In this interview, Stephen Inglis, head of Regional REIT’s asset manager, ESR Europe LSPIM, and de facto CEO of RGL, talks about the recently released H126 interim report, with a focus on the strategic progress made during the period. It continues to be a challenging market environment and while the progress that RGL is making is yet to be reflected in EPRA earnings, asset sales are on track to reach more than £55m for the year, debt is falling, portfolio quality is improving and rent levels are increasing. Stephen says that although lettings are taking longer to negotiate, occupier demand for good quality property is robust and that a growing demand-supply imbalance in the market provides a strong tailwind for continuing rental growth. Meanwhile, the full year DPS target of 8.0p was reconfirmed, leaving the shares on a yield of more than 9% and trading at less than half net asset value.
The first half results are very much about the strategic progress you are making. Can you briefly give the background to that strategy.
Stephen Inglis: The company is invested in the office market, which has struggled a little post-Covid, so in 2024 we set out a recovery plan, in effect, to reduce the indebtedness of the business and improve net income – by selling void properties and/or leasing up some of our asset management initiatives, where we’ve refurbished assets and where demand clearly exists.
What progress have you made on disposals in the first half?
Stephen Inglis: In the period, we’ve disposed of £21.5m of assets, mainly vacant or partially vacant, which has had a net effect of £700,000 of savings from those void costs. That’s in line with our £50m to £60m target for the year-end, and we’re hoping to achieve closer to the higher end of that range. That, in turn, has reduced debt by some £22.4m. If we’re on target for the year-end, we’ll reduce LTV from its current level of 38.5% to c 35% by year-end.
What are your plans for the refinancing due next year?
Stephen Inglis: We have a facility due to be redeemed in December 2027, so there’s still some time to go, but as you’d expect, we’re quite well progressed on replacing that debt. We’re in discussions with our current lender, as well as other parties in the market, and we’re looking to achieve some competitive tension between lenders. So yes, we’re well advanced – we’d anticipate having new debt in place by the end of the first quarter of 2027, well in advance of the December 2027 redemption.
Turning to the other side of the strategy, what kind of portfolio are you building and what are the prospects for it?
Stephen Inglis: The intention is to reduce the number of assets and hold higher-quality assets within the portfolio, and that’s done in a number of ways: selling down non-core, non-performing assets, and investing more money into those assets where we believe there’s a long-term future in terms of occupancy and rental growth. If we look at the letting side, the leasing market has been subdued – by that, I mean lettings are taking far longer to complete than we’ve ever seen before. Typically it’s now nine to 15 months to complete a letting from the initial viewing, versus six to nine months maximum pre-COVID. So it really has moved quite dramatically.
That being said, there are still tenants relocating, and we let 26 spaces over the course of the first period, generating £1.9m of income across those spaces – and that’s 3% ahead of ERV on average. So we’re still seeing that rental growth story, and I think that’s set to continue. Within that, we achieved one significant letting over the period: a business park with two buildings in Sherwood, Nottingham, totalling just over 146,000 square feet, which we leased to Glenair, an American technology company.
That’s quite an interesting story, in that the building had been identified as surplus from our perspective, and we were actually looking to demolish it to make way for a high-quality industrial unit in that location. However, we were approached by this tenant, who simply couldn’t find ready-made space in the marketplace to meet their requirements. They came to us saying: ‘Look, the fundamentals of this building are suitable for us – the quality of the building in terms of the external fabric is good, there’s a great car-parking ratio, and we’d like to occupy it.’
The difficulty for us was that this would have meant a c £5m investment to refurbish the building to make it fit for Glenair’s occupation. However, the tenant turned around and said, ‘Actually, we’ll do the works and spend the £5m ourselves.’ So, from our point of view, it’s a capital-light letting, achieving a rent that grows to £1.1m in 2027 – a very good result.
But that’s what’s happening in the marketplace: we’re seeing a lack of supply of ready-made space, of that there’s no doubt. We’re always speaking with occupiers who are complaining, literally, that they don’t see enough space available for their use, and that will create a bottleneck in the market for better-quality space – which is what we’re trying to provide through our refurbishment programme.
How important is building a higher-quality portfolio to meeting occupier demand and driving rental growth?
Stephen Inglis: Very important – it’s a simple answer. Nearly all of the interest we have, and most of the requirements in the market, are for Grade A accommodation meeting EPC A or B, so tenants have definitely been driven towards higher-quality space. That was happening even before COVID, but its aftermath has probably accelerated it, with tenants looking for better-quality space to attract talent and make spaces more attractive for existing employees. So that’s definitely been a huge trend in the market.
The other reason is that the government still intends to introduce minimum requirements by 2030 of EPC A and B, so tenants, in readiness for that, are now looking at space and saying: ‘If that doesn’t conform to those standards, then we really don’t want it.’ That has been, and continues to be, a trend.
We focus very much on the ESG credentials of the portfolio, with EPC being an important part of that. Over 61% of our portfolio is currently EPC A or B, and a further 25% is C, where we’ve identified the journey to improving those assets to A or B. It’s worth mentioning, in the context of the market, that only around 20% to 25% of the regional office market currently conforms to EPC A or B, and growth in that has been c 8% per annum – so obviously 8% of 25% isn’t going to make much of a dent in that ongoing requirement.
If you look at the supply-demand dynamics, approximately 81.6% of the regional office market is occupied. Of the c 20% that’s currently vacant, most is unrefurbished and not fit for purpose. So even with steady-state demand, rather than increased demand, we’ve clearly got a bottleneck – and that’s really what’s beginning to drive rental growth in the regional markets. I expect that to accelerate the closer we get to 2030.
What rental growth is the market seeing and what have you been achieving on your own lettings?
Stephen Inglis: We’ve seen consistent rental growth above ERV, and ERV themselves are moving – typically 3.7% in 2025, and 5.3% so far in 2026, above ERV. That translates to 6% to 7% annualised growth, and if that continues, the power of compounding should see substantial rental growth. But to put it in context, spaces we were previously letting at £15 to £18 a square foot are now in the region of £24 to £30 a square foot – that’s putting it in real terms.
What should investors expect in terms of earnings and dividends this year, and over the next two or three years?
Stephen Inglis: Consensus forecast has us paying a dividend of 8p per share. We’ve paid 4p so far in the six months, fully covered, and the board’s policy is that we will only pay fully covered dividends – but we wholly anticipate being able to meet our ambition of an 8p dividend by the year-end.
I think the important thing to recognise in the numbers is that we’ve achieved £1.9m of additional rent, plus the savings in void costs that tenants now cover. However, we do still have an issue with breaks and expiries over the period – that was roughly £1.8m, albeit offset by an additional £700,000 of savings from the sales. So we’re definitely going in the right direction: we’re 2.5% up in the period on actual occupancy.
The EPRA numbers distort the real picture, because refurbished assets come back into the EPRA numbers. So, bizarrely and counterintuitively, EPRA occupancy is slightly down, but real occupancy is actually up 2.5% – again, a step in the right direction.
Looking ahead, we talked about supply and demand earlier – you’d anticipate that renewal rates would improve, because we’re continually spending little and often on those buildings to upgrade them so they meet tenant requirements. The supply out there is limited, so there’s less choice for tenants to relocate. Combined with our leasing activity and improved renewal rates, we’d anticipate that our rental income will grow, and our net rental income will also grow, because we’re getting rid of those void costs through sales and leasing.
With a 9% well-covered yield and the shares trading at around 0.5x book value, what do you see as the catalysts to close that gap?
Stephen Inglis: Starting with why we are where we are: the listed real estate market hasn’t been a popular sector, and all the REITs are currently trading at a discount. We’re trading at a bigger discount than most, and that’s down to two things. One, we raised money a couple of years ago, which had an impact on the share price. And two, we’ve been in the worst sector in terms of valuation and perception – obviously the office sector, post-Covid.
I think that’s been oversold. We’re demonstrating now that there’s a supply-demand imbalance coming, and it’s just a case of when it arrives – I think we’re seeing the early stages of it now, and, as I said earlier, it will improve between now and 2030, which should improve our occupancy, our gross income and our net income. So I think all those things are positive.
The negatives, of course – and I’d be churlish not to mention them – are that we do have the refinancing ahead, and that will be at a higher interest rate, given the cheap debt we all locked into many years ago. That will clearly have a negative impact. And, of course, valuation generally has been unpredictable. That said, if you look at the valuation yields across our portfolio over the last three periods, they’re identical, so we’re seeing a flat valuation market, which would tend to suggest we’ve reached the bottom.
But we’ve also got interest rate pressures in terms of what the Bank of England will do, and, of course, a budget looming – prime minister Andy Burnham’s first budget. So there’s still a lot of uncertainty out there, and that uncertainty preys on investors’ minds. I think that’s why we remain at a fairly depressed share price, against what you mentioned earlier, which I’m wholly in agreement with: that the long-term potential of this portfolio is strong.
