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Analysts question Hammerson's optimism in selling £2B of retail assets

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Analysts question Hammerson's optimism in selling £2B of retail assets

Hammerson Plc's plans to sell £2 billion of assets in the U.K. as part of its integration of Intu Properties Plc may prove difficult as the market for retail properties in the country begins to falter, according to industry analysts.

The retail landlord said when it announced the £3.4 billion takeover deal on Dec. 6 that it would sell weaker assets to improve the quality of the combined portfolio and rebalance the merged company's exposure to the U.K. market to 60% from 75% of its portfolio value.

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Selling such assets at or near book value could be difficult, Colm Lauder, real estate analyst at Dublin-based stockbroker Goodbody, said in an interview. "Jettisoning those weaker assets might not be as easy as people think," he said. "If we look at investment volumes for U.K. shopping centers in 2017, they're pretty much at a 10-year low; volumes are as low as they were in 2009. So the investment appetite is very limited for U.K. shopping centers, especially the weaker assets."

While rents at prime U.K. shopping centers rose an average 1.8% in the first six months of 2017, capital values fell 3.5% in that period, according to CBRE research. Some analysts warn that there is mounting evidence the U.K. retail real estate market is set for a dive.

Mike Prew, real estate equity analyst at Jefferies, said the pending sale of a combined 42.5% stake in Bluewater Shopping Centre by GIC and Lendlease Corp. Ltd. could cause the shopping center market to crack in terms of valuations. Prew noted in a report responding to the Intu deal that fellow Bluewater owner Landsec has marked its 30% share down by 5%, and it did the same with St. David's center in Cardiff.

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Deteriorating conditions in the U.K. market will also test Hammerson's aim of rebalancing the merged company's geographic exposure, James Carswell, real estate analyst at Peel Hunt, said in an interview. Hammerson has in recent years reduced its exposure to the U.K. market to 60% of its portfolio value, a move analysts have applauded. Intu has U.K. exposure of roughly 90%, and the deal will push Hammerson's exposure to 75%, Hammerson CEO David Atkins said during a conference call discussing the deal.

"Ultimately, they may get back to a similar weighting, but it's going to take a long, long time. And during that period, they're trying to sell U.K. shopping centers into quite a tough market," Carswell said, adding that if Hammerson's plans were to succeed, it would be "a lot of work" in a short space of time for little gain. "It's going to take 12 months, selling £2 billion of real estate, to get back to the same portfolio exposure that you started with."

Faced with an unreceptive market, Hammerson may be forced to sell more or larger assets to meet its target, risking further devaluations of its assets, Goodbody's Lauder said. "It wouldn't surprise me if that £2 billion disposals figure became a bit bigger, in terms of gross disposals. To realize the £2 billion, they might have to market £2.5 billion. Hammerson don't want to be seen as forced sellers of anything because that will obviously affect pricing further. They want to be seen as sellers who can wait for the right purchaser."

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Hammerson's disposal plans might also be scuppered by the U.K.'s anti-trust authorities. The new entity, set to become the second-largest retail landlord in Europe, will own formerly competing retail assets in several U.K. cities, giving rise to fears of uncompetitive practices. Hammerson's assets in Bristol, Birmingham and Glasgow are particularly vulnerable to intervention from the U.K.'s Monopolies and Mergers Commission, according to an analysis carried out by Goodbody. "[Hammerson's] hand might be forced in terms of what gets disposed," said Lauder.

Analysts' response to the deal has generally been mixed, with the scale of the new entity seen as an advantage, as well as cost savings and the potential for refinancing. However, the immediate impact on the quality of Hammerson's portfolio has been lamented, along with the price the company is paying for Intu. "Hammerson is effectively paying a similar price to what [Hammerson] is worth, but for many, many years the stock market has said that Intu is worth a lot less than Hammerson," said Carswell.

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