Shopping centre operator Hammerson has drafted in management consultancy McKinsey & Co as part of a broader strategy review aimed at identifying how the company can elevate value for shareholders.
McKinsey is advising on emerging future retail and consumer trends. The findings of its report will be put to shareholders later this month.
For Hammerson, having been derailed by its failed £3.4bn takeover of rival intu Properties – after rejecting a takeover bid from French rival Klépierre – the need to firm up a clear vision has, unsurprisingly, become paramount.
James Carswell, real estate research analyst at Peel Hunt, says: “Shareholders are looking for a way to accelerate shareholder value in order to justify why they turned down Klépierre’s offer.
“In truth, I think it will be quite difficult for them, given the outlook for retail. At best it will be flat. Many people expect rents as well as capital values to weaken, in particular for prime assets where yields are low, where you’d ordinarily expect rental growth to come through.”
Hammerson indicated previously that its review would re-assess its disposal strategy and call for increased investment in its higher-growth retail assets, such as its premium outlets.
It would also aim to update its evaluation of risk-adjusted developments, identify cost efficiencies and seek ways to return capital to its shareholders.
As Hammerson considers how to position itself for the years ahead, EG takes a look at tactics the shopping centre owner could employ to get the business back on track.
Tweak the occupier strategy
Since McKinsey has been drawn in to analyse consumer behaviour – what shoppers are looking for and how the UK retail market will evolve over the next decade – reconsidering the tenant mix in its portfolio will likely be crucial.
For Carswell, the key element to future-proofing the business will be to target occupiers in markets that are less likely to shift online.
He says: “I think the focus will be more on getting in tenants that are relatively immune to online shopping. When you look at how the market is changing, there has been an increase in amount of leisure operators. Casual dining has expanded too quickly and now they are retrenching.
“It has become more about an experience you can’t get online. Equally, categories such as mid-market fashion are moving heavily towards online at the moment, so it will be about making sure its centres and locations suit this shift as well.”
Ramp up disposals
Another way in which Hammerson can look to maximise on returns – for which the outlook remains low across the market – is to step up its disposals strategy.
As Jeffries analyst Mike Prew highlights in his note in May, Hammerson “might have to shrink before it can grow”.
The shopping centre owner has earmarked a £500m disposal programme. It aims to kick this off with the sale of a 50% stake in its Highcross shopping centre in Leicester to a Japanese bank, as previously revealed by EG.
However, meeting this target could prove challenging. A senior source at a rival shopping centre operator, who did not wish to be named, says that if Hammerson could sell its stakes in some of its assets in full it would be “out like a flash”, if not for the tepid outlook for investment returns.
Although selling stakes rather than whole centres creates a smaller lot size, brings in a wider range of buyers and allows Hammerson to retain its management contract, to some buyers stakes are a deterrent since they do not grant control.
The source adds: “Selling its stake in Leicester would be a big step forward. But a lot of Hammerson’s assets are 50-50 joint ventures – not always an easy sell, as they are not very liquid – and its retail parks in capital terms are very high, often at more than £100m. It’s a tough market to sell in.”
Axe the retail parks
Hammerson’s traditional stronghold has been in shopping centres rather than retail parks, of which it had a £1.2bn portfolio as at 31 December. Although the retail park investment market is lagging, it has so far posted £600m of sales so far this year, according to Radius Data Exchange, with more deals in the offing.
“This is not about worrying about net asset value – the truth of the matter is, there’s a credibility gap between what the equity market is valuing its portfolio at and what the property market is valuing assets at,” one investor says.
“If you take the view that it is about getting share prices up to what we think is closer to a fair value, take out the bits that you think are having a drag effect. In Hammerson’s case, as a shopping centre specialist, that would be its retail parks.”
Double down on outlets
Following a further £76m investment in February, Hammerson now owns more than 50% of Value Retail, which controls Bicester Village. Its investment in the company has been universally heralded as a success, generating particularly healthy rental and sales growth.
Developing new outlets from a standing start is complex but upping its stake in Value Retail, even at an inflated price, would be likely to please the market and help fuel the growth of the expanding company.
Look to other sectors
Looking outside retail might offer an even more radical solution. The company sold off its City office portfolio at the bottom of the market to Brookfield in 2012 in a £518m deal and has been a retail specialist since. But it could make a move, similar to that made by Londonmetric, towards faster growth areas such as logistics and industrial.
The sector may have reached record prices, making it a more expensive exercise than it would have been five years ago, but it could be argued that the lines between the two sectors are becoming increasingly blurred as retail consumption becomes more distribution-based, in line with the online shopping boom.
“It depends on how radical it wants to be. Hammerson could open the blinkers a bit – logistics is a form of retailing today,” says one industry chief executive.
“The internet is benefiting from the channel shift – so Hammerson might want to become a player in this.”
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