London office landlord Great Portland Estates PLC is unlikely to grow its portfolio in the coming financial year amid struggles to find good-value deals in the city, CEO Toby Courtauld said during an earnings call.
The company sold more assets than it acquired in the year ended March 31. During the period, it sold £329 million worth of properties — including the £266.5 million sale of the 240 Blackfriars Road mixed-use building in Southwark, London, by its joint venture with Ropemaker Properties Ltd. — and completed just one acquisition deal for the Cityside House and Challenger House office buildings in the city's Whitechapel district for £49.6 million.
"If conditions continue as they are today, we are likely to remain net sellers," said Courtauld. Great Portland Estates is, however, actively assessing acquisition opportunities, he added, with £900 million worth of property under review. "Early signs suggest limited value is on offer."
Courtauld presented a company analysis showing that none of the deals that Great Portland Estates appraised in the last quarter were within 10% of its view of fair value. In the quarter ended Dec. 31, 2017, only 4% of deals fell within this range. As much as 55% of these deals were more than 25% ahead of fair value, Courtauld said. Great Portland Estates has capitalized on these buoyant market conditions through disposals, he added.
"We've been taking advantage of strong prices to crystallize surpluses, selling £329 million [worth of assets] often at record prices at an average 5.4% ahead of book value."
Amid limited acquisition opportunities, the company aims to generate growth internally from its development pipeline, which has about £3.5 billion of commitments for the next couple of years, Courtauld said. "As long as we see value internally that's better than the external opportunities, we're going to be a net seller and an investor internally for growth."
A substantial change in market conditions that would make acquisitions more attractive is unlikely to happen any time soon, said Courtauld, due to the amount of international capital targeting the London office market from various parts of the world.
"What might suddenly give us these opportunities in the market [relative] to the opportunities we already own?" he asked. "A loss of confidence [in the U.K. or global economy], a real loss of confidence, a flight away from real estate, a flight back for some of the overseas investors. I have to say at the minute, there are no signs of that."
In the year ended March 31, Great Portland Estates swung to an adjusted pretax profit, as measured by International Financial Reporting Standards, after a revaluation surplus of £76.7 million, compared to a loss of £140.2 million in the previous year. EPS rose during the reporting period to 18.2 pence from a loss per share of 40.8 pence a year earlier.
