Hammerson’s latest set of financial results are symptomatic of the wider issues plaguing the UK retail property market and the institutional landlord is unlikely to be the only one feeling the effects.
Yesterday, embattled institutional landlord Hammerson unveiled its financial results for the 12 months to December 31, 2019. While the landlord was keen to stress it had exceeded its disposal target and significantly lowered its debt, the fact remains that it had another tough year.
Like-for-like net rental income across the group fell 11.2% to £308.5m, with UK flagships reporting a 6.7% decline and overall profits falling 10.9% to £214m.
However, perhaps most alarming for the landlord was the fact that Hammerson was forced to slash more than £800m off the value of its portfolio, as cash-strapped retail tenants demanded rent cuts or pushed through debt restructuring that left the business out of pocket.
“Everything in property is about relationships. If one firm is valuing a landlord’s property, it’s likely to also pick up some other work for that landlord”
Hammerson UK and Ireland managing director Mark Bourgeois said the landlord is “comfortable with where our valuations are right now”, before warning of more pain ahead in the future.
“We do think there’s going to some further decline [in value],” he said. “We’ve been pretty open about that fact”.
Meanwhile struggling competitor Intu, which is due to update the City next week, has today announced it needs to raise a further £1.3bn in equity to get its lenders to agree to refinance its debts. Also, given that the likes of global property giant Unibail-Rodamco-Westfield have reported falling incomes on its UK sites, Bourgeois’ prediction seems a foregone conclusion.
Property values are decided by a combination of rents and consumer sentiment towards the sector, which in turn sets the net yield – which is income from rents combined with the purchasing price including costs such as maintenance and so on.
Yet, some in the sector insist that what is, on the surface, a fairly simple mathematical formula can be co-opted by more underhand tactics.
Conflicts of interest
As one former property agent turned retail property director says, the intertwined relationships that exist between landlords and property firms make it almost impossible for surveyors to independently value sites.
For a start, the landlord won’t thank you for a valuation below market value. Certainly not after being dragged in front of the board and dressed down for the prospective dip in the share price.
Second, everything in property is about relationships. If one firm is valuing a landlord’s property, it’s likely to also pick up some other work for that landlord, such as advising it on acquiring other sites or consulting on disposals and development pipelines.
In other words, you’d be a brave surveyor to threaten your wider firm’s relationship with an Intu, a Hammerson or a Unibail-Rodamco-Westfield by valuing a key asset under book value.
Inflated values result in artificially inflated rents, all at a time when bricks-and-mortar retailers are battling into some of the fiercest headwinds in a generation.
“Consumers still equate a visit to a shopping centre with its retail element and landlords ignore investing in the retail offerings at their peril”
Retailers, in turn, have cottoned on to this fact, particularly those that are defying the odds and still trading well from stores.
Successful retailers understand their value to a landlord in the same way they understand the value of a store, particularly when so many competitors have been cutting rents through administrations and CVAs.
While lower valuations would offer listed landlords, in particular, a headache in the short term, they could ultimately help alleviate some of the issues being felt in shopping centres themselves.
Properly valued schemes could offer a clean slate for landlords, allowing them to properly flex rents, incubate new and exciting tenants, and invest better in schemes to bring customers back.
Too big to fail
Landlords would argue that they are already doing what they can to diversify portfolios – pivoting away from retail towards food and beverage, leisure, co-working and even residential.
Even so, the majority of consumers still equate a visit to a shopping centre with its retail element and landlords ignore investing in the retail offerings at their peril.
This is all but impossible for many large landlords as plummeting values are twinned with sizeable debts and investors demanding sales to balance the books, rather than investment to drive footfall.
Landlords are indebted to banks, which themselves hold investments in swathes of retail property across the UK. As a result, rather than calling in the debts and seeing a landlord default, further cratering retail property values, banks instead will look to prop up the landlord by buying stakes in schemes for them to manage on the bank’s behalf.
“It is almost impossible to undertake root-and-branch reform in the face of the tyranny of the quarterly financial update”
So, the cycle goes on. Inflated values, rents and more debt. Yes, these landlords may now be too big to fail, but many are also too indebted to invest in their sites.
At a time when landlords need to think more creatively about physical space to get shoppers off their computers and phones and into stores, this doesn’t seem to be a sustainable arrangement.
It is also almost impossible to undertake fundamental root-and-branch reform in the face of the tyranny of the quarterly financial update and investors keen to see short-term return on investment.
It’ll take more than one brave surveyor or landlord to fundamentally change the way the retail property market in the UK works. However, as recent financial results show, the status quo is no longer working for landlords or, ultimately, for customers.
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