During Q2 we sold Derry’s Cross in Plymouth to Plymouth City Council, for £17.25 million, reflecting a net initial yield of 5.08%. The asset, which was acquired in April 2015 for £13.7 million, produced an ungeared IRR of almost 14% per annum and delivered significant capital growth of 26% during a relatively short hold period. The sale price was at a premium to valuation and in our opinion reflects a premium price paid by a special purchaser.
The asset comprises a Travelodge hotel, gym and four leisure units occupying a very prominent site in the city centre. Whilst the unexpired lease term is attractive at approximately 16 years we had concerns regarding the leisure sector at large, overrenting and security of rental income from the leisure occupiers. In particular, one leisure unit has a break option in 2019 which was exercised after we completed the sale and we are not optimistic about reletting prospects. The property is a local landmark and adjacent to the Theatre Royal, but there is a threat from competing leisure schemes and Premier Inn are developing a new hotel opposite, which will act as direct competition to Travelodge.
