Analysis: Deal-making frenzy comes to London's West End

Deutsche Wohnen SE

10/05/2022 09:43

By Iain Withers and Andres Gonzalez
    LONDON, May 10 (Reuters) - The exclusive cadre of landlords
that run London's bustling West End cultural and entertainment
district is about to get one smaller.
    Neighbouring developers Shaftesbury  SHB.L  and Capco
 CAPCC.L  outlined a 3.5 billion pound ($4.31 billion) merger
deal over the weekend, as the threat of recession accelerates a
rush to consolidate Europe's fragmented real estate market.
 urn:newsml:reuters.com:*:nL2N2X001N 
    Further tie-ups are inevitable, experts told Reuters, as
developers that survived punishing COVID-19 lockdowns replenish
their firepower to reshape cities for a post-pandemic world.
    "The market has changed," said Will Kirkpatrick, partner at
real estate advisory firm Gerald Eve. 
    "Covid has been good in some ways... People are saying let's
merge things or work together in various partnerships to create
a different way forward."
    The Shaftesbury-Capco deal would bring together nearly three
million square feet of prime real estate, spanning tourism
hotspots Covent Garden, Chinatown and Carnaby Street.  
    Under the proposed terms, Shaftesbury shareholders would get
53% of the combined company, and Capco investors the rest.   
    Norges, the main shareholder of both companies, has thrown
its weight behind the deal and would remain the dominant
shareholder of the combined company with a 20% stake.
    Capco is already a shareholder in Shaftesbury, having
snapped up a 25% stake in its rival two years ago, adding to the
momentum behind the deal.    
    The merger is set to be the largest real estate deal in
Britain since 2017, when private equity giant Blackstone sold
London-based Logicor to China Investment Corporation, according
to Refinitiv, and the second largest in Europe so far this year.
    Last year, Germany's two biggest listed landlords, Vonovia
 VNAn.DE  and Deutsche Wohnen  DWNG.DE , agreed to join forces
in an 18 billion euro deal.  
    Property consolidation in Britain is likely to continue as
developers face rising costs to sustain their investments.
    Capco and Shaftesbury will have 530 million pounds of cash
reserves to fuel expansion and redevelopment projects, according
to a Stifel report published on Monday, as the West End duo look
to capitalise on a tourism rebound after COVID-19 travel
restrictions were scaled back globally.     
    Stifel cautioned that the deal could be referred to
competition authorities. Yet while huge swathes of the West End
are owned by just a handful of landlords - including the Queen's
developer the Crown Estate, and Grosvenor Estate - the analysts
said overall there were still a vast number of investors holding
property in the area.
    Shares in Shaftesbury fell 3% and Capco closed down 7% on
Monday, suggesting investors still need some persuading on the
merits of the deal, although they had recovered some ground
early on Tuesday. 
    
    DOUBLE WHAMMY
    While people have been returning to London's offices and
shops, the sprawling capital has recovered more slowly from
lockdowns than other British cities, with more people swerving
lengthy commutes into the city centre by continuing to work from
home.
    "London's strength turned into a weakness when Covid hit,"
said Valentine Quinio, analyst at Centre for Cities. "Some
workers have come back, but reasonable numbers are staying away
and therefore not spending money on the high street and in the
West End in the evening."
    Weekday footfall in central London averaged 63% of
pre-lockdown levels in the final week of March, according to
data compiled by Centre for Cities, putting it bottom of a list
of 63 cities monitored by the group.
    Having weathered the pandemic, landlords now face a
potential economic recession and cost of living crisis that
could lead to less spending in restaurants and shops.
    In this context, analysts said Shaftesbury and Capco's deal
made sense to reduce overheads and strengthen their negotiating
power with tenants.
    "Given the overlap in portfolios, strategies, and ownership
there is little need for two corporate entities operating this
close together," said broker firm Numis in a report, adding it
believed their combined administration costs could be cut by at
least a fifth. 
    
    INVESTMENT DEMANDS
    Bulking up in order to take on bigger redevelopment projects
is particularly attractive to landlords when occupier demands
are changing rapidly, property experts said. 
    Retail and office demand has been damaged by the pandemic,
while residential demand has held up better, prompting a rethink
of portfolios.
    Pressure from investors and occupiers to make properties
greener also requires investment.
    "A key driver is being able to scale up in order to raise
capital to invest in those assets," said Simon Rawlinson,
partner at property consultancy Arcadis.
    A surge in development in London's West End, particularly
around new stations for the city's long-awaited Crossrail line,
set to open within weeks, mean the likes of Capco and
Shaftesbury do not want to be left behind.
    "The high street is going from crisis to crisis," said
Centre for Cities' Quinio. "But given the fundamental strengths
of London's city centre economy, its future and success isn't
really in doubt."
    
($1 = 0.8118 pounds)

 (Reporting by Iain Withers and Andres Gonzalez, Additional
reporting by Carolyn Cohn; Editing by Kirsten Donovan)
 ((Iain.Withers@thomsonreuters.com;))