Circle Property — Active investment in regional offices

Circle is an active manager of its assets, targeting well located but under-utilised regional office property where it has identified a clear opportunity to add value. As a non-REIT its emphasis is on delivering an attractive total return, significantly driven by capital growth while realising the income potential in the portfolio. The experienced management team has built a strong track record of NAV total returns both before and since IPO in February 2016. Driven by the completion and letting of important refurbishment projects, positively reflected in income and growth in capital values, accounting total return has been above 20% in each of the three full years since IPO, a very strong performance in a sector context. A positive supply-demand balance in the occupier market for regional offices, significant reversionary potential to market rents, and continuing asset management opportunities to enhance income potential further all bode well for future prospects.

The benefits of continuing lease activity are yet to be fully reflected in either reported recurring income or NAV. Having increased from £6.8m to £7.6m in FY19, annualised contracted rental income reached £8.2m at 30 September 2019 (H120). H120 NAV per share growth to 278p (277p at end-FY19) was modest, with property acquisition costs offsetting revaluation gains, but management expects further completed leasing progress in H220, including at the recently acquired property (Concorde Park), to have a clearly positive impact on full year NAV as well as recurring income. We estimate a current rental value at full occupancy of c £10.8m compared with c £9.1m of contracted rent (including H220 activity), representing a material opportunity to increase income and valuations further. A pipeline of additional asset management initiatives is aimed at further enhancing the value creation potential. None of this is captured in our forecasts due to the difficulty in forecasting the extent and timing of progress.

Circle has delivered strong accounting returns and a strong share price total return since IPO, both in absolute terms and relative to the sector. Over the past year its share price performance has been broadly in line with the sector but has failed to match the continued increase in NAV per share. This leaves the shares on a c 30% discount to FY20e NAV, wider than the broader sector and more direct peers (c 10%). As Circle invests to enhance total return over time the dividend yield is lower than the broader sector (c 3.8%) and peers (5.9%) but recurring income and DPS are growing. The current portfolio contains material opportunities to drive continuing value creation irrespective of the cycle. Additionally, while investors in the sector are currently focused on income visibility (long leases/inflation indexed rents) this could change if economic and Brexit uncertainties reduce, with the potential for a re-rating to further support shareholder return.

We discuss the sensitivities on page 14. In summary, the commercial property sector is cyclical; occupier demand is sensitive to economic growth, while valuation yield and capital values are affected by investment flows and monetary conditions. Circle’s relatively long average unexpired lease term (c 10 years) and a tenant base that includes number of strong tenant covenants complemented by several multi-tenanted properties mitigate some of the cyclical income risks. There appears little near-term risk of higher short-term interest rates, which would affect the cost of Circle’s floating rate debt. Higher long-term rates would be likely to negatively affect sector-wide property valuations. Management says it is unlikely to increase risk exposure and gearing (we estimate an LTV of c 42% currently) materially until there is an improvement in the political and economic outlook surrounding Brexit.

Circle is an internally managed property investment company registered in Jersey. It was initially founded as a limited partnership in 2002, became a Jersey Property unit trust (Circle Property Unit Trust or CPUT) in 2006, and has been quoted on AIM since February 2016. The company actively manages its assets, targeting well located but under-utilised regional office property where it has identified a clear opportunity to add value. Circle’s emphasis is on delivering an attractive total return, significantly driven by capital growth while realising the income potential in the portfolio. However, it is not a real estate investment trust (REIT) and unlike a REIT it does not seek to maximise short-term income. The company has a strong track record of NAV total returns both before and after IPO. In the 10 years to FY16 (the year of IPO), a period including the aftermath of the global financial crisis, it generated an average annual total return of more than 7.5% pa. Since IPO, and until the end of FY19, NAV and NAV per share have increased by 86% and including dividends paid the total accounting return has been 96.8%, or an annual average accounting total return of 24.5% (see Exhibit 9, page 12). The strong return since IPO has been driven by the completion and letting of important refurbishment projects, positively reflected in income and growth in capital values.

At 30 September 2019 the portfolio consisted of 15 assets valued at £135.6m, of which 14 were offices (99% of the total value). Aside from an office property in Moorgate, all of the assets are outside London.

Circle’s senior management team includes two full-time property professionals and the company is governed by a highly experienced board. Together, the management and board own approximately 24% of the company, closely aligning their interests with external shareholders.

Circle targets well-located, short-let, or part-let if the letting prospects are sufficiently strong, primarily office properties in the UK’s provincial cities where it can add value by undertaking lease renewals, rent reviews, lettings and refurbishments. Acquisitions are typically at close to vacant possession value, which allows management to use its expertise to undertake cost-efficient refurbishment and development to maximise reversionary rental values and secure new leases on the properties. Once the process of refurbishing an asset is underway, management will seek to attract tenants quickly with competitive rents in order to beat local competition, but still aims to achieve attractive yields. In this way, management seeks to increase both rental income and capital values. The company will dispose of properties that are not considered to have further potential and where an attractive price can be struck. The board’s strategy is to deliver annual total returns of over 12% through targeting returns at the property level of at least 15% on the costs of development expenditure and acquisitions.

Circle is not a REIT and has no plans to convert to UK REIT status. It believes that its total return strategy is best served by the added financial flexibility that it has outside the REIT regime, particularly given the requirement for REITs to distribute at least 90% of profits arising from their qualifying property rental business. Several recent UK REIT conversions have been driven by tax considerations and especially changes to the treatment of non-resident landlords, which became liable for UK capital gains tax on disposals of UK commercial property from 1 April 2019 and the planned inclusion of non-resident landlord companies within the scope of UK corporation taxation from 1 April 2020.

Circle is registered under the Non-Resident Landlord Scheme and will be affected by these changes, although we do not believe this will have a material impact on its current tax position. From the beginning of FY20 it will recognise deferred tax on property revaluation gains in respect of the capital gains tax that would be payable on disposal, at the standard UK corporate tax rate (currently 17%). As a result, we would expect the company to provide supplementary NAV disclosure, adding back any deferred tax in respect of investment properties as is the case under the commonly used EPRA reporting. The rationale for this adjustment is to highlight the fair value of net assets on an ongoing, long-term basis, by excluding assets and liabilities that are not expected to crystallise under normal circumstances. From the beginning of FY21, Circle’s net rental income will become taxable at the UK corporate tax rate of 17% rather than as income, currently the case, at the basic rate of 20%. Taking into consideration capital allowances and other adjustments, our forecasts include an effective 15% tax rate on recurring earnings (excluding revaluation movements).

At 30 September 2019 (H120) Circle’s portfolio was externally valued at £135.6m (FY19: £124.6m). During H120, in line with the company’s strategy of focusing on good quality, well located regional offices where management has identified attractive opportunities in current market conditions, a retail warehouse was disposed of for £4.6m and a south-east regional office park was acquired for £14.6m. Following these transactions, the office sector represents 99% (by value) of the portfolio. Comprising 15 assets, the portfolio is relatively concentrated by number of properties, which partly reflects the very hands-on nature of its asset management strategy. Reflecting the number of properties, but also management’s focus on areas where it expects letting prospects to be strong, there is a geographic bias towards Milton Keynes, Birmingham and Bristol, in aggregate 83% of the portfolio value at the end of FY19 (the last published full breakdown). Details of each of the properties can be viewed on the company’s website here.

The tenant base provides an additional level of diversification. There are currently 57 tenants (54 at end-FY19), including regional SMEs, national partnerships, and listed companies from both the FTSE 250 and FTSE 100. The largest tenant is Compass Contract Services, which leases office space at Circle’s largest asset, Kents Hill Business Park in Milton Keynes. The Compass lease accounted for a significant 20.1% of end-FY19 rent roll but it has a long duration (25 years at inception, with a break at 15 years subject to a £2m penalty, with 22.5 years remaining), agreed by Circle after it acquired the property on a short lease in 2013. Other principal tenants include BE Group (10.4%), Which? Financial Services (4.3%), Grand Union Housing Group (4.6%), B&M Retail (3.6%), Grant Thornton (3.3%), New World Trading (3.2%) and T-Systems (3.0%), although much of the portfolio is multi-tenanted. Circle has been focusing properties that are capable of subdivision to provide smaller office suites of up to 5,000sq ft, more attractive to local professionals and SMEs that may well prove less prone to the uncertainties posed by Brexit.

At the end of FY19, the portfolio annualised contracted rental income was c £7.6m. In H120 this increased by 7.2% to c £8.2m, with the growth was driven by further letting of refurbished assets and a positive net impact from acquisitions and disposals. The key letting in H120 was at K2 Kents Hill Business Park, Milton Keynes, where the remaining c 21k sq ft of refurbished space was let on a 10-year lease at an annualised contractual rent of c £353k. The end-FY19 weighted average unexpired lease term (WAULT) of 9.7 years to first break and 10.7 years to lease expiry was relatively long in a sector context, providing significant visibility over contractual income, and reflects the impact of the large and long Compass lease.

Occupancy (by area) was 91.9% at the end of FY19, but has since increased on a like for like basis (we estimate by 3.2 percentage points) as a result of the K2 letting. When reported, H120 occupancy will be negatively affected by the disposal of the fully let Baildon Bridge Retail Park and the acquisition of the partially let Concorde Park (we estimate c 90%). However, since H120, c 21k sq ft of vacant space at Concorde Park has been let, adding c £485k to annualised contracted rent (and, we estimate, taking current portfolio occupancy to more than 92%).

Also since the end of H120, Circle has re-geared the lease at Victory House Northampton with the existing tenant, Regus, for a further 12 years, adding c £360k to annualised contracted rent. We estimate that including the Concorde letting and Victory House re-gear, portfolio contracted rent will have increased to c £9.1m.

The end-FY19 portfolio estimated rental value (ERV) at full occupancy of c £9.7m will have increased further in H120, we estimate to c £10.8m, while the currently identified refurbishment projects within the portfolio are intended to further enhance income potential.

Concorde Park, acquired for £14.6m (before costs) in August 2019, is a well-located business park in Maidenhead, set to benefit from Crossrail. The property was rebuilt to a high specification (including new lifts, air conditioning and full height glazed atrium) in 2007 at a cost of c £7.4m. At acquisition, c 45.3k sq ft out of a total 71.5k sq ft was vacant (63% void) although the letting of c 21.3k sq ft was under negotiation. With these negotiations now completed, quickly halving the void space, the annualised contracted rent roll has increased from c £627k at acquisition to c £1.1m. In addition to positively affecting rental income from H220 onwards, the leasing progress is likely to generate a revaluation uplift. With an ERV of £1.55m (9.8% reversionary yield at acquisition), there is further asset management potential from this property.

Elsewhere in the portfolio, with letting of the major refurbishments at Somerset House and K2 now complete, the main remaining opportunities for letting vacant refurbished space are at Great Charles St in Birmingham (11.4k sq ft or 44% of the total); One Castlepark, Tower Hill, Bristol (6.4k sq ft or 8.1% of the total); Park House, Northampton (4.4k sq ft or 10.2% of the total); and 141, Moorgate, London (2.6k sq ft or 23% of the total).

Management has also identified asset management opportunities at K3, Kents Hill Business Park, Milton Keynes and 135 Aztec West, Bristol. Kents Hill comprises eight separate buildings of which two are known as K1 and K2, while the remaining six are known as K3. K3 was wholly let to Compass although the terms of the lease allowed Circle to take back one of the properties with no loss of rental income. Circle plans to refurbish and then re-let this 13.5k sq ft property, with an ERV of £245k, commencing in December 2019. At 135 Aztec West in Bristol, Circle will take advantage of the expiring lease (annualised contracted rent £175k) to refurbish the asset, commencing January 2020, and re-let it at an ERV of £245k.

In the regional office market that is the focus of Circle’s portfolio, occupier demand appears to have remained robust despite the continuing uncertainty of the Brexit process and some weakening in overall economic growth prospects, in part supported by structural factors such as business relocation out of London. With moderate new build activity there is a tightness of availability for prime office space that is spilling over into good-quality secondary office space and pushing up rents. The supply of secondary office space has been further constrained by Permitted Development Rights that have eased the conversion to residential use. In the investment market, UK-wide commercial real estate investment volumes weakened in H119, although there are some signs that the impact in the regions was more muted than for London. Overall UK volumes fell by 29% compared with H118 and were 26% below the half-yearly average. Although it is difficult to be certain, most commentators believe that the slowdown in investment activity reflects a delay in decision making that may reverse when the Brexit outcome becomes clearer.

Research by Avison Young indicates that take-up of office space across the big nine regional office markets continued to be above the long-term average through Q219 and that against a backdrop of limited supply this has continued to put upward pressure on rents.

Looking forwards, the most recent quarterly market forecasts by the Investment Property Forum (IPF, canvassing a group of fund managers and surveyors under the IPF Research Programme) were published in September and point to an expectation of positive total returns in the office (and industrial) sectors through to 2023. In the past quarter, the expectation for both rental and capital growth in the office sector has increased, while the expectation for industrial rent growth has weakened very slightly with a more noticeable dip in the capital growth expectation for 2019.

We present the market consensus data as a guide to expected overall market direction and returns but would caution against a direct read-across to Circle’s, or any other, portfolio. The market consensus is formed of a wide range of differing expectations and at the individual portfolio level much depends on the performance of individual assets as well as the timing and effectiveness of asset management initiatives. For an active manager like Circle, with a focused asset portfolio, this is very much the case.

Circle has an experienced and highly motivated board of directors, including the small team of executive directors that provide the internal property management. The executive directors have many years of experience in real estate asset management, and their extensive range of contacts has proven useful in providing access to less competitive off-market acquisition opportunities. By managing the portfolio internally, Circle has direct control of costs (there is no NAV-linked annual management fee) and this should provide a benefit from economies of scale if the company can successfully grow the size of its portfolio. Administrative and financial management services are provided externally by Oak Group, the private client, corporate services and fund administration group that acquired Consortia in 2018, which was paid £302k in fees in FY19 (FY18: £252k paid to Consortia).

Circle CEO John Arnold was one of the founders of Circle LP in 2002, the limited partnership forerunner of the company, along with James Hambro and John Bodie. The COO, Edward Olins, joined Circle in 2006 when Circle Property Unit Trust was created by way of acquisition of the Circle LP assets. Biographies for both can be found on page 17.

The board of directors comprises a majority of independent non-executive directors and two executive directors, the CEO and COO. Following the death of the 10th Duke of Roxburghe in August 2019 there are currently four independent non-executive directors including the chairman, Ian Henderson. Ian Henderson is widely experienced in the property industry and was formerly chief executive of Land Securities. The other non-executive directors are James Hambro, Michael Farrow and Damian Jepson. As noted above, James Hambro, chairman of James Hambro & Partners, was one of the founders of Circle LP and remains a significant shareholder in the company. The 10th Duke of Roxburghe was an investor in CPUT and his estate remains a significant shareholder in the company. Damian Jepson and Michael Farrow have extensive financial services experience. Damian Jepson is a corporate and fund accountant at Oak group and Michael Farrow was a founding director of Consortia.

The directors’ interests in the shares of the company, including family interests, amount to c 6.8m shares or c 24% of the total shares in issue, representing a significant alignment of interest with other shareholders. The percentage of shares not in public hands, as defined by the AIM rules, is 36.5% and also includes extended family interests that are not included within the 24% figure.

Executive remuneration is based on three pillars: an industry competitive salary, a bonus calculated on fixed performance indicators and a long-term incentive share plan (LTIP). In FY19 the CEO and COO received basic salaries of c £210k and £189k, respectively, each increased by 2.5% on the previous year. Both also received the maximum bonus award, being 100% of salary (FY18: 100%), at the discretion of the board, and based on the company’s performance in relation to certain key performance indicators (NAV growth, earnings/EBITDA growth, and maintenance of a progressive dividend policy). Annual awards under the LTIP take the form of a conditional right or nil cost options to acquire ordinary shares in the company. These vest over a three-year period during which the performance of the company must satisfy certain targets. At IPO in 2016 the company issued c 255k ordinary shares to be held in treasury subject to award under the LTIP with the vesting criteria set by reference to total shareholder return (share price movement plus dividends) compared to a basket of peers selected by the company’s nominated adviser (or Nomad). During FY19, 87.5% of these shares vested, although none has yet been exercised. The LTIP awards for 2017 and 2018 were held in abeyance subject to a review of the vesting criteria that was considered by the AGM in August 2019. At the AGM shareholders approved a further vesting condition that will account for 50% of the award being subject to a fixed NAV total return hurdle. This tranche of the share award will be non-vesting if the NAV total return is less than 8% and if the NAV total return is 14% it will vest in full. Additionally, the AGM approved an increase in the individual annual threshold for the value of LTIP awards from 100% of basic salary to 200%. Circle has indicated that, based on the company performance to end-FY19, a total of c 530k shares (100%) will vest in respect of FY17 and FY18 combined, with a fair value of c £540k. This has not yet been provided for in the financial statements up to 31 March 2019, but we have included it in our forecasts.

Since we last published, Circle has reported its FY19 results (July 2019), and ahead of interim results for the six months to 30 September 2019 (H120), expected to be published on 9 December 2019, the company has also issued a trading and NAV update.

Taken together these company announcements show continuing strong growth in contracted rental income, continuing into H220, driven by the letting of refurbished assets, lease re-gearing, and early progress in the letting of void space at the recently acquired Concorde Park. In FY19, annualised contracted rental income increased from £6.8m to £7.6m. In H120 it increased further to £8.2m and new lettings and re-gears have added an additional more than £0.8m so far in H220. The FY19 leasing progress drove strong capital growth in the year with reported NAV per share increasing 21% to 277p and including DPS paid the FY19 NAV total return was 23.3%. In H120, NAV per share edged up to 278p despite acquisition costs related to Concorde Park (we estimate almost £1.0m) and management expects the subsequent leasing progress to have a stronger positive impact on valuations and NAV in H220.

To provide context, the FY19 results are summarised in Exhibit 7. Reflecting the higher rental income, partly offset by higher administrative expenses and net finance costs (lower cash balances and interest earnings and a slightly higher cost of borrowing), Edison adjusted PBT (excluding gains/(losses) on sales of investment property, revaluation movements and other non-recurring items) increased by 8%. After tax adjusted earnings were lower as the tax credit of FY18 reversed to a more normal tax charge in FY19. Reflecting the increased income base and management’s confidence in the current year prospects, DPS was increased by 13% to 6.3p.

Although reported NAV and NAV total return were close to our estimates, the growth in recurring earnings (‘Edison adjusted earnings’) was not as strong as we had expected, primarily as a result of lower than forecast net rental income. The shortfall was despite a strong leasing performance and resulted from a larger lease incentive impact than we had allowed for, particularly evident in H219. In our revised forecasts we have paid close attention to this as discussed below.

For the current year (FY20) and FY21, our rental income (and hence recurring income forecasts) are significantly revised to allow for our better understanding of lease incentive impacts. Although from a lower base, we continue to forecast rental income to grow further, including reflecting a full year impact of the new leases previously agreed, the further leasing progress agreed year to date, and modest rental growth. We expect this to translate into further adjusted earnings and NAV growth, although in FY20 the underlying progress in adjusted earnings is tempered by the accounting recognition of the FY17 and FY18 LTIP awards (c £0.5m).

Our key forecasting assumptions are:

Exhibit 8 shows a summary of our revised forecasts. There is a slight reduction in forecast NAV, which primarily results from our reduced net rental income and adjusted earnings forecasts and modest dilution from the LTIP awards. The rental income changes mirror FY19, reflecting our clearer understanding of the impact of lease incentives rather than any fundamental deterioration in occupancy or contracted rents. FY20 also includes the accounting recognition of the FY17 and FY18 LTIP awards, which increases staff costs and reduces adjusted net profit and adjusted EPS by c £0.4m and 1.5p, respectively. We continue to forecast progressive DPS increases, fully covered by earnings, although we have slightly reduced our forecast DPS growth, in line with our recurring income forecasts and rebalanced the total return more towards capital growth.

As noted above, we estimate an H120 ERV of c £10.8m, significantly ahead of our forecast contracted rental income and representing material potential upside to both recurring income and capital value. Identified refurbishment projects within the portfolio are intended to further enhance income potential.

During FY19, Circle refinanced its existing £55m debt facility with RBS, replacing it with a new four-year £100m facility with RBS/NatWest and HSBC. The facility comprises a £60m revolving credit facility plus £40m accordion option with interest charged at 2.05% pa over Libor and a commitment fee of 0.82% pa payable on the undrawn facility and in relation to the accordion facility. At the end of FY19 gross drawn borrowings amounted to £49.7m with £10.3m of the £60m facility undrawn. An arrangement fee of 0.875% of the facility along with certain other costs has been capitalised and will be amortised over the term of the loan. The financial covenants include a 60% loan to value (LTV) and minimum 2.0x debt service coverage ratio.

Adjusting for cash balances of £3.6m at end-FY19 net debt was £46.1m and the group net LTV was 37.0%. The £14.6m (before costs) acquisition of Concorde Park in August 2019 was primarily funded by a £12.8m drawdown from the facility and net of some repayment from the proceeds of the Baildon Bridge Retail Park disposal we estimate that the £60m facility is currently fully drawn, with a net LTV of c 42%.

We estimate that were Circle to exercise the £40m accordion option directing the proceeds at the acquisition of investment properties, the net LTV would increase to c 56%. This would represent a relatively high LTV in comparison to the broader sector and hence we would expect any further significant debt drawing to be undertaken in conjunction with additional equity resources.

Circle is not a REIT and, unlike most REITs, capital returns are a significant element of overall total returns generated by the company. Although the company aims to increase rental income through leasing and rental growth, it is not focused on income maximisation over the short term. Similarly, although its dividend policy is progressive (defined as increasing or held DPS over time) cash flow is also deployed for reinvestment in the portfolio with the aim of optimising longer-term total returns. The recent strong capital uplifts are the result of letting assets, at increased rents, which were previously held vacant for a period of refurbishment.

Given its total-return strategy, we think Circle’s value creation is best illustrated by the NAV total return (the change in NAV per share plus dividends paid per share). NAV total return has been above 20% in each of the three full years since IPO (in February 2016). The aggregate return from IPO to end-FY19 has been 96.8%, or a compound annual average 24.5% pa, well above the minimum 12% pa targeted by management, and well above the average for the property sector. If calculated using dividends reinvested, returns would be higher still.

Our forward-looking estimates imply lower NAV total returns over the next two years but successful application of Circle’s intensive asset management strategy (the further letting of recently refurbished properties, additional identified asset management initiatives, and the capturing of reversionary potential through lease events) should see the company exceed these forecasts. Some slowdown in returns is to be expected as a result of Circle’s success over the past three years in exploiting opportunities within its current portfolio (the completion of refurbishment at Somerset House, 36 Great Charles St, and K2) as well as a more cautious outlook for the economy and sector. However, as noted above, our forecasts do not include any further letting activity either from existing refurbished assets or the additional asset management projects that Circle plans to undertake. This is simply because of the difficulty in estimating the timing and impact of such events. As a result, although our FY20 and FY21 estimates imply NAV total returns of c 6% and c 5%, respectively, there remains considerable scope for Circle to do better than this if market conditions remain favourable and it is successful in continuing to let remaining vacant refurbished space and capturing reversionary potential through lease renewals. Management also continues to seek accretive acquisitions, which are similarly not reflected in our forecasts.

This focus on NAV total return and the significant growth in Circle’s NAV and adjusted earnings per share since IPO highlights the difficulty of making a simple P/NAV or yield comparison with the broader sector, not least because many of those companies have a deliberate focus on recurring income generation rather than total return.

In Exhibit 10, we show a summary valuation and performance comparison of Circle with a narrow peer group of companies selected from the broader sector, all of which have significant UK regional commercial property exposure. The comparison with Circle is not direct as the group of companies covers a broad spectrum of return strategies (ie income versus capital), many of which have more diversified sector exposure compared with Circle’s office focus, and apart from Circle are all REITs. Palace Capital is perhaps the closest peer in terms of strategy, given its total return approach and focus on the acquisition, improvement and active management of mainly regional office properties. Highlighting these similarities and what it sees as an attractive valuation of Circle, Palace Capital acquired a 5.0% stake in Circle during the past year.

To ease comparison across the group, the P/NAV ratios shown are based on last published EPRA NAVs and the yields shown are based on trailing 12-month DPS declared. On this basis, Circle has a significantly lower P/NAV than the peer group as a whole, although given its total return strategy it also has a lower dividend yield than the average, albeit with above average cover by recurring earnings.

Tracking the strong NAV performance, Circle’s share price has performed strongly since IPO (Exhibit 11) and despite paying below average dividends its share price total return (change in share price plus dividends paid and reinvested) is well above median. This is despite a more muted share price performance over the past 12 months, despite the further strong growth in NAV, widening discount to NAV and increasing DPS, as investors have focused their attention on stocks that offer more visible income returns through long average leases and in many cases rent indexation to inflation.

Taken as a whole, and given the strong historical track record of total return generation, Circle’s valuation appears very undemanding and may in part reflect:

The commercial property market is cyclical, historically exhibiting substantial swings in valuation through cycles. Income returns are significantly more stable, but still fluctuate according to tenant demand and rent terms. The last major sector downturn came to an end in early 2009. From a sector viewpoint we also highlight the increased risks and uncertainties that attach to development activity, including planning consents, timing, construction risks and the long lead times to completion and eventual occupation. Circle is not a developer but is exposed to similar but lesser uncertainties as it actively invests in improvements to existing assets with the aim of enhancing long-term income growth and returns. We consider the main sensitivities to include: