A heavy weighting to offices dragged the value of Picton Property Income (PCTN ) lower in the fourth quarter of last year but management hope the end of interest rate hikes will mean prices stabilise this year.

The £363m self-managed real estate investment trust (Reit) reported a 2.5% decline in net asset value to 96p in the final three months of 2023, down from 98.5p in the previous quarter.

Including the interim dividend of 0.875p per share – which resulted in an annual dividend of 3.5p or a current yield of 5.3% - the total loss was 1.6%, a retreat from the flat level seen in the third quarter.

The falls were led by a 1.5% decline in property valuations, as the 30% weighting to offices continues to blight the portfolio as the work from home phenomenon shows no signs of coming to an end, with office prices down 2.4%. Industrials, which make up 59% of the fund, delivered the strongest showing but valuations still fell 1%.

The tick down in valuations was broadly in line with the MSCI Monthly Property Index, which dipped 2.7% in the fourth quarter.

Rent reviews

The fall in valuations was somewhat offset by rising rents, which has been the widespread trend in the UK commercial real estate market over the past 18 months.

Four rent reviews overseen by Picton chief executive Michael Morris secured a 33% increase in rents, with an annual rent of £2.3m confirmed, which was 5% ahead of the September estimated rental value. Two renewed leases in the industrial sector delivered a combined annual rent of £100,000, which was a 101% increase against the previous passing rent.

Morris also secured ‘valuable residential permitted development rights’ that will allow the trust’s offices in Angel, London to be turned into flats, which will ‘maximise future disposal proceeds’.

‘This quarter we have agreed some significant rental increases, which have mitigated the impact of outward yield movements, against a backdrop of rising interest rates in 2023,’ said Morris.

‘We have maintained a well-covered dividend over the period and made good progress on specific asset management initiatives.’

He said this progress will ‘improve earnings as we reposition the portfolio to ensure it continues to meet evolving occupier needs’.

The quarter also saw Picton abandon its bid to merge with UK Commercial Property (UKCM ) after the former’s largest shareholder, Phoenix Life, failed to back the deal.

With the failed merger in the rear-view mirror, Picton chair Lena Wilson was optimistic about the outlook for the real estate sector and the trust. 

‘With capital values having seen on average a 25% write down since their 2022 peak, the outlook, assuming interest rates have peaked, will become supportive and as such we expect a stabilisation of values in 2024,’ she said.

Mick Gilligan, head of managed portfolio services at Killik & Co, said being self-managed meant the interests of the Picton management are more aligned with shareholders as they are typically incentivised by share price performance and earnings growth.

‘I am optimistic about internally-managed Reits with low levels of debt that doesn’t need to be refinanced in a few years, and have good quality tenants,’ he said.

‘Picton fits the bill here with a weighted average interest rate on its debt of 3.9% fixed for seven-and-a-half years and overall gearing below 30%.’

Gilligan noted that the UK property sector is still considering with a number of macro issues, with interest rates still high, credit conditions tightening, and ‘uncertainty over where flexible working will settle in terms of office and home mix and toughening environmental standards’.