Shoppers may be abandoning the high street but Berenberg remains a fan of UK shopping centres and sees value in the sector.
Berenberg rates both stocks as ‘buy’ and has a price target of 60p for the former and a target of 230p for the latter.
The bank lists three key reasons why it sees value in the UK shopping centre market.
Firstly, shopping centres remain an integral part of the UK retail offer and not every retail offer is suited to e-commerce. “Physical stores with the right product mix in the right locations are likely to remain the primary point of sale,” Berenberg asserts.
Secondly, the current share prices of real estate investment trusts (REITs) focused on shopping centres are out of whack with asset fundamentals, Berenberg argues.
“With leverage materially lower than the equivalent period in 2006/07, it would require a 27%-35% fall in capital values or a 21%-49% reduction in net rental income to test the lowest debt covenants; we believe this is unlikely,” Berenberg stated.
Lastly, a material shopping centre valuation correction is unlikely for all but the most underinvested, poorly located or non-dominant assets.
In other words, investors that are backing REITs that have vibrant shopping centres on their books should not expect slumping valuations of the struggling centres to have too much effect on net asset values, although there will be some read-across impact, Berenberg admits.
“Although we do anticipate some capital value decline, we expect this to be materially lower than that experienced over the course of the financial crisis and partially offset by development gains,” the bank said.
According to Berenberg, Intu has a significant development pipeline, a portfolio of high-quality destination shopping centres and has embarked on self-help initiatives.
“The shares trade at an undeserved 53% discount to CY18 P/NAV [price/net asset value] and yield 8.9%, 1.07x covered,” Berenberg noted.
As for C&R, its “portfolio of London-weighted convenience centres with alternative use development potential also holds attraction and trade at a CY18 P/NAV of 0.68x and yield 8.6%,” Berenberg said.
Having previously traded in line with the wider UK sector, retail REITs now trade at a material P/NAV discount with current valuations implying significant falls in capital values; in short, Berenberg just does not see those sorts of falls happening.