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Custodian REIT portfolio proves resilient against tough retail market

Custodian REIT said it benefits from a "balanced and diverse" portfolio

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High street retailers have been hit by subdued consumer spending and a shift towards online shopping

UK commercial real estate investment firm Custodian REIT PLC (LON:CREI) expects the retail market to remain tough but a diversified portfolio means it is well-placed to mitigate the challenges.

The company said the overall value of its portfolio stood at £568mln at the end of June, down from £572.2mln at the end of March, as a number of retailers closed stores and negotiated lower rents as part of an insolvency process known as a company voluntary arrangement (CVA).

The net asset value (NAV) total return per share for the period was 0.5% while the net asset value per share fell to 106.0p from 107.1p.

Further CVAs expected 

Managing director, Richard Shepherd-Cross said while there has been more resistance from landlords, he expects to see further CVAs before concerted landlord action or legislation restricts the practice. 

“In core retail locations, the risk of CVA is not one of vacancy, but of falling rents,” he added.

“It has been our experience that retailers want to continue trading from their stores post CVA but at lower rents and the widespread impact of CVA rents is hastening a fall in retail rental values.  

“We expect further falls in capital values in this sector.”

However, Shepherd-Cross said lower rents are likely to support occupancy levels as stores remain affordable.

“The desire to continue to trade from stores appears to be supported by recent analysis of retailers' sales, which strongly supports retailers retaining physical stores as part of a multi-channel sales offering,” he said.

Custodian REIT expects its out of town, retail warehouse portfolio to be more resilient to rental declines than its high street properties amid a consumer shift towards online shopping. 

Industrial portfolio delivers valuation gains

In the industrial portfolio, the company has seen further valuation gains, particularly where unexpired lease terms are longer.

Regional offices have provided “fairly stable” returns over the period as sustained demand and low levels of development restricted supply and led to rental growth, the firm said.

"Custodian REIT benefits from a balanced and diverse portfolio with 17% of income derived from 'alternative' assets, which are broadly showing resilience despite the challenges in retail markets,” Shepherd-Cross said

“Current market conditions make a strong case for maintaining our diverse portfolio, where the largest tenant is responsible for only 3.4% of the rent roll, across three properties in different locations and no more than 1.7% of rent due is from any single-let property."

The group approved a dividend of 1.6625p per share.

Quick facts: Custodian REIT

Price: 115.2 GBX

LSE:CREI
Market: LSE
Market Cap: £474.11 m
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