THE RETAIL REVOLUTION
As sales boom online, are shares in shopping centres a bargain – or damaged goods?
FoR millions, the ideal shopping centre is no longer what it was. Now more functional than aspirational, it has a Primark, a Poundland, a B&M, plenty of free parking, plus a massive supermarket.
The pandemic has accelerated the preference among both the cashstrapped and the affluent for this unpretentious type of centre – the retail park, with its bargains and ample scope for social distancing.
This shift has serious implications for investors in property trusts and funds, many of which own the more traditional type of centre, where the anchor tenant is often a moribund department store, not a supermarket.
In America, hundreds of vacant malls face demolition. In the UK oversupply is less acute, although John Lewis and others have too much space.
Nevertheless, the recent collapse into administration of Intu, owner of Lakeside in essex and the Trafford in Manchester, highlights the crisis in the sector which has been exacerbated by online shopping’s explosive growth.
Five years ago, Intu’s market capitalisation was £4.5bn. By June 26, when the shares were suspended, it had slumped to just £25m. excessive borrowing weighed down the business, which is structured as a real estate investment trust or ReIT, but nonpayment of rents was the final blow.
Intu’s fate has increased scrutiny of other ReITs, in particular Hammerson, owner of Birmingham’s Bullring. only 14pc of the rents owing to retail landlords due on June 24 were paid, following a temporary government ban on the eviction of tenants.
Jonathan De Mello, head of retail consultancy at the adviser Harper Dennis Hobbs, says this is the lowest on record.
He also expects more attrition. In a world where ‘footfall is the new currency’, upmarket centres, like Westfield London, should survive, alongside the more utilitarian retail parks. The middle tier will be squeezed, unless centres can be ‘repurposed’ into offices and online shopping hubs, or converted into homes, under Boris Johnson’s planning shake-up.
In the meantime, attention has turned to a possible sale of the Trafford Centre, which is on Intu’s books at an optimistic £1.7bn.
This speculation coincides with rumours that Asian investors are eager to acquire UK centres – but at knockdown prices. They want to exploit sterling’s decline and also see Britain as a safe haven. But there is no evidence of this upbeat view in the massive discounts on ReITs that hold shopping centres (a trust is at a discount when the share price is below the value of its assets).
Richard Williams of QuotedData, the analysis group, says that Hammerson’s focus on shopping centres – it has a 50pc stake in Bicester Village – explains its 87pc discount. While it collected just 16pc of its rents, it has acted to shore up its finances.
But anyone minded to take a bet on its shares should note that it is the most shorted stock, maybe for a reason.
New River is another ReIT with a sizeable discount – 68pc – but has much better prospects.
It has shopping centres, but retail parks, where rents are more affordable, make up a large part of its portfolio. British Land and Land Securities are at discounts of 50pc and 54pc respectively.
Both have substantial office portfolios, but are also big names in malls – British Land owns Meadowhall in Sheffield, while Landsec has Bluewater in Kent.
This week British Land said it had collected 36pc of its retail rents. When non-essential stores reopened on June 15, footfall was a third down on a year ago, but sales in these stores were just 10pc lower.
Land Securities yesterday revealed it had collected just 29pc of the retail rent owed and 60pc of rent overall, but will resume paying a dividend.
But this was a significant improvement on its rivals.
The nation, it seems, has not lost its taste for a shopping trip, but its liking for buying online is rising, as shown by Segro.
This ReIT is at a premium of 27pc because it owns the logistics warehouses used by online retailers.
Patience, meanwhile, is the only option for investors in M&G, Legal & General and nine other property funds that remain gated in response to ‘material uncertainty’ over the valuation of their assets.
However, Darius McDermott of Fund Calibre points out that only Aberdeen’s fund has a substantial exposure to shopping centres.
Similarly, anyone with a stake in a ReIT reeling from the revolution in shopping habits has little option but to sit tight, hoping Chancellor Rishi Sunak will cut VAT to give a fillip to retail, that a Covid-19 vaccine will arrive – and that more repurposing of centres proves feasible and effective.
If this turns out to be the case though, some of today’s ReIT valuations may end up looking like a better bargain than anything you can find in a retail park.