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94. Bull, Bear & Beyond – Regional REIT: executive interview
5 Plays7 months ago
In this interview, Stephen Inglis, head of Regional REIT’s asset manager, ESR Europe LSPIM, and the de facto CEO of RGL, discusses in detail the prospects for the regional office market and the company’s strategy for delivering enhanced shareholder returns. The FY24 results published in March were in line with expectations and looking ahead, the outlook for the relative performance of regional offices has begun to look much brighter. Regional office use has returned to normal and there is a growing shortage of good-quality stock with the environmental credentials that occupiers increasingly demand, for which they are willing to accept higher rents, and from which RGL is already benefiting. With borrowing reduced by last year’s equity raise, RGL has flexibility to invest and further enhance its portfolio, most of which will be held for long-term income and capital growth. Around 20% will be sold, either in the near term or over the next three years, with valuations and total returns enhanced by being positioned for change of use.
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About ‘Bull, Bear & Beyond’
Bull, Bear & Beyond': features candid conversations with senior executives and from our own team of experts from across industries, exploring strategy, innovation, and the opportunities shaping their markets and 60-second pieces are a compressed summary of content designed to convey our message in a single, easily shareable hit.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
Original interview published on 11/06/2025 and reposted as a podcast
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Transcript
Introduction of Key Speakers
00:00:07
Speaker
I'm Martin King. I'm property analyst here at Edison Investment Research. And I'm joined this morning by Stephen Ingalls, who comes from yeah esr which is the external investment advisor to Regional REIT.
00:00:19
Speaker
Stephen has a leading role in the management of the company and represents yeah ESR on the board. Stephen, welcome back.
Year-End Results and Strategic Plan
00:00:26
Speaker
I'm Martin. yeah The year-end results were announced in March and were in line with expectations.
00:00:33
Speaker
So I'm thinking now is a good time to look at the strategic plan for the business moving forward, as well as the outlook for the regional office sector. And maybe we can start with that outlook for the sector, where there are signs that strong headwinds of the past few years may be receding.
Post-Pandemic Office Trends
00:00:49
Speaker
A key concern you during that period, of course, has been that since the pandemic, what the impact on the long term use of offices will be. Are you now getting some visibility on this? Yeah, I think we have been for some time. I mean, we're we're now seeing trends. and Before, it was probably a bit early to state trends. But I was on record very soon after the return to to the office post-pandemic of saying, I expected the majority of people to be back the majority of time.
00:01:18
Speaker
I think that's beginning to be borne out. It has taken longer than I anticipated, that's for sure. But it's beginning to be borne out by ah the vast majority of data that is now coming through. So Regional REIT, as you know, publish an annual update in terms of occupancy levels by staff in our buildings.
00:01:39
Speaker
The last one was was published in February, and I'll be updated again of the half year. but But that showed quite clearly that staff numbers were back to post-pandemic occupancy levels.
00:01:52
Speaker
And most interesting for us as an office lander, one obviously there is the number of people back in. And the second part is how many days they are back in. And on average, the last two years has shown that the average occupancy of our buildings is four days a week.
00:02:06
Speaker
I think that's very interesting data.
Regional vs. London Return to Office
00:02:09
Speaker
We, of course, are the regions, and that's a study of one hundred over 100 buildings in our portfolio, in excess of 26,000 staff members surveyed. By far and away the largest survey of its kind. But that is slightly at odds to what's happening in London. London still is a little bit slower in terms of return.
00:02:29
Speaker
Although, again, the anecdotal evidence and those ah published data points are showing improvement. So undoubtedly, there's a return to the office. And undoubtedly, that is continuing and trending upwards.
Demand for High-Quality Office Spaces
00:02:44
Speaker
Against that background, Stephen, can you talk about the trends that you're seeing in occupied demand, market supply, and what this means for office rents and office values? Yeah, again, Martin, will talk about the regional markets, which is our expertise, regional re obviously being in the regions.
00:02:59
Speaker
ah But in the regional markets, we are definitely seeing, as we are across the country, a flight to quality. And that doesn't mean ivory towers of glass and steel and Bre'am outstanding and and ah the like. It is high quality, grade A space.
00:03:18
Speaker
And that's what we provide. And more importantly, and there has been a growing trend, are the ESG credentials and um specifically EPCs.
00:03:29
Speaker
EPC A and B, of course, likely to become a statutory requirement by 2030. The entire world has been focused on that in terms of the real estate office sector.
00:03:40
Speaker
And that is clearly impacting on ah what tenants require and what tenants want. ah So definitely a flight to quality. We have seen a slight change even in the course of the last couple of years where ah traditionally people would take expansion space. That changed after COVID and people looking at it saying, well, yeah we're not expecting the same numbers back in the office. and A lot of companies downsized at that stage and took higher quality space but less space.
00:04:10
Speaker
We're seeing that trend reverse, where companies now realise that if they have all of their staff in the office at a point in time, and the majority of companies are going that way, that they don't have enough desk space.
Challenges in Regional Office Markets
00:04:21
Speaker
So actually, we're seeing an expansion ah from many of the ah the original downsizers, particularly accountancy firms and banks,
00:04:30
Speaker
ah All of that, again, good from the supply-demand dynamics for the regional markets. So the trend is definitely for better quality space, grade accommodation, and EPC A or B, i.e. to conform with statutory requirements going forward.
00:04:48
Speaker
Now, that brings with it a real challenge for the regional markets because the regional markets are approximately 82% occupied, so 18% remain vacant at this point in time.
00:05:01
Speaker
The majority of that 18% not fit for purpose, requiring extensive refurbishment ah to bring it back into ah modern use, or a indeed, it's just going to be repurposed or demolished to make way for other uses.
00:05:16
Speaker
ah But at the same time, so 82% occupiers suggest there's there's capacity in the market. But only 25% of the market conforms to EPC A or B. And this is a crucial aspect.
00:05:29
Speaker
If the majority of occupiers, and that's what we've seen trending in the last couple of years, want EPC A or B and grade accommodation, how can we provide that when only 25% of the market conforms?
00:05:43
Speaker
and And the growth in that, I mean, we've known about this issue for a number of years, and we, like every other landlord, have been but frantically refurbishing space and ensuring that our space is fit for purpose.
Rental Growth and Market Forecasts
00:05:55
Speaker
In regional reach case, we're currently 60% EPC A or B, so we're quite a way along the journey, but we've still got some way to go. But that means we've got a supply demand imbalance coming down the track at some point. If 82% of the market is chasing a market of only 25% conforming buildings, that would suggest there's going to be competition for those high quality buildings.
00:06:19
Speaker
And that would suggest higher rental growth. Now, we've already seen a bit of rental growth. So this is this is a self-fulfilling prophecy. So and and on average, for the last two ah calendar years, regional REIT has achieved on the lettings we have done, and it has been a subdued letting market.
00:06:37
Speaker
But the lettings we have done, we've seen ah rents of 13.5% ahead And it's not just as we've seen that across across the market for those better quality spaces.
00:06:50
Speaker
So rental growth has already started. I think that will be exacerbated by this issue that we have coming down the track. I think rental growth, therefore, in regional markets will be stronger in the next five years than we've seen the last couple of years.
00:07:06
Speaker
And I think, again, that that's extremely good from an office landlord point of view. The second point, of course, is you and supply demand. What about supply? The demand is there for that higher quality space, which we think it is.
00:07:19
Speaker
What about supply? Well, you know we've only seen that 25% grow by 8% per annum for the last couple of years. Now, 8% and 25% doesn't even make a dent in that issue of 82% occupancy.
00:07:33
Speaker
If also we see many of that 18% vacant space being repurposed or demolished, then, of course, supply diminishes. Again, that's a trend we've seen for some time.
00:07:45
Speaker
Total stock and total supply has been diminishing, as many buildings have been repurposed, roughly 22 million square feet last year in the regional markets. And that that is a decent proportion of the regional market.
00:07:58
Speaker
When on the other side, your new supply, we're seeing little or new new development. And all the major cities we're expecting to see close to zero ah developments come online over the course of 25, 26, 27. So yeah we we do have a situation that a will show a lack of supply and continuing demand.
Office Investment Market Outlook
00:08:23
Speaker
So, Stephen, that all sounds very positive for the Occupy market. Can you talk about the investment market and also what the outlook for valuations across the sector might be?
00:08:35
Speaker
Sure. I mean, we have seen, obviously, a very subdued investment market. There's been little investment in the office market generally across the country for for quite some time post-COVID. And that's really as a consequence of and that that risk element of not knowing where offices would end up ah post the the lockdowns and i'm working from home scenarios.
00:08:58
Speaker
I think we we are definitely seeing more activity in the investment markets. We have seen a few deals happening. They're few and far between, but there are a few deals happening.
00:09:09
Speaker
of what we would call core stock. ah But that that year is yet to translate through to improve value. So, I mean, traditionally what you'd expect is more interest will stabilize the the valuation market.
00:09:23
Speaker
and And then as we continue to see that improving occupational story, that will give confidence to investors ah to invest in in more office stock. And that will then show improvements in value that stage. So, I think in the short term, we expect see a stabilization of values.
00:09:43
Speaker
And in the longer term, I, you know, end of 26 and beyond, as as that story and growth story on the occupational side continues and gives confidence to the investor market with respect to the values of accruing on the back of that. So I think, again, positive, but it'll take some time to come through.
00:10:04
Speaker
Both those factors, the occupier market and the investment market, seem to be having a a positive impact on ah forecasting for sector returns. Can you just say what you're seeing on that?
00:10:17
Speaker
Yeah, and i think most most of the the major commentators are now forecasting that offices will outperform the other sectors over a five-year period. Of course, off a very low low base has been the hardest hit sector in terms of values. as Therefore, you know one would anticipate if we're going to see an improvement office market,
00:10:37
Speaker
which, you know given my comments on the occupier market and investment market, would suggest we are, then and clearly from a low base, you'd expect to see offices perform very well.
00:10:49
Speaker
I mean, in terms of of specifics, CBRE, obviously the largest commentator and in the world, an agent. are suggesting that UK offices will perform at 13% per annum over the next five years.
00:11:01
Speaker
And that's outperforming all of the other sectors ah by quite some way over that period. Now, these are predictions and forecasts that I didn't have to be treated that way.
00:11:13
Speaker
But nonetheless, I think that that positivity, and it is the first time offices have shown ah themselves ahead of the other sectors, that positivity can only help the sector.
Regional REIT's Strategic Adjustments
00:11:24
Speaker
Stephen, can we now switch over to regional rates itself and how you have aligned strategy to to suit these market conditions? Sure. I mean, obviously, we undertook our capital rates last year, which has been well commented on. You and I have discussed that previously.
00:11:39
Speaker
that That supported the business in terms of reducing debt. which remains a key strategy for for regional REIT. Current debt in the early 40s, that will come down as part of our sales program.
00:11:52
Speaker
We are continuing to sell non-core assets. That's roughly 5% of the portfolio, and that sales program continues. And we are continuing, obviously, to look at alternative use for properties. I think that's probably a slight pivot from the previous iteration of regional REIT. That that is about 15% of the portfolio where we have identified higher value alternative uses for those assets and where we are in the process of obtaining planning and positioning those assets to achieve full value when sold.
00:12:32
Speaker
And of course, concentrating on the 80% of the portfolio, which is our our core and our assets requiring refurbishment to to become the core. a So that that's really the the strands of the business. So the the core element being 80%.
00:12:47
Speaker
including the CapEx to core element, 20% being sales, of which 15% being value-add sales. and And all of that is is well
Sector Growth vs. Share Price Discrepancy
00:12:57
Speaker
underway.
00:12:57
Speaker
ah However, as always in real estate, there'll be a lag before we see the benefits of that in terms of improved income from our core portfolio and improved capital upside from those assets that we will eventually sell ah with improved planning positions and repositioned.
00:13:15
Speaker
The share price doesn't seem to be reflecting the strategic potential for regional REIT or the improved sector outlook, Stephen. You've said there will be some lags in the the benefits coming through. But can you say a bit more about what you're expecting in the near term in terms of earnings and dividends?
00:13:32
Speaker
Yeah, I mean, the the share price, you're right. oh The whole the REIC sector has continues to be depressed and has been depressed for some time. Our share price has been moving in line with the markets. I mean, as the markets go up, our share price goes up and and and vice versa.
00:13:47
Speaker
A lot of that created by geopolitical turmoil. And little we can do about that. we We very much focus on the day job and and what is within our control.
00:13:57
Speaker
What I can say is we're targeting 2.5 pence per share quarterly dividends. So 10 pence in the year. And we're back to our old added job. We will make four equal installments if there is the ability to increase the fourth of of the dividend levels we shall. And we'll know that obviously as we go through the year.
00:14:17
Speaker
ah But at 10 pence, that's almost a double digit return in terms of dividend return on current share price. ah Current share price has been bouncing around. you know We've been as low as a pound and as high as a pound 20 in the last couple of weeks, quite literally.
00:14:33
Speaker
ah But no, you're absolutely right. None of the improvements in terms of the occupational market what we expect to see in terms of the investment market flowing through in the relative short term, 12 to 18 months, nor indeed the value-add assets where there are some considerable upsides.
00:14:51
Speaker
None of that is reflected in the current share price. And indeed, in the last part, value-add elements have not even been reflected in any shape or form in the NAV. So, you know, values are still traditional in terms of Redbook valuations.
00:15:05
Speaker
and So there are under-existing uses as office buildings, not on alternative uses, which in many instances are substantially higher value. ah So, yes, but I look at the the share price in the company as it stands.
00:15:19
Speaker
We've rebalanced the the books in terms of the balance sheet. We're repaying debt and debt is down substantially. we see decent pathways to growth in terms of gross rents and net rents, which in turn will reflect higher values.
00:15:37
Speaker
And also with this latest pivot in terms of the value-add assets, none of which is reflected in the share price. So at the moment, ah you know we we are
Conclusion and Future Updates
00:15:47
Speaker
where we are. i think the company is well set up to show substantial improvements on all fronts.
00:15:53
Speaker
and And one would anticipate that will be reflected in the share price in two parts. Stephen, thank you very much for all of that. It sounds very interesting and a very interesting time to be looking again at the regional property sector. So we look forward to catching up with you later in the year. Great. Thanks very much, Martin.