U.K. retail REITs playing with fire, says Green Street

Green Street Advisors has warned that U.K. REITs with high retail exposure are playing with fire as they have “eye-watering leverage for retail specialists”.

In its latest U.K. Majors report, subtitled The Haves and the Have Nots, the research and advisory firm has said that the retail market is now undergoing such significant cyclical and structural changes that a “GFC-type” correction is “not out of the question” in the U.K.

“Retail issues are becoming evident — physical sales and margins are falling fast, tenants cannot afford high rents,” notes the report. “Retail capital values are poised for a roller coaster ride, yet some management teams are refusing to buckle up properly.”

Green Street also points to retail specialist and retail-heavy REITs’ balance sheets as evidence of the sector’s precarious nature. It says that Hammerson and Intu should currently be classified as “have nots” with the latter in danger of soon being a “have nothing”.

Hammerson has reported leverage levels of 42 percent, while Intu says that it has a leverage level of 51 percent. However, according to Green Street’s own valuations — which it admits normally tend to be higher than company reported figures — Hammerson’s overall leverage is 53.8 percent, while Intu’s is 73.7 percent. The firm calculates that this leaves the two REITs with debt to EBITDA ratios of 11.5 and 12.5, respectively. Meanwhile, British Land and Landsec have both deleveraged toward suitable levels in Green Street’s estimations (at 34.2 percent and 32.4 percent, respectively), but still have room for improvement.

The firm says that both REITs have done a good job in striking the right balance between positioning for downside risk and upside potential.