Shaftesbury: strength in diversity

The share price has fallen 12 per cent since the start of the year, as investors have become wary about the retail sector, given the number of company voluntary arrangements that have been seen recently. However, while Shaftesbury does rent a lot of space to retailers, the ultra-prime location of its properties makes the company a thing apart from most other retail landlords. Its £3.8bn property portfolio extends nearly 15 acres across the most vibrant part of London’s West End, and comprises restaurants, offices, and apartments as well as shops. In addition, it owns half of a 1.9-acre joint venture in St Martin’s Courtyard in Covent Garden. These locations draw not only the people who work and live in the area, but more significantly, an army of visitors, both domestic and overseas. And while not an overnight game changer, the opening of the Elizabeth railway line later this year will make it a lot easier to travel into Shaftesbury’s playground.

An indication of the resilience of Shaftesbury's portfolio is the seemingly minimal impact rising business rates have had on tenant demand. In fact, the portfolio’s reversionary potential (the rental upside if all rents were adjusted  to current market rates over night) totals £29.2m or 24 per cent above the current annualised rental income. This will be crystallised as leases come up for renewal. Indeed, during the six months to March, renewals and rent reviews were concluded with a rental value of £15.3m compared with £13.9m a year earlier.

Investor sentiment may have suffered due to larger schemes being a little slower than expected to secure new tenants, although 62 per cent by estimated rental value is now let or under offer. The effect of this can be seen in the vacancy rate, which decreased to 5.6 per cent from 6 per cent during the first half. And ignoring the larger schemes, the vacancy rate is just 2.8 per cent, nearly half of which is under offer.

Shaftesbury works to maximise income by making use of all available space, and has become an important provider of small, flexible office space on the upper floors of properties as well as residential appartments. This has been steadily extended to cover 452,000 sq ft of office space and 356,000 sq ft of residential, together accounting for a third of current income. With 238 tenants, the average office rent is £56 per sq ft, while the estimated rental value is higher at £64 per sq ft. On the residential side, there are 578 apartments, and while an increase in supply meant that rents were 0.5 per cent below previous levels in the first half, occupancy remains very high.

Earlier this year Shaftesbury raised £260m through a share placing at 952p. This has helped support £117m of acquisition spending in the six months to March, including the freehold on 72 Broadwick Street and six buildings in Neal Street, Seven Dials. Shaftesbury also spent £41m on the forward purchase of 90-104 Berwick Street, although delays in the vendor’s redevelopment scheme means that completion won’t be until spring next year.

Finances are in pretty good shape, and following the share placing the loan-to-value ratio is a modest 21.7 per cent, with the weighted average maturity of debt at 10.7 years. There has been a bit of concern about how difficult it is becoming to use these funds on fresh acquisitions, given the continued yield compression on assets. It may also be the case that some of the larger retail chains are in less of a hurry to open new outlets while the uncertainty surrounding Brexit drags on. However, there is sufficient reversionary value in the existing portfolio to underpin rental income, and at some point the fog surrounding Brexit will start to clear.