In FY25, Regional REIT Ltd (LON:) made good progress in repositioning its portfolio to unlock value. In this report we focus on the significant medium-term potential that this offers, beyond the immediate uncertainties created by war in the Middle East and an otherwise tough letting market.
Previously announced unexpected lease breaks will continue to affect income in the current year, weighing on the positive impacts of the revised management fee and lower debt and finance costs, but the previously announced FY26 DPS target has been reaffirmed.
Note: EPRA earnings exclude property revaluation movements and non-recurring items. NAV is EPRA net tangible assets per share.
Meeting Occupier Preferences
Occupiers have continued to show a strong preference for good-quality office space in the right locations. Rents are increasing and RGL expects this to be maintained by a growing supply-demand imbalance. The company believes that c 80% of its portfolio already meets occupier requirements or can be profitably enhanced to do so.
These assets will be retained to generate long-term income and capital growth. The non-core or poor-quality assets, or where asset management plans are complete, will be sold, either in the near term or over the next three years, with valuations and total returns enhanced by repositioning for alternative use, and LTV reduced. While economic uncertainty weighs on the broad commercial property sector, expectations for the relative performance of offices have recently improved.
Unexpected Lease Breaks
As expected, FY25 EPRA earnings fell by 16% and with a higher average number of shares in issue, EPRA EPS was 39% lower. Earnings will decline again in FY26, primarily the result of previously reported unexpected lease breaks, although our forecasts are not materially changed. We have moderated our expected growth in FY27. £51.6m of disposals in FY25, at a small premium to carried value, funded a reduction in borrowing and LTV (to 40%) and reinvestment to enhance portfolio quality. RGL targets a similar level of disposals in FY26 and has made a good start. Most immediately, the sale of non-core, underperforming assets is accretive to earnings, removing more cost than income and reducing debt and finance costs. As average portfolio quality improves, core occupancy and average rents should increase over time. In combination, sales and occupancy improvement have the potential to more than double FY26e EPRA earnings.
Valuation: Significant Embedded Value
The FY26e yield is c 9% and the shares are trading at a P/NAV of c 0.5x, well below peers on both measures. The upside from a successful execution of the strategy remains material and signs of progress should support performance.
Transitioning for Sustainable Growth
In this note we focus on the progress made by RGL in FY25 to reposition its portfolio to better meet occupier demand and generate sustainable income-led growth, and provide an updated analysis of the embedded potential net rental income upside.
Although the letting market remained challenging in 2025, underlying market supply and demand dynamics for well-located, high-quality office space continued to support market rental growth. RGL has significant company-specific opportunities to grow net rental income by letting vacant space and selling underperforming properties.
Structural changes in the office market have led to significant underperformance compared with the broader commercial property market in recent years. Encouragingly, the sector delivered a positive total return in 2025, with rents growing and capital values beginning to show signs of stabilising. Prior to the start of war in the Middle East, many market participants had begun to take a more favourable view of office sector prospects. While it is too early to assess the repercussions of the war on economic growth, inflation and interest rates, there is no obvious reason why the office sector should be affected more than the wider market. The most recent Investment Property Forum UK Consensus Forecasts, published in March but using data collected in January and February, are directionally in line with this trend. While the 6.9% per year consensus total return for the office sector (excluding West End and City offices in central London) over the next five years continues to trail the wider market (ranked fifth out of six sectors), the margin has narrowed considerably, and is well within the margin of error.