Regional property investor Custodian Income Reit (CREI ) has delivered portfolio growth after two flat quarters as commercial property prices bed down their recovery after sharp declines in 2022 and 2023.

The £343m investor in smaller regional assets across industrial, office and retail sectors, reported a 2% total return on net assets after paying a 1.5p quarterly fully covered dividend, in line with its target of paying at least 6p for the year, representing a 7.9% yield.

A marginal 0.5% uplift in the value of the property portfolio contributed to the net asset value (NAV) increase as did strong leasing over the quarter.

The portfolio’s estimated rental value (ERV), or the rent that could be achieved on the open market from a new letting or rent review, totalled £49.3m, exceeding passing rent of £44.3m by 11%.

The ERV of 11% reflects the reversion captured by the portfolio and the sale of vacant property undertaken during the quarter.

‘With approximately half of this reversion available from each of leasing events and vacancy respectively, there remains significant potential to grow rental income by capturing this at typically five-yearly rent reviews or on re-letting, in addition to continuing to drive rental growth through asset management and selling vacant property to developers or owner-managers,’ said Richard Shepherd-Cross, managing director of Custodian Capital and manager of the fund.

Further improvements

The real estate investment trust (Reit), which failed in a bid for Abrdn Property Income at the start of the year, signed 20 new lettings, lease renewals and regears across 12 assets over the quarter, as well as two rent reviews, increasing rents by 9%.

The occupancy of the trust also improved to 93.5% over the quarter, with 2% of vacant ERV subject to refurbishment, primarily due to the sale of vacant offices in Castle Donington in Leicestershire for £1.75m. The fund also sold an industrial unit in Sheffield for £550,000, 10% ahead of its June valuation, and an office in Solihull for £1.4m, a third higher than the valuation in June.

Shepherd-Cross said: ‘Having previously stated that we believed the market was bottoming out and with two consecutive quarters of broadly flat valuations behind us, it is pleasing to report a marginal increase in our portfolio valuation at the halfway point in the year.’

Although he said ‘one swallow does not make a summer’, the positive quarter confirmed his belief that ‘we are at the start of a gradual upwards trend’.

He said the scene was set for stronger total returns, principally driven by income and income growth, but the ‘direct property market has not fully reacted to this potential, as demonstrated by relatively flat valuations’.

In line with its UK peer group, the trust’s shares trade at a 16% below NAV and offer an above-average yield of 7.4%. 

The update came after Ian Mattioli (pictured), founding chief executive of pension consultants Mattioli Woods, which owns Custodian Capital, announced he had stepped down from the Reit’s board to concentrate on his business which was taken private by Pollen Street Group (POLN) in June.

Nathan Imlach, Mattioli’s former chief financial officer and now its chief strategic adviser, joins the board for a transition period up to the end of 2025 while Custodian seeks an independent director that will make its six-strong board fully independent.

David MacLellan, Custodian chair, said Mattioli had made an ‘invaluable contribution’ as a founding director since the Reit was launched in 2014.

‘Mattioli instigated Mattioli Woods’ syndicated property initiative that developed into the seed portfolio for the launch of the company,’ said MacLellan.

‘The board has high regard for Mattioli’s insight and expertise, and he will continue to serve a valuable role for Custodian in his capacity as chair of Custodian Capital.’