REI pledges further expansion of portfolio during H2

37a Waterloo Street

After announcing a strong first half, buoyed by the Midlands’ healthy commercial property sector, Birmingham-based Real Estate Investors has confirmed its positive outlook for the second half of the year.

REI chief executive Paul Bassi said the firm’s retail and restaurant/bar assets were continuing to experience high demand.

“Demand across our retail and restaurant/bar units remains very strong and we have experienced competitive bidding and rental growth,” he said.

One example of this was the deal for 37a Waterloo Street in Birmingham city centre, formerly the home of a Viva Brazil restaurant.

Cocktail bar chain Dirty Martini has agreed a new lease on better terms and a strengthened covenant following the administration of Viva Brazil. REI said the deal was off market and completed in under a week, with the added potential of the opportunity to convert the upper floors of the corner building to residential.

“Demand for regional investment property remains strong – we are very much in a sellers’ market and have taken advantage of this by making sales totalling £12.4m since the last year-end,” added Mr Bassi.

“We anticipate further sales above book value in the second half of 2017, and also anticipate growing our rental income from acquisitions and lettings from within our existing portfolio, while maintaining a £200m portfolio and a progressive dividend payment.

“There is limited criteria compliant property available to buy, and yet despite the level of competition for assets, we anticipate securing further criteria compliant property during H2, via our privileged network.”

He said the group currently had £5m of deals agreed and was confident of securing further acquisitions before the year-end.

He also said that while the Midlands’ regional yield discount to London was still evident, there was a noticeable shift in focus from the South East to core regional markets including Birmingham.

There has also been strong interest in more secondary assets, which he said was in part due to the lack of available prime assets. In the second half of 2017, prime yields are expected to remain unchanged, although transaction volumes are likely to increase as vendors look to capitalise on the depth of investor demand.

New acquisitions completed by REI in the first half included Maypole Retail Parade, to the south of Birmingham.

Acquired in an off-market deal for £6.1m from a private investor, the property attracts a net initial yield of 7.22% with a reversionary yield of 7.31%. The investment incorporates a 60-bed hotel, together with six ground floor retail units, with a combined contracted rental of £469,875 per annum, of which £201,000 per annum is secured against Travelodge for a further 24 years and subject to CPI-linked rent reviews. Other tenants include Wilko, Ladbrokes, Halfords, Subway and KFC.

Also acquired was a retail development at Barracks Road, Newcastle-under-Lyme. Purchased from London Metric Property for £2.8m, the deal represents a net initial yield of 8.00% and a minimum reversionary yield of 8.78% in February 2018. It produces £238,700 per annum, rising to £261,696 per annum in February 2018.

The property comprises four purpose-built units and is let to three tenants – Xercise4Less, Bathstore and Domino’s. Following acquisition, REI has extended the Bathstore lease by a further five years.

Sales completed in H1 included Latitude, Bromsgrove Street, Birmingham for £2.7m, representing a net initial yield of 7.95% and ahead of cost and the December 31, 2016 valuation.

More recently, the firm exchanged contracts to sell 6 Bennetts Hill, 102 Colmore Row, and 104-106 Colmore Row, three adjoining city centre offices, for a total of £7.2m, reflecting a current net initial yield of 4.36% and a 4.35% capital premium above the December 2016 valuation.

Mr Bassi said: “Our objective for the second half of 2017 is to grow the portfolio further, subject to making strategic sales, and to grow our rental income.

“This will allow us to continue with our objective of growing our quarterly dividend payments, which have now seen five years of year on year growth, in line with our progressive dividend policy.

“We expect property yields to remain stable or compress further, particularly with the secondary market place increasing demand and a shortage of investment stock at the end of the year.

“REI remains confident that the outlook for our regional economy is positive, and that our portfolio will benefit from healthy occupancy levels and a growing rental income and revenues.”