The end of most Covid-19 restrictions looks nailed on for July 19. Unfortunately for commercial property owners, this does not include the end of a ban on evicting tenants. For big players like the real estate investment trust Hammerson, which does not have time on its hands, this is the day of reckoning that never seems to arrive.
Hammerson, whose vast portfolio of retail property includes Birmingham’s Bullring shopping complex and the designer discount outlet Bicester Village in Oxfordshire, has been forced to sell assets to boost cash resources and fend off breaches to its debt covenants.
The company has found itself under financial pressure as enforced store closures during lockdown have hastened a decline in rental income and property values, which were already falling before the pandemic. The former fell by almost half last year following an increase in retailers going bust, launching company voluntary arrangements or refusing to pay rent owed.
Aside from the immediate impact of Covid-19, Hammerson must also deal with the fundamental long-term problem of ecommerce.
Hammerson is due to release first-half trading figures next month and while the magnitude of the declines in rents and asset values may be more muted than in the immediate onset of the pandemic, investors should not expect a change in the direction of travel in either metric.
Shop vacancy rates have continued to climb, continuing a three-year rise to 14.1 per cent at the end of March, according to the British Retail Consortium. Rent collection remains subdued. By mid-April Hammerson had collected just 46 per cent of the amount owed for the first half.
The urgent issue for Hammerson is remaining compliant with its debt covenants. Two of the three ratios used for covenant tests may cause shareholders to sweat. Interest cover declined to a multiple of 1.77 on a pro-forma basis at the end of December, down from 3.49 the prior year. Gearing has held steady but at 68 per cent, remains above that of peers. The group has the ability to withstand a 31 per cent decline in net rental income and 27 per cent fall in asset valuations before breaching its tightest covenants. Last year the former fell 49 per cent, while valuations were down 21 per cent. Management may well point to the unprecedented strain placed upon tenants’ cashflows and the huge uncertainty cast over commercial property valuations by coronavirus. But even before pandemic pressures, net rental income fell a considerable 17 per cent between 2017 and 2019, alongside an even more stark 21 per cent fall in the portfolio value.
There’s not a lot Hammerson can do about the easy appeal of online shopping, nor the financial pressure heaped upon tenants by disrupted trading. Selling assets and paying down debt with the proceeds is one of the few levers it has left to pull.
In April it agreed the sale of seven retail parks to the Canadian private equity firm Brookfield after a failed attempt to offload the assets last year. But investors should hold any applause, and not just because of the 8 per cent discount that was attached to the portfolio’s price tag versus December book value. Retail warehouse values have been maintained more than both shopping centres and high street retail premises in recent months.
For all Hammerson’s challenges, investors seem to be more optimistic than they have been in almost three years. The shares trade at almost 0.7 times consensus forecast book value, the highest rating since August 2018, when estimated rental values were in growth and rental income stable. Investors should judge the group more harshly before time runs out on the Reit entirely.
ADVICE Avoid
WHY Rental income and valuations look likely to slide further
Helical
If retail property is a real estate pariah and industrial assets are the choice pick, investors have found London-listed office landlords more difficult to place.
Helical is a case in point. The shares have rallied by about 80 per cent since March 2020’s market crash but still trade at an almost 20 per cent discount to consensus forecast net asset value at the end of December.
That is a wider gap than London office rivals Derwent London and Great Portland Estates, and one that does not seem justified.
The real estate investment trust develops and lets offices in the centre of the capital. Some caution is understandable. Companies have been reluctant to sign new leases during the past year’s economic turmoil, while the lockdown-induced shift to homeworking has also prompted some big corporate names, including Nationwide Building Society and PwC, the big four accountancy firm, to make flexible working a permanent feature. The central London vacancy rate had almost doubled to 9.1 per cent during the 12 months to the end of April, according to CBRE.
Helical’s chief executive, Gerald Kaye, says that there will be a “bifurcation” between the “real” Grade A space — the sort the Reit specialises in — and the rest. There are some indications that that theory may be credible. Yes, the level of new lettings was much reduced last year. But those that were agreed were inked at an average 5.5 per cent ahead of March 2020 estimated rental values.
Rent collection rates have also proven robust since the onset of the pandemic, standing at just over 93 per cent over the year to March. That was helped by the group’s modest exposure to the beleaguered retail and leisure sectors, which is lower than both Great Portland and Derwent.
Analysts are forecasting a net asset value of 537p a share for the March 2022 financial year end, which would represent an 8 per cent increase on March 2020.
Uncertainty around the extent employees will return to the office means the shares come with added risk, but investors should give Helical more credit.
ADVICE Buy
WHY Discount attached to the shares v NAV looks too severe
