Chief Executive's Statement

“We enter the recovery phase of the cycle with our balance sheet positioned as we planned in terms of gearing ratios. We have the capacity and confidence in our expertise to invest in the right acquisitions and new developments to create outperformance.”

Francis Salway
Chief Executive

  • Balance sheet well positioned
  • High level of lettings secured across the portfolio
  • Development opportunities progressed ready for a start on key sites in 2010
  • Outperformance against IPD Quarterly Universe


A deteriorating UK commercial property market found its floor during the first six months of our financial year. The market’s peak to trough fall in values was in line with our expectations at the time of the 2009 Rights Issue, and this reinforces our confidence in the actions we have taken. The timing of the turning point was slightly earlier than generally expected – in July 2009 – and by the end of our Half Year we had seen the first signs of recovery.

Recent trends in capital values
IPD Monthly Index – All Property – Capital value change


We are now entering a key phase for commercial property companies, with the decisions taken today likely to prove instrumental in terms of value creation tomorrow. As the market makes the transition from rapid deterioration to nascent recovery, it will be the combination of decisiveness, patience and flexibility that determines the long-term winners in our sector.

Since March 2009, we have placed particular emphasis on three key areas of activity. First, we have increased our financial flexibility by completing a programme of sales to position our balance sheet appropriately. Second, we have implemented a flexible lettings strategy to secure income, but not to the detriment of the quality of key assets. Third, we have continued planning for the medium term by preparing sites for redevelopment, whether through obtaining and improving planning consents or seeking construction tender returns.

Our combined portfolio showed a small valuation deficit of 1.4% or £117.8m, which contributed to our reported pre-tax loss of £4.6m. Our adjusted diluted net assets per share stood at 565p at 30 September 2009, down 4.7% over the period. The change was largely attributable to the valuation deficit and also to a £74.5m cash payment to terminate interest-rate swaps. As expected, our property sales in the period impacted underlying revenue profit, which was £128.4m, down 15.4% compared with the first six months of the previous financial year. Our adjusted diluted earnings per share decreased to a greater degree, down 42.8%, as a result of the dilutive effect on earnings of our Rights Issue. We have confirmed the second quarter’s dividend at the same level as the first quarter’s at 7.0p per share.

In terms of the relative performance of our property assets, our combined portfolio delivered an ungeared total property return of 2.1%, outperforming the IPD Quarterly Universe which delivered a 1.0% total return.

Investment portfolio performance – all property
Six months ended 30 September 2009


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Financial flexibility

In accordance with the plans we outlined at the time of our Rights Issue announcement in February 2009, we have continued with our programme of investment property disposals and sold £765.5m across the London and Retail portfolios in the six months. Asset sale values were, on average, 0.3% below their March 2009 valuations, while values in the market as a whole fell by 2.5% over this period. This provides a helpful validation of the pricing of the assets in our portfolio. In managing our sales programme, we have been careful to ensure that the sales have not materially impacted the quality or appeal of our portfolio from the perspective of our major customers.

Our balance sheet gearing is attractively positioned at the turning point in the cycle with a Group Loan to Value (LTV) ratio of 50.8%. This ensures an attractive multiplier on the conversion of future increases in property value into growth in shareholders’ net assets.

In September 2009, we paid down drawn debt facilities of £1.8bn to restore our debt structure to a normal operating environment. The result is a strong balance sheet that will serve to protect the company’s credit rating, while the proceeds of asset sales and our Rights Issue give us the financial firepower needed to start speculative developments and take advantage of acquisition opportunities. Managing our balance sheet to maintain an AA rating will help lower the cost of finance in the medium term, giving us a competitive advantage as we move into the next cycle.

We have continued to develop and implement effective approaches to funding outside the Security Group, our principal debt structure. For example, in July 2009, we closed a £360.3m bond linked to our commercial lease with the UK Government over Queen Anne’s Gate, London SW1. This is the first bond of its type issued by a property company for some time. In September 2009, the St David’s Limited Partnership – a 50:50 joint venture with Capital Shopping Centres PLC – agreed a facility of £290.0m against the St David’s shopping centre development in Cardiff. The cash raised from these two transactions further increases our financial flexibility.

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Leasing activity

The leasing markets remain difficult, but our pragmatic approach to leasing is proving effective. With some assets we are taking a tactical approach, securing short-term lettings that reflect current market dynamics. With others, particularly higher quality assets, our priority is to secure maximum value through long-term agreements with occupiers who enhance the tenant mix, as at our mixed office and retail development at One New Change, London EC4.

(like-for-like portfolio)


Units in administration
(like-for-like portfolio)


We are particularly pleased that News International made the decision to move into 3 Thomas More Square, London E1. This is the largest letting of second-hand office space in London since 2003, and it sees News International take on 17,820 sq m of office accommodation.

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Our people and capability

In June 2009, Mike Hussey left the company by mutual agreement, and I would like to thank Mike for his substantial contribution to the company over the past seven years, which included five years as a member of the Board.

In September 2009, we announced the appointment of Robert Noel to the Board and to the executive position of Managing Director of the London Portfolio. This appointment will take effect from 1 January 2010. As Property Director of Great Portland Estates PLC, Robert has created an outstanding track record on transactions and investment performance in the London property market. His experience and expertise will be a great addition to the strength and depth of the current London team.

In August 2009, Chris Bartram joined the Board as a non-executive director. Chris has had a successful and broadranging career in the property industry. He is currently Chairman of Orchard Street Investment Management LLP, a leading UK commercial property investment management firm, and he is a non-executive director of The Crown Estate.

These Board-level appointments add significant weight to what is already a very experienced and effective Board and senior management team. It is critical that our capability is in tune with a changing market, and I am delighted that our people continue to devise and implement truly innovative industry initiatives. For example, in April 2009, we helped lead the development of a ‘Ten Point Plan’ for service charge cost management for retailers. We are also making good progress on our Brand Empire initiative to help bring new international retailers into the UK.

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Planning and development opportunities

In keeping with our belief that rental growth will return first in London’s West End, we have obtained construction tender prices for three proposed development projects: Park House, London W1 (offices, retail and residential); Selborne House, London SW1 (predominantly offices); and, Wellington House, London SW1 (residential being delivered in conjunction with the offices at Selborne House), with the aim of commencing construction in 2010. Completions are scheduled for late 2012 and early 2013, when we expect to see stronger occupational demand and rising rents.

We are also making good progress towards securing an appropriate level of pre-lettings to enable us to start the 92,900 sq m Trinity Quarter shopping centre scheme in Leeds.

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Outlook and priorities

Looking ahead, we are confident that, from the low point in July 2009, property values will rise over the next five years with the profile characterised by ripples rather than pure straight-line growth, as residual risks and imbalances in the financial markets play out.

Our priority is to maintain a clear view on the strategies that will define success in this market, and to act decisively on these. We are prepared to be patient for the best opportunities and we will not rush our investment programme, as we expect a broader range of opportunities to emerge once banks begin to take action on their property loan portfolios.

In the short term, we will continue to focus on the key qualities and capabilities that have guided our actions since March 2009: a strong balance sheet and good access to finance; a high quality team showing leadership in planning, development and asset management; and a portfolio with exciting development opportunities. We believe these powerful tools for long-term value creation will become the hallmarks of success in our market.

Francis Salway
Chief Executive

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