Proactive Investors - Run By Investors For Investors

Capital & Regional focused on needs-based retail as times change

“The headlines are not great, but we need to get the message across that all retail is not bad”
Local means good footfall says C&R

It’s tough in retail at present.

Three major chains have gone under this year already, others are scaling back or curbing expansion plans and the online shadow grows longer.

Lawrence Hutchings, Capital & Regional PLC’s (LON:CAL) chief executive is undeterred and indeed believes that the current upheaval just underlines the resilience of its portfolio of ‘community’ shopping centres.

“The headlines are not great, but we need to get the message across that all retail is not bad.”

WATCH: Capital and Regional sees big opportunities for 'community shopping centres'

Capital & Regional is not one of the sector majors with huge sites and that will prove to be an advantage in the current environment, he believes.

A market cap of about £380mln values it at a fraction of each of merging Hammerson and Intu Properties even after their heavy falls on fears that retail is changing permanently for the worse.

C&R owns seven shopping centres outright and has a 20% stake in another.

Most are located in London and the South, with Blackburn the northern outpost.

Hutchings took over in July last year and has instigated a campaign not only to get C&R more appreciated by investors but also to get the type of properties it owns re-bracketed by the investment community.

Prime cut

Britain is the only major economy that classifies shopping centres as either ’prime’ or ‘secondary’, he explained to Proactive.

C&R’s portfolio falls into the latter category and he wants the classifications to be changed to better reflect their value both as an asset and to the local community.

To that end, the real estate investment trust appointed retail consultant Javelin to prepare an overview of the sector.

The findings are already being looked at by shopping centre lobby group Revo, he adds.

“Big does not necessarily mean good. There are good and bad large centres just as there are good and bad smaller ones.”

Shopping centres have historically been good income generators as landlords have been able to create the 'right' mix of shop size, tenants to drive rents.

BHS and others

Online shopping has thrown a spanner in the works, while austerity, a shift in tastes towards experiences and high profile failures have posed additional questions.

C&R has not been immune. The group had four units rented to BHS when it went under, while it estimates the failure of Toys R Us and others will cost £700,000 this year.

In context of 2017 profits of £29mln, though, that is bearable, says Hutchings, especially with occupancy at the end of the last financial year running at 97.3%.

Some 79 leases were renewed over the year with average rents rising by 10% on the previous passing rent.

Footfall (people visiting) too is better than the national average and comfortably higher than the huge destination malls such as Westfield, Bluewater and Brent Cross.

Complementary to giants

Hutchings says its centres are complementary to these giants in any case and are not in competition.

“People go to the big centres maybe once every six weeks, but they come to C&R's twice a week for the necessities they need such as groceries.”

A plan has also been put in train to boost the returns it generates.

“Retailers make a disproportionate amount of profit in our type of centres and the reason is that our rents are lower.”

“Occupancy costs (or rent over sales), a key measure in the retail industry, are lower.

“At ours it’s 12.7% on average. If you are a retailer in a large super-regional it’s over 20%.

Retailers make hay in regional centres

 “However, rents versus trading density (sales per sq m) are similar, so the differential in rent is very considerable, but for sales density it is minimal.”

“Retailers say our type of centre is the engine room of their business” he adds.

To change that is a key part of the strategy for the Aussie, who has spent 15 years in the UK.

A broader tenant mix is planned, with less fashion and more services such as hairdressers, nail salons and even dentists.

One reason is that fashion retail chains drive a hard bargain, but another is that online penetration of the fashion market is 45% compared to just 7% for groceries.

Again, it’s the idea that people will keep coming because they have to, whereas clothes shopping increasingly will be on a mobile or tablet.

Repositioning the proposition

That’s what the repositioning is about, he says.

“Deploying capex into assets to re-merchandise them consistent with the structural change underway in the industry,” is the corporate-speak description.

“Smaller centres have to be about needs-based local shopping and community-based.

“We need to ask ourselves the question, how do we ensure we offer a facility that is irreplaceable in our communities?”

There will be consolidation in the sector, he says - the UK has 850 shopping centres and more failures.

But as Hutchings points out, many chains are slimming down, not disappearing and there are plenty of international retailers keen to move into the UK - supermarkets Aldi and Lidl, for example, are important tenants.

Investors respond to strategy

Investors seem to be buying into the story. 

At 56.5p currently, Hutchings says only Intu has performed better since the strategy was outlined in December.

The 20% discount to the net value of its portfolio is in line with its peers, while a dividend yield of 6.8% reflects the hikes in the payout over each of the past three years.

C&R has delivered an 8% on average over since 2015, underpinned by its high-quality London-focused real estate and strong specialist management teams.

Hutchings believes that’s an attractive combination will underpin the dividend growth in future.

View full profile View Profile


© Proactive Investors 2019

Proactive Investors Australia PTY LTD ACN:132787654 ABN:19132787654.

Market Indices, Commodities and Regulatory News Headlines copyright © Morningstar. Data delayed 15 minutes unless otherwise indicated. Terms of use