Ray Mahlaka
3 minute read
12 Jan 2017
8:02 am

Brexit casualty Capital & Regional sees upside

Ray Mahlaka

As uncertainty mounts about the UK’s property market.

Capital & Regional, one of the worst-performing real estate investment trusts in 2016, appears to be riding out Brexit jitters as the UK-focused shopping mall owner is reporting tenant lease renewals and stable occupation rates across its property portfolio.

The company had a nail-biting year, with its stock on the JSE crashing by 42% in 2016 as uncertainty around the UK’s pending exit from the European Union (EU) mounts.

In a trading update for the second half of 2016, Capital & Regional on Wednesday reported 34 new leases and 15 lease renewals were concluded across its property portfolio totalling £2.8 million (R47 million in rand terms at the time of writing) in annual rental income. Occupancy rates during the period under review remained at 95.4% while contracted rent was £57.5 million (R961 million).

Capital & Regional owns a portfolio of shopping malls valued at £794.1 million (R13 billion) located in higher-income towns such Wood Green and Walthamstow, and southern areas including Maidstone and Camberley.

Its malls recorded growth in its like-for-like footfall– a key metric used by the industry to measure the number of people visiting malls – of 2.2% in the last two weeks of 2016.

The company’s chief executive Hugh Scott-Barrett said its operating performance reflected stronger consumer confidence than it had anticipated after the Brexit vote. “Footfall is up and, as has become the trend for our schemes, is well ahead of the national benchmark [1.9%], while letting momentum has been maintained as the mix of town centre locations and affordable rents continues to attract new retailers and leisure operators,” he said.

Despite the growing uncertainty around the UK’s economy, Capital & Regional is investing in its property portfolio. It spent £7.7 million (R129 million) in capital expenditure.

The UK’s retail property sector appears to be defensive relative to office and residential sector, as landlords can still achieve long-term leases on their shopping malls with sustainable rental growth.

Given the volatile pound and imminent change in the tax dispensation, market watchers are anticipating UK-based businesses to move their operations to other regions. This might be bad news for office property landlords. For now, it’s business as usual for many companies as details of the UK’s exit agreement are not yet properly understood until Article 50 (a law that outlines the procedure for the actual exit) is triggered in March.

Stanlib’s listed property analyst Lawrence Koikoi said the resilience of property sectors hinges on how the UK actually leaves the EU.

“Companies with strong property fundamentals should be able to survive the hard exit scenario [big structural changes to the UK’s economy] and fare well in the soft exit situation [no major structural changes],” Koikoi told Moneyweb.

Income-chasing investors who backed Capital & Regional and other UK-focused property companies via the JSE felt pain in 2016. Latest figures from Cape-based Catalyst Fund Managers indicated that Capital & Regional, with a market capitalisation of R6.3 billion at the time of writing, delivered a negative total return of 39.79% in 2016. Other UK-focused companies including former market darling Capital & Counties Properties, Intu Properties, Atlantic Leaf Capital and New Frontier Properties also delivered negative total returns ranging from 16% to 51%.

Capital & Regional’s shares were down 5.58% on Wednesday.

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