Coronavirus continues to highlight the limitations of futurology, even as infections decline. No one knows how permanent the big switch to home working and online shopping will be. Billions are riding on the answer. British Land and Hammerson, two UK real estate groups, give some pointers. Offices and shops will be emptier. Store landlords will take the heaviest financial hit, as foreshadowed by the collapse of Intu last week.
British Land has collected almost 90 per cent of office rents for the June quarter but only 36 per cent of shop rents. Hammerson, which specialises in shopping centres, has received a measly 16 per cent of its money. The outlook for British Land, the bulk of whose assets are offices, is unexciting but sound. Hammerson’s prospects are dire.
Retail is in a worse mess than the admin factories in which so many white-collar workers toiled. Coronavirus has accelerated the long-term trend for online purchases to supplant the traditional kind. Mike Prew of Jefferies reckons digital shopping has jumped to 30-40 per cent of the total from 12 per cent.
Some of those gains will vanish as stores reopen. British Land reports lower footfall but higher spending per consumer — so-called “mission shopping” to buy coveted goods. However, the drift towards a 50/50 split in purchasing channels is unstoppable. Moreover, stores are supposed to be profit centres. You close the ones that lose money.
The calculus in cutting or maintaining office space is more complex, as Lex’s chats with CEOs have reflected. Most expect staff to go on working regularly from home after lockdown. The actual reduction in demand will be relatively small, we predict. Fewer people may visit the office each day. But they will each need more space. Moreover, offices are acknowledged cost centres. Their megalomania-related functions — projecting corporate status and fostering group cohesion — shield them from big cuts.
That makes British Land an investment to consider if you expect a V-shaped recovery. The stock is trading at a 50 per cent discount to net asset value, which looks steep given its office portfolio. Hammerson’s hefty 85 per cent discount is more justified. Short positions represent one-third of its free float and the cost of insuring against bond defaults has spiked. Survival looks uncertain. Even if Hammerson rides out the current storm, its cash flows — and those of other retail landlords — will go on dwindling.
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