1 February 2023

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

Net Asset Value at 31 December 2022


1 February 2023: UK Commercial Property REIT Limited (“UKCM” or the “Company”) (FTSE 250, LSE: UKCM), which owns a £1.31 billion portfolio of high quality and diversified real estate across the UK today provides a net asset value (“NAV”) and trading update for the fourth quarter of 2022.


·      12.3% increase in EPRA earnings per share to 0.82p (30 September 2022: 0.73p) for the quarter leading to 19% growth for the year.

·      Unaudited NAV per share of 79.7p (30 September 2022: 101.5p) a NAV reduction of 21.5% and a NAV total return for the quarter of -20.8% (Q3: -7.9%). The twelve months of 2022 show an overall 21.9% NAV reduction, and a NAV total return of -18.1%.

·      Dividend maintained at 0.85p per share for the fourth quarter, payable 28 February 2023.

·      Dividend cover was 96.9% for both the quarter and year.

·     17.8% decrease in like-for-like portfolio capital value, net of capital expenditure, to £1.3 billion, due to market yield expansion following increased bank interest rates / cost of debt and macro-economic position; the MSCI UK Monthly Property Index capital value decreased by 15.6% over the quarter.

·      Rent collection normalised at 98% for rents due in the first quarter; portfolio occupancy also high at 98%.

·      ESG – second in GRESB peer group and 3* for 2023, on target to meet Net Zero Carbon 2030 and 2040 goals, and strong Energy Performance Certificate (EPC) ratings.

·      The Company benefits from relatively low and prudent gearing at 20.0% group loan to value* and a current blended interest cost of 3.61% per annum, of which 68% is at a fixed rate.  All covenants well covered.

·      On 10 January 2023 the Company extended its revolving credit facility with Barclays from January 2024 to January 2026 and at a slightly increased margin of 190bps (previously 170bps). After the extension, the weighted maturity is 5.2 years and removes the risk of short-term refinancing in a potentially volatile banking market.

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

Ken McCullagh, Chair of UKCM, commented: “UK Commercial Property REIT’s high-quality, diversified portfolio, which is weighted towards sectors that benefit from strong underlying structural and societal drivers, coupled with our proactive approach to asset management have allowed us to deliver robust earnings growth in the final quarter and almost 20% over the year.  This gives me confidence that, at an operational level, the Company is well placed to weather the current economic headwinds and rising interest rates which have led to a rerating of real estate and therefore downward pressure on valuations.  While we have not been immune from this, our balance sheet remains well positioned with low gearing.  Our confidence in the Company’s prospects is underlined by our decision to maintain the dividend for the final quarter. This translates to a 11% increase in ordinary distributions to shareholders over the year, a level which is 97% covered, in addition to a 1.92 pence per share special dividend which we paid in August.”

Will Fulton, Lead Manager of UKCM at abrdn, said: “Although the challenging macroeconomic backdrop has impacted valuations across the industry, our continued focus on asset management has driven impressive rental growth during the period. It is testament to the strength of our team and the underlying quality of our properties that we have been able to capture reversionary potential across a number of lease events while maintaining a very low void rate. We expect to deliver further income growth in the next 12 months as we complete development projects in the student accommodation, industrial and hospitality sectors. Extending the maturity of our flexible RCF debt facility to January 2026 at a very mild margin increase protects our P&L from the risk of refinancing in a potentially volatile banking market and we are delighted, after the year end, to have secured two new industrial tenants making good on the expectation of strong rental increases.  Both actions are positive milestones on our journey to increase Company earnings.”

Asset management delivering rental growth potential and high occupancy

The Company has maintained a very low void rate of 2.0% 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. 

Strong leasing momentum in the investment portfolio during the last quarter including:

·    An Agreement for Lease at Emerald Park Industrial Estate in Bristol has been signed with Northgate Vehicle Hire Ltd over Unit 101 at 25% above passing rent and 16% ahead of the previous rental value. The 10 year lease, which includes a tenant break at year five and is subject to the completion of landlord refurbishment works which will improve the unit’s EPC rating from C to A, is at an annual rent of £251,000 pa, equating to £11 per sq ft.

·    A six year lease extension at 10% above the previous passing rent and a 3% premium to ERV was also agreed at Emerald Park with MedaCo Ltd, a supplier of equipment for care homes, schools and hospitals. Running to 2030, with a tenant break in 2027, the new rent of £96,200 pa, equates to £9.75 per sq ft

·    At Gatwick Gate Industrial Estate in Crawley a short term extension was agreed with Airbase, the tenant at unit 2B. The tenant’s lease has been extended by 12 months and the annual rent increased by 17% to £330,000 pa.

Strong leasing momentum continues into 2023:

·    The Company has recently signed two new lettings at its largest asset, Ventura Park, Radlett, at a collective new rent of £2.0 million pa, £800,000 pa above the previous rent. This equates to a 69% increase and is 63% ahead of ERV 12 months ago.

Progress continues to be made in the Company’s development pipeline:

·    The larger first phase of the Company’s student development at Exeter was completed and its 131 beds are now fully occupied. Phase 2 is scheduled for completion in Q1 2023 and will provide a further 83 beds with the Company benefitting from a minimum guaranteed total annual income of £1.65 million for the 2022/23 academic year. Homes for Students has been appointed to manage the asset and interest from students in Phase 2 has been strong.

·    The industrial developments at Sussex Junction, Bolney, and Precision Park, Leamington Spa, are expected to complete in early February and April 2023 respectively.

·    Work on site has started for the Company’s Hyatt Hotel in Leeds which is expected to complete in Q2 2024.

Strong balance sheet with significant covenant headroom and flexibility

Robust balance sheet with low gearing and financial resources of £42.5 million available after allowing for future capital commitments and the February 2023 dividend.

The Company has three debt facilities in place with all covenants well covered and an additional £431 million of unencumbered property which provides further significant headroom and flexibility with respect to the Company’s covenant package. The current blended interest rate is 3.61% per annum on drawn debt of which 68% is at a fixed rate.

On 10 January 2023, the Company extended its £180 million revolving credit facility with Barclays, of which £93 million is drawn, to January 2026 with a new margin of 1.90%. The new overall blended interest rate is 3.68% per annum with a weighted maturity of 5.2 years.

The Company adopts a prudent approach to debt which allows it to benefit from relatively low gearing with a group loan to value of 20.0%*, as calculated using AIC methodology, and 21.5% ** as calculated using Gross Assets methodology, as at 31 December 2022.  The Board continues to target a gearing level up to 25% (as calculated using the Gross Asset methodology) at the time of drawdown or commitment where borrowings are used to fund development expenditure. 

The Company has a pipeline of four high quality developments due to complete over the course of 2023 and one in 2024 which will add further long-term income to the Group’s rent roll. It is intended that the c.£55 million of remaining development commitments will be funded through existing borrowings which will move gearing to approximately 24.6%***, based on the assumption that development valuations change in line with project expenditure.   It is reasonably foreseeable that the current economic and investment climate and its market wide impact on valuations, could take gearing slightly above, over the medium term, the Board's target level of gearing of 25%. The Board, with the investment manager, will continue to ensure that borrowings are controlled and managed effectively taking into account the Company's development plans.

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

**calculated as (Current Borrowings £293m / Gross Assets £1,359m).

***calculated as (Current Borrowings £293m + Development Commitments £54.5m) / (Gross Assets £1,359m + Development Commitments £54.5m).

Rent Collection

Rent collection rates have normalised with 98% of first quarter rents already received allowing for those tenants who have paid, by agreement, on a monthly basis. Cumulatively 99% of rents due over 2022 have been collected.

The Company has a diverse tenant mix of 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 (3.5%).  In total the portfolio’s income is secured from 196 tenancies.


The fourth quarter dividend has been maintained at 0.85p per share and is payable 28 February 2023, giving dividend cover of 96.9%, with dividend cover for the twelve months of 96.9%.

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 September 2022 to 31 December 2022:

UK Commercial Property REIT Limited Per Share (p) Attributable Assets (£m) Comment
Net assets as at 30 September 2022 101.5 1,318.7
Unrealised decrease in valuation of property portfolio -21.2 -275.2 Predominantly driven by a market wide rerating of yields in response to interest rate rises.
Capex -0.6 -7.5 Primarily relates to ongoing development capex for the student accommodation at Exeter, the industrial units at Sussex Junction and Leamington Spa and the hotel in Leeds.
Income earned for the period 1.4 18.0 Equates to dividend cover of 96.9%.
Expenses for the period -0.6 -7.3
Dividend paid in November 2022 -0.8 -11.0
Net assets as at 31 December 2022 79.7 1,035.7

The EPRA Net Tangible Assets per share is 79.7p (30 September 2022: 101.5p) with EPRA earnings per share for the quarter being 0.82p (30 September 2022: 0.73p).

Sector Analysis

Portfolio Value as at 31 December 22 (£m) Exposure as at 31 December 22 (%) Like for Like Capital Value Shift (net of CAPEX) Capital Value Shift (including sales & purchases & development spend)     (£m)
Valuation as at 30 Sep 22 1,583.0
Industrial 773.4 59.1 -22.0 -214.0
South East 35.8 -25.0 -155.1
Rest of UK 23.3 -16.7 -58.9
Retail 180.3 13.8 -11.9 -24.5
High St – South East 1.0 -14.2 -2.1
High St- Rest of UK 1.2 -12.9 -2.3
Retail Warehouse 11.6 -11.6 -20.1
Offices 171.2 13.1 -11.9 -23.2
West End 1.9 -10.1 -2.9
South East 5.2 -14.6 -11.7
Rest of UK 6.0 -10.0 -8.6
Alternatives 183.1 14.0 -9.1 -13.3
Valuation at 31 Dec 22 1,383.0 100.0 -17.8 1,308.0

UKCM Yield Profile Q4 2022

Sector Net Initial Yield Reversionary Yield
Industrial 4.1% 5.8%
Office 5.5% 7.1%
Retail 6.2% 5.5%
Alternatives 6.1% 6.0%
Portfolio 4.9% 6.1%

Top Ten Investments                                                                                                                                

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

The independent valuation as at 31 December 2022 was carried out by CBRE Ltd.

Net Asset Value analysis as at 31 December 2022 (unaudited)

       £m % of net assets
Industrial 773.4 74.7%
Retail 180.3 17.4%
Offices 171.2 16.5%
Alternatives 183.1 17.7%
Total Property Portfolio 1,308.0 126.3%
Adjustment for lease incentives -32.4 -3.1%
Fair value of Property Portfolio 1,275.6 123.2%
Cash 30.9 3.0%
Other Assets 52.5 5.1%
Total Assets 1,359.0 131.3%
Current liabilities -31.6 -3.1%
Non-current liabilities (bank loans) -291.7 -28.2%
Total Net Assets 1,035.7 100.0%

The NAV per share is based on the external valuation of the Company’s direct property portfolio as at 31 December 2022. It includes all current period income and is calculated after the deduction of all dividends paid prior to 31 December 2022.

The NAV per share at 31 December 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

Economy and Investment Outlook

Perhaps an over-used phrase but never more true - it was a year of two halves in 2022. The positive performance that UK real estate recorded at the start of the year was unwound with a notable acceleration in the final quarter, as capital value declines weighed on performance. UK real estate recorded a total return of -10.1% in 2022, according to the MSCI monthly index data, having returned 9.6% in the first half of 2022 and -17.9% in the second half of the year. Regardless of the continued strength of many operational markets, there was a broad repricing of UK real estate, driven by a weaker macroeconomic environment and, primarily, rising debt costs. Value declines for All Property were 13.3% over the year and -15.6% in Q4 alone.

Yields moved out across all real estate sectors, with lower yielding areas of the market, such as the industrial sector and long income which have experienced the biggest value gains in recent years, experiencing greater outward yield movements than the wider market.  Indeed, given the magnitude and speed of correction we have seen in the supermarket, industrial and logistics, and areas of the long-income market, we think that market pricing for these areas of UK real estate will find a floor much quicker than we have seen in previous cycles. As such, our outlook and forecasts for these areas of the market have improved materially, given the level of correction these sectors experienced in the latter part of the year.

The UK economy has faced a period of significant volatility over the second half of 2022, as the macroeconomic environment weakened and political turmoil rocked financial markets. While greater political stability has returned to the UK, the economy is facing headwinds as we enter 2023. Although UK GDP edged up in November the ONS attributed this to a World Cup-related services boost and it seems likely to be an upwards blip rather than evidence of a stronger underlying rate. We currently forecast UK GDP to decline by 1.3% in 2023, before recovering in 2024 with modest growth of 0.6%.

Headline inflation looks to have peaked with the Consumer Price Index falling in December from 10.7% to 10.5%. Powerful base effects combining with global goods disinflation are expected to pull inflation down in 2023. However costs remain high and underlying inflation pressures are still apparent, leading us to expect headline inflation to only moderate through 2023, not fall to pre-2022 levels. We expect 6.2% by the end of the year, before falling to 2.4% in 2024.

The real estate investment market reacted quickly to expanding interest rates and, as expected, the Bank of England continued its monetary policy tightening cycle in December 2022, with a further 50bps rise in response to the rate of UK inflation, taking the base rate to 3.5%. Further hikes are expected in early 2023, with the base rate expected to peak between 4.25% and 4.5% before a sharp rate-cutting cycle begins towards the end of 2023 as the Bank of England attempts to stimulate the UK economy out of recession.

Due to the recessionary pressures, we expect our view is more bullish than some for an earlier rate-cutting, which we expect being towards the end of 2023.  While there is considerable uncertainty around the speed and trajectory of monetary policy easing, we expect the base rate to be cut to 2.5% by the end of 2023, before stabilising between 1-2% during 2024. The risk of the base rate returning to even lower bounds is skewed to the upside.

This has significant, and potentially very positive, implications for real estate.  During H2 2022 the combination of an uncertain economic environment and rising cost of debt financing hit markets hard with significant negative repricing. The prospect of an earlier than anticipated rate cutting cycle, combined with a repriced market, offers the prospect of a far more positive real estate yield margin over a 10-year Gilt risk free rate, providing the potential for renewed interest and appetite for the real estate sector.

Higher costs in this inflationary environment are naturally having a significant impact on UK consumers who are experiencing a deepening cost-of-living crisis and are expected to face further pressure from a weakening employment market in the face of recession. The most obvious implication for real estate is likely to be further depressed retail sales as household discretionary spend drops but this weaker economic environment is likely to weigh on occupational sentiment across the entire real estate sector as we move through 2023. The relative strength of income and occupier covenant therefore will grow in importance as will asset quality and location, in addition to simple sector selection.

On a brighter note, and unlike previous market cycles, we enter this period of market turbulence with supply levels remaining tight across many sectors. This is particularly the case for those sectors benefitting from longer-term structural growth drivers, such as residential asset classes and industrial and logistics. In the latter sectors, tenant demand has remained robust and the UK vacancy rate remains near an all-time low of 3.4%* [*CoStar], on top of which supply is expected to remain limited by the fact that development pipelines have been constrained by higher construction costs.  We expect this to contain availability rates, albeit partly offset by rising occupational costs including an expected 2023 rise in business rates. It is hard to imagine that business sentiment will not be weakened which will temper occupational demand but rental growth in the industrial sector is still anticipated to remain positive, at more normalised levels rather than the high-growth levels experienced over the last few years. As with the wider real estate market, asset location and specification will be important to secure this.

The question around the future occupation of offices and how this sector reacts is perhaps the hardest to decipher. There is a historic correlation between office take-up and GDP growth, with poorer business sentiment and a weakening economic environment expected to add further pressure to a sector already facing structural headwinds as businesses and employees re-evaluate working practices.  And so, as we enter a recessionary environment in 2023, we anticipate demand for good-quality accommodation will prove more resilient but secondary accommodation will progressively face tougher conditions. ESG adds another layer of complexity to the office equation as owners face mounting costs to repurpose offices to a ‘B’ energy rating, the expected legal occupational and trading requirement by 2030 and that increasingly demanded by many tenants. It is fair to assume not all will succeed and a reduced national office demand, a response to agile working practices, is likely to lead to a concentration of that demand, and so rental growth, in only the very best offices.

Retail will continue to feel the impact of the cost-of-living crisis and the subsequent squeeze on household disposable incomes. Retail sales volumes have continued to decline and occupier sentiment, particularly in the discretionary end of the market, has weakened. The sector remains structurally oversupplied and further retailer failures are likely in this environment, adding further space to an already saturated market. Discount-led retailers and budget supermarkets have enjoyed more robust trading conditions, particularly in the run up to Christmas, but the prospect of rental value growth in the sector is more limited in the near term.

Turning to residential, fundamentals in the private rented sector (PRS) remain supportive reflected in very strong levels of rental value growth. We expect the limited availability of good-quality rental accommodation across much of the UK, and increasing demand, to offset consumer cost pressures and allow rents to moderate to more normalised levels of growth for PRS and the Build to Rent sector.

All in all a weaker economic environment is expected to weigh on occupational sentiment across real estate as a whole, as we move through 2023, with the relative strength of income, occupier covenant, location and asset quality growing in importance to tenants and so investors.

Quality will prevail across all sectors, with prime assets remaining far more resilient. The 2022 repricing of real estate and the likelihood of a positive recalibration of its historic attractive margin over a risk-free investment yield later in 2023 and into 2024 as interest rates fall is likely to enhance general investment appetite.

Investors continue to narrow their focus on prime and best-in-class assets, and particularly within those sectors that benefit from structural and demographic growth drivers. Secondary assets, and those that do not meet current environmental and occupier criteria, are expected to see much weaker demand from investors. Pricing is likely to recalibrate, as a result. While prime and secondary pricing moved out in tandem during 2022, prime pricing is expected to stabilise in 2023 while secondary pricing sees greater capital value declines. While this trend has occurred in previous market cycles, we expect the divergence in pricing in some sectors to be more pronounced during this cycle as occupier and investor demand narrows.

The pace of repricing for UK real estate will mean opportunities will arise over the course of 2023, particularly as the path of monetary policy turns more accommodative. Those sectors that benefit from longer-term growth drivers, such as the industrial and living sectors, will see greater demand return and at more attractive pricing levels. The repricing of long-income real estate investments will also provide an attractive opportunity to investors, particularly as yields for gilts and inflation linked bonds are expected to move lower in line with the expected policy rate cuts from the Bank of England. Despite seeing significant capital value declines during 2022, the industrial sector will grow in favour once again. Investors are attracted by re-based yields and rental value growth prospects, driven by a very positive supply/ demand dynamic in the sector. Investors will focus on assets with good fundamental attributes, location and specification.

The Board is not aware of any other significant events or transactions which have occurred between 31 December 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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