Property Portfolio

Investment Performance Highlights

Total property portfolio value increase of 5.4% to £5.1bn

(equating to £262.5m increase after adjusting for purchases, sales and capital expenditure)

Commercial portfolio value higher by 5.2% to £3.6bn

Retail portfolio increased by 10.7% equating to £222.9m

Office portfolio lower by 4.2% equating to £31.2m

Leisure and other lower by 2.4% equating to £13.8m (after adjusting for purchases, sales and capital expenditure)

Residential portfolio value increase of 6% to £1.5bn (equating to £84.6m after adjusting for purchases, sales and capital expenditure)

While the portfolio grew in value overall, our principal sectors performed differently - which was also a theme over the pandemic – providing greater portfolio resilience, with retail and residential values growing while office and leisure values declined.

Retail was most affected before and during the pandemic by the acceleration of changes in consumer behaviour driving more retail transactions online and we have not been immune to these macro-forces. The speed of this change during the pandemic required retailers to rapidly rationalise their bricks and mortar presence, retaining stores in the best locations while closing down poor performers. Post-pandemic it has become clear that Chelsea has emerged well from these changes, as retailers have understood that they were able to trade profitably in this location. We have seen this evidenced by strong growth in demand and rents.

The Chelsea office market has proved to be resilient. Where space has become vacant, it has re-let quickly resulting in continuing low vacancy levels averaging less than 1%. Despite, or perhaps because of, continued higher levels of home-working, our experience has been that there is demand for well specified and located office space from small and medium sized businesses that place a high value on being located in an attractive ‘lifestyle’ environment. Office rents grew in 2022 but not sufficiently to offset an increase in valuation yields, resulting in a decrease in the value of the portfolio.

The residential short-term letting market in Chelsea proved very strong with high demand as people continued to return to London, coupled to limited supply. As a result, the short-let income has grown continuously since mid-2021 (when it stood at £30m) to nearly £34m at the start of 2022, ending the year at nearly £37m.

Retail, our largest sector at 45.3% of the portfolio, increased in value, up 10.7% to £2.3bn (after a cumulative like for like fall of 35% between 2018 and 2021). The result is that the retail element of the portfolio is £0.9bn (27.8%) below the 2018 value peak. Retail gross rental income increased by 7.1% to £86.3m per annum (47.7% of the total rent roll), remaining behind the 2019 high of £89.9m.

Offices, which represent 14.1% of the portfolio, decreased in value by 4.2% to £719.6m. The portfolio has remained virtually fully let through the pandemic and 2022. Office rental income increased by 16.0% to £39.1m per annum (21.6% of the total rent roll).

The Residential sector represents 29.5% of the portfolio by value. The headline valuation at £1.5bn was unchanged from the previous year but on a like-for-like basis after adjusting for purchases, sales and capital expenditure, the portfolio increased in value by 6.0%. This is the second annual increase following five years of declines which started in 2016. Gross rents for the market let portfolio increased by 8.7% to £36.7m from £33.8m, building on a 12.3% increase in the previous year. Adding ground rents from long leaseholds of £2.8m, residential comprised £39.5m or 21.9% of the gross total rent roll.

Retail is our largest sector, accounting for 45.3% (up from 43.2% last year) by capital value and 47.7% (last year 48.8%) of income.

The growth in capital value was driven by an increase in rents achieved on new lettings in excess of our valuers' estimated rental values, offset by a modest widening of yields in some areas in response to rising interest rates and a worsening general economic outlook.

During the pandemic, retailers experienced an obvious acceleration in the underlying structural changes in consumer behaviour. Their response to the rapid move of sales online was to rationalise their store numbers, focusing physical presence in locations which traded well and most effectively supported their on-line businesses. Cadogan benefited from this, as retailers, when faced with such choices, generally opted to retain their Chelsea stores while closing others. Similarly, a number of strong retail brands chose Chelsea to open new stores because of the desirable demographic of the catchment and evidence from existing retailers of profitable trading. This has been supported by a positive outcome to the business rates revaluation for many of our retail occupiers, which will see their business rates bills reduce from 1 April 2023, easing the cost pressures arising from high inflation and energy prices.

Based on sales data that we obtain from over 170 occupiers, it is evident that footfall and trading performance are closely correlated. As footfall rapidly returned to pre-pandemic levels on the Estate, driven in part by our curation of the area and marketing and placemaking strategies, we have seen a strong increase in demand for vacant retail and hospitality space and a consequent strengthening in lease terms and rents achieved. Despite the market adversity over the past few years, we have maintained our standard lease terms which support our holistic estate management strategy.

We have experienced healthy demand from new brands wishing to enter the area and existing retailers seeking expansion locally. The increasing retail lettings activity emerged in the second quarter of 2021 and continued through the course of 2022. The King’s Road and Duke of York Square were early benefactors of this interest which widened to Sloane Street by the second half of the year.

We were thrilled to welcome many new and exciting brands during 2022. These included pre-loved luxury fashion from Lampoo, American women’s fashion label Anine Bing, sustainable women’s fashion brand Reformation, the great British success story of Rixo, women’s ready to wear brand Self Portrait, young UK independent fashion from Wyse, traditional French children’s fashion by Jacadi, eco-friendly footwear AllBirds and French beauty brand Oh My Cream; all on the King’s Road and Duke of York Square. On Sloane Street, we welcomed the family run luxury Italian menswear brand Kiton plus the fragrance and wellness maison Diptyque. In the meantime, both the multinational French luxury brand Christian Dior and the Florentine fashion house Ermanno Scervino, committed to substantial up-sizes. With the aim of further strengthening the food offer on Sloane Street we secured the restaurant group Aqua led by David Yeo, which will open a new concept in Autumn 2023.

The business continued its long track record of maintaining low vacancy levels, finishing the year with a retail vacancy rate of 2.0%, lower than the start of the year when it was 2.7%, including a reduced number of temporary retailers – pop-ups – which allow us to introduce new and emerging names and concepts as part of our wider curation of the mix, contributing to vibrancy and excitement for consumers.

The public realm project on Sloane Street commenced on-site during the year. When complete in 2024, Sloane Street will be transformed into a safer, greener and more beautiful one kilometre boulevard. This will include extensive greening including new street planting and over 100 new trees, carefully designed new lighting and street furniture and where appropriate, wider pavements. The result will be a hugely enhanced pedestrian experience with a neutral effect on vehicular traffic. Inevitably there will be some disruption during the period of the works affecting traffic using the road, local residents, businesses and occupiers. Cadogan are working in close consultation with the Royal Borough of Kensington and Chelsea, who are overseeing the project, to minimise disruption.