2010 was another difficult year for the UK economy with bank lending remaining subdued. This lack of funding has contributed to a polarisation in investor demand with cash buyers being predominant. These investors look for well-let property where tenant demand remains high and rental growth is still achievable.
Our portfolio of retail property comes into this category. We have significantly re-profiled our portfolio in the last 5 years and disposed of £178 million of mature property where we felt we would be unable to deliver further growth. Initially we disposed of secondary shopping centres at a time when net initial yields were lower than deposit rates, yet investor demand for this type of asset remained high. More recently, we have been selling assets with long leases and excellent covenants, again to meet investor demand.
Over this period we have also been investing heavily into our asset base. King Edward Court, Windsor and Orchard Square, Sheffield account for 72% of our property portfolio, and we have spent a combined £46 million on them over the last 5 years. This capital expenditure has produced better configured units to meet modern retailer demand. These units were pre-let to quality tenants on long leases.
During 2010, we spent £0.5 million on developing and improving our properties. This produced an incremental annualised income of £0.16 million. We currently have no substantial development work underway, although we are constantly looking to improve our assets and grow rents.
Our property portfolio is now valued at £194.9 million, and our top five properties by value account for over 90% of this total. All of these properties are well-let and all of them have either delivered rental income growth over the last year or confirmed their growth potential. Across the portfolio, our average weighted unexpired lease term is 7.2 years. Over 63% of our leases by rental value run for more than 5 years and 31% for more than 10 years. We have voids of just 1.5%. All of this combines to provide resilience during this property recession.
Group rental income on a like for like annualised basis grew by 2.4% to £15.6 million compared with £15.2 million in 2009. This has been achieved against a widely reported reduction in rental levels across most parts of the country. Our top 50 tenants account for 74% of our gross rents. 93% of all rents were collected within two weeks of the December quarter day.
We disposed of Antiquarius in King’s Road Chelsea during the year for £17.82 million compared to a book value of £17.0 million as at year end 2009. This followed the completion of the lease in 2009 to Anthropologie at £1.15 million per annum and represented a net initial yield of 5.74%. We paid down our revolving credit facility by £12.75 million from the cash proceeds.
During 2010, we were appointed by Grant Thornton as asset manager on a portfolio of three shopping centres in Burnley, Cardiff and Harlow. The fund that owned these shopping centres had been placed into administration and the centres had suffered from under investment and lack of direction as a result.
LAP conducted a strategic review and identified a number of areas where the centres could be improved. We carried out a number of strategic lettings, including redeveloping shops where necessary, and applied our rigorous management controls to reduce irrecoverable costs.
At the time of our appointment, the centres were independently valued at £120 million. We marketed the centres through leading investment agents and since the year end the disposal completed at £145 million. LAP received fees from Grant Thornton for the work undertaken and we are in discussion to take on further similar appointments.
Following the financial crisis there is still much stress in the UK banking system and lack of credit at acceptable terms. As a result, we have entered into talks with a number of property funds with a view to establishing joint ventures. One of these is at an advanced stage of making an acquisition although contracts have not yet been exchanged. I am, however, confident that the transaction will conclude in the near future and we will make an appropriate announcement to shareholders in due course.
I will now report on some of our major centres.
King Edward Court Windsor King Edward Court remained fully let throughout 2010 with the exception of a small office suite. Since the year end we have been able to negotiate the surrender of leases on two shops where we had less vibrant retailers. The first of these was originally let to a musical instrument retailer at £72,000 per annum. This unit has now been re-let to Prêt à Manger for a new café concept at £85,000 per annum. This not only brings a more exciting retailer to the centre, but also a rental level equating to a Zone A level of £116 per sq.ft., a record for this part of the centre.
The second unit had previously been let to a discount book retailer. The unit is now under offer to an established, upmarket gift retailer at an increased rent. The new lease should complete soon.
In September 2010, Boots the Chemist vacated its 14,000 sq. ft. Shop, having taken a lease on the much larger, former Woolworths store outside our ownership. The lease on our shop continued until 2015. We have, since the year end, accepted a surrender of this lease in exchange for a payment of £1.025 million, equivalent to over two and a half year’s rent. We intend to divide this unit into three smaller units and incorporate the vacant first fl oor offices.
We have seen a high level of retailer interest in these units and already have offers on all of them from exciting retailers. I look forward to announcing the lettings in due course. We have made a planning application to change the shop fronts on these units and, subject to obtaining this consent, anticipate that the development will be let and completed during 2011.
Sheffield Orchard Square has remained fully let throughout 2010. As a result, we have been able to grow the rents by some 5% over the previous year as the rental levels established by our successful lettings in previous years filter through to other shops in the centre. Orchard Square is anchored by reputedly one of the most successful TK Maxx stores in the country, and most of the shops are let at rents of between £80 and £90 Zone A. We believe this to be an undemanding level for a major city centre.
Brixton Since late 2009, we have invested considerable time and effort in establishing our two Brixton markets as cutting edge retail and leisure locations. Initially we worked with a specialist marketing company to offer pop-up shops to entice new retailers into a location that had suffered over the years from high vacancies and low investment. The vast majority of these early retailers converted into full leases at market rents at the end of their trial periods. Once we had established a critical mass of new exciting retailers, word of mouth and positive press articles created suffi cient interest to ensure that these markets are now fully let for the first time in approximately 20 years.
While this project has been a success throughout 2010, we do not feel LAP has the resources to develop the Brixton Markets further. Consequently, since the year end we have agreed terms to let the two markets to In Shops Ltd, a subsidiary of Groupe Geraud, Europe’s largest private market operator. The leases are at a base rent of £817,500 per annum with a profit share on the net rent above that amount. This increases to a 50:50 profit share on any net rent above £1,017,500. There will be a saving of direct staff costs and other central overheads and therefore we expect this deal to be cash neutral at the outset.
We are confi dent that In Shops shares our belief that Brixton will become one of the most successful market areas in London. In Shops has the resources, energy and experience to enable this to take place, and we expect to benefit from its success through the profit share in the medium term.
King’s Square, West Bromwich We invested heavily during 2010 in re-gearing the leases of our anchor tenants at this shopping centre. These accounted for 29% of the centre’s gross rental income. The centre’s age meant that a number of the original leases there had less than 12 months until expiry. As a result of the re-gearing, the centre’s future is much more stable and we will be able to concentrate on driving rents forward in the future.
Other Properties As shareholders will be aware, we have deliberately sought to position the rest of our portfolio at the value end of retailing. We believe that this offers us signifi cant defensive qualities in the current economic environment as our tenants are less dependent on discretionary spending. Last year, tenant failures across the whole portfolio were limited to an aggregate rental income of £127,000 per annum. These units have now been re-let at broadly the same rent.
Outlook We remain concerned that the outlook for UK consumers will continue to impact upon retail property in general. However, we believe that the property market will experience differing levels of success dependent on location, affordability of rents and attractiveness of the individual centres. We have sold almost half our portfolio over the last fi ve years and now retain a core of quality assets in which we have invested signifi cantly. Our top fi ve centres account for almost our entire portfolio by value and these are mostly fully let on long leases. I therefore remain cautiously optimistic going forward.
John Heller, Chief Executive 15 April 2011
