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TEXT-Fitch:UK REITs largely insulated from retail administrations
Jan 22 - Despite the recent spate of UK retail chain failures at HMV, Comet, Jessops and Blockbuster, involving nearly 1200 stores, major UK REITs should not see their credit profiles materially affected, Fitch Ratings says.
Overall, the major UK REITs such as British Land ('BBB+'/Stable), Hammerson ('BBB+'/Stable) and Land Securities ('AAsf') own prime and trading-dominant shopping centres in first-class locations with up-to-date specifications and leisure facilities. Footfall and sales have generally remained resilient through the current period of austerity.
From our estimates, the various retailers that have gone into administration should only marginally reduce major UK shopping centres' retail rents, probably by less than 1% of the total rent roll at most major UK retail REITs. In some cases, the administrator will continue to trade from profit-making units within major shopping centres, while he seeks a buyer for the whole or part of the retailer. In other cases, major UK REITs will be able to re-let store units in their shopping centres to new retailers attracted by stable footfall and resilient spending.
There are also other investors, such as private equity groups, who are prepared to take over failed retailers, such as, for example, private-equity owned group Game Plc possibly bidding for up to 45 HMV stores.
However, although the retail failures should not materially undermine their credit profiles, major shopping centre and retail park landlords will have to continue to be vigilant about their tenants' revenue and financial profile. Strong asset management will remain a key competitive advantage for UK REITs in what is now a tenant's market. Overall UK retail property values fell by 6% in 2012 (Source: IPD) and retail rents have fallen 7% since 2008, although the main reductions have come from secondary retail property stock.
We are aware of and comforted by major UK REITs with well-defined contingency plans to deal with a major retailer default, based on anticipated weakening KPIs, which are made available to landlords under their lease terms. These coherent and forward-looking strategies, allied to large shopping centres with a top-quality tenant base and good transport infrastructure, underline why these retail shopping centres are performing well above the average.
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