Governance
Financial Statements
Additional Information
Strategic Report
Impact on occupational markets
Our strategic response
Geopolitical tension has the potential to impact supply chains, increase energy prices, increase import/export costs, cause social unrest and impact business confidence. Factors affecting occupier decision making relating to property requirements may include changing locations, improving supply chain efficiency, the need to reduce costs and an increased desire for on-site renewable energy. The state of the economy affects occupiers’ outlook for their businesses, in terms of confidence, expansion activity and their need for space. The different property sectors are typically linked to economic conditions in different ways. For example, retailers are strongly impacted by consumer confidence and retail sales, whereas industrial occupiers may have stronger ties to import/export volumes. If occupiers are in expansion mode, this is more likely to increase take up/ net absorption figures, reduce vacancy rates and generate rental growth. The opposite is true if occupier businesses are struggling. Structural drivers can impact the occupier markets of property sectors differently, placing them at different phases of the cycle. E-commerce has had a profound impact on the industrial and retail sectors. Demand for industrial property soared as a result of an increasing proportion of retail spend occurring online. Supply did not keep pace, and as a result, the sector has benefitted from strong increases in rents. The opposite situation occurred in the retail sector, where consolidation, CVAs and insolvencies contributed to rising vacancy rates and falling rents. Post the Covid-19 pandemic and rise in working from home, the office sector continues to experience a structural change, with occupiers reassessing their requirements. However, as there has been reasonably limited development activity, there is competition for prime space that meets modern ESG requirements, leading to polarisation within the sector. Occupiers have various motives for engaging with ESG. Ultimately, being more sustainable can increase profitability. Achieving more whilst using fewer resources cuts costs, and occupying a sustainable building aligns with this narrative. Some occupiers will be motivated by their own pathways to net zero. Occupying technology enabled, energy efficient buildings, signing up to green lease clauses and initiatives like sharing energy usage data, using on-site renewable and adopting green energy tariffs will aid progress. From a social perspective, buildings containing health and wellness facilities, green spaces, biophilic design and other amenities can improve occupiers’ employee satisfaction and retention. Advances in technology, caused for example by automation, emerging industries and new skills, reshape the employment industry, and require evolution of spaces and places that businesses occupy. Buildings that are technology enabled, for example with elements of automation and sufficient grid capacity, are likely to be more appealing to occupiers and command a rental premium. There are sector specific occupational drivers, for example technology to optimise supply chains and the capacity to run fleets of electric vehicles within the logistic sector, or the technological capability of a building to be used as a data centre.
We have an agile and flexible business model and so are able to adapt and respond to market trends. We have been able to keep energy costs down for some of our occupiers through working with our managing agents to offer reduced rates and bulk buying. We are undertaking a phased roll-out of on-site renewable energy across our portfolio where feasible, which will be available to our occupiers at a reduced rate. Five sites were fitted with solar panels during the year. For further details see the Principal Risks section of this report on pages 42–46. We have an appropriate capital structure for the market cycle and have retained our defensive position, with a loan to value ratio of 28% and 93% of borrowings fixed, with 2031/32 maturities. Our weighted average interest rate is less than the base rate at 3.9%. We have a diverse income base via our 400 occupiers that have proven to be very resilient, operating within a wide variety of industries. Our occupier focused, opportunity led approach enables us to create spaces to help our occupiers succeed. Proactive asset management drives performance through enhancing asset quality, attracting and retaining occupiers, minimising the cost of vacancy and maximising efficiency. Our in-depth understanding of the UK commercial property market enables us to identify and source value across different sectors and reposition the portfolio through the property cycle. Through maintaining a diversified portfolio, we are able to dilute cyclical risks associated with a single sector. Dynamics that cause a downturn or disproportionate shock in one sector have a reduced impact on overall performance. We have retained our overweight position in the outperforming industrial sector and are seeking alternative uses for selected buildings within our office portfolio. For further details see the Portfolio Review section of this report on pages 28–37. We are committed to integrating sustainability within all our business activities, and in a way that makes a positive contribution to society, whilst minimising any negative impact on people, local communities, and the environment. We are focused on becoming net zero carbon by 2040 through following the UK Green Building Council’s net zero carbon hierarchy. We are investing in decarbonising the portfolio, including removing fossil fuel-based systems, installation of on-site renewables and engaging with our occupiers to measure and manage our Scope 3 emissions. We have carried out risk assessments of our existing assets in line with the TCFD framework, and integrated sustainability-focused due diligence in our investment process. For further details see the Being Responsible section of this report on pages 56–77. We are committed to maintaining an efficient operating platform and continue to investigate and invest in PropTech solutions where appropriate. Wherever possible, we use data to measure, manage and drive progress on our strategy, including our sustainability goals. For further details see the Principal Risks section of this report on pages 42–46.
Picton Property Income Limited / Annual Report 2024
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