Deputy City Editor
Slough Estates, the industrial property landlord and the UK's fifth- largest property company, said yesterday that commercial property rents had finally stabilised, but warned that any rises in rental values as the economy picked up would be slow to show in earnings.
Sir Nigel Mobbs, chairman, said: "As corporate expansion plans resume, we can expect good growth in rents for quality, well-located properties. However, it will take time for market improvements to be translated into significant earnings growth."
His comments highlighted a problem affecting companies thoughout the property sector, which have been protected from falling rents by the UK's system of upward-only rent reviews but are now paying the price. Upward- only reviews can mean tenants pay higher rents than would be achievable in the market, but they also slow landlords' profits growth when the market picks up again.
In the six months to June, Slough's pre-tax profits slipped to pounds 32.8m from pounds 33.3m, despite a 7 per cent rise in investment income. Acquisitions during 1994 added more than half the increase. Earnings per share increased from 4.5p to 4.9p and the interim dividend was maintained at 3.1p.
Although the held payout was expected, Slough's shares closed 5p lower at 218p, at which level they have fallen by almost a third from last year's peak of 313p.
During that period, in line with the unfashionable property sector, they have underperformed the rest of the market by 30 per cent as the market focused on the likelihood of a slowly rising dividend for several years to come.
Slough does not revalue its properties at the half-way stage, so there was no indication yesterday of the discount to the company's underlying worth at which its shares are trading. Six months ago, Slough disappointed the market with a 2.6 per cent increase in net asset value from 269p to 276p.
Despite a sluggish investment market as institutions continued to shun commercial property, Sir Nigel said it had received a number of inquiries for design and building work. It was also undertaking a limited number of speculative industrial buildings.
Earlier this week Slough received a formal commitment from the John Lewis partnership to take the anchor tenancy at a proposed pounds 150m shopping centre in Glasgow, which the company is developing with AMP Asset Management.
AMP joined forces with Slough after Grosvenor Square Properties, the property arm of Associated British Ports, pulled out of the 600,000 sq ft venture, which as well as the John Lewis store will include parking for 2,000 cars - one of the country's largest city centre car parks.
The scheme, Buchanan Galleries, was acquired with the purchase of Bredero Estates, the company brought down by the ambitious redevelopment of Hammersmith Broadway in west London. Completion is planned for 1999.