Up next, we have AEW UK REIT. Today we have with us Laura Elkin, Portfolio Manager of AEW UK REIT, and also Henry Butt, who is the Assistant Portfolio Manager and Lead Asset Manager at AEW UK REIT. Laura and Henry, without further ado, over to you.
Thank you very much, and thank you everyone for joining us this morning. I think we're controlling the slides. Yep, if that's working for everyone, good. I'm Laura Elkin. I'm the Portfolio Manager of AEW. Here at AEW, we've been running this trust for the past 11 years. I'm showing you here on the first slide, just a summary of our strategy. It's the same strategy that we've been running for the past 11 years. If I had to describe that in one sentence, I would say that means that we are sector agnostic value investors. We look to buy and sell real estate counter-cyclically. That means that throughout market cycles, we are looking for those property sub-sectors where our competitors are pricing assets at a lower level than they really fundamentally should be, and that's what we're looking to buy.
The most obvious example that I think I can give you of this is, if we look at high street retail markets, during and immediately after the COVID pandemic. The pricing in those markets were absolutely on their knees. The prime assets were being priced very much down from where they had been, along with the secondary and tertiary assets. Now, we had a belief that of course, people would want to return to the high streets, retailers would want to return to the high streets, and that market would recover in those prime areas. So we were buying that part of the market at that time when those prime areas were priced very substantially lower than where we felt their fundamentals should have been. Of course, now we have since seen recovery in those sectors.
Just a quick illustration there of the obvious things that we are looking to buy. We then, of course, time our sales. We believe that the timing of our sales is very key to the implementation of our strategy as well. So we are also looking to sell into sectors where the converse is correct. So where we believe that pricing is higher than fundamentals should be or higher than where assets can be acquired in our pipeline. Then we can of course, go again. So once we own those assets, we very actively manage them, and that's a really key part of our strategy too. That active management looks to deliver our dividend, which we have paid at 2 pence per share per quarter now since we IPO'd. We also very actively manage our assets to unlock capital upside.
I hope that's demonstrated here in our very strong levels of total return that we have generated from the strategy. That high level of total return has led us to receive numerous awards, which you will see here along the bottom of the page. We have a couple of slides coming up, which will give more detail on our performance as well.
Good morning, everyone. I am Henry Butt, Assistant PM and Lead Asset Manager. This next slide really is a bird's eye view of the portfolio. This is as at June 3. We are just going through the Q2 reporting process as we speak. But a portfolio evaluation of GBP 215.7 million, 34 commercial assets, across the U.K., 130 tenants. Importantly, looking at that net initial yield and that reversionary yield. So the portfolio at this point in time, June 3, is throwing off an income yield of 7.28%, which is actually a little bit less than normal, and that's because actually we have had quite a lot of asset management activity recently with some rent-free periods, as they are known as in the industry, burning off. Our vacancy, you will see is at 6.5%.
That tends to yo-yo between about 10% and 5%, and we do not mind having a bit of vacancy because it allows us to push on rent. I think the most meaningful statistic here on this slide is that reversionary yield of 8.87%. That is the income growth potential, which is built into the portfolio. We are particularly seeing that in our industrial holdings, which are our largest weighting. We have a GBP 60 million debt facility, a Loan to GAV of about 25%, and that debt is at a very low, fixed interest rate cost of 2.96%, and that is until July next year when we have our refinance. We have about GBP 13 million of cash currently, which is mainly going towards asset management initiatives, refurbishing space, improving buildings, and looking to capture that reversionary potential.
As Laura says, we have paid out that 2 pence dividend now for 42 consecutive quarters, 8 pence per year, which is roughly an 8% dividend. Just looking at these pies on the right, as you can see, we are across the U.K. We have one asset in Scotland. We have a bit of a cluster in the southwest, but as I say, we pick assets on a sort of a case-by-case basis. So we are not deliberately targeting specific areas in the U.K. We look at an asset. If we like it, we buy it. In terms of the sectors, our weighting has been as high as about 60% in industrials. But over the last couple of years, we have actually been selling out of the sector, crystallizing profits, as Laura was just mentioning, and recycling those profits into high-yielding assets.
That has led to our retail weighting increase to roughly a similar percent, around 40%. That is obviously split into two sub-sectors being retail parks and the high street. Those two sectors are very much diverged in recent years, with our high streets sort of shortening, and it is all really about best in class. Retail warehouse is a sector which is doing very well at the moment, kind of with its synergies with e-retailing, and I will come onto that later on in the presentation with an example on Barnstaple. Handing back to Laura to look at some performance.
Thanks. What I am showing you here on this slide is really an indexation of our total return performance the company has generated since our IPO against its diversified REIT peers. You will see that the divergence comes in early 2020, so approximately five years in of running AEW. I would put this down to two main reasons. Firstly, our high weighting to industrials, and whilst we have taken some profit off the table in this area, the majority of those assets are still held today by the company, and we do expect them to continue to drive performance into the future.
Also around that time, and we are looking at approximately five years into running AEW, we saw a lot of business plans maturing at this time. We see often a lot of value in acquiring income that is sort of under 10 years in terms of its expiry length.
On average, I think that figure has often sat over the past 11 years at around about five years in terms of its average length. With five years being the average length of our business plans, when we can really then get to a point of having those very real conversations with tenants, moving rents on, perhaps even changing tenants in order to maximize value, refurbishing space, bringing space back to the market so we can realize its true potential. As Henry mentioned earlier, we are not afraid of having a bit of vacancy in the trust. In fact, it is very important to us in order to enact those business plans for the reasons I have just set out.
Again, no surprise to us that that is where we start to see our performance diverge from our peer group because of the fact that within AEW, we so actively manage. Here on this slide, I am showing you our property level total return outperformance over various time periods. You will note that really over all of these time periods, except for I think the 12-month bar, the total return performance generated by AEW's portfolio is more than double that of the MSCI benchmark. If we look back over the past 11 years, it has really been quite a tricky time for the real estate market and for the economy in general, for obvious reasons.
But to see how our strategy is able to so strongly outperform over those kind of market conditions, it gives us a lot of conviction in the strategy and looking at our pipeline today, really very much the same.
As Laura said earlier on, the strategy now has been going for 11 years, and this slide here looks at our sort of 10 year track record, from 2017 to today, 2026. I suppose there's kind of a couple of main themes in this chart, which obviously runs from left to right, 2017 to 2026. I think the first is income, the blue bar running right through the middle of this chart, the meat in the sandwich. Laura's just been talking about performance, and this chart really sort of emphasizes the significance of income in terms of property performance, particularly in an investment market today where we're seeing less yield compression. A number of years back, we obviously saw industrials see some really strong capital appreciation.
We're in a market at the moment where we're seeing less of that with a lot of sectors, question marks over sectors, for example, office, the high street retail is recovering. Leisure is under pressure because of discretionary spend. So it really is signifying the importance of income, that blue bar running right through the middle. The other sort of two themes, really, as Laura has touched on earlier on this presentation, are diversification and countercyclical buying and selling. So you can see that in 2017, we were buying retail and offices. In 2018, we were buying industrials, low capital value, cheap industrials. When the market was really strong for life sciences, we sold out of an office, which we got a life science use in Oxford. So we were selling that in a very strong market.
We've also recently been selling, as I said earlier on, industrials, which have been strong, and recycling that money into retail and leisure sectors. So that countercyclical buying is very much a theme of what we do. It emphasizes the diversification, how we're not particularly chasing a particular sector, but we can kind of roll with the punches and rotate out of sectors where we see that there is value. And I think the sort of final theme here, which is really important, is knowing when to sell. We very much like to get under the bonds of our assets, asset manage them, add value, grow income, and then when we realize that we've kind of maximized value, we decide to cash in our chips and recycle that money into something else where we see another exciting opportunity.
This slide here shows all the sales that the REIT has transacted on over the past 11 years. We have a 41% average sale to purchase price premium, which is a very strong statistic. I mentioned Oxford Business Park, which was an office which we moved into a life sciences medical use and sold for a profit in excess of 250% from the purchase price into a sector which was very much in vogue at the time. More recently, to the right of that Oxford bar, which sticks out like a sore thumb, we have been selling out of industrials for yields probably in the low sixes, and we have been recycling that money into assets which are yielding 9%+ . Obviously that is really buoying our dividend more recently. I think it would be wrong of me not to mention the red bars.
I think it is fair to say that managers do not get every decision exactly right. We have sold an asset in Blackpool and Portsmouth fairly recently. Both of those were retail assets, and as I mentioned earlier on, we have seen high street shorten. It is all very much about the best in class retail. In those two particular locations, we decided to fill those assets and then decided to essentially drain the town and sell those, cut our losses and move on.
Thanks, Henry. Moving on to what the current market opportunity is today. We have got a strong conviction in our strategy being able to continue to deliver out performance. That is really based on the kind of statistics that I am showing you here on this slide. We are showing you average commercial property values in the U.K. over a 20 year period, but really focusing in on this time horizon since AEW's IPO in 2015. It is showing you that effectively, average capital values in commercial property are at their lowest point since our IPO, and that has been the case since late 2022. Of course, one of the main drivers for that has been interest rates in the U.K., but it is also very much the case that the U.K. commercial property investment market has been seeing significantly lower volumes during that time.
We have seen much less competition, and of course, that leads to a greater propensity for mispricing. That is absolutely what we are looking to buy. In actual fact, that mispricing and really opportunity in our pipeline, we believe is concentrated in the types of assets we are looking to buy because the investment market is thinner than normal in terms of competition, but actually there is a greater concentration of where our competitors are looking to acquire. That has been so focused over the last few years on prime industrials and logistics, that actually it has left investment volumes in the areas of the market that we would be looking to buy in even lower than the trends would suggest. Capital values being at their lowest point, or one of their lowest points in the cycle. Converse to that, yields are at their highest point as well.
Really, absolutely kind of spot on for our investment strategy where we are looking to maximize income and our ability to maximize total return over the long run as well. That pipeline of assets that we are tracking at the moment totals in excess of GBP 200 million. It is across sector, and it is yielding about 8.5%-9%+ . Really exactly the type of stuff that we have been focusing on for AEW over the past 11 years and has led us to generate the type of outperformance that we have previously shown you, Henry?
We have got a few asset management case studies here and really kind of showing you what we do. This is an industrial asset that we bought back in 2016, and you can see we bought it for a very low capital value per square foot at GBP 37 a square foot. If you compare that to what it costs to develop new build warehouses these days, you are kind of well in excess of GBP 100 a square foot. So a relatively very attractive in price at GBP 37 a square foot, throwing off a day one yield of 8.72%.
It is let to an agriculture manufacturing distributor, with a Scandinavian and Asian HQ over in Japan, and this is their U.K. HQ. What we have recently done is we have renewed their lease on a 10-year lease, and we have moved on the rent that they were paying by 42%.
When I mentioned earlier on the difference between the net initial yield and the reversionary yield, this is exactly what I was meaning sort of on a property tenant specific example. We have pushed on that rent, and not only have we grown the income, but we have also added some quite significant value. Over the two quarters when we were doing this deal, the value of the asset moved on by over GBP 1 million. So it is exactly kind of what the asset management team are setting out to try and achieve within the portfolio. Moving on to another industrial example. This is a multi-let industrial estate in Runcorn in Northwest, just south of Liverpool. We bought this between 2016 and 2017, so we bought it in two chunks. So we assembled a larger multi-let industrial estate.
Again, a very low capital value per square foot of GBP 58 a square foot, throwing off an 8.1% net initial yield. So doing exactly what we want, day one. What investors typically like about multi-let industrials is that you can get more churn and therefore you can demonstrate rental growth and move on rents more quickly because obviously you have the best comparable evidence to use on upcoming vacancies or lease renewals or re-gears, et cetera.
Anyway, in this instance, we got a number of units back and we refurbished those units, which was good because it meant that we could look to move on the rents, but we also improved the environmental credentials of the buildings, the quality of the building. So there is a lot of value there as well. More recently, we have done two lettings, really pushing on the rent, by an excess again of 42%.
Coincidentally, a very similar increase to what we achieved at St Helens on the slide that I just mentioned shortly ago. I think we saw rental growth as high as about 20% in 2021. We have seen some really strong rental growth come through in the past five years. We really demonstrate that here, not with a lease renewal, but with fresh new lettings moving on the rents from GBP 6.50 a square foot to rents in excess of GBP 9 a square foot. This slide just covers the industrial sector within the portfolio in general. Just looking at these four bullet points first. The statistics for the industrial holdings within the portfolio are more acute than they are portfolio-wide.
We have a shorter WALT to break and a WALT to expiry of 2.48 years and 4.84 years, which means that we have the ability to add value and grow income sooner than we would on the remainder of the assets within the portfolio. In terms of the arbitrage between the net initial yield and reversion yield, significantly bigger as well. We are holding our industrials today off an income yield of 6.12% with a reversion as high as 9.56%. As you can see, there is some really strong rental growth to go after for the asset management team. You can see that our rents, the average passing rent in the industrial sector at the moment is just shy of GBP 3.50, so relatively very low with an ERV across the portfolio of about GBP 4.86.
I think it is fair to say that historically, we tend to beat our valuers, who are CBRE, their assessments of ERV. You could argue that that rental growth could potentially be stronger. Then finally, I have touched on the capital value of our industrial assets. The average capital value per square foot is GBP 48 a square foot. Again, compare that to the build costs, around GBP 150 a square foot. You are excluding the land, so this is a relatively really exciting value proposition. You have obviously got that really healthy income on top of that very low capital value per square foot. Then, just to finish, we have got this chart here, which is showing the rental growth opportunity within the portfolio.
You can see, the navy blue bars is AEW and the light blue bars is CBRE's U.K. projection for rental growth within the U.K. You will appreciate there is very little in years 2028, 2029, and 2030, but that is because we have a lot of lease events coming up in 2026 and 2027. Then typically most of our leases are on five-year periods. That rental growth that we are capturing in 2026 and 2027, the next time that we probably have the ability to grow that income through a re-gear, a renewal, or a rent review would be 2031 and 2032. Unfortunately, they slip off this graph. I think the main point here is that this rental growth that we are seeing, this cumulative rental growth over this five-year period, is about 18% in comparison to the U.K., which is predicted to be about 13%.
Now, the final point I'd like to emphasize is that is purely based on lease events within the portfolio's industrial assets. Whereas the projections from CBRE are just general projections. You could argue that that 13% could also be baked into our 18%. Our 18% is based purely on CBRE's ERVs as at today. So a very exciting and compelling investment proposition with this significant rental growth within the industrial holdings.
Thanks, Henry. I'm just going to talk quickly about an example here in Bristol that I think is particularly interesting for AEW, and then perhaps we'll move on to conclude because I'm just conscious of time and we'd like to get to some Q&A of course. But for me, I've picked out Queen Square in Bristol here as an asset that we have held for a long time in the portfolio. So we've held this asset now for almost as long as we have been trading. And that's coming up to 11 years. So for me, this asset really represents two strong examples of how we buy assets. Firstly is the focus on location, and how this is such a strong location, and how that has really played into the success of the asset, in terms of growth of the rent and also the asset's occupation level.
Also, an example of an asset really being able to buy that at a price which is fundamentally misaligned to where it should be, in terms of what the asset really offers. We acquired this building in Queen Square in Bristol in late 2015, and it was at a time when Bristol offices were just starting to show signs of some quite healthy rental growth. We identified, again, that strong location. At the time, the asset was about 50% vacant, with an average passing rent of around GBP 17. During the course of the first 18 months of our ownership, we took the building to fully let, with an average passing rent of around GBP 20 per square foot. So some really positive movement made there in the first initial period of holding it.
But over the past eight years, we have then continued to move on the rents. And that's really been in conjunction with our asset management team making improvements to the building. We've been refurbishing suites, common areas, and upgrading the facilities in this building, at a time when the wider office market has really been suffering. By, I think it was 2021, we had moved the rents to around GBP 30 per square foot, and then in 2022, we hit GBP 40 per square foot. Of course, during that time, rents in the wider office market would have declined significantly. Again, looking at where we are today, we have the building at fully let with rents in the mid to late GBP 30s.
Really showing how a focus on strong location combined with active asset management and buying assets at a notably low price compared to where their fundamentals should be, has really shown with this asset how we can effectively double the rent per square foot coming from this asset over the course of the last 11 years. Now, of course, you will see a dip in the rent overall being received here during the pandemic. But really the trajectory that we have continued since then and where we project for the next coming years, continues the trend of the strong rental growth that we saw in this sub-market, when we acquired the asset back in late 2015. I think maybe if we just skip over Barnstaple. It is a great example, but perhaps one we can talk about another time.
I will just conclude by saying that the value proposition that we see continuing in our portfolio that we hold today, I think as Henry has really demonstrated with the industrials, is the same kind of fundamental that we see across our portfolio. So the reversionary yield being significantly higher than our initial yield. That, combined with the strength of the opportunity that we are seeing in our pipeline at the moment, just really shows a strong conviction in our strategy and hopefully, in the level of total return that we have demonstrated that our team are able to achieve through their skills in stock picking and in asset management. We have a strong conviction that we will be able to achieve outperformance from our strategy over the long term.
Thank you very much. I am going to take a couple of questions. We have not got a huge amount of time, but I want to try and get to a couple in, because we do have a good number of questions. Thank you very much for the presentation. A question comes in from Jason here, who asked about the merger that you walked away from and asks, are there any cash restrictions preventing further acquisitions? And also asks, "Are you still looking to merge with somebody else to create a larger trust?
Yeah, thanks. I think those sort of where Jason is touching on the kind of, cash restriction, I think it is more just the fact that, because we are currently fully invested and have been for the past 18 months, we really need to find a way for AEW to be able to unlock new equity or, yeah, in order to grow the company, in order to access that pipeline to its full extent, or really to a meaningful extent. Of course, we can recycle capital and we continue to do that, as Henry has shown through that sort of track record of profitable sales that we have made. But really that is just kind of incremental asset by asset, and we would like to be able to access that pipeline in a more meaningful way.
Now, whether we look to do that through further merger opportunities or whether we continue to do that by simply looking at ways that AEW might be able to issue new equity on its own, these are all business plans that we are currently exploring with our board and our broker who are very much on board with our conviction in that pipeline and trying to find ways to access it. I think that we'd like to message to shareholders that we are, together with our board and broker, leaving kind of no stone unturned in terms of opportunity to try and access that pipeline.
Thank you. We're about done, but I'm going to try and squeeze one more question in here, Laura, and it's a question that came in from Roger at the beginning, and it's about interest rates and how you see that impacting the performance of the trust going forward.
Yeah, thanks. We have to, before end of July next year, fully refinance the debt facility that we currently hold. So size being GBP 60 million and the rate currently being a very favorable, just under 3%. When we come to refinance that, yes, that rate will increase significantly, and we have an in-house debt team here who has already been working on speaking to various lenders to try and ascertain the most competitive terms that we possibly can for AEW going forward. But it's quite obvious to everyone, and we're making no secret of the fact, that clearly that rate will increase significantly. In our projections for rental growth from the trust going forward, we see a lot of growth coming through over the next couple of years because of lease events, because of that much higher reversionary yield, as Henry has demonstrated.
I believe that the company does have the ability to grow income in that time. It's possible that, given the length of time it takes to sign a new lease and going through those processes with our tenants, possibly around 2028, that we could perhaps kind of see that kind of catch-up happening. But when we look at the figures over the long run, we don't see that AEW's earnings dividend cover level should be any different to what we have achieved over the long run, which is a level in the GBP mid-90s in terms of cover.
Laura and Henry, thank you so much. We are going to have to leave it there. We have run out of time. There are lots of great questions there. I think we will try and get a date in the diary for a follow-up podcast, possibly to get through some more of these questions. Henry and Laura, thank you very much for being with us today.
Thank you very much.
Thank you.