Analysts at Berenberg have given shopping centre REITs intu and Capital & Regional “buy” ratings, and has outlined three reasons why it is confident in the value of the UK shopping centre market.
The German bank, which has initiated coverage of both landlords, has outlined a price target of 230p for intu and a target of 60p for Capital & Regional. Intu is its “top pick” in the sector.
Its three key reasons for seeing value in the UK’s shopping centres are:
■ ecommerce is “not everything” – Berenberg explained that not every retail offer is suited to ecommerce, while the costs associated with satisfying consumer expectations are increasing exponentially; consequently, physical stores with the “right product mix in the right locations are likely to remain the primary point of sale”;
■ there is a material share price disconnect between current share prices and asset fundamentals – the bank said current prices implied a capital value decrease of 10%-35%, or +211bp of outward yield movement, amounting to 89% of that experienced in the financial crisis – which it found “highly unlikely”; and
■ a material shopping centre valuation correction is “unlikely for all but the most underinvested, poorly located or non-dominant assets”, said Berenberg, which noted: “Market fundamentals are attractive; yield spreads remain elevated, new supply remains constrained, systematic debt has fallen, REIT leverage remains comfortable and some lead indicators are showing green shoots.”
According to Berenberg, intu has a significant development pipeline and a portfolio of high-quality destination shopping centres, along with “self-help potential”. The bank observed that its shares trade at an “undeserved 53% discount to CY18 price/net asset value and yield 8.9%, 1.07x covered”.
Meanwhile, it noted that Capital & Regional’s portfolio of “London-weighted convenience centres with alternative use development potential” also held attraction and “trade at a CY18 price/net asset value of 0.68x and yield of 8.6%”.
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