Real Estate Investors’ canny positioning in the commercial property marketplace has left it poised to emerge as one of the big winners from the economic downturn.
By picking up poorly managed and unfundable commercial property at the bottom of the market and adding value through asset management and market expertise, the business has bucked market trends and sentiment and is set to benefit.
Chief executive Paul Bassi said “The economic climate, property and asset valuations remain subdued, yet the irony is that this is an ideal environment in which to grow and establish REI within the Midlands.”
Real Estate Investors plc is paying its inaugural dividend following half year results announced today that show rental income up 48 per cent against the same period in 2011.
Paul Bassi said: “We are pleased to report a positive first half of the year, and the announcement of our maiden dividend.
“We remain well positioned to capitalise on unstable market conditions while our existing portfolio remains stable and secure but with significant capital upside potential.”
The AIM-listed property investment firm saw rental income up 48 per cent from £1.81 million in the first half of 2011 to £2.67 million this year.
The West Midlands-based business showed a pre-tax profit of £556,000 against a 2011 first half loss of £1.81 million.
And despite continuing negative property valuations across the market, gross property assets were up three per cent from £71.2 million to £73.5 million.
Investment property assets rose by four per cent to £65.8 million. The company now has net assets of £39.4 million against £39 million at December 31, 2011. Net asset value per share rose slightly from 54.7p on December 31, 2011, to 55p.
The company has £6 million in cash and agreed borrowing facilities when and where required.
During the first half of 2012, REI refinanced £10.4 million with Aviva providing 15 year financing on fixed terms at 5.16 per cent.
Paul Bassi said: “We made £2.4 million of acquisitions in the first half year and are hopeful of making further selective acquisitions in the second half with a stable regional property market backdrop.
“While the economic backdrop remains fragile, we are able to announce our inaugural dividend of 0.5p.. The Board is committed to paying a dividend annually in October and will consider other payouts depending on activity.
“Contracted rental income has risen to £6.3 million. Valuations across the property market remain under pressure, however, our asset management and improving rental income are able to combat these pressures and we have seen a modest increase, with further growth potential.”
He pointed out that commercial property activity in the West Midlands had doubled in the second quarter of 2012 to £317 million from £167 million in the first quarter.
“This is due to improving lending conditions and growing appetite for regional assets that provide significantly better yields and capital growth potential than in London, on which the market has been focused for some time.”
Purchases during the first half have included the Apex office development in Edgbaston, for the sum of £1.690 million, let to Lombard North Central (Natwest) and Royal London Life, producing £353,502 per annum on leases expiring in December 2015 and producing an initial yield of 20 per cent.
The properties were acquired from the receivers acting for the mortgagees, Capital Asset Services (London) Ltd. The vendors acquired these properties in March 2005 for the sum of £4.525 million.
REI also acquired a part-vacant freehold property at High Street, West Bromwich, a former Allied Carpets retail store, with offices above, for £475,000. This property will be refurbished and re-let, with potential income of £150,000 per annum. The vendor paid £1.6 million in May 2006.
During this period land in Birmingham with planning consent was sold to Bromford Housing Association for £350,000.
Mr Bassi said: “Our portfolio remains stable and secure, with significant asset management opportunities that will enhance the income and capital values.
“New tenants include AFH Financial Group plc at Avon House in Bromsgrove. The letting is for a term of 11 years, with a tenant break in September 2018, at a commencing rent of £173,352 per annum and rising to £202,244 per annum at the first review.
“Additionally, following positive discussions with planning consultants, we are submitting a planning application for a 45,000 sq ft food store in Southgate Retail Park, Derby.
“Planning consents will provide significant capital upside on this asset.”
He added that REI’s focus on its regional roots was paying, literally, dividends in a marketplace that was generally one of doom and gloom.
“As our business has a very strong West Midlands and central England focus, I feel that I should comment on some of the regional economic influences that impact positively on our business and locality, particularly when so much of the national and global news is so negative,” he said
As well as the doubling of commercial property activity in the first two quarters of 2012, he pointed to factors such as £120 billion of exports from the region (the West Midlands is the largest regional exporter to non-Euro countries), and the best performing High Streets in the UK, according to PWC.
“We are seeing record residential rents in the West Midlands.
“We have companies like Jaguar Land Rover creating 1,000 supply chain jobs, a new £250 million investment by BMW, the expansion of Birmingham International Airport, and the impending completion of the £640 million New Street Station project.
“West Midlands rental growth is the largest in England and we are seeing year-on-year house price growth – all of which demonstrates the activity in the region, which we believe will positively impact upon our portfolio, and is why we are seeing improving demand and occupancy,” he said.
Turning to the prospects for the second half of 2012 and 2013 ahead, he said: “We have now established REI as a highly respected regional property investment company that has a portfolio that will deliver strong cash flow and subsequent capital growth through asset management, improving market conditions, rising rental income and lending growth from the banks.
“We have already witnessed the doubling of property activity from Q1 to Q2 in the West Midlands, and improving interest from investors and occupiers in regional property assets.
“The existing portfolio remains stable and we will seek to add to this, and take advantage of our market reputation, and preferred buyer status, but only when we identify opportunities that meet our criteria.
“We believe that these are most likely to be derived from institutional funds wishing to exit non criteria assets and distressed sales from banks and receivers.
“Market conditions remain fragile, unpredictable, yet opportunistic and we will continue to run our business prudently, with the view to growing income and enhancing capital values.”