View from City Road: Slough bows to the inevitable

JUDGING by comments from Sir Nigel Mobbs, chairman of Slough Estates, the property slump started just last month. While in March he had expected to be able to hold this year's dividend - and cover it with earnings - in the past few weeks 'general business indicators have been turning a bit more gloomy than they were'.

In reality Slough has finally accepted what has long seemed inevitable; it will take some time before the property market recovers sufficiently to sustain current levels of costs and dividends. By cutting the interim dividend from 4.4p to 3.1p, and warning of a similar drop in the final to 5p, Slough believes it has established a sustainable level 'even if the recession is prolonged'. Shareholders will hope that Sir Nigel, who enjoyed a 4 per cent rise in salary in 1991, will show similar forbearance.

Although some analysts say they were led to believe the dividend would be maintained, the market was clearly expecting a cut. The shares rose 6p to 95p, giving a prospective yield, on the reduced payout, of 11.4 per cent. The City clearly expects others to follow suit. Hammerson, down 1p at 224p, would yield 12.2 per cent if it holds at 20.5p. A warning of a cut in the final payment is expected when it announces its interims in October. MEPC, up 2p at 227p, has a similar yield although its relatively stronger cash flow makes a cut less certain.

Slough's dividend reduction was despite an increase in pre-tax profits from pounds 19.1m to pounds 33.6m, partly through a halving of exceptional write-downs of trading assets to pounds 5.5m. But that hides the effect of pounds 20.9m ( pounds 27.7m) of capitalised interest which, had it been charged against profits, would have meant the dividend being paid from reserves. Capitalisation will tail off as developments are completed, and is likely to fall from pounds 52.3m to pounds 35m in the full year. Slough will eventually fill the 12.4 per cent of empty space, but the terms are unlikely to be generous. Its borrowings also remain stubbornly high. Net debt is pounds 778m, 70 per cent of shareholders' funds.

Slough's strength in relatively resilient industrial property means its asset value is likely to suffer less than some of its rivals, but analysts are still forecasting a fall of up to 17 per cent to 275p at the year-end. The 64 per cent discount and the yield meanthe shares are unlikely to fall much further, but investors' aversion to property means there will also be little recovery.

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