Property investor Custodian REIT PLC (LON:CREI) delivered a net asset value (NAV) total return of 2.3% in the third quarter.
NAV per share at the end of September stood at 108.6p, up from 107.8p at the end of June. During the third quarter, the real estate investment trust (REIT) paid a dividend of 1.6375p (which added to the 0.8p increase in NAV per share give the total return of 2.3%).
READ: Custodian REIT has cranked rents up by 19% on average over the last year
At the end of September, the REIT’s portfolio was valued at £547.0mln, up from £537.4mln three months earlier. Custodian invested £19.2mln in five property acquisitions, one development site and one refurbishment projected and booked a £4.4mln gross profit on the disposal of two properties for an aggregate consideration of £13.1mln.
The occupancy rate had risen to 96.9% from 96.7% at the end of June.
$CREI Custodian REIT gives a quick run-down on what's hot and what's not in property circles. It's not looking good for secondary retail locations, as one might expect. https://t.co/LAgT1ivKqw via @proactive_uk #CREI #brighterir #AndrewScottTV #CapitalNetwork1
— John Harrington (@JournoJohnH) July 24, 2018
"Investment market demand has continued in Q3 from property companies, institutions, private investors and from overseas investors. While there have been marginal outflows from the open-ended funds [i.e. unit trusts] and many REIT's are trading at a discount to NAV, the demand for income-focused investments has not abated,” said Richard Shepherd-Cross, the managing director of Custodian’s investment manager, in a comment on the commercial property market outside of London.
“The rise in UK interest rates was sufficiently well forecast that it had an imperceptible impact on the market and there does not appear to be an imminent threat of meaningful rate rises in prospect,” he continued.
The investment manager observed that investment in the regional office market has been consistently strong, which has coincided with a number of the UK's 'big six' regional cities hitting record rental levels for prime offices, thanks in large part to restricted supply.
“However, we are conscious that obsolescence and lease incentives can be a real cost of office ownership, which can hit cash flow and be at odds with the company's relatively high target dividend, so we remain very selective, although open to opportunities,” Shepherd-Cross said.
On the retail side, Shepherd-Cross acknowledged there is a general move against owning retail properties, especially after a number of well-publicised collapses into administration this year by sector stalwarts.
“While the easy explanation for the changing retail market is the rise of online retailing, the real picture is much more complex. Over-gearing, poor management strategy and an inability to modernise over an extended period of time have had a more detrimental impact on certain retailers than the internet,” Shepherd-Cross opined.
“In many locations rents need to adjust to support retailers, not least because labour costs and business rates are rising,” he suggested.
"We generally feel comfortable that retail warehousing, with low rents per sq ft, 'big box' formats and free parking will be more robust than the High Street,” Shepherd-Cross revealed.
Weighted by income, retail warehouse space accounts for 18% of the portfolio while High Street retail accounts for 14%.
The largest segment is industrial property (39%) while office space (12%) is the smallest segment; if you are wondering where the remaining 17% comes from, it is in properties classified as “other”, which includes car showrooms, petrol filling stations, children's day nurseries, restaurants, gymnasiums, hotels and healthcare units.
Shares in Custodian were down a shade at 120.4p from 120.6p overnight.