LondonMetric Property chief executive Andrew Jones has predicted that rents in the retail sector will fall by an average of 50%.
Jones told EG that he believed rents will drop by at least 30% across the board.
“You have to consider rent-free periods and incentives,” he said. “I think we have seen the first phase of value destruction – essentially loss of income through [processes such as] CVAs. I think we are going into the second phase now, which we will see through the course of 2020, where the retail survivors will inherit unbelievable pricing powers to drive rents down.
“Then I think the final leg, which might be a few years off, is that retailers are only taking five-year commitments in shopping centres and retail parks. This means cap rates will need to recalibrate to [adapt to] both upward and downward rents. Yields will therefore have to be put up on these.”
He added that logistics will continue to indirectly benefit from the migration to shopping online, in what he termed “the Amazon race”.
“It is only possible to compete and service customer demands by having a market-leading portfolio of warehouses located adjacent to major urban populations. In the right locations, urban logistics is increasingly benefiting from a perfect scenario of strongly rising demand and falling supply,” he said.
Jones shared his views alongside the company’s financial results for the six months to 30 September.
LondonMetric, which has turned its focus away from retail to urban logistics in recent years, posted net rental income growth of 16.6% to £59.4m, including three months of income from its acquisition of A&J Mucklow.
EPRA NAV per share was fairly static at 174.9p, similar to its performance on 31 March.
The Mucklow acquisition increased the value of LondonMetric’s urban logistics portfolio to £826m, up from £504m in March. The total portfolio value now stands at £2.4bn.
Retail parks, which account for 3.7% of the company’s portfolio, delivered a -2.6% property return.
The company’s loan-to-value ratio was 37.9%, with a weighted average debt maturity of 5.3 years. This compares with 32.2% in March.
Disposals that exchanged in the period totalled £14.1m. These included the sale of 22 residential flats, with nine flats now remaining, and one of 11 non-core office assets acquired through the Mucklow acquisition, which was sold at a 12% premium to book value.
Jones said the company is in discussions on further office sales, with some off-market approaches.
He said: “Looking forward… what really matters is what is yet to come and we are fully conscious that the future value of our assets is heavily dependent upon future income performance.
“Therefore, in a world where income and income growth will be the defining characteristics of the next decade’s investment environment, it is logical for us to allocate our capital to sectors and assets where we expect the income streams to be reliable, predictable and which we expect to grow.”
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