St Modwen Properties plans to step up development activity

After a review of the business St Modwen Properties plans to accelerating commercial development activity and grow its residential and housebuilding business.

Chief executive Mark Allan, who led the six month strategic and portfolio review, said the process highlighted "the strength and depth of opportunity within the business and portfolio to create value through our regeneration, commercial and residential expertise".

"Having experienced a positive start to the year that reflects management expectations, we will now continue to refine the strategy further and concentrate on those areas of our deep and diverse portfolio that present genuine opportunities for value generation and further business growth which will ultimately lead to enhanced shareholder returns".

As well as the accelerating commercial development and growing residential, Allan's review produced four new "strategic objectives" against which future performance and direction will be reported, with the remaining two being "cementing and growing our regeneration reputation, and portfolio focus and capital discipline".

St Modwen, which confirmed that its portfolio and wider business has shown "resilience in the face of broader market uncertainties" and performed in line with expectations in recent months, hosted a capital markets day for investors and analysts on Wednesday to highlight the opportunities as Allan sees them.

The FTSE 250 company said commercial development activity was proceeding in line with expectations, with good ongoing levels of UK commercial occupier demand and rents, particularly in the industrial and logistics sector.

"Various development completions and sales and lettings mean that development profits for the first half are likely to be in line with expectations and ongoing positive demand means that the outlook for the full year is similar."

The commercial development pipeline is concentrated on the industrial and logistics sector, representing roughly 70% of the medium term opportunity by value.

Housebuilding arm St Modwen Homes has benefited from a solid demand in the UK in the year to date, particularly in the regions, with "good levels of ongoing demand from third party housebuilders for 'oven ready' land for development".

St. Modwen Homes is working on 16 sites, three of which were launched this year, with sales volumes in the first half expected to increase by approximately 15% over the same period last year and profit growth "at least offsetting" the lower profits from the reduction of activity in the Persimmon joint venture.

In response to third party housebuilder demand, the homes business has made £17m from selling off 35 acres of its residential land at prices at or above book value in the last six months, including from joint ventures.

It has used some of this cash to acquire a development agreement to deliver a new 227-acre community including 1,500 homes in South Oxfordshire, with the Homes arm beginning to delivering up to half of the homes in coming months, with the remaining development plots awarded in tranches and sold to other housebuilders.

On the investment portfolio, although the retail portfolio is seeing pressure on valuations, the industrial and logistics investment portfolio was resilient thanks to robust yields and modest rental growth from good occupier demand

Net debt is expected to increase £85m from the £523.2m at year end as investment activities exceed proceeds from asset sales, though debt levels are expected to fall in the second half from more sales.

In particular, the Nine Elms square site at New Covent Garden Market is making progress and management have decided to sell the Bay Campus at Swansea University to take advantage of the strong demand.