SEGRO plc Interim Management Statement
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On 6th November SEGRO plc announced its interim management statement for the nine months ended 30 September 2008.
Key Points
Continuing robust performance from existing tenant base, despite worsening market environment
Maintaining good momentum in leasing activities, particularly in Europe
Development starts significantly reduced and focused on areas of highest market demand
Strong financial discipline with tight control of capital expenditure and costs
Occupier market conditions
The Group has continued to maintain good momentum in its leasing activities, letting a total of 457,000 sq m in the nine months to the end of September, compared with 397,000 sq m in the equivalent period last year. 174,000 sq m was let in the third quarter of the year (2007: 86,000 sq m).
The overall vacancy rate was 9.5% at the end of September, a slight increase from the 9.3% seen at the end of June and entirely due to development completions in the period.
We have seen no increase in the level of tenant insolvencies and rents have continued to be paid in line with previous experience. Nonetheless, we are monitoring our customers carefully in anticipation of some weakness in the months ahead.
Enquiries for new space have slowed in the UK in the third quarter, although are still at similar levels seen in the corresponding periods in 2006 and 2005; enquiry levels in Continental Europe have remained good, particularly in Poland.
Development activity
We have made good progress with our existing development schemes, comprising a combination of pre-lets and speculative product, underpinned by good demand. 308,000 sq m of developments have been completed in 2008 (151,000 sq m in Q3), 68% of which has been let or sold, whilst 42% of the 285,000 sq m of developments under construction, has already been pre-let or sold.
As noted at the time of our Half Year Results Announcement in August, new construction starts are being tightly controlled. Notwithstanding the current robust occupier demand being experienced in certain markets, we are being very cautious about any new speculative development starts.
Property values
As previously reported, SEGRO’s UK investment property portfolio recorded a 10.4% reduction in value for the six months ended 30th June 2008, partially offset by a surplus of 0.7% in Continental Europe.
Since then, the severe stress in global financial markets has continued to have a negative effect on investment market conditions, with property values showing further declines.
Whilst the next valuation of the Group’s properties will not be until 31 December, the Investment Property Databank (IPD) indicates that capital values of UK industrial properties have declined by 6.1% over the third quarter of 2008 (a decrease of 14.0% in capital values from December 2007). Due to the relative scarcity of transactions in the market, the IPD index may not be fully reflective of the “true market”.
In Continental Europe, investment market conditions are also weakening. Accordingly, we expect there to be a softening of yields in Continental Europe in the second half of the year but, as with the UK, there is relatively limited market evidence to guide valuers.
Financial position:
In the nine months to the end of September, SEGRO has invested c.£179m in its development pipeline and has realised c.£264m of cash from disposals, leaving the Group with net debt of c.£2,190m.
Cash and un-drawn debt facilities at the end of September were c.£808m.
SEGRO has a widely diversified funding base. Approximately £1bn of borrowings are syndicated with a strong group of banks. A further £1.3 billion of term funding is provided by 7 separate, unsecured fixed rate Sterling Eurobond issues held by institutional investors.
The average maturity of outstanding debt is 9.5 years and only £140m of the Group’s committed facilities are due for repayment or rollover before the end of 2009.
Outlook
General economic conditions across the UK and Europe have deteriorated markedly over recent months. Whilst we have made good progress with our own letting and development programme, we are cautious about the outlook both for occupier markets and investment markets. We anticipate some weakening in demand for industrial space in the months ahead and expect property values to show further declines until such time that debt markets stabilise.
In this environment, we are exercising strong financial discipline and expect to commence relatively little by way of new developments, particularly those of a speculative nature. We continue to pursue opportunities to generate cash from disposals where acceptable prices can be achieved.
Ian Coull, Chief Executive said:
“Our carefully planned development programme which has been concentrated in attractive markets, coupled with our active approach to asset and customer management, has enabled us to continue delivering excellent letting results. Nonetheless we are cautious about the near term outlook for our markets and for property values.
Looking further ahead, I believe there will be some very attractive investment opportunities in the coming years. We are managing the business in a cautious and disciplined manner to ensure that SEGRO is well placed to take full advantage of such opportunities.”
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