European retailers which stuck with shopping centres through the pandemic appear to have made the right choice. The continent’s second-largest mall owner Klépierre upgraded earnings expectations on Friday. Sales by retailers were only 6 per cent below 2019 levels in the first nine months of the year. Rent collections are 90 per cent of pre-pandemic levels.
British counterparts cannot boast the same recovery. Yet there are some signs of improvement. Retail sales volumes may have shrunk slightly in September but volumes at physical retailers are well above pre-crisis levels. Shopping centre owner Hammerson reports that UK sales in August and September have returned to 2019 levels.
Equity markets remain circumspect. Hammerson shares trade almost 90 per cent lower than five years ago. Klépierre shares have done better, having fallen less than 50 per cent in the same period.
Online shopping growth, the biggest structural threat to both companies, accelerated during the pandemic. But Klépierre has so far been more insulated from this threat. Online penetration is lower in Italy and France, where many of its malls are located. French malls also have hypermarkets as cornerstone tenants. These draw regular grocery shoppers who then visit other stores. Landlords in Europe have also been less ruthless about demanding a proportion of store revenues.
Both Hammerson and Klépierre remain over-levered and must continue selling assets to pay down their debts. That means disposing of more of their property into a falling market. Current book values have yet to fully adjust. Wereldhave’s summer disposal of four French centres at a sizeable 40 per cent discount to book value offers an idea of where the bid is on troubled assets, thinks Rob Virdee of property analysts Green Street. Valuations in France might have another 20 per cent to fall.
The UK property market has already adjusted but may still have another 10 per cent decline to come. Shoppers are returning, but the sector is still in need of a reality check.
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