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BUSINESS REVIEW > United Kingdom |
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UK Business Unit Directors left to right:
Phil Redding, London Markets, Gareth Osborn, National Markets, and Kevin O'Connor, Slough Trading Estate |
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Sustained delivery of strong lettings performance
sq m (000s) |
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“Strong occupier demand leading to unprecedented levels of lettings was the consistent theme across all our UK markets, with 298,000 sq m of lettings, an increase of 62 per cent on 2006 – helping to drive vacancy to less than 11 per cent.”
Overview
Very healthy lettings
Portfolio resilience in the face of a tougher investment market
The UK property business achieved an adjusted operating profit before interest and taxation of £175.8 million, up 14.8 per cent from 2006 and reflecting the benefit of very strong profits from the disposal of trading properties, excellent lettings of new and existing buildings, rental growth largely from rent reviews and a number of surrender premiums.
Strong occupier demand leading to unprecedented levels of lettings was the consistent theme across all our UK markets, with 298,000 sq m of lettings, an increase of 62 per cent on 2006 – helping to drive vacancy to less than 11 per cent.
Investment market conditions became more challenging in the second half of the year as all classes of UK commercial real estate suffered in the face of the growing global credit crisis and concerns over future returns from property investment. Following our previously announced stance of having been ‘net sellers’ in the UK market, we took the opportunity to sell £232.8 million of investment and trading properties (at £18.5 million profit over book value) in the first half of the year. However, no significant disposals were made in the second half of the year. Similarly, we invested our capital in a relatively modest £103.3 million of largely special situation acquisitions.
By contrast, the healthy state of our occupier markets gave us the confidence to maintain a substantial development programme and we invested capital of £142.5 million in developments. Encouragingly, of the 116,688 sq m of new building completions, 55 per cent are currently let or sold. Lettings from developments generated £7.9 million of annualised new rental income.
The decline in UK investment market conditions saw UK commercial property values fall across most sectors in the second half of 2007, with IPD reporting sector average falls in value of 11.7 per cent during that period. Industrial property faired relatively well with an average 10.8 per cent reduction according to IPD and this puts into context the 9.5 per cent year on year (11.3 per cent since the half year) reduction seen in our portfolio valuation.
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Strategy
Our broad strategy in the UK remains unchanged, which is to create value by:
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acquiring larger estates or assembling a critical mass of properties within an area, enabling customers to expand their businesses within our holdings and facilitating the cost-effective provision of services |
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disposing of assets where there are limited opportunities to add value or where they are not located in one of our key clusters |
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undertaking developments of new sites |
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pursuing and delivering redevelopments that allow us to effectively replace older buildings and recycle the portfolio whilst retaining key holdings |
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working closely with our customers to provide a level of service that contrasts positively with other landlords. We regularly measure customer satisfaction to ensure we are delivering on this objective |
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By space the UK business comprises approximately 5 per cent logistics properties, 85 per cent other industrial, 7 per cent offices and 3 per cent retail. Consequently the UK business provides a range of building sizes and product types, from 50 sq m workshops to ‘big box’ logistics warehouses of over 10,000 sq m. We have 79 separate holdings and we serve approximately 1,470 customers.
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New Business Unit Structure
During 2007 we restructured the UK business into three geographically organised business units – the Slough Trading Estate, London Markets and National Markets. This structure is an evolution of the successful move to a regional structure which started over two years ago. The new structure gives more critical mass to the business units and facilitates our teams concentrating more strongly on developing and managing clusters of property in our chosen markets. These clusters include major holdings such as the Slough Trading Estate itself and Heywood Distribution Park, Manchester, but also groupings of smaller estates that can increasingly be managed as a single cohesive entity due to their geographical proximity.
The advantages of this approach include, for example, marketing leverage – once the cluster has a clear identity it can be promoted as a whole. Good illustrations of this approach already working include ‘the LHR.com’ and ‘Bristolworks’ (www.theLHR.com and www.Bristolworks.co.uk). The new structure also better allows for the accumulation of knowledge and experience because the team allocated to a particular cluster can develop close relations with local customers, building up superior knowledge of economic drivers and local market characteristics. These benefits are being reinforced by the appointment of regional managers to head up each identified cluster. Networking benefits are also optimised with contacts and reputation being built up with business sectors and shared at networking events. Service delivery is improved, with the standardisation of processes or procedures to deliver a consistent high level of services. Perhaps most evidently there are also economies of scale opportunities with more efficient procurement.
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Disposals and acquisitions
Disposals |
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| Location |
Price
£m |
Gain/(loss)
over book
value £m |
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| Elstree |
20.5 |
0.9 |
| Basildon |
29.9 |
(0.1) |
| Farnborough |
23.8 |
9.7 |
| Gloucester |
9.6 |
(0.4) |
| Huddersfield |
29.7 |
3.6 |
| Cambridge |
13.8 |
3.5 |
| Various |
101.1 |
0.3 |
| Other |
4.4 |
1.0 |
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Acquisitions |
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| Location |
Price
£m |
Size
sq m |
Annual
Rental
Income
£m |
Initial
Yield
% |
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| Enfield |
12.6 |
29,800 |
1.0 |
7.9 |
| Feltham |
6.1 |
3,000 |
0.3 |
4.3 |
| Colnbrook |
26.5 |
11,300 |
1.1 |
4.1 |
| Frimley |
3.8 |
2,400 |
0.2 |
5.1 |
| Bristol |
21.3 |
32,800 |
1.4 |
7.0 |
| Heston |
32.7 |
14,900 |
1.6 |
4.9 |
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With yields at historic lows during the first half of the year, it was challenging to identify potential acquisitions that would create value for our shareholders and, accordingly, we made only a few, very selective purchases. These conditions, however, enabled us to dispose of various non-core assets. The largest transaction concluded in 2007 involved the sale of six smaller estates in Coulsdon, Guildford, Huntingdon, Isleworth, Weston and Wokingham for £101.1 million and the simultaneous acquisition of the Airlinks Industrial Estate in Heston (near Heathrow airport) for £32.7 million. The Airlinks Industrial Estate is a fully let industrial and warehouse estate extending to around 15,000 sq m, but contiguous to our existing Heston Centre Estate and providing opportunities to add value from the combined active management of customers.
Further details on these and other acquisitions included: |
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Two purchases near to Heathrow – Atlas House, North Feltham Trading Estate extending to 3,043 sq m producing £0.3 million per annum, let to UPS; and Lakeside Industrial Estate, Colnbrook extending to 11,326 sq m producing £1.1 million per annum let to DHL. Both offer well-secured income and medium-term redevelopment opportunities |
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Morson Road, Enfield – a well-located 5.2 hectares site producing £1.0 million per annum of short-term income |
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South Liberty Lane, Bristol – 32,826 sq m Industrial Estate producing £1.4 million per annum complementing other existing well-let estates in and around Bristol resulting in over £5.8 million of income |
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Albany Park, Frimley – 2,366 sq m industrial building adjacent to our existing Frimley Holdings. |
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In addition to the six estates referred to above, investment property disposals included: |
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Juniper 1 & 2, Basildon – a converted factory building and adjoining modern estate extending to 40,950 sq m producing £1.8 million per annum (including rent guarantee) |
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The Ringway Centre Huddersfield – 1970’s industrial estate developed by SEGRO extending to 24,338 sq m producing £1.4 million per annum |
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Javelin Park, Gloucester – 11.3 hectare site |
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At Farnborough, the sale of five hectares of land for residential development to Redrow Homes for £18.2 million gave rise to a trading profit of £9.5 million. This is a good example of value being extracted by exploring alternative uses. Also at Farnborough, a 1.5 hectare hotel site and a site for a crèche were sold. At Centennial Park, Elstree, we completed and sold 21 individual industrial units to occupiers and investors for £12.3 million (7,253 sq m), sold a 1.4 hectares site for a hotel development for £4.6 million and sold a 0.9 hectare site to Business Homes for £3.6 million.
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Customer and Asset Management
In 2007 a record 298,000 sq m of buildings were let, securing annualised rents (including licence fees) of £25.5 million per annum. This demonstrates both the robustness of our underlying occupier markets and our success in meeting customer needs with a well-timed and focused supply of attractive properties in good locations.
Major lettings we secured included: |
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| Customer |
Building Type |
Location |
Size
sq m |
Annual Rent
£m |
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| Thales |
Industrial & Office |
Crawley |
34,500 |
5.0 |
| Interconnect |
Industrial |
Slough |
7,200 |
0.8 |
| Rackspace |
Industrial |
Slough |
4,700 |
0.5 |
| Agilent |
Office |
Winnersh |
1,900 |
0.5 |
| Red Hat |
Office |
Farnborough |
2,000 |
0.4 |
| Norbain |
Office |
Winnersh |
2,900 |
0.4 |
| Savvis |
Industrial |
Slough |
5,700 |
0.7 |
| Wilkinsons |
Retail |
York |
3,700 |
0.6 |
| Eddie Stobart |
Industrial |
Heywood |
9,700 |
0.5 |
| Barons |
Industrial |
Farnborough |
2,900 |
0.5 |
| Character Options |
Logistics |
Heywood |
12,200 |
0.5 |
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Pre-lettings agreed during 2007 included: |
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| Customer |
Building Type |
Location |
Size
sq m |
Annual Rent
£m |
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| O2 |
Office |
Slough |
10,200 |
3.0 |
| Harris Systems |
Office |
Winnersh |
6,700 |
1.8 |
| Jacobs |
Office |
Winnersh |
11,100 |
3.4 |
| Leading Bank |
Industrial |
Slough |
13,900 |
1.8 |
| MicroChip |
Office |
Winnersh |
2,800 |
0.6 |
| Lansdon |
Industrial |
Camberley |
4,000 |
0.4 |
| Wellman |
Industrial |
Portsmouth |
3,400 |
0.3 |
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| Resilient UK portfolio, good occupier demand, high customer service ratings |
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Prime quality portfolio, valued on a 6.1 per cent equivalent yield £3.5 billion year end value |
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9.5 per cent valuation decline (11.3 per cent since 30 June 2007) |
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Record 298,000 sq m of lettings, up 76 per cent, vacancy down below 11 per cent, 8.5 per cent underlying |
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Divestments of £184 million at £19 million premium over book value |
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Developments increased annualised rental income by £8 million |
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Customer satisfaction
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| Percentage of customers leasing SEGRO buildings who rated their overall satisfaction levels with SEGRO’s service as either ‘good’ or ‘excellent’. |
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By rental value, 49 per cent of lettings in 2007 were to existing customers, underlying the importance we attach to building strong relations with our occupiers. 30 per cent of lettings were new buildings, let for the first time. The buildings returned during the year represented 217,000 sq m (with £14.7 million per annum of related rental income). The net absorption of space was 81,000 sq m and will generate £10.8 million per annum of annualised net new revenue. With the overall vacancy rate at 10.8 per cent, down on 2006 and with the underlying rate (stripping out planned vacancy relating to new acquisitions or recently completed developments) at the year end of 8.5 per cent, 2007 was clearly a year of strong letting performance.
Specific letting successes are highlighted in the previous tables. Particularly important projects included the 34,000 sq m letting of a major office and industrial facility for Thales at Crawley, following completion of this build to suit development. The 10,200 sq m pre-letting agreed with O2 to expand their headquarters facility at the Bath Road in Slough will see their total space on the estate increase to 25,466 sq m (£6.6 million per annum rent roll).
This project was a particularly good example of SEGRO working flexibly with a customer, building on our established relationship. Two new data centre lettings on the Slough Trading Estate are further evidence of the attractiveness of the Slough Trading Estate for this type of operation.
Winnersh Triangle also secured some particularly impressive lettings towards the end of 2007, with a £3.4 million pre-letting to Jacobs and lettings to two electronics sector companies – Norbain and Microchip, both existing occupiers on the estate. With the retention of Virgin/NTL, this positive activity is evidence of the continuing attractiveness of Winnersh due to its location and its excellent communications.
Rent reviews and lease renewals in respect of leases with passing rents of £12.4 million per annum produced an uplift of £0.7 million. The rental growth demonstrated was 1.4 per cent, ahead of IPD at 1.2 per cent. Within the 1.4 per cent we achieved on average 3.0 per cent on rent reviews.
As a result of core asset management skills being applied and the effects of development completions, acquisitions and disposals a gross uplift in property rental income of £30.2 million had been achieved by the year end.
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Development
While take-up of space was very positive in 2007, we are ever mindful of both local and wider market conditions and, in the context of a potential slowdown in the UK economy, speculative development is now being balanced with an increasing proportion of pre-let schemes. In 2007 116,688 sq m of projects were completed, on time and within budget, and of this new space, 55 per cent had been let or sold by the year end. At the start of 2008 53,483 sq m was under construction in the UK, of which 64 per cent had been pre-let with 36 per cent being speculative.
Pre-lets remove the risk associated with speculative development and enable our customers to enjoy a bespoke facility designed to suit their particular requirements. Our success in attracting major organisations to Winnersh Triangle Park and the Slough Trading Estate has been particularly encouraging. However with some sites not suited to pre-letting and certain occupiers unable to make advance commitments, buildings will continue to be developed speculatively – albeit in a way that carefully manages our overall exposure. One of the attractions of our business model is that the development ‘tap’ can be turned on or off relatively quickly and, accordingly, as in 2007 we expect to flex the level of speculative development starts in 2008 according to the economic outlook as it progresses during the year.
Longer term, the UK has a very attractive bank of development opportunities, comprising the ability to develop up to 618,000 sq m of business space, with future capital expenditure of some £836 million and incremental rental income of approximately £95 million per annum (at current prices). This programme is based on the UK’s current land holdings of some 150 hectares, comprising both greenfield sites and brownfield redevelopment opportunities.
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Empty Business Rates
New provisions are being introduced by the Government in relation to rates to be paid on unoccupied industrial property after a period of six months. Although the resulting cost increase could be as much as £8 million in a full year, a firm of specialists has been appointed to challenge rating assessments and to check all payments. |
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LHR1, a new development in Hatton Cross, UK, close to Heathrow Airport. This 29,432 sq m warehouse facility provides an
ideal location for logistics distribution, with the Heathrow Cargo Centre within 2.8 miles and Heathrow Terminal 4 only 1.5 miles away. |
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