UK property mess reveals bleak high street outlook

Link Real Estate Investment Trust

12/02/2020 10:41

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Aimee Donnellan
    LONDON, Feb 12 (Reuters Breakingviews) - The UK high street
has taken another knock. UK landlord Intu Properties  INTUP.L 
lost a third of its market capitalisation after an investor
shunned its capital increase. A 4.7 billion pound debt load
makes any rescue tricky. The bigger issue, for Intu and peers,
is a lack of clarity over the value of its assets. 
    Intu’s rescue plan is looking shaky. The firm, which owns
shopping malls like Manchester’s Trafford Centre, is trying to
raise cash to cut its debt load, currently equivalent to 58% of
the value of its assets, to less than 50%, implying around a
billion pounds of new funds. But that would still leave it quite
indebted. Berenberg analysts reckon it needs more like 2 billion
pounds. Getting an investor to put that money in, equivalent to
13 times Intu’s market capitalisation looks tricky. Link Real
Estate Investment Trust  0823.HK , a Hong Kong real estate
investor, has just pulled out.
    Debt isn’t the only challenge. Intu’s business, like many
landlords, is suffering as shops are losing customers, and
demanding rent cuts. That makes it hard to know what its
revenues will be, and means it needs more cash to make its
centres more attractive to tenants. Intu’s net asset value, the
worth of its property less its debt, fell 21% in the year to the
end of June. Berenberg thinks it will have already declined a
further 30% since then. And as Intu’s property values fall, its
problems get worse: Many assets are held in special purpose
vehicles, which are forced to siphon off cash to pay bondholders
if covenants are breached. 
    If Intu can’t raise capital from shareholders or new
investors, it could try to sell itself to a rival. Yet property
groups like Hammerson  HMSO.L  are scaling back from the UK
retail. Its best bet may be for an opportunistic property
investor or private equity fund, which could recapitalise the
business at the same times as carrying out a debt haircut. The
snag is that any restructuring is likely to be very complex,
given the different interests of creditors. Some bondholders
with security over the best assets may be unwilling to take a
loss. Intu’s rivals may not have the same balance sheet
problems, but its woes show that UK retail property values
probably have further to fall. 
    On Twitter https://twitter.com/aimeedonnellan
    
    CONTEXT NEWS
    - Intu Properties said on Feb. 11 that Link Real Estate
Investment Trust would not participate in a planned capital
increase, a day after saying it was in talks with the Hong
Kong-based firm.
    - The debt-laden shopping centre operator said on Feb. 10 it
was in talks with billionaire John Whittaker’s Peel Group, Link
Real Estate Investment Trust and others to raise funds to shore
up its balance sheet.
    - Shares in Intu were up 2.3% at 12.41 pence at 0819GMT on
Feb. 12.
    - For previous columns by the author, Reuters customers can
click on  DONNELLAN/ 
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Intu says Link REIT will not participate in cash raise   
 urn:newsml:reuters.com:*:nL4N2AB2AB
Company statement     https://otp.tools.investis.com/clients/uk/intu_properties/rns/regulatory-story.aspx?cid=1732&newsid=1364192
BREAKINGVIEWS-UK property’s crisis cash call tests Boris bounce 
   urn:newsml:reuters.com:*:nL8N29P2MU
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 (Editing by Neil Unmack and Karen Kwok)
 ((Aimee.Donnellan@thomsonreuters.com; Reuters Messaging:
Aimee.Donnellan.thomsonreuters.com@reuters.net))