cent after plunging 16.6 per cent last year. Yet, small as this drop was, the accompanying increase in its net debt from £5.7bn to £5.9bn, combined with a slight increase in the cost of its debt from 2.5 per cent to 2.7 per cent, make its leverage position look less favourable. According to its in-house figures, loan-to-value (LTV) increased from 32 per cent to 33 per cent and this LTV figure is based on December’s higher portfolio valuation.
Grainger’s leverage was also higher. In its results for the six months to 31 March, its net debt as a percentage of its assets had increased from 64 per cent to 73 per cent as at 30 September thanks to an increase in borrowing combined with a drop in the value of its assets.
Meanwhile, BCPT managed to slightly reduce its debt to net asset ratio from 30.6 per cent to 30.4 per cent even as its portfolio value dipped thanks to a decrease in its borrowings. Similarly, peer UKCM managed to nudge its bank borrowings to asset ratio down from 28.2 per cent to 27.8 per cent over the same period.
Taken together, the picture for the listed property sector is mixed, but the handful of wins combined with the bottoming of valuations suggests that the next nine months will be much smoother than the previous nine. As BCPT put it: “There remains an air of caution and the relative recovery in sentiment and activity is nuanced as investors favour the most resilient sectors and assets.”
