Why Growthpoint is circling Capital & Regional

For months, retail real estate prices have been sinking, with little sign of them stabilising any time soon. For that reason, investors have been trying to suss out whether it is the right time to dip a toe in the water – or whether to hold off for a little longer. But now Johannesburg-listed Growthpoint, South Africa’s largest REIT, is taking a punt. It has entered talks to buy a majority stake in shopping centre landlord Capital & Regional, which would involve cash for shares and a subscription for new shares. Analysts have noted that since discounts in the retail sector have become more persistent, management teams are now more likely to consider approaches. Shares at C&R climbed by around 9% in the hours after the discussions were announced. Norbert Sasse, chief executive of Growthpoint, told EG that the UK’s market had created a “pretty intriguing opportunity” for investors from South Africa. “There’s more to it in the UK at the moment than just retail,” he added. “It is fair to say that the UK is one of the markets most affected by the online [sales] phenomenon. But the rate of growth in online sales has started slowing. “Then there is potentially some evidence to suggest the rate of companies going into CVAs is slowing down. And then there is also the impact of Brexit on the pound. “With all of those put together, there’s a level at which investors will look at these and say: ‘Is it near enough to the bottom, or a level at which an entry could be considered appropriate or reasonably priced?’ There is a dislocation, and we think it’s a good time to consider it now.” The bid marks the REIT’s first attempt to establish a long-coveted presence in the UK, as a South African firm battling with high costs of capital, interest rates, yields and inflation domestically. While the percentage of the stake remains undisclosed, Growthpoint has built majority shareholdings in other overseas businesses that range from 29.9% in Globalworth, an AIM-listed business focused entirely on operations in Poland and Romania, to 62% in Growthpoint Properties Australia, known as Orchard Industrial Fund until its acquisition in 2009. It is worth noting that both of the businesses remain listed, and with largely the same management structures in place. Sasse says that since its involvement in both companies, the market cap for its Australian business has grown to AUD$3.4bn (£1.9bn), from around AUD$250m. Meanwhile, Globalworth’s market cap has increased from circa €400m to €1.8bn. For Lawrence Hutchings, chief executive of C&R, which has a secondary listing on the Johannesburg Stock Exchange, the negotiations are centred around an income play. “Our leasing metrics are positive, on an absolute basis as well as a relative basis, compared with our peer group,” he told EG. “It reinforces that our community shopping centre-focused strategy that we launched two years ago was the right one. Growthpoint is a REIT, so they are income focused as well. “The market is struggling to understand where income is going and where it is going to rebase to. But our income has been robust, and the types of spaces we are leasing – to Lidl, Aldi, Boots, Holland & Barrett, Tesco – that sector in retail has proven resilient, not just in the UK but elsewhere in the world.” Its long-running strategy to add build-to-rent and housing aspects to spaces that surround its centres will also stand it in good stead. In north London’s Wood Green, residential developer Aitch Group is acquiring a £5m plot, while at Walthamstow there are advanced talks to sell a site with scope for 450 flats. That said, it has a lot to contend with when it comes to its balance sheet. C&R has a considerable amount of debt to handle, with net LTV currently standing at 52%. Shareholders will doubtless be hoping that a prospective deal will alleviate some of this pressure. “C&R desperately needs new equity and a cash injection to cut debt,” said Alan Carter of Stifel Nicolaus Europe. “Operationally it’s a good company, but as always it’s the debt that gets you.” “The devil will be in the detail of the offering, which will require existing shareholder approval – and almost certainly dilution for them.” Matthew Saperia of Peel Hunt agreed that dilution for existing C&R shareholders seemed likely. “Price discovery in retail remains difficult, but I don’t think we’ve seen the bottom in valuations in retail assets yet,” he added. At this point in time, it remains to be seen whether Growthpoint’s bid will herald an influx of overseas capital in the retail sector. But it seems as though the long-predicted M&A activity in this space may finally be inching forwards. To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette