The Bluewater shopping centre in Kent claims to “set the benchmark for the ultimate shopping and leisure experience”.
But the recent sale of a stake in the 240-acre complex has prompted concerns about falling prices for even the UK’s most highly prized shopping centres. Investors are questioning whether property owners have fully absorbed the impact of changes buffeting the retail industry — from the shift to ecommerce and rising inflation to falling consumer confidence.
Hermes Investment Management agreed in September to sell 7.5 per cent of the Bluewater centre to insurer Royal London for £155m — some 7 per cent below its original asking price.
The figure implies Bluewater’s total worth is about 8 per cent lower than the value Landsec — the UK’s largest listed property company — holds on its books for its 30 per cent stake and lower than the price it paid for the stake in 2014, according to an analysis by Numis Securities.
Robert Duncan, analyst at Numis, says the price may begin a “slow bleed into valuations” across the UK’s most upmarket shopping centres, most of which are owned by listed companies.
Falling values come partly from downward pressure on rents, Mr Duncan says: “Landlords face a substantial challenge if they are trying to gain any kind of rental growth.”
Landlords of the UK’s largest shopping centres — often listed companies such as Landsec, British Land, and retail specialists Hammerson and Intu — have so far argued they are less subject to the pressures affecting smaller, cheaper retail properties.
As retailers shrink their numbers of stores, landlords say, they are focusing on key locations as showrooms for their brands, plus hubs for click-and-collect deliveries.
“When we are having conversations with most of the prime retailers, they want more space [in our centres], not less,” says David Fischel, chief executive of Intu.
But Mr Duncan and other analysts say they believe top shopping centres are not immune from the pressures affecting their smaller competitors.
Next, one of the UK’s largest clothing chains and Intu’s second-largest tenant, told investors earlier this year that stores were “an important part of our online service to the increasing number of customers who collect and return their orders through our stores”. But this did not translate into a willingness to pay higher rents, it said, adding that it was agreeing rents for new stores opening in 2017-18 that were 24 per cent lower per square foot than existing ones.
So far, property companies have been cushioned by landlord-friendly contractual terms and have generally been able to secure small rises in average rents year on year. But they are losing some of their negotiating power, analysts say, while landlords’ own expansion plans may not help.
According to Hemant Kotak, analyst at Green Street Advisors, big “grade A” shopping centres plan extensions amounting to 12m sq ft in the next six years. “That’s a material amount that you are adding,” he says.
“Grade A malls are going to grab more and more market share, but can they grab it at a fast enough pace to offset the square feet they are adding?”
Shopping centre operators are also seeking to enhance the “experience” they offer customers, with more food and drink options, along with activities from cinemas to dry ski slopes. However, “casual dining” chains such as Byron Burger, which had helped drive this trend, are now slowing their expansion and even considering closing branches, according to reports.
When it comes to the shopping centre landlords, markets are sceptical that their assets are worth the prices on their books.
Intu is trading at a discount of 43 per cent to the book value of its assets, and Hammerson at a discount of 31 per cent, according to Numis figures, against an average 17 per cent discount for real estate investment trusts.
Capital values for prime UK shopping centres had fallen 3.5 per cent in the year to the end of June, according to figures from commercial property group CBRE — although rents continued to edge upwards by an average 1.8 per cent.
The Bluewater stake sold by Hermes came with no management power over the centre, which may have depressed its value. So investors are watching what happens to the next stake due to be sold.
The Singaporean sovereign wealth fund, GIC, and Australian group Lendlease are together selling stakes that amount to 42.5 per cent of the development for about £900m, having earlier sought separate sales totalling more than £1bn.
In the sector as a whole, short sellers believe values have further to fall. In the US, there are similar worries about the future of “grade A” shopping malls and internationally, short positions against retail real estate investment trusts have almost doubled this year to $12.4bn, according to financial analytics company S3 Partners. This includes $455m of current positions against Intu and $124m against Hammerson.
Online shopping is more widespread in the UK than other countries including the US, Germany and France, according to figures assembled by research group Green Street. But this does not mean the transition is over, says Richard Hyman, a retail consultant.
“We are seeing fundamental structural change,” he says. “This is going to be painful, and it is going to last for some years.”