Regional Reit (RGL ) is to use the cash from its recent capital raise to pursue planning permission for a large swathe of offices to maximise returns for shareholders.

The £207m portfolio of regional offices outside the M25 orbital road underwent a heavily discounted rights shares issue totalling £110.5m in July in a bid to tackle its enlarged debt pile, with the cash used to repay a £50m retail bond that matured last month and £26.3m used to reduce bank facilities.

Fund manager Stephen Inglis said the remaining £28.4m would be used to pay for planning consents for non-core assets, turning offices into residential homes, industrial workspaces and student accommodation.

Inglis (pictured below), who is chief executive of London and Scottish Property Investment Management, said that until now the real estate investment trust had been selling assets as offices and ‘missing out on the upside’ from gaining alternative use planning.

He noted that one former asset was sold to student accommodation group Unite (UTG) for £13.3m. Unite took the site through planning permission and then sold it for £20m.

Inglis blamed the previous lack of capital for failure to obtain planning permission, stating that it costs between £300,000 to £1m to change the use of a building, depending on the site.

‘There is the potential for very big upside but it is site-specific and not every property can be changed,’ he told Citywire. ‘We have been giving that upside away and we want to capture that… but you have to have the capital to do that.’

A ‘half or a third’ of the portfolio will be suitable for alternative use, Inglis said, with 134 properties currently vacant or close to vacancy and able to be redeveloped in the short term. Attention will then turn to properties with short terms left on the leases.

‘Our intention is not to sell the entire portfolio,’ said Inglis. ‘We want to stay invested in regional offices and improve the income and also maximise value.’

Regional Reit has been undertaking a programme of disposals of non-core assets but it has been relatively slow-going, with just £21.9m of sales undertaken in the first half, which was one of the key reasons for the equity raise.

Since the end of the quarter, two disposals have been signed, totalling £1.5m, with a further 10 sales worth £12.4m under offer and in due diligence.

At the end of June, the property portfolio was valued at £647.9m, down from £752.2m as at the start of the year. The sharp fall reflected a revaluation movement loss of £36.1m, while the fund lost £1.2m on the disposal of investment properties.

The reduction of 5.1% in the portfolio valuation over the first six months of the year did, however, compare favourably against the MSCI Rest of UK Offices index, which fell 6.4%.

Inglis said the regional office market appeared to be reaching an inflection point following the Bank of England’s interest rate cut last month.

While valuations have taken a hit, rent collection remained strong over the first half of the year, with 98% of rent collected on the trust’s 132 properties. Rent totalled £63.5m, which was a 3% dip from the end of December.

The fund continued to pay out income, declaring a first-quarter dividend of 1.2p per share and a second-quarter dividend of 2.2p per share, although both are a reduction on the 2.85p paid in the second quarter of 2023.

Deutsche Numis analyst Andrew Rees said the vacancy rate, which grew from 20% to 22%, highlighted that the occupational backdrop remained challenging and much of the capital expenditure would be required to try and stem the tide of declining occupancy and valuations. 

‘We continue to believe there remain more attractive risk-adjusted return prospects elsewhere across the property universe, including diversified commercial portfolios such as Custodian Property Income Reit (CREI ) and Schroder Real Estate Income (SREI ).’

Regional Reits’ shares rose 0.4% to 128p on Tuesday morning, putting them on a 48% discount.