SLI.L Regulatory News (SLI)

26 Jan 2009 10:00



STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST LIMITED

31 December 2008

Net Asset Value Announcement

The unaudited net asset value per ordinary share of Standard Life Investments Property Income Trust Limited at 31 December 2008 was 61.7 pence. This is a decrease of 29.2 percentage points over the net asset value of 87.2 pence per share at 30 September 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 1.00p per ordinary share for the quarter to 31 December 2008.

The net asset value incorporates the external portfolio valuation by Jones Lang LaSalle at 31 December 2008. The property portfolio will next be valued by an external valuer during March 2009 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 September 2008 to 31 December 2008.

The ungeared decrease in the valuation of the property portfolio over the quarter to 31 December 2008 was 13.6%.

Cash position

As at 31 December 2008 the Company has borrowings of £84.4m and a cash position of £44.5m (excluding rent deposits) therefore cash as a percentage of debt was 52.7%.

Loan to value ratio

As at 31 December 2008 the loan to value ratio after taking account of the cash offset was 32.4%. The gearing level was 38.9% (bank borrowings plus zero dividend preference share liability less cash divided by property portfolio).

Total asset analysis as at 31 December 2008 (unaudited)

Breakdown in valuation movements over the period 30 September 2008 to 31 December 2008

Investment Manager Commentary 

UK Property Market

Despite credit markets thawing to a limited extent over the quarter, the process of de-leveraging continues with the consequent effect on the economy, confidence and the commercial property market. All property recorded a total return of -13.5% in the three months to the end of December as capital values fell further due to the ongoing stand-off between buyers and sellers and concerns over the occupier market related to the declining economic fundamentals. Although we may see some stabilisation for the sector towards the latter part of 2009 and opportunities arising as property becomes increasingly more attractively priced compared to other assets, the early part of 2009 is likely to be another challenging period for commercial property investors.

The listed Reit and offshore property markets appear to be discounting a large part of the economic downturn and the sector remains on a significant discount to current NAV of approximately 30% to 35% for REITS, and higher in the offshore vehicles. The listed REIT sector recorded a decline of -35% over the quarter and volatility remains heightened resulting from the on-going concerns over valuations and further loan to value breaches. The Offshore property sector also recorded significant declines of -38% on average over the quarter.

The spread of returns across all sectors was narrow again this quarter and at -14.4% over the 3 months to end December, retail sector returns were more negative than offices at -13.4% and lagged the industrial sector significantly as industrials recorded -11.6% in the same timeframe. On a 12 month view, property returns were significantly negative due to the deteriorating economic environment which has been exacerbated by the credit market problems. All property, as measured by IPD,  recorded -22.5% p.a. in the twelve months to end December. Retail returns were the lowest over this period at -23.6% p.a. with offices just behind at -22.7% p.a. Although still negative, industrial returns were an improvement on the other two sectors at -20.2% p.a. up to the end of December. The negative returns over the year have mainly been driven by the reduction in capital values. Rents also remain under pressure as tenant demand falters. All property rents weakened sharply over the quarter, falling by -1.4% p.a. over the twelve months to end December compared to 0.8% p.a. at the end of the September 2008 quarter.

Unlike previous cycles, supply in this downturn is relatively restrained and with development projects struggling to get off the ground due to the lack of financing, when markets do eventually recover, the restrained future supply will be a further boost for potential returns. Currently however, as would be expected because of property demand being a function of the underlying economic fundamentals, vacancy rates are increasing as take-up falls and more supply becomes available across the market. In this environment, covenant strength is likely to be key along with a focus on income security related to tenant's financial viability. 

Investment Outlook

We anticipate another challenging year for property investors. The fundamentals supporting the market are likely to recover towards the latter part of the year as the significant global fiscal stimuli coupled with the unprecedented monetary easing and anticipated gradual thawing of credit markets once again restore confidence and liquidity to financial markets and help reduce the caution prevailing across asset classes. Although financial markets are improving, uncertainty remains elevated and the de-leveraging process currently underway looks likely to play out further.

In the context of the ongoing credit market problems, the occupier market has weakened further and vacancy rates continue their upward trend. The volatile Central London markets were at the forefront of the slowdown in demand and the effects of the downturn are now spreading out across the country and rents are weakening across all sectors. 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. We maintain our view that in the current environment, asset management initiatives and locational choices will be key to preserving income as rents generally contract. Defensive assets, i.e. prime quality buildings in the best locations, let to financially secure occupiers, are likely to be most resilient in the uncertain and challenging economic environment we anticipate across 2009

Portfolio commentary

Returns in quarter 4 were again negative, with the IPD monthly index (the Benchmark used for the fund) showing a total return of -13.5%, and a capital fall of 15%. The Company's property assets performed better than the benchmark, with a total return of -11.7%, however the greater benefit came from the high cash holding (26% of fund value), giving an investment return on investment assets of -8.8%.

During Q4 we undertook further modelling of anticipated cash flows, which lead to the Board's decision to reduce the dividend. We are committed to maximising the revenue account through controlling costs (including a reduction in the management fee) and actively managing the property assets. We have agreed terms to extend the leases on three assets although the legal documentation is not yet completed, and have put in place short term lettings on two units to reduce our exposure to vacant rates. Following the administration of Innovate Logistics we completed the sale of the property to an owner occupier so that the capital can be reinvested, and the Company does not have ongoing void costs. During the quarter voids increased slightly to 5.1%, which is still significantly below the industry standard, following the failure of MFI (one unit). We have also shown the Yates unit as void in our calculation as we are receiving no income, but it is still let to the administrator so we do not have a liability for void costs such as rates. 

There are a total of 6 lease expiries or breaks due in 2009. We are in advanced discussions with five of the tenants, with only one tenant we know will vacate, with an ERV of £50,000pa. 

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: