7 November 2022

UK Commercial Property REIT Limited (“UKCM” or “the Company”)

Net Asset Value at 30 September 2022


7 November 2022: UK Commercial Property REIT Limited (“UKCM” or the “Company”) (FTSE 250, LSE: UKCM), which owns a £1.6 billion portfolio of high quality and diversified real estate across the UK today provides a net asset value (“NAV”) and trading update for the third quarter of 2022.


  • NAV per share of 101.5p (30 June 2022: 112.9p) a NAV reduction of 10.1% and a NAV total return for the quarter of -7.9% (Q2: +2.3%). The first nine months of 2022 show an overall 0.5% NAV reduction, and a NAV total return of 3.7%.
  • 7.1% decrease in like-for-like portfolio capital value, net of capital expenditure, to £1.6 billion, against the MSCI UK Monthly Property Index capital value, which decreased by 5.1% over the quarter.
  • Rent collection rates have normalised to pre-pandemic levels with 97% received for the fourth quarter of 2022 and 98% for the year to date.
  • The quarterly dividend of 0.85p per share has been maintained. Payable in November 2022.
  • EPRA earnings per share for the quarter was 0.73p (30 June 2022: 0.83p) giving dividend cover of 86.3%, with dividend cover for the nine months of 96.9%.
  • Reflecting the Company’s continued progress with its ESG strategy, the Company retained its three star GRESB rating, increasing its overall score placing it second within its GRESB peer group, and retained its EPRA Gold award for its sustainability disclosures.
  • The Company continues to be one of the lowest geared companies in its peer group at 16.0%, with drawn debt at a blended interest rate of 3.16% per annum, of which 75% is fixed rate.  The weighted maturity is 5.2 years and all banking covenants are well covered. 

Ken McCullagh, Chair of UKCM, commented: “Since we last reported, and as widely anticipated, the economic environment has become more challenging.  The rise in interest rates has resulted in weakening yields, which have, in turn, put downwards pressure on valuations.  We have continued to focus on our strategy that we have put in place over the past few years to proactively manage our portfolio towards high quality assets in sectors that are supported by structural drivers and societal changes, that positions us well for the future.  Our assets remain well placed to deliver income growth and security, as evidenced by the continued high occupancy our portfolio enjoys and we have continued during the quarter to sign tenants at above passing rents and / or rental value as vacancy or lease events arise.  I take further comfort from the fact that our balance sheet remains lowly levered, with over three quarters of our debt at fixed rates and continues to be comfortably within the banking covenants, and undrawn debt that provides us with flexibility.”

Positive Investment Activity

As previously disclosed, in July the Company disposed of its 68,400 sq ft central Birmingham office, 9 Colmore Row, to Birmingham City Council at a price of £26.48 million, ahead of the asset’s book cost and at a premium to its latest valuation. In addition to securing a strong sale price, the disposal is in line with the Company strategy of exiting risk assets and those in need of capital expenditure which will not enhance value.

Asset management driving rental growth, occupancy and value

The Company has maintained a very low void rate of 1.3% (1.5% at Q2 2022) which provides good visibility of future income and clearly demonstrates both the quality of the Company’s portfolio and the asset management team’s ability to retain income while focusing on capturing reversionary potential. 

Notable transactions over the last quarter include:

At Emerald Park industrial estate in Bristol, a new 10 year lease has been secured with Pitchmark Group Ltd, incorporating a tenant only break in year 5.  The letting has established a new rental tone of £10.50 psf per annum on the estate, 11% up from the previous rent passing of £9.30psf per annum and 8% ahead of the unit’s previous rental value (ERV). 

At Newton’s Court industrial park in Dartford, a 10 year extension was completed at lease renewal with Clear Channel over Unit 9 with a tenant break in year 5. The lease was agreed at a new rent of £169,737 per annum, equating to £12.50 psf per annum, 32% ahead of the previous passing rent and 2% ahead of ERV.

In Hatfield, an open market rent review over the 298,400 sq ft distribution warehouse was settled with online logistics solutions retailer Ocado at £4,000,000 per annum, equating to £11.88 psf. The reviewed rent reflects a 32% increase on the previous rent passing and was 13% ahead of ERV at the time of review. 

At the Company’s 260,100 sq ft distribution warehouse in Newcastle Under Lyme another rent review was settled with TK Maxx, at £1,391,535 per annum equating to £5.35 psf. The settlement was 15% ahead of the previous passing rent and 2% ahead of ERV at the rent review date.

Excellent progress continues to be made at the Company’s developments with notable updates as follows:

At Gilmore Place, Edinburgh the Company’s new student housing development reached completion on 1 September and was handed over to the University of Edinburgh who have taken a new FRI 20 year lease at a rent of £1,238,000 per annum with annual uplifts (CPIH+1% with a collar/cap at 1% - 4%)

The first phase of the Company’s other student housing development, in Exeter, is expected to complete shortly this month, at which time 131 students will be housed in the scheme. Phase 2 completion is anticipated to follow shortly thereafter with the rooms marketed towards postgraduate students with a start date in early January 2023.

Sectional completion was achieved in September over units 2&3 at the Sussex Junction industrial estate in Bolney, delivering 60,229 sq ft of new space. The units are let to CGG under two 15 year leases at a combined rent of £780,875, equating to £12.50 psf per annum. Completion of unit 1 totalling 46,500 sq ft, which is being marketed for lease, is scheduled for November 2022.  

Construction continues at Precision Park, Leamington Spa to create a modern logistics facility of 67,700 sq. ft with strong ESG credentials.  Practical Completion is scheduled to take place in February 2023 with the unit attracting encouraging levels of interest. 

Cash and Borrowings

As at 30 September 2022, gearing continued to be one of the lowest in the Company’s peer group at 16.0%*. The drawn debt has an overall blended interest rate of 3.16% per annum, of which 75% is fixed rate, with a weighted maturity of 5.2 years and banking covenants that are well covered.   Allowing for its committed capital expenditure the Company has available resources of £54.8m having agreed an additional £30 million facility in August 2022.

* Calculated, under AIC guidance, as gross borrowings less cash divided by portfolio value.

Rent Collection

Rent collection rates have normalised to pre covid levels with 97% of fourth quarter rents due as at close of business on 31 October  2022 already collected after allowing for agreed rent deferrals, as well as those tenants who have paid, by agreement, on a monthly basis.

The Company has a diverse tenant mix with a number of high quality occupiers, the largest five of which comprise resilient businesses such as Ocado (5.8% of rent), Public Sector (4.9%) Warner Brothers (4.2%), Amazon (4.0%) and Armstrong Logistics (3.6%).  The remainder of the portfolio’s income is secured on 190 tenancies.

The third quarter dividend has been maintained at 0.85p per share, following the 13.3% dividend increase announced in relation to the first half of 2022.

Breakdown of NAV movement

Set out below is a breakdown of the change to the unaudited net asset value per share calculated under International Financial Reporting Standards ("IFRS") over the period from 30 June 2022 to 30 September 2022:

UK Commercial Property REIT Limited Per Share (p) Attributable Assets (£m) Comment
Net assets as at 30 June 2022 112.9 1,467.4
Unrealised decrease in valuation of property portfolio -8.1 -105.7 Predominantly decrease in property portfolio
Realised gain on sale of property 0.3 3.5 In July the Company disposed of its central Birmingham office, 9 Colmore Row.
Capex -1.5 -20.0 Primarily relates to ongoing development capex for the student accommodation at Exeter and Edinburgh, the industrial units at Sussex Junction and Leamington Spa and the hotel at Sovereign Square, Leeds.
Income earned for the period 1.3 16.8 Equates to dividend cover of 86.3%.
Expenses for the period -0.6 -7.3
Dividend paid in August 2022 -0.9 -11.0
Special dividend paid in August 2022 -1.9 -25.0
Net assets as at 30 September 2022 101.5 1,318.7

The EPRA Net Tangible Assets per share is 101.5p (30 June 2022: 112.9p) with EPRA earnings per share for the quarter being 0.73p (30 June 2022: 0.83p).

Sector Analysis

Portfolio Value as at 30 Sept 22 (£m) Exposure as at 30 Sept 22 (%) Like for Like Capital Value Shift (net of CAPEX) Capital Value Shift (including sales & purchases & development spend)     (£m)
Valuation as at 30 Jun 22 1,710.9
Industrial 987.5 62.3 -10.0 -104.9
South East 39.3 -8.9 -56.8
Rest of UK 23.0 -12.0 -48.1
Retail 204.8 13.0 -3.7 -7.9
High St – South East 0.9 -5.4 -0.8
High St- Rest of UK 1.2 -5.3 -1.0
Retail Warehouse 10.9 -3.4 -6.1
Offices 194.3 12.3 -5.5 -33.3
West End 1.8 -6.9 -2.1
South East 5.0 -7.1 -6.1
Rest of UK 5.5 -3.6 -25.1
Alternatives 196.4 12.4 2.1 18.2
External valuation at 30 Sept 22 1,583.0 100.0 -7.1 1,583.0

Top Ten Investments

Properties valued in excess of £100 million
Ventura Park, Radlett Industrial
Hannah Close, Neasden, London Industrial
Properties valued between £50 million and £100 million
Dolphin Industrial Estate, Sunbury-on-Thames, London Industrial
Ocado Warehouse, Hatfield Industrial
Newton’s Court, Dartford Industrial
Junction 27 Retail Park, Leeds Retail
XDock 377, Lutterworth Industrial
Properties valued between £25 million and £50 million
Emerald Park, Bristol Industrial
The Rotunda, Kingston on Thames Alternatives
Maldron Hotel, Newcastle Alternatives

The independent valuation as at 30 September 2022 was carried out by CBRE Ltd.

Net Asset Value analysis as at 30 September 2022 (unaudited)

       £m % of net assets
Industrial 987.5 74.9%
Retail 204.8 15.5%
Offices 194.3 14.7%
Alternatives 196.4 14.9%
Total Property Portfolio 1,583.0 120.0%
Adjustment for lease incentives -32.3 -2.4%
Fair value of Property Portfolio 1,550.7 117.6%
Cash 14.6 1.1%
Other Assets 55.6 4.2%
Total Assets 1,620.9 122.9%
Current liabilities -35.6 -2.7%
Non-current liabilities (bank loans) -266.6 -20.2%
Total Net Assets 1,318.7 100.0%

The NAV per share is based on the external valuation of the Company’s direct property portfolio as at 30 September 2022. It includes all current period income and is calculated after the deduction of all dividends paid prior to 30 September 2022.

The NAV per share at 30 September 2022 is based on 1,299,412,465 shares of 25p each, being the total number of shares in issue at that time.

Investment Manager’s Market Commentary

Following a strong start to the year, UK real estate is now in the midst of a broad repricing and performance for the remainder of the year and into 2023 is expected to slow further. This trend is already apparent as, according to the MSCI Monthly Index, all property total return for Q3 2022 turned negative at -4.1%, the weakest quarterly performance recorded since May 2009. Capital value declines have been the principal driver in slowing performance, with capital values falling 5.1% over the same quarter, as yields have begun to move out sparked by rising interest rates and government bond yields, particularly in lower yielding areas of the market. By way of illustration, industrial capital growth fell by 8.1% in Q3 2022, with south east industrials reporting the steepest monthly capital value decline since December 2008.

Transaction volumes also fell in Q3 2022 to £10bn according to Real Capital Analytics, as weaker sentiment spread throughout the UK real estate market, causing lower liquidity as a result. Increased market volatility in September 2022, on the back of economic and political uncertainty, has also ensured that investor conviction on asset pricing levels has fallen. The speed of this change in sentiment is characterised by the fact that H1 2022 transaction volumes were the second strongest since 2002 and totalled just under £40bn.

Despite a record breaking Q1 2022 for transactions in the industrial sector, with over £7.1bn traded, transaction volumes in Q3 are down 64% on this number, primarily due to lower demand in response to the highlighted rise in the cost of debt financing and a thinning margin over UK gilt yields.

However, from an occupational perspective, the sector continues to benefit from positive supply/demand dynamics and the UK vacancy rate remains near historic lows. Limited new development and robust demand should allow for rental value growth in the prime end of the sector, but at more normalised levels. Further capital value declines are to be expected in the sector, but the medium to long term sector fundamentals remain well balanced.

The office sector is also experiencing headwinds in the face of a weaker economic environment. Historically, office occupational demand has been closely correlated with GDP growth and, given the poor economic outlook, office take up levels are expected to fall.  This will be more patently felt in the secondary end of the market, while demand for best in class assets should prove more robust. Tight supply of best in class accommodation should insulate Grade A rental values, but a decline in secondary office rents is to be expected as occupiers narrow their focus on future fit assets, with strong ESG and wellbeing credentials. Investor demand also continues to narrow and office capital value declines are expected. It is still unclear how medium-term demand for office space will be influenced by COVID-induced changes to working habits and how these will evolve - it seems fair to assume companies embracing agile/home working will also look to reduce occupational costs and that many will concentrate that reduced budget on a smaller quantity of better quality “Grade A” space; in other words less overall demand but potentially greater demand for the best space.

The cost of living crisis and subsequent squeeze on household disposable incomes will be most acutely felt in the retail sector, and particularly within discretionary led retail schemes. While fiscal support measures will likely soften the blow, data already suggests that consumers are cutting back on non-essential spending and seeking savings wherever possible. As a result, occupational demand from discretionary retailers (such as fashion) is likely to fall whilst those retailers deemed to be essential (such as budget supermarkets) will perform better in this environment. DIY and housing related retailers are also likely to face tougher trading conditions in the period ahead as the UK housing market comes under pressure. The prospect for rental value growth in the sector is therefore limited and investors are also expected to focus principally on non-discretionary retail schemes, such as budget retailers and supermarkets.

The alternatives sector has continued to see growth over the course of 2022, driven by strong demographic and structural tailwinds. Investment into the sector is already ahead of the calendar year total in 2020 and only 6% behind that in 2021, with investment into the residential sector the largest contributor to this rise. The Purpose Built Student Accommodation (PBSA) and healthcare sectors, while not immune to the weaker environment, will also benefit from thematic tailwinds and are expected to outperform the wider market over the next 12 months. The PBSA sector in particular has often run countercyclical to economic downturns, with UCAS data indicating increasing demand for university places in the 2022/2023 academic year.

Investment Outlook

Whilst rising debt costs proved to be a catalyst for a repricing in UK real estate, ongoing concerns surrounding elevated gilt yields is now a significant driver, as the margin between the risk free rate and UK real estate yields tightens. This is more pronounced in lower yielding areas of the market, such as parts of the industrial sector, where it has resulted in yields moving out by between 100 – 125 bps since June 2022 according to CBRE. UK gilt yields are anticipated to remain elevated and, with further tightening of monetary policy ensuring debt costs remain prohibitive, UK real estate performance will remain under pressure in the short term.

However, a rebound in UK real estate performance is expected in the medium term as the economic situation in the UK improves. Inflation, which has driven the Bank of England’s recent interest rate hike of 0.75% to 3%, is anticipated to fall as recessionary pressures weigh on the global economy and, as a result, the Bank is expected to start reversing monetary policy in late 2023 in a bid to pull the economy out of recession. UK gilt yields are also expected to move lower as the economic outlook improves and this, combined with a repricing of UK real estate, will ensure that UK real estate will look attractive from a relative pricing perspective to investors. 

Better quality assets are expected to lead the recovery over the medium term due in part to ESG considerations becoming ever more important to both occupiers and investors. As a result, and given the current energy crisis and drive towards net zero, integrating ESG strategies into investment decision making is paramount to ensuring assets are future fit and ready for a recovery in real estate performance.

The Board is not aware of any other significant events or transactions which have occurred between 30 September 2022 and the date of publication of this statement which would have a material impact on the financial position of the Company.

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement via Regulatory Information Service this inside information is now considered to be in the public domain.

Details of the Company may also be found on the Company’s website which can be found at: www.ukcpreit.com

For further information please contact:
Will Fulton / Jamie Horton, abrdn
Tel: 0131 528 4261

William Simmonds, J.P. Morgan Cazenove
Tel: 020 7742 4000

Richard Sunderland / Andrew Davis / Emily Smart, FTI Consulting
Tel: 020 3727 1000

The above information is unaudited and has been calculated by abrdn Fund Managers Limited.


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