McKay Securities has said it is noticing a widening price gap between prime and secondary assets in the London and South East industrial and office sectors which “should present value add opportunities”.
The REIT has de-risked its development portfolio over the last year through lettings and planning approvals, and is now looking to make acquisitions, with opportunities expected to emerge despite a lack of supply in its target market.
Chief executive Simon Perkins said: “Where leases are becoming shorter and there is money to be spent and letting risk, the risk elements associated with those assets don’t appeal to the same number of investors [as prime assets]. That is enabling a more appealing level of discount between prime and secondary assets.”
He added: “It’s still evolving. Capital expenditure is something which clearly has to be taken into account, and letting risk. All of those things are factors in investors minds. We’ve still got 12 months to Brexit as well. And that is I think resulting in the value of those assets moving to a point where they are beginning to reflect a more sensible level of risk.” He said this was particularly the case for offices outside of London.
The company, announcing its full-year results today, said it has focused on investing in its existing assets over the past year, “rather than compete in a relatively supply starved investment market”.
However, the REIT expects to see more opportunities to make acquisitions this year, “provided stock is selected wisely.” Particular areas of interest include the Western Corridor, which will benefit from the Elizabeth Line, and the stops along the Western Rail Link to Heathrow, a proposed new direct rail link between Reading, Slough and Heathrow, via Maidenhead and Twyford.
The company reported a NAV increase of 6.3% to 322p per share for the year to 31 March 2018.
It follows a year of record lettings, with 26 deals signed, contributing £7m per annum – a 23.3% increase in contracted rental income to £27.1m per year.
Perkins said: “We are now reaping the benefit of the many asset management initiatives that we have been working on, particularly the decision made to speculatively develop three office schemes back in 2014.
“Each scheme has been exceptionally well received, with two of them fully let during the period and the third at 92% occupancy.”
Deals included the prelet of all 58,000 sq ft of offices being speculatively developed at 30 Lombard Street, EC3, to St James’s Place.
The FTSE 100 wealth manager has agreed a 15-year lease at a rent of £3.8m per year.
Further de-risking its development portfolio, McKay secured planning consent for a 38.5% increase in floorspace at its industrial scheme at Brunel Road, Theale, Reading. Development of a speculative 134,150 sq ft warehouse scheme is now under way, with completion due for next Spring.
McKay reported total net assets of £460.2m – up 7% on the previous year.
The initial yield was 4.1%, down from 4.6% at the previous year.
“These year-on-year movements have been driven by the strong development lettings, which are still in rent-free periods, generating a lower initial yield but a higher topped up yield,” the company said.
The group currently benefits from £190m of banking facilities, having refinanced the final of its four facilities in August 2017 and increased its existing Aviva loan by a further £10m in March 2018.
The gearing ratio of drawn debt to portfolio value as at 31 March 2018 was 31.9% – up from 31.6% at the same time last year.
McKay’s final dividend was up 14.3% to 7.2p per share.
Richard Grainger, chairman of McKay Securities, said: “While we must remain wary of the current political environment, the markets that McKay operates in and knows so well continue to prove robust and our business is well placed to deliver further shareholder value into the future.
To send feedback, e-mail Louisa.Clarence-Smith@egi.co.uk or tweet @LouisaClarence or @estatesgazette
