Retail Portfolio review

Our market

This was a demanding year for everyone in the retail sector with non-food retail sales down 1.3% according to the BRC/KPMG sales monitor. In addition we saw a further shift in retailer demand away from smaller towns and high streets towards larger shopping centres and out-of-town locations. This combined with the rapidly developing multichannel approach of shoppers to create major challenges for retailers. Some have not survived but the stronger retailers are actively addressing their floorspace requirements leading to opportunities for us in our developments and existing assets.

The investment market reflected this trend with prime and secondary values diverging further. In the second half of the year we saw shopping centre values falling with a more marked decline in weaker assets, albeit on a very low volume of transactions. The retail warehouse market was more resilient.

2011 further challenged the notion that the internet will lead to the end of physical shopping environments. While online sales remained a threat to some bricks and mortar retailers and certain locations, others are finding ways to integrate the online world into their offer. Many retailers are now transacting online and fulfilling orders through physical stores and we have made efforts to ensure our centres support this activity.

During the year we found opportunities to work with online retailers. In London, for example, we created self-service delivery lockers for Amazon at seven sites. And at One New Change, EC4 we helped Ocado create a QR code wall that enabled customers to add items to their next Ocado order by pointing their phone at a product photograph. We also used social media to reach specific consumer groups while reducing our marketing budget.

People now carry the online world with them in their phone or tablet, and more shoppers are using a mobile device as part of their retail and leisure experience. IMRG and eDigital research from November 2011 shows that 24% of consumers have used their smart phone to access websites while out shopping, and 50% of those have accessed retail websites. In the autumn of 2011, 8.2% of visits to retail sites were through mobile devices; by the winter this had risen to 11.6%. To accommodate this trend, we have entered into an agreement to offer free wireless connectivity at our centres and their websites are being mobile enabled. We are also carrying out a trial with Google and Debenhams that will enable shoppers to conduct product searches using our shopping centre websites.

We have continued to see the value of a strong retail and leisure mix. The combination of shops with attractions such as cinemas, fitness centres, health spas, cafés and restaurants ensures that people are drawn to physical environments. We expect new patterns of consumer behaviour to generate additional requirements from occupiers, leading to new asset management initiatives and development opportunities.

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Our strategy

Our strategy has remained clear and in line with the evolving nature of the retail market. Based on our knowledge of the retail sector and our relationships with key retailers, we aim to provide our customers with new or more efficient space that helps them drive their own profits. Through that we will create value across both our asset management and development activities.

Our aim is to own assets that are affordable for retailers and have active plans for growth. We will look to improve our assets, raising them up the retail hierarchy and improving their appeal relative to any competition. We see opportunities to apply our skills across the retail market and work in partnership with retailers on specific locations to drive returns. Where we do not see these opportunities within our assets, as has been the case with a number of our secondary properties, we will sell them and reinvest the capital elsewhere. We have started to grow our representation in leisure because of the increasing role of this area in anchoring retail centres and in creating attractive stand alone destinations.

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Our performance

The portfolio, valued at £4,751m at 31 March 2012, produced a valuation deficit for the year of 0.1% overall. Shopping centres and shops were down 1.5%. Retail warehouses and food stores were up 1.3%.

Included within the figures for our shopping centres and shops are current development projects. These performed well, with a valuation surplus of 9.5%. Our portfolio of Accor hotels showed a valuation surplus of 6.9%, reflecting positive income growth. Rental values on our like-for-like portfolio (excluding units materially altered during the year) were down by 1.8% for our shopping centres and shops, and increased by 1.7% for our retail warehouses and food stores.

The portfolio produced an ungeared total property return of 5.8%, outperforming the sector benchmark in the IPD Quarterly Universe by 2.4%. Our shopping centres outperformed the IPD sector benchmark by 1.6%. Retail warehouses outperformed the sector benchmark by 0.6%.

We reduced voids across our like-for-like portfolio from 4.3% at March 2011 to 3.6% at March 2012, of which 1.3% are subject to temporary lettings. Units in administration across the portfolio were 2.2%, up from 0.6% in March 2011. However, 0.8% of these units in administration were still trading and, including these, our overall level of occupancy was 96.3%.

Footfall in our shopping centre portfolio was down 0.5% in the year ended 31 March 2011, with the national benchmark down 1.8% over the same period. Our measured same store VAT exclusive like-for-like sales were down 1.5%, while the BRC benchmark was down 1.3% on a VAT inclusive basis, implying outperformance by our centres on a VAT equivalent basis. The VAT change from 17.5% to 20.0% impacted three quarters of the comparative year. Our same centre sales, taking into account new lettings and tenant changes, were up 3.9% on a VAT exclusive basis. Our measured retailers' rent/sales ratio for the year ended 31 March 2012 was 10.5%. Total occupancy costs (including rent, rates, service charges and insurance) represented 17.9% of sales.

Net rental income has increased by £8.2m from £275.5m to £283.7m. There was a £5.7m favourable movement in our like-for-like properties which was driven by improved performance at a limited number of centres including Gunwharf Quays and our Accor hotel portfolio. Income from properties acquired within the last two years increased by £9.7m as we benefited from a full year of ownership of last year's acquisitions, notably Overgate, Dundee, and The O2 Centre, Finchley Road, as well as the purchase this year of Kingsmead, Bath. In contrast, there was a reduction in net rental income of £8.4m from assets we sold over the past two years including Corby town centre this year and The Mall, Stratford last year.

NET RENTAL INCOME

 31 March 2012
£m
31 March 2011
£m
Change
£m
Like-for-like investment properties 229.5 223.8 5.7
Proposed developments 1.5 2.6 (1.1)
Development programme 3.7 4.2 (0.5)
Completed developments 9.0 6.9 2.1
Acquisitions since 1 April 2010 21.4 11.7 9.7
Sales since 1 April 2010 14.6 23.0 (8.4)
Non-property related income 4.0 3.3 0.7
Net rental income 283.7 275.5 8.2
 
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Sales and acquisitions

We continued to recycle capital during the year. Sales generated a total of £281.9m, slightly ahead of our development and capital expenditure of £220.2m. Sales were on average 5.6% above the March 2011 valuation and at a yield of 7.0%. Our acquisitions totalled £44.9m, yielding 5.1%.

Key sales included:

  • Corby
    We sold Corby town centre for £67.8m. We felt that Corby was the least well equipped of our shopping centres to deal with the shift we are seeing in consumer behaviour.
  • Garratt Lane, Wandsworth
    Our Harvest joint venture with Sainsbury's completed the £25.7m (our share) sale of the existing 7,300m2 Sainsbury's store in Wandsworth, together with the forward sale of an extension of the store, hotel and a further retail unit.
  • Grimsby and Swindon
    We sold two further food stores in the period - at Grimsby and Swindon - for £25.8m and £30.2m respectively.
  • Lord Street, Liverpool
    We sold this small parade of high street shops in August 2011 for £19.1m. 
  • St Johns Centre, Liverpool
    We sold St Johns, Liverpool for £76.6m, as we felt the opportunity for significant improvement had receded due to competition from Liverpool One.

We also made acquisitions to increase our footprint in leisure-based schemes, as follows:

  • Kingsmead Centre, Bath
    We acquired this 8,400m2 leisure and restaurant complex in the heart of Bath for £20.0m. The centre houses the only multiplex cinema in the city. Subsequently we entered into a forward purchase agreement on an adjacent site for the development of a hotel.
  • X-Leisure
    In February and March we spent £30.5m on acquiring a 12% interest in the X-Leisure Unit Trust from a number of institutional investors. X-Leisure owns schemes across the UK, including X-scape in Milton Keynes and Brighton Marina. The assets are of interest to us and we will now have a seat at the table as the fund approaches a vote on its extension.

Since the year end we acquired The Cornerhouse, Nottingham, a leisure scheme in the heart of this vibrant city.

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Asset management

Our asset management activities were formed in three key areas.

Bringing in new major occupiers:

  • Primark
    During the year, Primark agreed to take an extended 8,400m2 store at Trinity Leeds. We also made good progress on delivering the three Primark stores we agreed in the last financial year. A new 6,500m2 store at The Centre, Livingston, opened in December. Works are underway on a 6,500m2 store at Westwood Cross, Thanet, and a 5,550m2 store at our Bridges shopping centre in Sunderland.
  • John Lewis Partnership
    We worked with John Lewis to create the first of its new small format, full-line department stores, which is due to open in autumn 2012 in Exeter. The store will occupy all 11 floors of the Sidwell Street site, with selling space of 10,000m2. In July 2011 we completed the 'at home' shop at the Greyhound Retail Park in Chester, and it opened in September 2011.
  • Debenhams
    We concluded a letting for a 3,000m2 store on the Ravenside Retail Park, in Chesterfield. The new store will replace the recently demolished Focus DIY unit and is expected to open in autumn 2012.
  • Marks & Spencer
    We have agreed a letting to Marks & Spencer for a 4,855m2 store in Bexhill Retail Park. The agreement is subject to planning and we are expecting a decision in June 2012.

Improving leisure and food and beverage provision:

  • Aberdeen
    As well as refurbishing the Bon Accord Centre we have expanded and refurbished the food court which was pre-let to Yo! Sushi, Café Rouge, Pret A Manger and Di Maggio's, most of which are new occupiers for Aberdeen. Trading has been strong since opening in January 2012.
  • O2
    We have completed new lettings to Rossopomodoro and Wagamama. Yo! Sushi will relocate to a new unit. Paperchase and Oliver Bonas will be opening new stores later this year.

Adding space:

  • Lakeside Retail Park
    We started a 2,300m2 extension, with two retailers - CSL and Mamas & Papas - committed to taking 1,800m2 of the scheme.
  • Southside
    We have started construction of 3,250m2 of space of which 50% is pre-let to Wagamama, Rossopomodoro and Cattle Grid. We now have planning for a further 11,700m2 comprising an anchor store, 10 units and a gym.
  • Chesterfield
    We have achieved lettings for two additional units totalling 2,460m2, to Hobbycraft and ASDA Living, subject to planning.

During the year we ended our Brand Empire agreement with Grupo Cortefiel, one of Spain's largest fashion retailers. Eight stores were closed resulting in closure costs of £2.7m. Established to help counter a flat leasing market in late 2009, Brand Empire was an innovative way to help overseas retailers access the UK market. Unfortunately, the Grupo Cortefiel brands were unable to establish themselves here. We structured our agreements on the basis that this may happen and acted quickly and decisively to close the operation. The Brand Empire initiative had been welcomed by the sector, and a number of valuable retailer relationships were formed as a result of interest in the scheme. We will apply the lessons learnt and continue to look for new ways to help retailers and increase lettings.

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Development and planning

  • Trinity Leeds
    Having secured pre-lettings of 40% before committing to build, we now have 65.4% pre-let and 6.6% in solicitors' hands, by income. Trinity Leeds is the only major new shopping centre under construction in the UK and is due to complete in March 2013. Confirmed occupants include Marks & Spencer, Primark, BHS, Next, Boots, Topshop/Topman, H&M, River Island, Cult and Hollister.
  • 185-221 Buchanan Street, Glasgow
    Work is on schedule and discussions with major retailers have proved successful. At March 2012 we had 91.8% pre-lettings in place, by income. The retail component of the scheme is due to open in March 2013. Only one unit remains available on Buchanan Street and two units are available on West Nile Street. Confirmed occupants include Forever21, Paperchase, Gap, Fat Face, Office, Skechers and Watches of Switzerland.
  • Meteor Centre, Derby
    In April 2011 we received permission from Derby City Council for the creation
    of a new 9,300m2 food store and the reconfiguration of existing units. This redevelopment scheme will help regenerate the existing retail park and improve shopping and services.
  • Bishop Centre, Taplow
    In March 2012 we achieved a resolution to grant planning consent for redevelopment of the existing shopping centre. The new 12,260m2 development could commence in early 2013. Tesco has already agreed to take 5,100m2 of the space. The remaining space will be divided into 10-12 smaller retail and leisure units.
  • Whalebone Lane, Chadwell Heath
    We have secured planning permission for a food store at the vacant B&Q building on Whalebone Lane. Since the year end this space has been pre-let to ASDA.
  • Crawley
    Planning permission has been gained for a 7,000m2 supermarket and a 110-bed hotel, together with 600m2 of restaurant space. The main units have been pre-let to Morrisons and Travelodge. Subject to achieving vacant possession, development can start in late 2012.
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Retail Portfolio looking ahead

Overall, the retail outlook remains challenging and property owners are having to take an even more active approach to asset management to create value. Continued uncertainty in capital markets would add to downward pressure on the sector, but it may also generate attractive buying opportunities. Whether market conditions worsen or we see a return to growth, the quality of our portfolio and our relationships will be increasingly important.

Every retail asset will be affected in some way. Many have the potential to thrive as new dynamics emerge. Retailers continue to be drawn to less expensive space that consistently trades well and asset managers will be required to continually review their assets' attraction to the shopper and the retailer. Larger destinations are likely to do better than the overall market because of the scale of their retail and leisure offer. We will continue to ensure every one of our assets has a clear plan with flexibility to adapt to market scenarios.

Consumer behaviour is changing, not just with the growth of leisure and online shopping, but also through social networking and mobile technology, which can provide information to consumers while they are shopping. This will create even greater distance between the winners and losers in our market, from retailers to locations and property assets. Our strategy is well matched to this evolution.

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