Westfield Group’s A$2.9bn (€1.5bn) institutional placement last month was not welcomed by investors. On the Australian stock exchange, the company’s share price slid 12.4% to a record low closing of A$10.60 after it resumed trading following the capital raising at A$10.50 a share.
The placement prompted analysts at ABN Amro to issue a sell rating on the world’s largest listed retail property group. “An equity raising via a $2.9bn institutional placement, in our view, leaves Westfield with insufficient balance sheet firepower to pursue value-added M&A,” the analysts warned. “As the founding shareholders, the Lowy family, are prepared to be diluted under the deal, we believe this transaction is a negative signal to the market. We move to sell.”
The analysts explained that the placement, at a 13.2% discount to the share price, although anticipated, will not raise enough cash to allow Westfield to make meaningful acquisitions during the rest of this year.
Fears of further revaluations
Investors were also rattled by fears that further revaluations of the group’s assets could wipe away the A$2.9bn in additional equity. And though gearing looked set to fall to around 36% immediately after the equity issue, ABN said it could rise back to 40% by mid-2009 as a result of yield expansion and negative currency effects.
Most analysts are predicting at least a 30% fall in asset valuations from current book values, mainly caused by Westfield’s business in the US, the UK and New Zealand. A write-down could be worth up to A$6bn when the centres are marked back to market prices, according to valuers.
Westfield generates 60% of its revenue outside Australia. The group has interests in and operates a global portfolio of 119 regional shopping centres in Australia, New Zealand, the UK and the US, valued at more than $60bn.
Although Westfield is not speaking publicly about its expansion plans until it reveals its 2008 results at the end of February, it privately admits to ambitions for continental Europe. The latest available figures for the company date back from August last year when Westfield posted a first-half net profit of A$1.3bn, boosted by asset revaluations and mark-to-market adjustments.
But for now the global slowdown is causing concern for the company’s performance in existing markets. Last month, the company lowered its earnings forecast to reflect the effect of higher finance costs and the deterioration of retail fundamentals in some core markets, especially the US, UK and New Zealand.
Sales and occupancy at Westfield’s US malls have declined. The US portfolio was 92.6% leased at the end of December, down from 94.1% the previous year, while the UK portfolio was 98.9% leased.
However, Westfield pointed to the strong performance of its Australian portfolio. Westfield said that the facilities are 99.5% leased and that retail sales rose by 1.6%, on a comparable basis, in the last quarter of 2008.
Eight projects in the UK
In the UK, where Westfield has been active since 2000, the group has eight shopping centres either trading or in the development and planning stages. These include its flagship 150,000 m2 Westfield London, which opened last autumn the 92,900 m2 Westfield Derby, which opened in October 2007 and two urban regeneration projects.
Westfield London, 20 years in gestation, started trading against a background of a biting credit crunch and low economic expectations. Two months later, in December, the company began consultation with its staff over job cuts in the UK, where it employs over 700 staff, after the value of Westfield’s UK investments fell by 11.4% in first half of 2008, from £790m (€907.5m) to £700m.
Tenants offered incentives
In order to tempt retail tenants to take space in Westfield London, the company has offered incentives. Some of the speciality retailers in the centre secured rent-free periods of up to 18 months.
Rents at Westfield London are also lower than those at other recently opened developments. Rental amounts vary according to the sector of the retailer, but the average zone-A rent is £300 per sq ft per month (€32 per m2 per month). This compares to £320 per sq ft for Liverpool One, another significant city centre shopping development opened last year, and £415 per sq ft at Bluewater in southern England.
Property experts say that Westfield London is cheaper because the development location is unproven among retailers and it faces stiff competition from the West End.
Since the shopping centre opened, retailers have rebelled against what they consider to be high service charges in relation to the fall in UK consumer spending.
Last October, retailers at Westfield London protested about a service charges increase to £14 per sq ft (£1.30 per m2) just days before opening. They had been told the charge would be around £8 per sq ft. In December, a group of retailers, including Marks & Spencer, Debenhams and House of Fraser, had appointed a consultancy to advise them on challenging the charges.
This month, newsagent WH Smith and sports retailer Fred Perry have become the latest tenants at Westfield London to challenge the centre’s charges. But Westfield is adamant that it can ride out the current downturn and insists that it has created a centre that will outlast cyclical slumps, and be worth the high service charges.
But falling consumer spending in the UK has prompted the group to slim down its UK development pipeline. Regeneration projects in Stratford, east London, and Westfield Bradford in northern England are going ahead, but projects in Guildford, Nottingham, Merry Hill and Lisburn, Northern Ireland, look to be on hold.
The mixed-used 1.25m m2 Stratford City regeneration scheme is planned to open in March 2011. Located next to the site of the 2012 Olympic and Paralympic Games in London, it will comprise 465,000 m2 of offices and 120,000 m2 of hotel and conference space, 5,000 new homes, public spaces and car parking. Westfield’s redevelopment of the Stratford district itself will include a 175,000 m2 shopping, leisure and entertainment space housing three flagship stores, and more than 200 retailers. Three major anchors – The John Lewis Partnership, Waitrose and Marks & Spencer – have already signed up.
Westfield Bradford is a £340m retail-led, mixed-use regeneration project in central Bradford next to the city’s prime retail pitch. The project will provide a 54,600m2 shopping centre, 3,800 m2 of offices, housing and 1,800 parking spaces. A 10,900 m2 Debenhams store and a 6,970m2 Marks & Spencer store will be the anchors site preparation started last year.
ABN Amro points out that Westfield can expect some hazards, “including worse-than-expected global macro-economic factors such as a downturn in global consumer confidence and, potentially, tenant bankruptcies, as well as a rapid increase in development costs or project delays.”
But it also lists a few possible upsides for Westfield, including an acceleration of the development pipeline, growth in near-term US consumer spending, and corporate acquisitions made possible by the global recession.
