By Simon Packard
June 22 (Bloomberg) -- The two-year slump in the U.K. commercial-property market may be close to its bottom for the best buildings, according to Hammerson Plc, owner of stakes in London’s Bishops Square complex and Birmingham’s Bull Ring mall.
Rents are falling more slowly, which is helping to halt the decline in property values, Chief Executive Officer John Richards said. Capitalization rates,-- or annual rental income as a proportion of a building’s value -- for new and recently refurbished offices, stores and warehouses in the best locations may peak in the next month, he said.
“We will see values stabilize,” Richards, 53, said in an interview at his office in the Mayfair district of central London. For prime properties, “the occasions of tenant default or delinquency are going to continue to be rare.”
Commercial-property values in the U.K. have plummeted 44 percent since the market’s peak in June 2007, Investment Property Databank Ltd. estimates, dragged lower by the economic recession, rising unemployment and borrowing restrictions. The monthly decline for May was 1.6 percent, the smallest in a year, the London-based research company said June 12.
Hammerson was the first of Britain’s four largest publicly traded property companies to announce a rights offering, raising 584 million pounds ($961 million) in March to avoid breaking the terms of bank loans as values fell. Hammerson’s assets depreciated by 1.05 billion pounds, or 14 percent, to 6.5 billion pounds in the 18 months through December.
Property Sales
Since May, sales of buildings in Berlin, London and Paris enabled Hammerson to reduce net debt to 2.1 billion pounds. That’s about 45 percent of the value of its properties, assuming a 15 percent drop in their value in the first half, said Mike Prew, a London-based analyst at Nomura International Plc.
The risks of an “additional capital increase aren’t that big any more,” said Kai Klose, an analyst at Macquarie Capital in London with a “neutral” rating on the stock.
Concerns that Hammerson might breach loan terms have weighed on the shares. The stock is down 14 percent since Jan. 1, making the company the fourth-worst performer in an index of the 16 largest U.K. real estate companies. Hammerson has a market capitalization of 2.19 billion pounds. The shares have dropped 49 percent in the year through June 19.
‘Hold’ Ratings
Two-thirds of 18 analysts that cover Hammerson have “hold” recommendations on the stock.
Nomura’s Prew estimates property values can fall another 25 percent from the end of the first half without causing Hammerson to break bank-loan terms.
On June 4, Hammerson announced the sale of a 75 percent stake in the Bishops Square office building in London, its most valuable asset. Since then, the yield for the company’s six-year notes has declined 1.78 percentage points to 8.61 percent. Hammerson shares have climbed 13 percent.
The asset sales and the proceeds from the rights offering have “given us some headroom,” said Richards, who became CEO in October 1999. “We are back to a business-as-normal approach, albeit in what is clearly continuing to be very tough economic times.”
Hammerson may sell some retail parks in France and the U.K. as well as buildings that are unlikely to increase in value or generate more rental income, Richards said.
Eastgate Quarters
For now, it “isn’t viable” for the company to proceed with development projects, he said.
“Over time we will resuscitate a development business,” such as the Eastgate Quarters project in the northern English city of Leeds, he said.
Richards ruled out disposals of the most recent projects, such as 60 Threadneedle Street and 125 Old Broad Street in London’s main financial district, the extended O’Parinor shopping center on the northern outskirts of Paris and three retail centers in Aberdeen, Bristol and Leicester.
The developments opened when property values and rents were falling, something that in hindsight was a mistake, Richards said. Hammerson’s “timing has been wrong,” he said.
“In running a business you have to look forward,” he said. “From where we are now, that kind of stuff is the best recovery stock available. Our strategy is not to sell.”
Rent-Free
As rent-free periods for tenants lapse, Richards expects the properties will produce an additional 40 million pounds in annual rental income by 2014. Leasing the remaining vacant space may bring in an extra 20 million pounds, he said.
The combined 60 million pounds in extra revenue is equivalent to about 20 percent of Hammerson’s net rental income in 2008.
Richards said that only 1.4 percent of Hammerson’s rental income isn’t being paid because of tenant insolvencies.
Two thirds of Hammerson’s properties are shopping malls and out-of-town retail parks, including a stake in the Brent Cross center in north London. In the U.K., these tenants have seen a drop in sales of 3 percent to 4 percent from a year ago. That compares with a 6 percent decline nationally, Richards said.
“Flawed retail formats have already in the main been found out,” he said.
As unemployment mounts in the economic recession, properties that aren’t in prime locations or condition will generate less rent, incur higher tenant default rates and will lose value, he said.
“Our portfolio is at the top end of quality asset performance,” he said.
To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net.
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