By James Watson – 6th April 2018
The Hammerson/Klepierre/Intu corporate wrangle has brought into sharp focus the value of UK shopping centres.
Owing to the constraints under which property valuers work, it’s long been acknowledged that the value in which an asset is ‘in the books’ can be at a marked variance from the price it would command if it were put up for sale.
The inferred value that Hammerson put on Intu and then Klépierre’s bid put on Hammerson underscored this point. Hammerson’s stated net asset value as of December 2017 was a little over £6bn. This then rather begs the question as to why Klépierre feel that a bid of just under £5bn won’t be immediately laughed at. Meanwhile public markets give Hammerson a market capitalisation of just £4.29bn (as at April 5th).
The whole Hammerson/Intu/Klepierre ménage a trois has highlighted the mismatch between ‘fantasy’ valuation and ‘real’ market price, but actually this is good news and will hasten a return to normality.
After a prolonged period when the sector was in suspended animation, forced sellers in the UK shopping centre market are beginning to ease liquidity and this is giving the sector as a whole a cold shower of reality.
The Abbeygate Shopping Centre in Nuneaton sold at auction last week for £4.25m. The last time it changed hands was for £17m in 2005 when the net income was a little more than £1.1m per annum. Income attrition means the centre now produces just £543,000 per annum and the expectation that this is only headed lower meant purchasers were only prepared to bid to a 12% net initial yield.
Whilst these ‘transition prices’ will send shudders through certain areas of the market, they are ultimately healthy. Shopping centres are complex assets which require intensive management and relatively high capital expenditure. Accordingly, if investors are going to get involved in a high risk asset they need a high return environment. More imminent deals will highlight this wave of ‘real’ pricing and will allow investors to enter the market again. Meanwhile, at the top end of the market, achieved prices also look to be delivering value. AXA is in lengthy talks to buy a 25% stake in the Bluewater shopping centre in Kent.
The pricing reflects a yield of around 4.75% – 12% below book value – which looks an absolute bargain compared to the industrial sector which – on the back of online retailing logistics hype – is now achieving yields hovering around 3%.
The debate about shopping centre values, prices and risk – and what is real and what is fantasy – will continue to rage.