Picton Property Income Limited Annual Report 2023

Strategic Report

Governance

Financial Statements

Additional Information

UK property market Due to the sharp rise in the risk-free rate and cost of debt, the MSCI UK Quarterly Property Index All Property equivalent yield moved out by 85 basis points in the three months to December 2022. MSCI reported capital growth of -12.6% for this period, the fastest quarterly correction since December 2008 at the height of the Global Financial Crisis. The situation appears to now be stabilising and the three months to March 2023 saw capital growth of -1.0%. Looking at the year to March 2023, the MSCI UK Quarterly Property Index reported an All Property total return of -12.6%, comprising -16.1% capital growth and 4.1% income return. This is in sharp contrast to the previous year; the total return for the 12 months to March 2022 was 19.5%. Despite the tribulations of the investment market, the occupier market saw a more encouraging performance, and All Property ERV growth for the year to March 2023 was 3.5%. This compares to 3.1% ERV growth for the year to March 2022. Following an extraordinarily strong year of capital growth to March 2022, the low yielding industrial sector was disproportionately affected by the recent market correction. The MSCI All Industrial total return for the year to March 2023 was -20.4%, comprising capital growth of -23.2% and income return of 3.6%. Capital growth ranged from -18.7% to -27.1% between sub-sectors. On a more positive note, due to ongoing supply constraints and healthy occupier demand, the industrial sector achieved strong rental growth for the year to March 2023 of 8.6%, ranging from 10.0% to 7.2% between sub-sectors. In addition to the recent rise in yields experienced by all sectors, the office sector is still undergoing a structural change reflecting post-pandemic working patterns and sustainability- related costs. There is a growing trend of polarisation between prime, energy efficient space and secondary office stock and locations. MSCI reported an All Office total return of -12.3% for the year to March 2023, comprising -15.3% capital growth and 3.6% income return. Capital growth ranged from -10.3% to -22.7% between sub-sectors. ERV growth was 1.6%, ranging from 2.8% to 0.6% between sub-sectors.

MSCI UK Quarterly Property Index – Annual Capital Growth (%)

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Mar 2007

Mar 2008

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Mar 2023

All

Retail

Office

Industrial

Following a prolonged phase of repricing, the retail sector suffered less of an impact from the recent correction than others. The MSCI All Retail total return for the year to March 2023 was -7.9%, comprising capital growth of -12.7% and income return of 5.4%. Capital growth ranged from -5.6% to -17.8% between sub-sectors. The wave of retailer liquidations and CVAs seems to have abated, and arguably retailers that survived the pandemic years should be better placed to weather the storm of weaker consumer demand owing to the cost of living crisis. Following four years of decline, All Retail ERV growth turned positive at 0.4%, ranging from 4.4% to -2.1% between sub-sectors. According to analysis from Property Data, the total investment volume for the year to March 2023 was £50.6 billion, a 31% decrease on the year to March 2022. The slowdown in investment activity is only evident during the six months to March 2023, which is 58% down on the same period for the previous year.

Investors have been waiting for greater stability in the macroenvironment, which has more recently been affected by concerns within the banking sector. The five-year swap rate currently stands at around 4%, placing the cost of debt just below the MSCI All Property equivalent yield. The chart above shows the annual capital growth for All Property and the three main sectors. It illustrates the increased polarisation of sectors in more recent years, until the year to March 2023 which saw a return to a narrower range of capital growth. The chart below shows the strength of industrial rental growth in comparison to other sectors, particularly in the last two years, and the significant rental value declines endured by the retail sector, particularly during the pandemic.

MSCI UK Quarterly Property Index – Annual Capital Growth More recent data from the MSCI UK Monthly Property Index shows that property values have begun to stabilise with continued positive capital growth in the industrial and retail sectors in April. MSCI UK Quarterly Property Index – Annual Estimated Rental Value Growth (%)

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