Retail Portfolio review
During the first few months of our Half Year, retail property values continued to weaken before we then began to see an improvement in investor demand for shopping centres and, particularly, for retail warehouses. Although retail leasing conditions continue to reflect pressures in the wider economic environment, we have benefited from a clear strategy on leasing and from our deep relationships with retailers. As a result, our response to these conditions has proved effective in securing new lettings.
The revaluation of our Retail Portfolio resulted in a valuation deficit for the six-month period of 3.6% overall, with shopping centres and shops down 5.9% and retail warehouses and food stores down 0.1%. Decreases in rental values on our like-for-like portfolio over the six months were 6.0% for our shopping centres and shops and 4.5% for our retail warehouses and food stores.
On the basis of ungeared total property returns, our Retail Portfolio outperformed the IPD Quarterly Universe by 1.7%, with shopping centres ahead by 2.3% over the six months and our retail warehouses underperforming slightly by 0.5%.
Gross rental income of the Retail Portfolio declined by £12.6m as set out in the table below.
Table 3: Gross rental income – Retail Portfolio
|Like-for-like investment properties||141.7||152.9||(11.2)|
|Proposed development properties||3.5||3.6||(0.1)|
|Purchases since 1 April 2008||1.1||0.6||0.5|
|Sales since 1 April 2008||13.1||25.2||(12.1)|
|Gross rental income(1)||170.6||183.2||(12.6)|
- Includes properties treated as finance leases. The income of these properties for the six months to 30 September 2009 was £1.4m (30 September 2008: £1.6m)
In line with our plans, we continued to make asset disposals. The assets we chose to sell were those that provided us with fewer opportunities to create value through development and active management, whereas the funds generated have increased our flexibility to exploit future opportunities. Asset sales from the Retail Portfolio totalled £469.2m. On average, the sales were at 0.9% above the 31 March 2009 valuation (before disposal costs) and showed an average income yield of 8.0%.
Development and asset management initiatives
On 22 October 2009, we opened the St David’s Shopping Centre in Cardiff with our partners, Capital Shopping Centres PLC. The centre is anchored by a new John Lewis department store, the first in Wales and the largest outside London. The centre also benefits from linking into the existing Debenhams and Marks & Spencer stores, which have been refitted to coincide with the opening of the new scheme. The centre is now 63% let or in solicitors’ hands by income, and has brought 25 new retailers to Wales.
In May 2009, John Lewis confirmed that our Commerce Centre in Poole, Dorset, would be the first location for its new ‘John Lewis at home’ format. In trusting us to deliver this new format, John Lewis has underlined the strength of our relationship. The new unit sells the retailer’s home and electrical goods along with additional features, including customer collection, a gift-list service and a customer café, providing a total floor area of 5,110 sq m.
During the six months we also confirmed a series of new lettings for our Livingston and Dundee retail parks, achieving rental levels of between £215 and £248 per sq m (£20 and £23 per sq ft). At Almondvale retail park in Livingston, Currys will open a 1,860 sq m PCWorld/Currys concept store, double the size of its current unit and the first of its kind in Scotland. Dreams, the leading national bed specialist, has signed two lettings, one for the existing 930 sq m Currys unit at Almondvale and another for a 930 sq m store at Kingsway West retail park in Dundee. Meanwhile, at the Bon Accord shopping centre in Aberdeen, Next has opened a new 5,010 sq m store and we have seen new openings from Topshop Topman, River Island, Kurt Geiger, Phase 8, Coast and other fashion retailers.
Early in 2009 we worked with others in our industry to develop a ‘Ten Point Plan’, an initiative to help landlords and occupiers develop new ways to reduce service charges and other costs. We created a combined task force of both our own and retailers’ employees to look at potential savings within our own portfolio, which visited a number of our shopping centres during the Half Year. Retailers have seen material benefits as a result of this initiative.
We continue to have constructive discussions with retailers around other key issues such as monthly rents and the structure of leases. We have developed our new ‘Clearlet’ leases in conjunction with retailers, and we intend to introduce more of these on new lettings to help speed up and simplify the leasing process. Clearlet leases are straightforward contracts offering monthly rents and deemed approvals for assignment, sub-letting and alterations if responses are not provided within fixed timescales. This is part of a wider set of initiatives to become more aligned with our retailers and includes the sharing of turnover information, which will help us to manage shopping centres to their maximum potential.
Development and planning
In December 2008, we obtained planning consent to provide 54,000 sq m of new retail space at our Trinity Leeds shopping centre development; this will be integrated into our existing shopping centre of 38,900 sq m, which will also undergo refurbishment. We have made good progress in discussions with retailers to take us towards our target for pre-lettings before starting the development.
We have obtained consent for a 8,360 sq m Sainsbury’s store at Almondvale South retail park, Livingston. The proposed Sainsbury’s store would take over the units currently occupied by Homebase and Argos, with Argos relocating to new premises at Almondvale retail park previously occupied by Land of Leather.
We expect to see a continued strengthening of buying interest for retail investment property despite the backdrop of some further downward pressure on rents. It is also realistic to assume that there will be more insolvencies in the sector, but we expect the level of units in administration in our portfolio to remain stable or to reduce slightly as new lettings offset further insolvencies. Over the next 24 months, the outlook for rental recovery will become polarised across UK towns and cities according to the level of vacancies and the attraction of individual assets.