SLI.L Regulatory News (SLI)

27 Oct 2008 11:00



STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST LIMITED

30 September 2008

Net Asset Value Announcement

The unaudited net asset value per ordinary share of Standard Life Investments Property Income Trust Limited at 30 September 2008 was 87.2 pence. This is a decrease of 14.1 percentage points over the net asset value of 101.6 pence per share at 30 June 2008.

The net asset value is calculated under International Financial Reporting Standards ("IFRS") and includes a provision for payment of a proposed interim dividend of 1.69p per ordinary share for the quarter to 30 September 2008.

The net asset value incorporates the external portfolio valuation by Jones Lang LaSalle at 30 September 2008. The property portfolio will next be valued by an external valuer during December 2008 and the next quarterly net asset value will be published thereafter.  

Breakdown of NAV movement

Set out below is a breakdown of the change to the unaudited net asset value per share calculated under IFRS over the period 30 June 2008 to 30 September 2008.

The ungeared decrease in the valuation of the property portfolio over the quarter to 30 September 2008 was 7.6%.

Total asset analysis as at 30 September 2008 (unaudited)

Cash position

As at 30 September 2008, the Company has borrowings of £84.4m and a cash position of £43.3m (excluding rent deposits) therefore cash as a percentage of debt was 51.3%.

Loan to value ratio

As at 30 September 2008 the loan to value ratio after taking account of the cash offset was 28.3%. The gearing level was 33.7% (bank borrowings plus zero dividend preference share liability less cash divided by property portfolio).

Breakdown in valuation movements over the period 30 June 2008 to 30 September 2008

Investment Manager Commentary 

UK Property Market

The re-pricing of UK property continued throughout the third quarter. Uncertainty and heightened risk aversion resulting from the ongoing credit market problems are having a significant impact on sentiment and overall confidence in the sector. All property recorded -4.8% in the three months to end September which was a further decline on last quarters -2.7% return. Given the continuing financing constraints, elevated uncertainty and projected impact on the real economy, capital values are likely to continue to fall further. At the same time, deteriorating occupier markets will lead to falling rental levels. Both of these factors are likely to result in a further challenging period ahead for property investors. 

Although volatility remains heightened, returns in the FTSE EPRA/NAREIT UK listed sector improved to 3.4% over the quarter. This was also the case in the offshore sector which recorded -1% (approx) on average in quarter 3. The listed sector remains on a significant discount to current NAV of greater than 30% on average, pricing in further falls in capital values. 

Rents fell during the quarter at the All Property level in the 3 months to end July and also in the 3 months to end August and to end September. These are the first quarterly declines in rents recorded by the monthly IPD index since late 2003 and this reflects deteriorating tenant demand in all the sectors and increased occupier caution. As a result of the weakening economic fundamentals, voids have generally risen from the start of the year. Voids currently stand at 9.3% and the largest proportional increase has been in the industrials sector with the void rate now at 12.6%. As anticipated, over the quarter, secondary assets yields increased by a larger percentage than higher quality assets. This is a trend that we expect to continue.

Investment Outlook

With the economic fundamentals deteriorating sharply as a result of the prolonged and sustained credit market problems, the anticipated challenging year of negative returns ahead is likely to be worse again still due to increased risk aversion, frozen wholesale lending markets, the associated banking woes and the consequent knock-on effects for the economy. It is likely that the duration of the downturn may be more prolonged and sustained than the market had generally been expecting last quarter. The government measures to support the banking sector should help reduce uncertainty somewhat and will hopefully re-build confidence. It is debatable whether the measures go far enough and it may be some time yet before credit markets return to a semblance of normality. 

In the context of the continuing financial market problems, the read across for the 'real' economy

is that economic prospects have deteriorated further and recent economic data bears this out. For example, the sharp contraction in the manufacturing and service sector in August along with forward looking data suggests that these trends will continue. The downside risks to our forecasts crystallised further over the quarter and as widespread de-leveraging continues at both a consumer and corporate level it is likely that investment and expansion decisions are likely to be reduced further. Occupier demand, particularly in the volatile Central London markets has weakened markedly over the quarter and already generous incentive packages have increased further. This is also the case for vacancy rates which although starting at relatively low levels have moved out again over the quarter. In the current challenging environment we continue to expect single digit returns over the next few years, mainly resulting from properties stable income return and economic recovery in 2010.

Portfolio commentary

Q3 was a disappointing quarter. The property portfolio decline of 7.6% was worse than the IPD monthly index of -6.2%. The main reason for the underperformance was that one of our larger tenants, Innovate, went into administration. The tenant was assessed by D&B as a 5A1 covenant, low risk tenant right up until it went into administration. Innovate operated a logistics business specialising in frozen foods, and operated from the Company's holding in Scunthorpe. We have secured income until early 2009 at the contracted rate, and agreed terms to sell the building to an operator who has purchased part of the Innovate business, but the value reflects vacant possession values. This one problem alone knocked 1.5% off returns for the quarter, but no further write downs on the property are expected. We also suffered on one of our larger properties in London, where the market rent for the cinema has been reduced by the valuers from the level Cineworld offered before the OFT ruling, to a level that reflects current interest. The Company's valuers have also taken a cautious stance on a number of short leases / imminent break clauses, which we think is appropriate in the current market. Unfortunately, these hits coincided with an adverse SWAP movement. 

Despite the poor quarter we continue to concentrate on protecting capital values where we can, and maximising current and future income. No purchases were made during the quarter, as we believe that holding 23% of the fund in cash is still the right thing to do until we see real value. Whilst transaction volumes are low, and pricing under severe pressure, we have also not marketed any property for sale. We have however, completed on the sale of a 0.4 acre plot of land in Witham to the adjoining owner, and agreed terms for the sale of a cold store unit in Scunthorpe. 

Terms have also been agreed to let the vacant office suite at White Bear Yard, for a lease renewal in Queen St Bristol, and rent review settlements in Skelmersdale and Bathgate. The Company had exposure to MFI and Ethel Austin (one unit each) and in both cases the management buy out from the administrator has confirmed they want the unit included in their retained stores. We did not have such luck with the unit let to Yates, and have commenced marketing of the unit. 

For Q4 the focus remains on protecting the income stream as we expect a difficult environment for occupiers. We will continue to look for opportunistic purchases where we believe there are forced sellers. The Company is in good shape to weather the storm, and the high cash weighting gives it flexibility, we do not want to do anything to weaken this position and retain a cautious outlook.

All Enquiries:

The Company Secretary

Northern Trust International Fund Administration Services (Guernsey) Ltd

Trafalgar Court

Les Banques

GY1 3Q1

Tel: 01481 745439

Fax: 01481 745085

APENDIX 1

Historical adjusted IFRS NAVs per Ordinary Share are as follows: