Regional Reit says 'only way is up' as it sets out turnaround plan

The regional office investor has suffered in the property slump but believes its turnaround plan will start to bear fruit in 2026.

Heavily-discounted Regional Reit (RGL ) is on the ‘path to recovery’ but shareholders will have to sit tight until 2026 to see the benefits of its turnaround plan.

Last year proved to be a difficult period for the portfolio of regional offices outside of the M25 orbital road. The portfolio valuation fell 8.2% on a like-for-like basis to £622m over the year to the end of December. 

Today, Regional Reit trades at a 51% discount to its net asset value (NAV).

Road to recovery

Regional manager Stephen Inglis acknowledged that his trust was the ‘hardest hit company in the hardest hit sector’ but said he has a plan to turnaround performance.

The crux of the recovery is the £110m raise Regional completed last summer. This was underwritten by Bridgemere Group, which was set up by Stephen Morgan, the founder of Redrow.

Morgan had been an early investor in Regional before its IPO in 2015 but gave up his shares due to his interest in Redrow.

‘It was actually his shares we listed in 2015,’ said Inglis.

Morgan came back into the Regional fold after seeing a press leak that said the trust was considering a capital raise. At that point, he had sold out of Redrow, which had been acquired by Barratt Developments, now Barratt Redrow (BTRW).

Inglis said the raise has ‘transformed the balance sheet’ and put the trust on the ‘pathway to recovery’.

The plan is to offload 20% of the portfolio, 5% of which is non-performing and vacant assets that Inglis considers ‘small and messy’.

The other 15% are ‘value-add’ properties where Inglis believes he can increase their sale price by making improvements. In some cases, the team will change planning permissions to make the asset more desirable, such as turning offices into residential homes.

Inglis noted Morgan’s view that ‘now is the time to apply for planning applications given the government’s wish to be proactive’. Local authorities also have quotas to meet for housing, he added.

Over the past three to four months, Inglis said any planning appeal against a residential development has been lost because ‘central government is sending the message that it is positive on development’.

Active asset management

For the properties that Inglis wants to keep, he will focus on active asset management. This includes bringing EPC ratings up to A or B, which will underpin performance.

While it has not become statute yet, the commercial property marketplace is anticipating that all assets will have to hold an A or B EPC rating to prove their environmental credentials by the end of 2030.

Inglis said it is ‘now part and parcel of the marketplace’ that this will happen and tenants do not want to be in non-conforming properties.

Just under 60% of Regional’s assets are A or B-rated and Inglis has a host of projects planned to upgrade the remainder over the next 24 months, at a cost of £22m.

The shift to higher EPC ratings is tightening an already tight supply of office space, and Inglis said tenants continue to chase a small pool of properties. This will be compounded by the loss of office space to other uses, such as residential.

In addition, many buildings from the 1980s and 1990s are becoming operationally obsolete and are being demolished.

While Inglis is positive about the plans to improve performance, he said investors will have to wait to see the results as there will be a lag on the financials.

He estimated that income benefits of the turnaround are likely to be seen in early-to-mid 2026 and the first sales of value-added buildings will be at the end of this year or the beginning of 2026.

The timeline for changing planning permission and selling an asset to, for example, a residential property developer is around 18 months.

On top of this, he believes the ‘market should re-rate at some point’, with the CBRE predicting offices will outperform over the next five years. This should  encourage investors back to the sector, which hopefully means a recovery becomes ‘a self-fulfilling prophecy’.

‘The only way is up,’ said Inglis.

‘From a low base we have recapitalised and we have capital to invest, and we should see the benefit of that in the mid-term.’

Over the past three years, Regional Reit’s shares have fallen 82%, which compares to a 26.1% share price decline by the average trust in the AIC’s UK commercial property sector. The trust currently yields 8.1%.