REITS Continue to Remain Under Pressure, Shaftesbury Receives Less Than Half of The Rent

Summary

• Shaftesbury received only 41 per cent of the rent dues in the last six months
• The company has been struggling to relet flats as 20 per cent of the apartments
• UK property market recently witnessed shortening of leases, where the high street retail re-negotiated the terms of their contract.

One of the biggest landlords in central London, Shaftesbury Plc (LON:SHB) has received less than half of the rent due since the peak of the novel coronavirus as the high street retail businesses continue to struggle even now. The property firm had received only 41 per cent of the rent dues in the last six- month period ended 30 September 2020. Shaftesbury Plc has even deferred its final dividend.

The company has been struggling to relet flats as 20 per cent of the apartments are currently vacant. These flats were the most sought-after choice for international students. Most of the people have chosen to vacate the premises and have returned to their country of origin. The Britons are expecting a second wave of coronavirus with a sudden rise in the number of coronavirus infections. This would also deter tenants from returning to the UK. The lessened demand for flats might push the rents downward in the near term.

UK property market recently witnessed shortening of leases, where the high street retail re-negotiated the terms of their contract. Even though, the footfall has been increasing, it is still on a lower side in comparison to the pre-pandemic levels.

Do read: Commercial Leases Getting Shorter in The UK - What Does It Mean for The Real Estate Sector?

Let us put our lens through some LSE listed REITs: SGRO, BLND, and WKP.

Segro Plc

The lockdown measures enforced by government in the wake of Covid-19 pandemic across Europe had wide-ranging implications on the diverse customer base of the company. Overall portfolio has performed well, with a robust pipeline of additional near-term pre-let projects. Overall, the Group has posted a decline in earnings in the first half of 2020; however, the Group is confident of its asset management approach and a strong pipeline of projects.

Driven by deteriorating macro-economic conditions, the real estate valuations are declining. The company might struggle to attain target rents or to attract target tenants due to volatile market conditions.

(Source: Company’s filings, LSE)

In H1 FY20, the IFRS profit before tax of the company decreased by 46.2 per cent year-on-year to £220.9 million (H1 FY19: £410.8 million), due to lower property gains of £57.3 million. Led by a 0.7 per cent increase in the valuations of the portfolio, the adjusted NAV per share was up by 2.6 per cent year-on-year to 718 pence (31 December 2019: 700 pence). EPRA (European Public Real Estate Association) net asset value per share rose by 2.7 per cent year-on-year to 716 pence. Further investment to support future growth with £631 million of net capital expenditure through development projects, asset acquisitions and land purchases. The Company has more than £1 billion of new equity and debt financing, which gives strength to the balance sheet. LTV (loan to value ratio) stood at 22 per cent on 30 June 2020. The Board has declared an interim dividend per share of 6.9 pence, an increase of 9.5 per cent from the previous year (2019 interim dividend: 6.3 pence).

FTSE 100-listed Segro Plc (LON:SGRO) is a London-headquartered property investment and development Company. It owns, develops, and manages warehouse and industrial properties for customers in the UK and Continental Europe.

Segro’s shares closed at GBX 942.40 on 25 September 2020, up by 0.58 per cent against the last day closing price. In the last 52-week period, the shares of the company delivered a price return of 16.84 per cent.

Also read: The Plight of High Street Retailers Amid the Covid-19 Crisis

British Land Company Plc

FTSE 100 listed British Land Company PLC (LON:BLND) is a property development and investment company. The Group has witnessed highly uncertain trading environment.

The Company’s financial position is resilient with lesser debt; it has access to GBP 1.3 billion of undrawn facilities and cash. However, both the retail & office segment appears to be challenging in the near term.

(Source: Company’s filings, LSE)

The company witnessed a decrease in the total portfolio of 10.1 per cent in value during the fiscal year 2020. Impact of Covid-19 pandemic was severe in the last quarter of 2020 that resulted in balance sheet valuations. Underlying earnings per share were down by 6.3 per cent to 32.7 pence as compared with the prior fiscal year (2019), reflecting a dip in underlying profit by 10 per cent. EPRA NAV (Net Asset Value per share) decreased by 14.5 per cent to 774 pence in 2020 against the previous year (FY19: 905 pence). Debt value remained low, with LTV (Loan to Value Ratio) standing at 34 per cent and the weighted average interest rate decreased to 2.5 per cent. The dividend per share for 2020 was down by 48 per cent.

British Land Company shares closed at GBX 322 on 25 September 2020, down by 0.77 per cent against the last day closing price. In the last 52-week period, the shares of the company delivered a negative price return of 43.86 per cent.

Workspace Group Plc

Workspace Group Plc (LON:WKP) is a London, United Kingdom-headquartered real estate investment trust which offers flexible office, co-working, and meeting room solutions in London.

The Group’s performance was significantly impacted by the outbreak of Covid-19 in Q1 2020. The level of activity reduced, and the Company offered a 50 per cent rent reduction to business centre customers. WKP witnessed a fall in occupancy level by 3-90 per cent on a like-for-like basis in Q1 and expects to see the same pressure in the short-term period on occupancy levels. However, with the improved levels of viewings, lettings and enquiries, the Company is expecting a slight recovery in the business.

The Company operational performance was impacted by an increase in the bad debts, while the financial performance was impacted by the inability to collect rents. The Company witnessed improvement in customer demand in Q1, with 765 enquiries in June versus 272 enquiries in April. The Company made 75 per cent cash collection of rent due in Q1 and received 65 per cent of rents due for Q2. As the customers started to return to business centres, the activity level stood at 15 per cent of usual levels.

Workspace Group Plc shares closed at GBX 482.40 on 25 September 2020, down by 2.23 per cent against the last day closing price. In the last 52-week period, the shares of the company delivered a negative price return of 49.30 per cent.

The property sector has witnessed shortening of leases and reduced rent payments due to the onslaught of the novel coronavirus. The UK is expecting a second wave of coronavirus, which would further result in lower occupancy rate by people who have flown back to their countries of origin. The trading environment in the sector is likely to remain challenging in the near term.