Picton Property Income Limited Annual Report 2022

Occupier focused, Opportunity led. Picton Property Income Limited Annual Report 2022

Welcome

to our 2022

Annual Report

Our purpose To be a responsible owner of commercial real estate, helping our occupiers succeed and being valued by all our stakeholders.

Strategic Report 2 Highlights 4

Sustainability and Net Zero Carbon

6 8

Chair’s Statement

Chief Executive’s Review

12 14

Business Model Our Marketplace

20 Our Strategy 22 Our Strategy in Action 28 Key Performance Indicators 32 Portfolio Review 44 Financial Review 48 Principal Risks 53 TCFD Statement 58 Section 172 Statement 60 Being Responsible Governance

Visit our website picton.co.uk

68 Chair’s Introduction 70 Board of Directors 72 Our Team

74 Leadership and Purpose 80 Division of Responsibilities 82 Composition, Succession and Evaluation 85 Audit, Risks and Internal Controls 91 Remuneration Report 109 Directors’ Report Financial Statements 113 Independent Auditor’s Report 117 Consolidated Statement of Comprehensive Income 118 Consolidated Statement of Changes in Equity 119 Consolidated Balance Sheet 120 Consolidated Statement of Cash Flows 121 Notes to the Consolidated Financial Statements Additional Information 139 Supplementary Disclosures 143 Property Portfolio 144 Five Year Financial Summary 145 Glossary 146 Financial Calendar 147 Shareholder Information

Strategic Report

Financial Statements

Additional Information

Governance

Occupier focused, Opportunity led.

Through our occupier focused, opportunity led approach, we aim to be one of the consistently best performing diversified UK REITs.

Sustainable thinking, responsible business A responsible and ethical approach to business is essential for the benefit of all our stakeholders and understanding the long-term impact of our decisions will help us to manage risk and continue to generate value. Our occupier focused, opportunity led approach ensures we actively manage our assets, which helps to maintain high occupancy and create space for our occupiers to succeed. We believe that sustainability must be fully embedded into all of our business activities. Our sustainability policy guides our long-term sustainability priorities, including tackling environmental challenges, providing sustainable buildings for our occupiers and engaging with our stakeholders. We are a member of the Better Buildings Partnership and a signatory to the Better Buildings Partnership Climate Commitment. Our strategy In order to deliver on our purpose, we have in place three distinct strategic pillars: Portfolio Performance, Operational Excellence and Acting Responsibly. These pillars include a range of strategic priorities which guide the direction of our business and are regularly reviewed.

Our business We acquire, create and manage buildings for around 400 occupiers across a wide range of businesses. By applying insight, agility, and a personalised service, we provide attractive, well-located spaces to help our occupiers’ businesses succeed. We have a long-term track record, outperforming the MSCI UK Quarterly Property Index, over one, three, five and ten years, and since inception. Our diversified portfolio consists of 47 assets, valued at £849 million as at 31 March 2022.

Read more on pages 12–13

Picton Property Income Limited Annual Report 2022

Highlights

Financial highlights

Record results demonstrate success of strategy and business model.

Read more on the following pages: Portfolio Review on pages 32 to 43 Financial Review on pages 44 to 47

Strong financial performance

Outperforming property portfolio

Total property return 24.3%

Profit after tax £147m

Net assets £657m

Property valuation £849m

2022 2021 2020

24.3

147

657

849

528

682

7.3

509

665

5.3

Highest profit recorded since launch in 2005

An increase of 24.4%

Like-for-like valuation increase of 21% Like-for-like increase in passing rent 2.1%

Outperforming MSCI UK Quarterly Property Index of 19.6% Like-for-like increase in estimated rental value 5.4%

NAV per share 120p

Earning per share 27.0p

2022 2021 2020

120

27.0

2.1

5.4

6.2

1.9

1.1

4.1

1.2

1.3

Total return 28.3%

Total shareholder return 18.7%

‒ Outperformed MSCI UK Quarterly Property Index for ninth consecutive year ‒ Upper quartile outperformance against MSCI over three, five and ten years, and since inception ‒ Selective investment activity: ‒ Two industrial assets acquired for £25.0 million ‒ One retail asset disposal for £0.7 million, 16% ahead of March 2021 valuation ‒ Rent collection back to pre-pandemic levels

2022 2021 2020

28.3

18.7

6.6

0.0

4.5

3.6

‒ Increased dividends paid of £18.4 million, with dividend cover of 115% ‒ Loan to value ratio maintained at 21% with significant headroom against loan covenants ‒ Refinanced existing debt facility increasing borrowings by £49 million while reducing the cost of debt and extending the term

Picton Property Income Limited Annual Report 2022

Strategic Report

Financial Statements

Additional Information

Governance

EPRA measures

120p EPRA NTA per share (2021: 97p, 2020: 93p) 4.1% EPRA net initial yield (2021: 4.8%, 2020: 4.8%)

119p EPRA NDV per share (2021: 93p, 2020: 88p) 4.8% EPRA ‘topped-up’ net initial yield (2021: 5.5%, 2020: 5.4%)

131p EPRA NRV per share (2021: 105p, 2020: 102p) 7.2% EPRA vacancy rate (2021: 8.8%, 2020: 11.5%)

£21.2m EPRA earnings (2021: £20.1m, 2020: £19.9m) 26.0% EPRA cost ratio 1 (2021: 26.9%, 2020: 28.3%)

3.9p EPRA earnings per share (2021: 3.7p, 2020: 3.7p) 19.9% EPRA cost ratio 2 (2021: 20.8%, 2020: 20.2%)

1 Including direct vacancy costs 2 Excluding direct vacancy costs

Occupier focused asset management Responsible stewardship

Occupancy 93%

EPC rating 71%

Net zero carbon 2040

2022 2021 2020

Target date

2022 2021 2020

93 91

Increased occupancy

Improved EPC ratings A-C

Asset management transactions completed 76

Signatory to Better Buildings Partnership Climate Commitment ‒ Pathway to net zero carbon published ‒ This covers both operational and embodied emissions

‒ 34 lettings or agreements to lease, 8% ahead of ERV ‒ 21 lease renewals or regears, 3% ahead of ERV ‒ 12 rent reviews, 7% ahead of ERV ‒ 9 other asset management transactions

Invested into asset refurbishment, upgrades and repositioning projects £10m

Picton Property Income Limited Annual Report 2022

Sustainability and Net Zero Carbon

London Stanford Building

Picton Property Income Limited

Annual Report 2022

Strategic Report

Financial Statements

Additional Information

Governance

Sustainable thinking, responsible business

Our net zero carbon pathway Our pathway sets out our approach to tackling climate change and priority actions towards decarbonising our portfolio. We have committed to achieving net zero carbon for our operational and embodied emissions by 2040, which is ten years ahead of the UK Government target. Our pathway sets out our plan to achieve net zero carbon for both our own and our occupiers’ emissions by 2040 and our strategy for achieving this. Our target covers the whole life carbon of our assets, including the energy use of our occupiers. To ensure credibility and transparency in our approach, our net zero carbon pathway aligns with the Better Buildings Partnership’s (BBP) Net Zero Carbon Pathway Framework and the UK Green Building Council’s (UKGBC) net zero carbon hierarchy. To meet our commitment, we have set targets for whole building energy efficiency for each asset type and embodied carbon related to major refurbishments. By 2040, all operational emissions will be reduced as much as possible through energy efficiency measures and renewable energy, with any residual emissions offset. From 2040 onwards, all completed refurbishment projects will have reduced their embodied and operational carbon as much as possible, with any residual emissions offset upon practical completion. We value collaboration in driving industry-wide change and facilitating knowledge-sharing on best practice. To ensure our continued alignment with the BBP requirements, we will continuously monitor our performance and report annually on our progress.

This year we published our net zero carbon pathway and became a signatory to the Better Buildings Partnership Climate Commitment.

2040 Net zero carbon

for operational and embodied emissions 300 kgCO 2 e/m 2 Embodied carbon target for major refurbishments by 2040

Visit our website picton.co.uk/sustainability

Read more in Being Responsible section on pages 60–66

Picton Property Income Limited Annual Report 2022

Chair’s Statement

A record year for Picton

Our well-positioned portfolio continues to deliver on our longer-term track record of outperformance.

I am delighted to report that Picton has delivered a total profit of £147 million, resulting in the most successful year since our launch in 2005. Lena Wilson CBE Chair

Picton Property Income Limited Annual Report 2022

Strategic Report

Financial Statements

Additional Information

Governance

I am delighted to report that Picton has delivered a total profit of £147 million, resulting in the most successful year since our launch in 2005. As lockdown restrictions were lifted, the economy rebounded. Driven by improving income and marked capital growth, our portfolio was well positioned. The majority of our assets saw a significant improvement in value. Almost all our key performance indicators have improved from last year. Further details on these are set out later in this Report. Performance We have delivered a total return of 28.3% alongside a 5.5% increase in EPRA earnings, which has enabled us to increase dividends accordingly. Our total shareholder return was 18.7% and whilst it saw a healthy improvement during the year, like many listed real estate companies, our share price currently remains below our net asset value. We have delivered property performance ahead of the MSCI UK Quarterly Property Index. This continues to reinforce our strong longer-term track record, achieving upper quartile property performance against this Index over three, five and ten years, and since inception. Property portfolio Our outperformance at a property level has principally been driven by our high exposure to the industrial, warehouse and logistics sector, but we have also benefitted this year from a recovery in the value of our retail warehouse assets. Performance in the office sector has been more muted, but our focus on asset management has helped to offset a wider market slowdown. Encouragingly we have had leasing success across all three sectors, and grown occupancy to 93% from 91% a year ago. This has had a positive impact in terms of void holding costs, which will flow into future years. In separate transactions, we acquired two multi-let industrial assets and disposed of one small high street retail asset. Although at the early stage of our asset management plans, our acquisitions have already delivered valuation and income growth. Capital structure During the year we have extended and increased our longer-term borrowings by £49 million, insulating the business from further rising borrowing costs. Our new debt facility is at a lower cost than our existing borrowings and we incurred one-off costs in resetting the facility to a lower overall rate. By substantially repaying our revolving credit facility, we have future operational flexibility and firepower. At the year-end borrowings totalled £219 million, with the loan to value ratio broadly constant over the year at 21%.

Dividends On the back of strong leasing activity and improving rent collection, we have increased the dividend twice during the period. We have restored our distributions back to their pre-pandemic level and we can report a healthy dividend cover of 115% over the period. Our aim is to continue to grow dividends on a progressive basis, which in the short-term will be driven by further improvement in occupancy and rental growth, predominantly coming from our industrial assets. Sustainability We have made significant progress on our sustainability priorities, recently publishing our plan to become net zero carbon by 2040. Our net zero carbon pathway ambition of 2040 is ten years ahead of the Government target and although our initial focus will be on reducing Scope 1 and 2 emissions, we intend to work with our occupiers to reduce the most significant part of the portfolio’s emissions, which come under Scope 3. We will report regularly on our progress. I am grateful to Maria Bentley who has agreed to act as Board champion and oversee the work with the Executive Committee on sustainability. Outlook We are acutely aware of the new challenges emerging both directly and indirectly from the conflict in Ukraine. Rising energy, food and commodity prices, along with supply chain disruptions and labour market shortages are becoming increasingly visible and will impact economic growth. We are already seeing rising interest rates and gilt yields have risen this year. Real estate has both an income and capital element and can offer inflation protection as evidenced by our performance this year, particularly in areas where supply is constrained, and demand enables rents to continue to rise. As a UK diversified REIT we have greater flexibility with regard to asset selection giving us the ability to position the portfolio for the long-term. We will continue to explore opportunities for growth, but this must be on terms that are attractive to our shareholders and with the right quality of asset. We remain disciplined in our approach. As in previous years we have invested in our assets and upgraded the quality of accommodation. This approach is increasingly relevant to a discerning occupier base, and will enable us to grow income. Whilst returns in 2022 are likely to soften from those seen over this reporting period, we can be confident that we have a portfolio that will continue to see further growth. Lena Wilson CBE Chair 25 May 2022

Picton Property Income Limited Annual Report 2022

Chief Executive’s Review

Strong operational performance

A successful year of record profit delivered against a backdrop of reduced pandemic-related disruption.

Picton Property Income Limited Annual Report 2022

Strategic Report

Financial Statements

Additional Information

Governance

Growing occupancy and income profile We have improved occupancy this year, which has led to increased income. Our rent collection over the period has averaged 98% and was close to 100% for the December 2021 and March 2022 quarters. This higher level of income has enabled us to increase the dividend twice during the year, which we cover in more detail in the Financial Review. Enhancing asset quality During the year, we have invested £10 million in upgrading our assets. The impact of some of this activity is very obvious, such as the creation of Rum Runner Works, at Regency Wharf, in Birmingham where we have converted leisure space into offices; however, some of the less visible work is equally important as it aligns to our sustainability targets. For example, the complete upgrade and removal of our gas-fired air-conditioning system at 50 Farringdon Road, London, will help with our net zero commitments and improve energy efficiency for our occupiers. In our refurbishments at Angel Gate, London, 180 West George Street, Glasgow and Longcross, Cardiff, we have also focused on improving occupier amenities, creating more communal and informal space with outside areas where possible. Outperforming MSCI We have outperformed the MSCI UK Quarterly Property Index for the ninth consecutive year. This year, across the Index, the range between lower quartile and upper quartile returns was the widest on record at 10.7%. We delivered a portfolio return of 24.3% compared to the Index of 19.6% and upper quartile of 24.9%. Whilst we are just below upper quartile for the year, we have still delivered upper quartile returns against the Index over three, five and ten years, and since inception. Of note, our industrial assets delivered a total property return of 38.2%, our retail assets delivered 25.6%, which comprised retail warehousing delivering 33.4%, and our office assets delivered 4.4%. 120p Net asset value per share 27p Earnings per share

We have outperformed the MSCI UK Quarterly Property Index for the ninth consecutive year.

Michael Morris Chief Executive

We have had a very successful year, delivering a record profit against a backdrop of reduced pandemic-related disruption. Our clear purpose and strategic priorities have enabled us to focus on what matters. To reflect the closer integration of sustainability into our business model and our commitment to achieving net zero carbon, we have redefined our Purpose, which now states: ‘To be a responsible owner of commercial real estate, helping our occupiers succeed and being valued by all our stakeholders.’ We have also added two strategic priorities, specifically relating to the work we are doing to reduce our impact on climate change: ‒ Adapting to and mitigating the impact of climate change; and, ‒ reducing emissions to become carbon net zero in or before 2040. This makes it clear that the focus of our sustainability strategy is aligned with our occupiers and other stakeholders. Our strategic priorities are detailed on pages 20-21 , and a summary of our progress is detailed below. Portfolio performance Income and capital growth We have seen exceptionally strong portfolio growth over the period. This has been predominantly driven by our industrial, warehouse and logistics assets where both rental and capital values have continued to move higher. Our retail portfolio, which now comprises 65% retail warehouse assets, has also seen strong valuation growth, with a reversal of some of the writedowns seen during the pandemic. Our office assets have not seen the valuation growth we might have expected, especially recognising the leasing success in this sector. This in part reflects perceived changes in working habits and costs associated with improving sustainability credentials. We will seek to offset increasing cost pressures where we can attract premium rents, either due to limited supply or by providing high quality space.

Picton Property Income Limited Annual Report 2022

Chief Executive’s Review continued

Capital structure We have recently completed the refinancing of one of our long-term debt facilities, which not only increases the maturity by four years until 2031, but also reduces the overall interest rate. As part of the same transaction, we increased our borrowings by £49 million, which has allowed us to repay most of our revolving credit facility and gives us future financial flexibility. Recognising the asset value growth over the period, the loan to value ratio remained stable at the year-end at 21%. Growth and economies of scale We have seen growth this year in two forms: firstly, the valuation growth from the portfolio, which with the use of gearing has increased net assets and secondly, through acquisitions. We have made £25 million of acquisitions, which are earnings accretive, although during the period we have been impacted by stamp duty and other transaction costs. Within our Interim results, we expressed a desire to grow and highlighted the wide discounts across the listed REIT sector, as well as some of the challenges in the UK real estate open ended sector, which are still prevalent. While we have not yet concluded any transactions, we have been proactive in our dialogue with suitable prospects. We will continue to advocate for change, but remain selective to ensure enhanced future performance. Acting responsibly Values and alignment Ultimately, the performance of the business is delivered by those who work here. Having a small team means that we are able to operate quickly and efficiently with clear objectives that are aligned to remuneration. Our values of being principled, progressive and perceptive have guided us through the challenges of this year. We have broadened our team objectives and asked everyone, irrespective of their role, to help to reduce our impact on the environment. Working closely with our occupiers We have spent much of this year focused on a return to normal working practices, as have our occupiers. We have worked with many occupiers to help them rightsize their business. This has enabled us to retain income and de-risk future lease events. We have undertaken 12 transactions where we have extended leases or enabled occupiers to remain in our buildings. 24.3% Total property return 28.3% Total return

One of the advantages of our diversified approach is our ability to position the portfolio as market conditions dictate.

Michael Morris Chief Executive

Operational excellence Efficient platform

We continue to run the business as efficiently as possible and have maintained our cost ratio at 1.0%. We have a small but very dedicated team and use external resource as appropriate. We are not immune from rising costs and it is clear that sustainability focused measures will add to both our workload and costs. We expect to recruit further this year to support our transition to net zero carbon. Adaptable business model One of the advantages of our diversified approach is our ability to position the portfolio as market conditions dictate. As returns become more convergent we are looking more widely across sectors. During the year we acquired two adjoining city centre industrial estates, off attractive pricing. Our most recent acquisition post period end was an office and retail asset in London. This year we introduced SwiftSpace, our flexible lease offering, in response to changes in occupier demand, particularly as we face increased competition from serviced office providers. Our solution provides fast, flexible, inclusive leases, which we are offering in our smaller multi-let offices. Earnings growth Our earnings per share of 27.0p are significantly higher than the preceding year, reflecting the growth in the portfolio value. Our EPRA earnings are 5.5% higher reflecting the enhanced income position.

Picton Property Income Limited Annual Report 2022

Strategic Report

Financial Statements

Additional Information

Governance

Sustainability We have devoted significant resource this year to further integrating sustainability within our business model. Specifically, much of the year was spent considering climate-related risks and creating a plan to mitigate these. In addition, we have been preparing our net zero carbon pathway, which is now published, and sets out a clear direction for the business as we aim to meet our 2040 target. The majority of the team have benefitted from specific training in this area and contributed to the formulation of our net zero carbon pathway. We have held externally facilitated workshops on relevant sustainability issues, alongside an internal workshop to ensure that the team is appropriately briefed on our future plans. Outlook We are positive about our future. Although we have had considerable letting success during the year, we can still increase income by improving occupancy. Most of the assets are now seeing stabilised or increasing values. In the industrial sector, we are generally seeing rental growth that is ahead of inflation and believe it is likely that growth will continue, especially if construction costs continue to rise and this impacts supply.

The team is aligned with the need to continue to enhance the portfolio and mitigate any risks from changing occupier habits or climate change. Our future engagement with occupiers and communication of our plan will be crucial moving forwards. Macroeconomic events are likely to dampen a further recovery in property values, but despite this we believe that the right assets will remain attractive to occupiers and investors alike. We have created a quality portfolio, that is well managed and offers scope to continue to grow both the income and capital position.

Michael Morris Chief Executive 25 May 2022

Picton Property Income Limited Annual Report 2022

Business Model

Our business model

Our business model creates value through owning a portfolio that generates a diversified and stable income stream. We have the flexibility to adapt to changing market conditions and so deliver value to our stakeholders through the property cycle.

How we create value

Our business model is driven by knowledge, expertise and research led decision making 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.

What makes us different

02 Stock selection and acquisition – buying into growth assets, locations or sectors

Our long-term track record of outperformance

We have established a diversified UK property portfolio and while income focused, we will consider opportunities where we can enhance value and/or income.

We have outperformed the MSCI UK Quarterly Property Index over one, three, five and ten years, and since inception.

Read more on pages 60–66

Picton Property Income Limited Annual Report 2022

Strategic Report

Financial Statements

Additional Information

Governance

Stakeholder value

Shareholders £147m Profit after tax

Occupiers 93% Occupancy Communities 15 Charities supported Our people 82% Employee satisfaction score The environment

Our business model is driven by knowledge, expertise and research led decision making 01

Creating value through proactive asset management 03

71% EPC ratings A-C

This is underpinned by:

Risk management Our diverse portfolio and occupier base spreads risk and generates a stable income stream throughout the property cycle. We adapt our capital structure and use debt effectively to achieve enhanced returns. We maintain a covered dividend policy, to generate surplus cash and allow us to invest back into the portfolio.

Responsible stewardship We have a responsible and ethical approach to business and sustainability is embedded within our corporate strategy. We understand the impact of our business on the environment and are committed to creating and delivering value for the benefit of all our stakeholders.

For more detailed information on our stakeholders, see our Section 172 statement on pages 58-59

Picton Property Income Limited Annual Report 2022

Our Marketplace

Our marketplace

Inflationary pressures likely to subdue post-pandemic recovery.

Economic backdrop As Covid-19 concerns began to dissipate, the war in Ukraine has become a fresh source of uncertainty. The consequences of the sanctions on Russia and embargo on Russian oil and gas are multifaceted. In the UK, we are fortunately less reliant on Russian imports than our neighbours in Europe but the added pressure on household incomes as a result of commodity price increases and persistent inflation will still be considerable. UK GDP saw an annual rise of 7.4% in 2021 following a -9.3% fall in 2020 and at the end of March 2022 was 0.7% above its pre-pandemic level in December 2019. In the short-term, the rate of economic recovery is expected to be impacted on the supply side by disrupted supply chains and shortages of goods and labour and on the demand side by the cut in household incomes. Forecasters have revised down their GDP growth expectations for 2022 to reflect the impact of the crisis, which are now 3.8% for 2022 according to the Office for Budget Responsibility.

Quantitative easing and Government stimulus during the pandemic supported households and injected significant capital into the economy. As lockdowns ended and more and more businesses were able to reopen, consumer demand increased but this was not always matched with increases in supply, putting upward pressure on prices. The 12-month CPI inflation rate hit a new 40-year high of 9.0% in April 2022. The increase reflects the change in Ofgem’s energy price cap in April causing a jump in utility prices, alongside the rise in fuel and food prices as the agriculture sector faced increasing cost pressures. The Bank of England’s response to rising inflation has been a series of base rate increases from a historic low of 0.1% to 1.0% in May 2022, the highest level since 2009. Further rate increases are expected, together with a programme of quantitative tightening. Growth in average total pay (including bonuses) was 7.0% and growth in regular pay (excluding bonuses) was 4.2% among employees in January to March 2022. In real terms, total pay increased on the year by 1.4% and regular pay fell on the year by -1.2%. In terms of demand, there is still momentum from the reopening of the economy, particularly for the travel industry which is one of the last to see restrictions lifted. As workers have returned to the office, albeit in a more flexible capacity, this will hopefully create an increase in the consumption associated with business travel, city centre retail and leisure activity. Retail sales volumes are 4.1% above their level in February 2020, however did fall by -0.3% in the three months to April 2022, fuelling concerns that consumers are being hit by affordability pressures. The proportion of online retail sales stood at 27.0% in April 2022, remaining significantly higher than the 19.9% level in February 2020 before the pandemic. The end of the furlough scheme in September 2021 did not have a significant impact on unemployment. The unemployment rate has fallen below pre-pandemic levels and job vacancies are at a record high. The number of job vacancies in February 2022 to April 2022 rose to a new record of 1.3 million, an increase of 0.5 million from its January to March 2020 level. UK ten-year gilt yields have been on a generally upward trajectory since December 2021, but remain relatively low by historic standards.

Picton Property Income Limited Annual Report 2022

Strategic Report

Financial Statements

Additional Information

Governance

House prices accelerated during the pandemic as changes to the tax paid on property purchases were announced. UK average house prices increased by 10.9% over the year to February 2022. Rising interest rates are likely to dampen the housing market to some extent in the short-term. Despite the now more muted outlook for the UK economy and the current inflationary environment, there are reasons for cautious optimism. The Covid-19 pandemic has moved into the rear-view mirror. With the vast majority of adults in the UK fully vaccinated, restrictions have been lifted and normality has largely resumed. In a global context the UK remains a safe haven for international capital and posted the strongest GDP growth of all the G7 economies in 2021. UK property market The speed and strength of the property market’s recovery from the pandemic was better than expected. Although the average returns are positive, there is still polarisation between sectors and within subsectors, particularly retail. According to the MSCI UK Quarterly Property Index, commercial property delivered a total return of 19.6% for the year ended March 2022, which compares to 1.1% for the year ending March 2021. The stellar performance was largely attributable to the continued growth in the industrial sector and a recovery in values in the retail warehouse subsector. All Property capital growth was 14.9% in the year to March 2022, significantly better than the -3.2% recorded for the previous year. The income return was 4.2%, slightly lower than the 4.5% recorded for the preceding year. The industrial sector had an extraordinarily strong year. The industrial total return for the year ending March 2022 was 40.7%, with annual capital growth reaching an all time high of 35.9% and an income return of 3.6%. Industrial ERV growth for the period was 11.2%, with a subsector range of 15.8% to 8.2%. Capital growth ranged from 47.7% to 28.2% within subsectors. Equivalent yields for industrial property now stand at 4.1% (March 2021: 5.0%). The office sector continued to face a degree of uncertainty over future demand levels and suffered an additional setback in December 2021 as people were once again advised to work from home in the face of the Omicron wave. The office sector produced a total return of 6.9% for the year to March 2022, comprising 3.2% capital growth and 3.7% income return. All Office annual rental growth was 1.4% ranging from 2.4% to 0.9% within subsectors. Office capital growth ranged from 6.5% to -0.6%. Equivalent yields for office property now stand at 5.5% (March 2021: 5.8%).

The elevated rate of online sales over bricks and mortar retail and oversupply of retail units continues to hamper the retail sector as a whole, albeit some segments have recently seen a return to positive capital growth. The retail sector produced a total return of 14.9% for the year to March 2022. This comprised capital growth of 8.9% and income return of 5.6%. Rental values fell -2.0% over the period, ranging from 0.6% to -7.0%. Retail subsector capital growth ranged from 22.9% to -5.8%. The retail warehouse subsector was the driver of growth, with increased demand from investors pushing down yields. Equivalent yields for all retail property now stand at 5.9% (March 2021: 6.7%). According to Property Data, the total investment volume for the year to March 2022 was £70.5 billion, a 66.5% increase on the year to March 2021. The volume of investment by overseas investors in the year to March 2022 was £33.0 billion, accounting for 46.8% of all transactions. As the disruptive threat of the pandemic recedes, new challenges for the property market are emerging from the macroeconomic and geopolitical environment. In times of uncertainty, UK property is often seen as a safe haven for investment. During periods of increased inflationary pressure property can provide a hedge in the form of an opportunity to grow income through rental growth and in turn generate capital growth. Certain property types are more akin to acting as an inflation hedge. At the current time, assets where demand is strong and supply limited are likely to offer protection through rising rental values, equally leases with fixed or inflation linked leases will also provide support.

Picton Property Income Limited Annual Report 2022

Our Marketplace continued

Market drivers and impacts

The drivers of commercial property markets are complex and can vary between sectors. The relationships between the drivers described below are often interconnected, with certain themes or trends spanning multiple drivers and creating multifaceted impacts. For example, the systemic shifts created by the Covid-19 pandemic, political unrest, environmental degradation, social inequality, inflation, and economic conditions have cross-dimensional impacts on our operational environment.

Market driver

Impact

Socio-political There is no doubt we are operating in a tumultuous period. With the Covid-19 pandemic subsiding, the conflict and humanitarian crisis in Ukraine and plight of refugees around the world are front and centre of political agendas. In the wake of the Covid-19 pandemic, global vaccine equality is vital to help control the severity of future outbreaks and variants. In terms of economic recovery, the pandemic amplified many social injustices, from unemployment to access to affordable childcare, education and health inequalities. There is growing recognition that we need to transition to a fairer and greener economy. Inflationary pressures and the rising cost of living are being felt by many. Rising oil and energy prices have been amplified by the war in Ukraine and sanctions on Russia. The UK Government’s levelling up agenda involving investment in infrastructure and creation of freeports will affect market drivers in certain areas through tax benefits relating to property and business rates, planning permission and tariffs. Longer-term trends that impact the commercial property market include but are not limited to; shifting global economic power, the slowdown in economic growth in China and the impact on supply chains of China’s zero Covid policy, the shifting demographics towards an ageing population, the ongoing trend towards urbanisation and the increasing population of cities. Economic The war in Ukraine poses multiple threats to the UK economy, from trade links with Russia to a reduction in business and consumer confidence, investment sensitivity to uncertainty and links to inflation through rising energy costs and commodity prices. The annual rate of inflation recently reached a 40-year high. The rising price of gas and electricity following the increase in the cap on energy prices and the rising price of motor fuel were significant contributors. In addition, there was a transitory element to inflation, as it was anchored to the pandemic years and the reopening of the economy following lockdowns. Pay increases are not expected to keep pace, resulting in a fall in real incomes. Property provides a hedge but for some sectors more than others. Despite the Omicron variant causing prolonged uncertainty in the winter of 2021/22, GDP is now ahead of pre-pandemic levels. In the short-term, it is expected that GDP growth will be dampened by heightened inflation. There are also concerns on the supply side as bottlenecks due to Covid-19, labour shortages and wider geopolitical issues affect the global supply chain.

With the pandemic amplifying social injustices and inequalities, societal value has moved up the corporate agenda. Companies are increasingly held accountable for creating long-term positive impact to local communities and the environment. The pandemic has changed the way in which we live, work and consume. Certain trends, for example increased online retail spending and remote working, are not expected to fully revert to pre-pandemic levels. Remote working is evolving into a hybrid model, with many employers wanting to stay flexible post-pandemic. This means not only working from home, but flexitime, compressed hours, and other dynamic working practices. For office occupiers this could mean changing requirements for location, fit out, configuration and quality of space. The ‘new normal’ is still being figured out and will depend on many factors, for example sector, industry, workforce age/seniority level, company size and location. In terms of demographics, the impacts of an ageing population are complex. There are implications for the economy, labour force, fiscal balance and real estate. Urbanisation and population growth in cities brings a general increase in demand for goods and services and for property from which to manufacture, distribute and sell them. Any form of uncertainty has the potential to adversely impact economic growth. The global pandemic is not over and there is the potential for further variants to reduce vaccine efficacy and threaten public safety. In addition, some aspects of the Brexit transition have not been finalised, the cost of living has dramatically accelerated and heightened geopolitical tensions are not conducive to improving business and consumer confidence. In times of uncertainty, investors often turn to ‘real assets’ as a less volatile haven. The degree to which real estate acts as an inflation hedge is a topic of debate. Factors to consider are the length of investment period and point of investment. The speed at which rents keep pace varies across property sectors. For example, recently, industrial rental growth has comfortably outpaced CPI inflation. There is also a link with property values through rental and income growth. The gap between property yields and risk-free gilt yields is a crucial measure in the attractiveness of property investment. The Bank of England has responded to rising inflation by increasing interest rates, with further rises expected in the short-term. Despite the increases, interest rates remain low by historic standards, leaving investors to search for income in a low-rate environment.

Picton Property Income Limited Annual Report 2022

Strategic Report

Financial Statements

Additional Information

Governance

Market driver

Impact

Occupational and investor demand The property market is cyclical, with performance linked to economic growth. The balance of supply and demand in the investment and occupier markets impact pricing and rental growth respectively. Historically, all property sectors have moved through cycles broadly in unison; however, more recently there is a greater divergence between sectors brought about by structural drivers. The Covid-19 pandemic accelerated trends that affect the use of commercial property, for example remote working and online retail.

In 2021 the MSCI Quarterly Property Index reported a huge increase in industrial capital values, with robust occupier and investor demand and limited supply resulting in surging rents and yield compression. Although it is not expected that this pace will be maintained, demand from a wide range of occupiers is likely to underpin this sector’s performance going forwards. The role of the office is evolving. Although the Government advice to work from home where possible has now been reversed, many office-based businesses are still establishing a new normal and incorporating an element of flexible working. The office as a place for collaboration and face-to-face communication requires an adjusted fit out, incorporating more meeting rooms and breakout space. Enticing office workers back to the office is achieved through offering quality space in the best locations. The various subsectors within the retail sector are at different stages of recovery. Retail warehouses saw very robust performance in 2021, with capital growth almost keeping pace with industrial. Other retail subsectors have not yet seen a significant turn in fate. It is expected that 2022 will begin to see a rebalancing of total returns and more convergence of the main sectors. The social and human cost of achieving success is increasingly considered. Society is holding Governments and corporations accountable for the wider impact of investment decisions. Sustainability is becoming widely and fully embedded into corporate strategy, business models and asset business plans. TCFD is promoting the improvement and increased reporting of climate- related financial information and enabling progress to be measured against science-based targets. Complacency brings increased physical and transitional risks and potentially stranded assets. Measures to reduce the carbon emissions of a property portfolio, lift the EPC profile and improve other sustainability credentials like biodiversity and wellness bring both costs and opportunities to enhance value. Collaboration is key. Engaging with industry stakeholders to share knowledge, data and best practices accelerates progress. Engaging with occupiers on Scope 3 emissions is vital to achieve a meaningful reduction in portfolio emissions and progress along a pathway to net zero. Applying circular economy principles to real estate helps to reduce embodied carbon emissions through extending the lifecycle of a building, promoting repurposing over demolition and reuse of materials over landfill. Remote working, flexible working and reduced business travel are facilitated by the advancement of online communications platforms. Although accelerated by the pandemic, these working patterns will continue in a hybrid model. Flexible workspaces require technology to be marketed and managed, to remain competitive and provide an effective solution for businesses. The UK Government’s agenda to ban sales of new combustion engines by 2030 will shape requirements for electric vehicle charging where we live, work and shop, with implications for buildings, power supply and parking arrangements. A longer-term consideration is the roll out of the 5G network, enabling driverless vehicles. There is a heightened need for data storage and datacentres. Big Data, Artificial Intelligence, Machine Learning and cloud computing are shaping the future of the workforce and the requirements for buildings in which they operate. Bolstering cyber security and secure data storage is high on corporate agendas. For retailers, investment in online platforms and fulfilment is paramount. The proportion of online spending has not reverted to pre-pandemic levels. Longer-term, the increased use of robotics, electric industrial vehicles and drones has the potential to impact the way online orders are fulfilled and industrial property is occupied.

Sustainability and climate change Sustainability, climate change, extreme weather, biodiversity loss and other environmental issues are amongst the largest risks we are facing on a global scale. Time for change is limited and the real estate industry has a significant part to play. There is a need to transition to a low carbon economy. The Government has set a target of bringing all UK greenhouse gas emissions to net zero by 2050. Declaring a pathway to achieving net zero carbon, involving reducing carbon emissions as much as possible and then offsetting any residual emissions, is becoming common corporate practice. The Task Force on Climate-related Financial Disclosures (TCFD) provides a framework for reporting the physical and transition risks to companies associated with climate change and provides transparency to stakeholders. Specific to the property industry, the legislation on minimum energy efficiency standards (MEES) is changing. Landlords must understand the new requirements and adapt where necessary to avoid stranded asset risk. There is growing recognition that the linear economy – take, make, waste; is not sustainable and a more regenerative and restorative economy is needed. Circular economy principles and systems aim to tackle waste and pollution, reuse products and materials and regenerate nature. Technology The digitisation of real estate, increased use of data, advanced analytics and automation are drivers of change in the built environment. The technology trends set to directly impact the property sector in the short to medium-term are wide ranging, from smart building technology, the 5G network, increased adoption of electric vehicles, Artificial Intelligence, robotics, Big Data and cloud computing. Competitiveness in a post-pandemic world will depend on a company’s ability to thrive in the digital environment. The use of analytics to make data-backed decisions provides confidence to investors. Technology plays a significant role in driving positive change towards sustainable buildings during each stage of a building’s life cycle. Technological advances in construction, manufacture of materials, energy usage and circular economy principles are all essential to progress towards a low carbon economy. Property sectors are all uniquely impacted by technological advances in multiple areas, with each facing its own benefits and challenges. Common problems in the industry include a reliance on legacy systems, fragmented software solutions, lack of standardisation and decentralised data platforms.

Picton Property Income Limited Annual Report 2022

Our Marketplace continued

Throughout the year, structural changes that were accelerated by the pandemic continued to create a divergence in performance between property sectors. The industrial sector has benefitted from the increase in online consumer spending to the detriment of traditional retail, whilst enforced working from home during the pandemic is likely to lead to a longer-term shift towards a more hybrid model of home and office-based working.

Industrial market trends

The 12 months to March 2022 was a record-breaking year for the industrial sector, which saw capital values increase by 35.9% – the highest annual growth recorded for any sector across any year in the MSCI UK Quarterly Property Index. Annual rental growth was also a record for the sector at 11.2%, significantly higher than the 12-month CPI inflation rate of 7.0% for the same period. The industrial sector has witnessed exceptional levels of take-up for the last two years as it continues to benefit from the accelerated shift to online spending, as well as global supply chain disruptions which have created a need for greater stock holding to maintain supply chain resilience. On the supply side, development has struggled to keep pace with demand, with the rising cost of materials and labour shortages increasing lead times and in turn supporting rental growth. However, now more closely tied to levels of consumer spending, like the retail sector, industrial may also be adversely impacted if activity falls because of persistently high levels of inflation. Industrial occupiers are also faced with rising fuel and energy prices coupled with increasing rents and the impending business rates revaluation in 2023, potentially putting pressure on profit margins. The sector is experiencing strong investor demand which has driven down yields. For the year to March 2022, the industrial sector accounted for 27% of total investment volumes at a value of £19.2 billion. Standard industrial units, particularly in London and the South East are forecast to outperform the All Property average. What this means for Picton ‒ We are primarily invested in multi-let industrial assets, for which there continues to be healthy demand across a wide range of occupiers. The portfolio remains well positioned with limited exposure to large and online driven distribution units. ‒ Our occupier focused approach has enabled us to capitalise on strong demand for industrial property and grow ERVs through new lettings, renewals and rent reviews. Our response to these trends ‒ We will continue to capture rental growth through new lettings and proactive portfolio management. ‒ We will strategically maintain our overweight position to the sector. ‒ We will continue to acquire complementary assets where possible, whilst remaining selective given the increase in pricing. ‒ We envisage only limited and selective disposals.

Picton Property Income Limited Annual Report 2022

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