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Palace Capital Plc

Palace Capital's regional focus keeps growth credentials intact

The provincial centres such as Birmingham, Manchester and Leeds where its commercial properties are situated are buoyant thanks to a combination of rising demand and lack of supply. Newcastle, for example, has just six months of unlet office space based on the pace of recent lettings says Neil Sinclair, Palace’s chief executive.

Liverpool
One Derby Square in Liverpool

Largely swerving London’s property market has been a smart move for Palace Capital Plc (LON:PCA).

Provincial centres such as Birmingham, Manchester and Leeds where its commercial properties are situated are buoyant thanks to a combination of rising demand and lack of supply.

Newcastle, for example, has just six months of unlet office space based on the pace of recent lettings says Neil Sinclair, Palace’s chief executive.

WATCH: Palace Capital PLC focused on income, growth with some added development 'spice'

Structural anomalies like that are meat and drink to the property veteran who has built Palace around Britain’s university cities and towns.

Permitted development rules designed to boost residential space have sparked a rush of conversions of offices into flats and lofts which has left shortages now that business activity has picked up again.

Sinclair is also crossing his fingers that the HS2 rail extension will get the green light, which will only add to the North’s resurgence.

New PM Boris Johnson has already indicated he is in favour even with a price tag of £100bn.

HS2 will connect Hull, Leeds, Manchester, Liverpool, Newcastle and Sheffield - all places (bar Hull) where Palace has properties.

Offices nearly half portfolio

At present, city centre offices make up 47% of the portfolio.

Retail accounts for 10% though within that there are tenants such as fast-growing Aldi, Tesco and Pret so it has been relatively unaffected by the high street/CVA crisis seen elsewhere.

Others. though. have cottoned onto the good value available in the regions and obvious bargains are becoming hard to find says Sinclair.

“Prices that might have been attainable nine to twelve months ago no longer provide sustainable value,” said the last annual statement.

Palace has reined back its acquisition programme as a result.

The main market-listed group bought only one property in 2018 –  a close-to-fully let retail and office property at One Derby Square, Liverpool for £14mln.

Changes have also been made to plans going forward.

Reversionary potential

Over the next year, the priority is to tap the reversionary potential and redevelopment opportunities within the existing portfolio.

Lease restructuring and improving occupancy and value through refurbishments and developments will be key to this.

Sinclair says it is very hard to grow organically at present”, he says, but corporately might be another option.

Palace recently took a 5% stake in fellow provincial commercial property specialist Circle Property.

“An opportunity to buy the shares cheaply,” says Sinclair.

Palace is also undertaking its own development in York – the Hudson Quarter - comprising office and residential space to add some ‘spice to the mix’.

Costing £35mln, the site is a minute away from the city's railway station.

Completion is expected early in 2021 with the complex composed of 127 apartments, 34,500 sq ft of offices and 5,000 sq ft of commercial space.

REIT from August

Palace also became a real estate investment trust or REIT from 1 August.

REITs must distribute at least 90% of rental income to shareholders, while the company no longer incurs corporation tax on its rental profits.

Net assets will rise with the absence of deferred tax liabilities.

Sinclair says the company had been considering the REIT change for a while but now with a property portfolio worth £286mln, it is sufficiently large to warrant the step.

Recent acquisitions had also come with substantial carried-over losses, which lessened the tax benefit.

Sinclair hopes REIT status will reduce the current discount to asset value and give it more scope to use its shares to build the business.

At 291.5p, the shares are currently 28% below the March 2019 net asset value of 407p (2018 415p).

The dividend was held at 19p to give a yield of 6.5%, again another hefty prop to the share price.

Palace also £22.9mln of cash from its £145mln debt facility available if the right deal did come along.

A growth company

Sinclair is confident Palace can continue to grow even if the market currently is not looking favourably on property.

Palace’s portfolio achieved a Total Property Return of 7.1% for the year against the MSCI IPD index comparable of 4.6%, for example.

People are also now looking to the north as they can recognise there is talent there now.

Graduate retention. for example. is on the rise and the days when students headed for London as soon as they got their degrees is over, he says.

 “We are confident we have a growth company and we are working hard to get the share discount narrowed.

Quick facts: Palace Capital Plc

Price: £2.83

Market: AIM
Market Cap: £129.62 m
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