Brick & Mortar melts down on mall owners. So “repurpose” malls into housing?
After a weekend of fevered speculation, struggling UK mall owner Intu Properties confirmed on Monday that it plans to raise £1 billion of fresh capital to buttress its shaky finances. The company’s shares reacted in time-honored fashion, plunging 8% to a historic low of 21 pence before ending the day down just 1%. Intu’s share price is now 80% lower than it was a year ago and 95% lower than five years ago, leaving the group valued at just £306 million.
Intu owns dozens of malls in the UK, including nine of the 20 biggest ones, and a handful in Spain. It describes itself as a commercial real estate company that is “in the business of helping customers and brands flourish, whether that’s through leasing space in our prime retail and leisure destinations, commercialisation activations or online through our multichannel platform intu.co.uk.” The problem is that many of its clients — mainly large bricks-and-mortar retail chains — are not exactly flourishing; they’re either battling for survival or going out of business.
Intu is also bleeding funds. Its net rental income in the first half of 2019 slumped by around 18% year-on-year to £205 million as a result of major clients like Topshop’s owner Arcadia, Debenhams, and House of Fraser falling into administration (a form of bankruptcy), resulting in a spike in store vacancies. Its losses surged to £856 million in the first half of 2019, up from £506 million in the same period of 2018. The combined value of its assets also fell, from around £9 billion to just over £8 billion.
The company has £4.7 billion of debt on its books that it cannot service under current conditions, which is why it is asking shareholders to stump up an extra £1 billion of capital. But just how willing will investors be to inject funds worth more than three times the market value of a company whose shares have already collapsed 80% in the last year, at a time when the UK’s retail sector is in the deepest of doldrums?
The UK retail sector had a terrible time in 2019, in particular the second half. The three-month moving sales average between October and December fell 1.1% year-over-year, the biggest decline since September 2009. Many consumers, their psyches’ pummeled by the never-ending uncertainty over Brexit and their finances stretched to the outer limits of their borrowing capacity, have begun to tighten their belts, which is the last thing the UK’s brick-and-mortar retail sector needs.
In the last year alone, 14,500 stores were closed. This is having a direct impact on retail malls, as well as the investors that own them. Open-ended property funds sustained the largest withdrawals on record in 2019, with total outflows of £2.2 billion. In December, the giant UK fund manager M&G suffered a run on its £2.5 billion M&G Property Portfolio, leaving it little choice but to suspend redemptions. The “temporary” ban has not yet been lifted.
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