Property developer Assura sees profits dive amid interest rates hikes

Assura’s profit has more than halved as higher interest rates and economic uncertainty have led to a fall in property valuations.

Pre-tax profits at the FTSE 250 investment trust and healthcare real estate developer plunged to £30.9m for the six months ended September, from £69.3m in the same period last year.

Although the company’s net rental income rose 15 per cent to £70.9m, it had a £19m negative swing in the value of its estate, compared to a £28.1m increase last year.

Chief executive Jonathan Murphy blamed the “currently adverse” economic situation and rising interest rates for downward pressure on valuations.

The Bank of England has raised key rates eight consecutive times since December 2021 in response to skyrocketing inflation, largely driven by skyrocketing energy and food prices, and supply chain issues.

This has made mortgages and financing for new commercial real estate transactions more expensive for homebuyers and investors, discouraging some real estate investments and slowing or reversing price growth.

The problems were exacerbated in September by a ‘mini-budget’ of uncovered tax cuts that boosted government bond yields and an acceleration in the number of investors seeking to exit UK property funds.

Since September, Assura has imposed a moratorium on new property purchases, partly because of the rise in bond yields, but also because of the broader headwinds hitting the UK economy.

It also continues to suffer from cost inflation and supply chain delays experienced by the construction industry, with schemes having to be extended by two to three months.

However, the Warrington-based company believes it should capitalize heavily on the need to upgrade the NHS estate, which the company says was ‘unfit for purpose and requires significant investment’.

Just over 600 primary care properties with a total value of approximately £2.8 billion are held in the group’s investment portfolio.

In the most recent reporting period, the ongoing rent from this estate has risen to £139.3 million, 60 per cent of which is from GP tenants.

Murphy said the company is seeing “growing and consistent demand for high-quality public healthcare buildings that is not linked to the economic cycle.”

He added: ‘The need to invest in primary care has broad political support from all sides – as it is cheaper for the NHS to provide services in this environment and as pressures on hospital resources become increasingly unsustainable.’

Assura shares were up 1.1 percent late Tuesday afternoon to 57.75 pence, though their value has fallen 18 percent over the past six months.

Today’s trading update from Assura mirrors similar announcements from British Land and Land Securities, both of which have posted losses following a fall in the valuation of their London office property.

While economic problems and interest rate hikes have weighed down their portfolio valuations, they have also suffered from the growth of hybrid working since the Covid-19 pandemic started to weigh on office rental demand.