Performance overview

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.

Retail Portfolio by capital value £3.80bn (%)

Capital value

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%.

Voids across our like-for-like Retail Portfolio remained static at September 2009 at 4.8% compared to March 2009 despite units previously in administration being transferred to void status.  Within the 4.8% of void space, 1.3% is subject to temporary lettings, and on a further 1.0% terms have been agreed for re-letting.  We have reduced the proportion of units in administration from 5.6% in March 2009 to 3.7% in September 2009, as a result of good leasing progress which we attribute to our excellent relationships with a wide range of retailers.  Our response to the MFI insolvency illustrates the benefits of our scale together with the quality of our relationships with retailers. We were left with eight MFI stores but by the end of the Half Year we had let or agreed to let four, one has been sold, and we are planning to develop another. That leaves just two stores outstanding.

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Rental income

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

30 September
30 September
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)
Ongoing developments 11.2 0.9 10.3
Gross rental income(1) 170.6 183.2 (12.6)
  1. 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)

The decline in gross rental income from like-for-like investment properties, compared to the same period last year, is attributable to the failure of a number of retailers in the second half of our last financial year.  In addition, our sales programme resulted in a decline in gross rental income of £12.1m compared to the prior period, although this was substantially offset by increased income from our developments in Bristol and Livingston, which opened in September and October 2008 respectively.

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Asset sales

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%.

The largest disposal related to our one third ownership in the Bullring, Birmingham, which was sold to the Future Fund of Australia for £209.8m in September 2009.  The sale price reflected a net yield of 6.9% after settlement of outstanding rent reviews.  The centre has performed well for us but it was an unusual asset within our portfolio because of our lack of management control and the constraints on raising debt against the asset as a result of the partnership structure.  Other asset disposals were retail warehouse parks and foodstores in Bury, Melton Mowbray, Plymouth, Liverpool, Edmonton, Swansea and Chester together with a shopping centre in Maidstone.

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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.

During the Half Year, we also developed our innovative Brand Empire initiative, which sets out to attract overseas retailers to our UK shopping centres.  This is an example of our teams engaging with brands and retailers at all levels to find new ways to enhance the vibrancy of retail environments despite tough market conditions.  We are in active discussions with several potential entrants to the UK market.

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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.

During the year we also achieved planning permission for a food store at the Greyhound retail park, Chester, and a 6,500 sq m application was recently submitted for a food store at our Northampton retail park. We have submitted further applications for food stores in our retail warehouse portfolio and related to our Harvest Limited Partnership joint venture with J Sainsbury. These applications reflect the relative buoyancy of the food sector and underline our ability to identify sites with excellent development potential despite an adverse economic environment.

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Looking ahead

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.

In response, we intend to deploy our capital to acquire retail assets requiring intensive management.  We will also invest, selectively, in the development of shopping centres in the strongest regional cities.  And, we will look to deploy capital in smaller out-of-town developments where we can capitalise on our strong relationship with retailers to secure key pre-lettings.

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