The ongoing recovery in the West End has helped tip the scales in the favour of Balanced Commercial Property Trust (BCPT ) following one of the worst quarters for UK real estate on record.

Annual results yesterday confirmed the £624m closed-end property fund, the larger of two real estate investment trusts (Reits) run by Columbia Threadneedle, suffered a 9.2% decline in net asset value (NAV) last year driven by an underlying 6.5% drop in the total portfolio return. This, in turn, was driven by a 10.5% fall in capital values offset by a 4.5% income return – meaning on an underlying basis the trust beat the MSCI UK Quarterly Property index, which fell 8.9% in 2022.

The outperformance was driven by the continued recovery in the fund’s largest holding St Christopher’s Place, a retail estate near London’s Oxford Circus which was a dark spot on performance during the pandemic, but returned to capital growth for the first time since 2018.

Fund managers Richard Kirby and Daniel Walsgrove had in recent years seen prices fall and yields rise with the estate valued 21% less than before the 2020 pandemic. But as activity picked up in the West End, the flagship asset comprising 172 units and 40 buildings in retail, leisure, residential and offices, had become BCPT’s best performer.

Kirby said 2022 marked ‘a stabilisation and recovery in the central London retail market, assisted by a return to offices after the Covid-19 pandemic and the opening of the Elizabeth Line at Bond Street.

The managers had repositioned St Christopher’s Place towards the food and beverage sector which ‘drives footfall, consumer spend and dwell time’ and offers longer leases alongside a ‘higher rental tone’, he said.

‘The strategy has begun to yield tangible results: the estate is outperforming the wider West End in terms of footfall recovery… Strong tenant retention has maintained the income profile, while occupier demand across the holding’s sub-markets has seen the estate’s rental value grow during the course of the year,’ Kirby reported.

High quality offices

While retail has been the best-performing sector, it is not the largest weighting in the portfolio at 17.4%. Offices make up the largest portion of the fund at 31.6% and delivered a decline in total return of 7.2% over the period, although it beat an index fall of 9.5%.

Kirby said the office assets are ‘high-quality buildings with robust fundamentals in resilient locations’ and he has been successful in driving demand, rental growth and capital performance.

Industrials, which make up 28.9% of the fund, experienced the most severe capital falls last year as the sector fell from the lofty heights reached during the pandemic. The trust’s industrial holdings saw their total return tumble 15.8% but Kirby said he remained confident in the ‘strong occupational fundamentals and growth prospects, with portfolio assets offering reversionary income potential in excess of 40%’.

He said the sector will be ‘central to maintaining and growing the portfolio income return’ and has undertaken asset management initiatives such as refurbishments and improving the environment credentials of the buildings.

Second half recovery

Last year’s painful correction driven by interest rate rises meant the ‘market remains relatively muted as value protection is at the forefront of investor thinking, with a prevailing disconnect in expectations between buyers and sellers’, Kirby said.

However, pressures around inflation and the cost of debt are easing, and UK growth is expected to be stronger than first thought this year, leading Kirby to predict the ‘real estate market will move to a recovery phase in the second half of 2023’.

While he said St Christopher’s Place will be a ‘bedrock of returns’ he believes industrial and retail warehousing – which account for over 40% of the portfolio – have ‘been oversold but retain a strong performance outlook founded on their critical role in UK business and consumer infrastructure’.

Cash preservation

During the year BCPT maintained monthly dividends at 0.4p giving a total of 4.7p per share covered 1.05 times by earnings. The shares, which have fallen nearly 23% over 12 months and stand on a 26% discount to asset value, yield 5.6% against a general Reit average of 5.9%.

To address the wide discount, the board bought back 51.6m shares at a cost of £58.5m, paid from the proceeds of £200m of asset sales. However, since September the directors have put buybacks on hold believing it is more important to preserve cash in the current markets.

At 31 December BCPT had cash of £54m and gross borrowings of £310m, leaving it with a net loan to value of 23.4% and an average interest rate on its debts of 3.6%. Its loan and credit facility expire next year, with the company in discussions with debt advisers over refinancing options.