Merlin Properties had to defend its retail investment strategy in the face of persistent questioning by analysts at the Spanish Socimi’s recent 2018 results presentation.
Merlin owns 18 shopping malls valued at €2.27 bn, which make up almost 19% of its €12 bn Iberian portfolio. When urban high street assets are added, retail property accounts for 37% of the portfolio.
While many investors are reducing retail exposure, last year Merlin added to its shopping centres by acquiring Almada Forum (below right), the dominant mall south of the Tagus in Lisbon, paying Blackstone €406.7 mln, a yield of 5.9%. Over the same period Merlin failed to sell a package of four shopping centres it had deemed non-core, which it had acquired via the acquisition in 2016 of Metrovacesa.
Non-core centres
Asked ‘Have you missed the opportunity to sell shopping centres?’ CEO Ismael Clemente replied: ‘I know in 2018 we didn’t sell our non-core shopping centres and I know you are critical.’ By way of further explanation, and slightly tongue-in-cheek, he added: ‘What happened was that someone else sold (a rival portfolio) to our potential buyers and our (sale) didn’t go through... sorry about that!’
Chief investment officer David Brush said the four non-core assets represent only 2.2% of Merlin’s gross asset value. ‘I know some people feel differently but we will be patient,’ he said. ‘If they represented 15% of the portfolio I would feel differently, but they don’t and we can wait for the best execution possible.’
Clemente confirmed that Merlin will not be increasing the shopping centre portfolio and ‘may reduce it a bit’. He also said that, while ‘the turmoil’ in the retail sector caused by e-commerce meant that all bricks-and-mortar retail ‘will take a knock’, ‘we do believe in shopping centres; we believe good-quality shopping centres are good-quality shopping centres.’
Almada was a dominant destination mall acquired at an ‘attractive’ yield and was part of the group’s strategy to increase its exposure to Portugal, Clemente said. Sales there increased 4% during 2018.
The company’s strategy is to focus on its flagship malls – and on dominant urban high street retail which Brush said would be the retail sub-sector likely to show the best growth in future.
In its own portfolio, examples of urban high street value creation include Monumental in Lisbon and Callao 5 in Madrid. The first, a large office refurbishment underway in Lisbon, includes a ‘meaningful’ 5,495 m2 of retail, Brush said.
The second is a former office tower of 11,629 m2 which is being turned into retail and food and beverage and which has the highest expected yield on cost – 20.2% – in Merlin’s retail programme. ‘It overlooks Preciados, so is very urban, very core, and we can get significantly higher rents than for offices in this location’ he explained.
Merlin is part-way through a programme, dubbed ‘Flagship’, of intensive capital expenditure on its core shopping centre portfolio. This is ‘offensive and defensive’, said Clemente. Work is currently underway on six, with Larios Centro in Malaga the first of them, which is due to complete before the summer, followed by X-Madrid.
Two more Madrid centres, Arturo Soria and Tres Aguas, are due to finish later this year, while works on El Saler in Valencia should be completed next year and a start will be made on Porto Pi in Mallorca later this year.
‘A very good year’
While ‘heavy works’ had made a small dent in overall visitor numbers across the whole portfolio (footfall was down from 109 million in 2017, to 107.6 million in 2018), 2018 was ‘a very good year’ with like-for-like shopping centre rental growth up 4.1% and gross rental income up from €92.8 mln to €103.6 mln, Brush said. The value created by the updating/refurbishment spend on the six, plus Callao 5, is 9%.
However, shopping centres showed a 2.3% valuation uplift in 2018, the lowest in the portfolio where the average was 7%. The highest was a 12.4% jump for logistics, partly under-pinned by 50 basis points of yield compression, and Merlin plans to increase gross rental income from logistics from 10% of the portfolio to 16%, mainly through development.
As well as infill opportunities at existing sites in Barcelona and Madrid, the ‘Best III’ initiative will develop more than 500,000 m2, mainly in new hubs in Lisbon, Seville, Valencia, Zaragoza and the Basque area.
Brush also confirmed talks about selling peripheral office assets, ‘some advanced with numbers that work for us’. The Spanish press has tipped Apollo as the buyer.
Four shopping centres on sale
The four malls Merlin wants to sell are: Vilamarina in Viladecans near Barcelona; La Fira in Reus, Tarragon; Thader in Murcia; and La Vital in Gandia, Valencia.
They total 152,000 m2 and attract around 17 million visits a year. CEO Ismael Clemente reiterated that sales will be made ‘if we can reach our value expectations’.
This article first appeared in EuroProperty, PropertyEU's sister publication.
