2009 was again a challenging year for the property sector. The difficult times experienced in 2008 when the credit markets effectively collapsed, continued into the first half of 2009. Retail property values, as measured by IPD, fell from peak to trough by some 45%, and no property portfolio seemed immune from this general markdown. The investment market, however, started to stabilise over the summer and a return of good demand from cash rich buyers meant there was a surge in value for properties that fulfilled certain criteria towards the end of the year.
Buyers that have been most active in the investment market recently are generally looking for stable bond-like income from property during this period of historically low interest returns. Therefore, those properties which attracted the interest of the investment market have needed strong cash flows from quality covenants.
LAP’s property investment portfolio was valued at £213.6 million at 31 December 2009. Our top three properties accounted for 73% of this figure. All of these properties are fully let, with the exception of one small unit within a future development site at our centre in Sheffield. They also have long single leases to strong covenants or are multi-let but with rental income that has increased over the last 12 months.
Gross rental income from our property portfolio has increased to £17.1 million during 2009 from £16.8 million the previous year. This is a significant achievement in the current environment and demonstrates the strength of our properties and of our rent roll. Our top 50 tenants plus the income from the car park at King Edward Court, Windsor account for 80% of our gross income. Almost all of these tenants are household names and some 74% by value of our leases have more than 5 years to run.
We collected 95% of cash owed to us within 2 weeks of the December 2009 quarter day. Within our portfolio, vacant units account for just 2.2% by rental value, 0.7% of units are let to tenants on a temporary basis, while 3.4% of our rental income has moved from being received on a quarterly basis to being received on a monthly basis. In 2009 ten tenants went into some form of insolvency accounting for £681,000 per annum. Of these, 7 leases with a rental value of £739,000 per annum have been re-let. In 2010, to date, we have lost one further tenant accounting for £26,000.
During the year we invested £3.5 million into developing and improving our property portfolio. These developments were all carried out with prelets in place, and have led to an incremental income of £858,000, which represents an annual return on investment of some 25%.
We sold or exchanged contracts to sell three properties during the year, of which two completed in the financial year. In all three cases, we felt that the assets in question would demonstrate minimal rental or capital growth over the medium term. The first property to be sold was a block of shops in Solihull for which we received £11.5 million. We had carried out two recent lettings there that had enhanced the rental value of the block, and we felt the property would be unlikely to show further rental growth for some time.
The other two properties sold were both in Islington. They had been acquired as part of the London Portfolio in 2006. The Mall, which is the larger property, was sold for £6.6 million. During the year we had successfully appealed an earlier refusal for consent to convert the Mall from an antiques arcade to a single shop. The application was made after pre-letting the entire building to Jack Wills, the fashion retailer, at £367,500 per annum. The cost of the amalgamation works and associated fees was £0.8 million and the property was handed over to the tenant on time and on budget in October 2009. The property was disposed of in December to show a profit over book value of £1.6 million.
The third property was a single shop adjacent to The Mall which was let to Foxtons, the estate agency. We achieved £3.8 million for the freehold of the building which equated to a net initial yield of 5.75%. This showed a profit over book value of £0.6 million. This sale was completed in January 2010. Following these disposals our estimated rental income still stands at £17.4 million per annum.
Windsor At King Edward Court in Windsor, the Centre returned to full occupancy having lost two retailers to some form of insolvency in December 2008. The two units that became vacant were on either side of Robert Gatward, a chain of upmarket jewellers who had recently taken over an existing jewellery business within the Centre. This presented an opportunity to extend and amalgamate all three units to create better configured space with more visible frontage.
We obtained planning consent for the works during the year and pre-let the larger of the shops to Robert Gatward, who have significantly increased their retail space. Another unit has been let to Fat Face, the fashion chain, while the remaining space has been taken by Mystique Lingerie.
The combined rent of the three units is £295,000 per annum, a 42% increase over the previous passing rent. In addition we have managed to increase Zone A rents to over £115 for the shops fronting onto the principal mall, a record for this part of the Centre. The total cost of the deal, including all tenant incentives, has been approximately £0.5 million.
The total income for King Edward Court now stands at a record £7.8 million per annum, an increase over the year of 6.8%.
Sheffield Orchard Square continues to trade well following the significant developments that we have carried out at this centre over the last few years. The shops remain fully let with the exception of one small unit that forms part of a future development site.
The income from this centre reached £3.0 million per annum in 2009 compared to £2.8 million the previous year, and 78% of the leases have more than 5 years to run. We have previously reported to shareholders that during 2009 we let a prime shop fronting Fargate to Republic, the fashion retailer, at a record rent per square foot for the city.
The London Portfolio We successfully completed the transformation of the Antiquarius building from an antiques arcade to a large single unit with approximately 16,000 square feet of retail space. The entire building has been let to Anthropologie, the US fashion chain, at a rent of £1.1 million per annum. The apartment to the rear of the building which we refurbished in 2007 has also been let at a further £50,000 per annum.
The development required listed building and freeholder consents, which were obtained in April. The total cost of the development has been £1.96 million, and the net incremental rent is £592,000. Anthropologie took possession of the building in October 2009 and has recently commenced trading following an extensive period of fitting-out.
At our markets in Brixton, South London, we have focused over the last year on improving occupancy and increasing the footfall across both of the markets that we own there. This has been particularly the case with those units in Brixton Village, one of the two markets, that have historically been hard to let away from the main pedestrian flows. We have enjoyed some success through the introduction of flexible leases for an initial 3 month trial period. These have only been available for retailers who we believe will add substantially to the quality of the tenant mix.
The result of this initiative is that Market Row, the more successful of the markets, remains effectively fully let while Brixton Village now has 90% occupancy for the first time. Of the 17 tenants that commenced trading on flexible leases, 10 have now converted to full leases at a market rent. As a result the rental income for these two properties has increased by 9.4% over the last 12 months.
Remainder of our portfolio The remainder of our portfolio continues to trade well in the current difficult economic environment. In addition to those properties mentioned above, our portfolio has been deliberately concentrated into locations where value retailing and day-to-day shopping is prevalent. We are confident that these locations will continue to trade at an acceptable level regardless of wider economic difficulties as they are less dependent on discretionary spending.
Outlook The UK economic recovery continues to be fragile with a large rise in consumer savings and a low level of confidence. In addition there is less credit available for consumers, small businesses and property companies. We do not expect bank lending to return to the levels of 18 months ago in the near future.
Consequently, we expect the polarisation already apparent between prime and secondary properties to continue to widen. Given the nature of our portfolio, of which 73% is in three high quality properties that can all demonstrate strong cash flows, we remain cautiously optimistic going forward.
John Heller, Chief Executive 16 April 2010
