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Our well-let portfolio offers protection against falling markets, and our strategic mix of low-vacancy, non-prime location buildings, with a high proportion of long-term leases to government tenants is now providing significant defensive benefits. |
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In 2008 we have seen unprecedented turmoil in financial markets and the global economy as a whole. Governments have reacted with attempts to stabilise conditions and we wait to see whether these reforms and initiatives are successful.
The real estate market has been badly affected by unavailability of funding and its consequent effects in terms of substantially lower transactional volumes and valuations.
Valuations of properties are intended to indicate the price in an open market, and with low transactional volumes our valuers have indicated that greater subjectivity is required in arriving at the open market valuation. My personal view is that open market values generally are proving very difficult to establish with a reasonable level of accuracy.
The IPD UK index indicates that commercial property capital values have fallen by 27 per cent over the year, and whilst a number of companies in the UK listed real estate sector have reported full year falls across their portfolios in excess of 20 per cent, the CLS portfolio has performed comparatively well dropping in value by only 13.4 per cent on average. Our portfolio in France has performed particularly well relative to the local market, and the UK business has reported falls of below 16 per cent.
Our well-let portfolio offers protection against falling markets, and our strategic mix of low-vacancy, non-prime location buildings, with a high proportion of long-term leases to government tenants is now providing significant defensive benefits. I believe we have a resilient portfolio, with a relatively low risk of tenant default given our high proportion of government tenancies (39.8 per cent by rental income).
CLS’s strategy of holding property for the medium to long-term and deriving value from active management means that valuation movements are of less significance to us than the fundamentals of secure rental income and effective treasury management.
CLS has always been a well-managed and defensively structured group, evidenced by our tight cash management, the spreading of risk across European markets and currencies, and our hands-on, active management of the portfolio.
One consequence of the global recession is that borrowing rates on existing floating rate debt have fallen. We have 42 per cent of debt on floating rates and therefore if levels remain at current rates this will increase our underlying profitability during 2009 and beyond as the interest burden is lessened substantially.
Companies that are successful over the medium to long-term anticipate changing market conditions and react accordingly. During the second half of 2006, CLS embarked on a strategy of disposing of property assets, both to crystallise capital gains made during the preceding years of good market conditions, and also to free up cash reserves that we felt would be crucial as the downturn began to take effect.
This strategic decision has meant that over £700 million of property has been disposed of in the last 3 years, the 2008 disposals at a weighted average price nearly 5 per cent above 2007 year end valuations and significantly boosted our bank balances. We have returned £72 million in cash to shareholders in the last 12 months. This was by way of tender-offer buy-backs totalling £59 million in the latter part of the year and early 2009, and by buying back shares in the market for £13 million, whilst still maintaining strong cash reserves to see us through the current tightening of credit lines.
We are in discussions with our bankers and loan providers regarding loan-to-value clauses in loan agreements on several of our properties in London. We thank them for their continued support and willingness to negotiate on key terms during these difficult times. We have always maintained good relationships with our banks, and will work in partnership with them going forwards to ensure mutually acceptable terms for continued financing.
In France and Germany it is much more difficult for the lender to enforce a loan-to-value breach if interest, amortisation and agreed interest cover is in place. This is why in the UK many unnecessary repossessions are taking place, and a number of our peers based in the UK are genuinely concerned about this situation. It is hoped that the UK Government will seek to influence banks not to enforce loan-to-value breaches when all other covenants are being honoured.
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This strategic decision has meant that over £700 million of property has been disposed of in the last 3 years. We have returned £72 million in cash to shareholders in the last 12 months. |
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We also believe that property yields are now moving towards a level where the gap between yields and returns on cash deposits are sufficiently wide that property will once again become a desirable investment alternative.
In common with many businesses, and as a result of the sale of around one third of the portfolio, the directors have been focussing on reducing the operating cost base and staffing levels. A cost-cutting programme has been implemented and this is expected to show a further £2 million of annualised cost savings in 2009 and beyond, compared with 2008. The results for 2008 show non-recurring costs in relation to this re-structuring.
There have been a number of changes to the Board of directors during 2008. I would like to thank James Dean, Per Sjöberg and Steven Board for their advice, hard work and contribution to the Group over many years.
In May 2008 I welcomed Henry Klotz as CEO, and in November 2008 Joe Crawley and Chris Jarvis joined the Group as non-executive directors to the Board. I look forward to working with them and I am sure that their knowledge, coupled with the Board’s experience of previous downturns will steer CLS successfully through these turbulent times.
Finally, I would like to thank our lenders, customers, staff and suppliers for their continued support, enthusiasm and dedication to the business. |
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Sten Mortstedt
Executive Chairman
14 April 2009
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