Brexit-induced bargain – Intu Properties shares appeal after unwarranted smack

Intu Properties, which has a R200bn portfolio that includes 9 of the UK’s Top 20 shopping centres, has been an unjustified victim of London’s post-Brexit market slump. Especially in South African Rands where a combination of the UK property stock sell-off and a weaker Pound saw the FTSE 100 and JSE Top 40 stock lose 17% in the past week.‘s Alec Hogg paid a visit to the Intu offices in London to quiz long-time CEO David Fischel on the actual impact on the business of the UK’s historic exit from the European Union. What emerges is an opportunity for long-term investors to look past the noise. Intu is in rude health and its focus in non-London regional centres means it is likely to be unaffected or, indeed supported, in the wake of Brexit. Shares in the company founded in 1980 by Donald Gordon, the founder of Liberty Life, are listed on both the London and Johannesburg stock exchanges, with around 30% of the company still owned by South Africans.

Well, I’m having a cup of tea in the Intu Property Offices in London just outside of the St James underground station, pretty convenient, with the Chief Executive, David Fischel who’s been running this company for a long time, but it goes back, I guess, David, to when you joined Donny Gordon when he started his operations here in London through Liberty International.

Yes, Donald came to the UK for the first time in 1980 and started out a small business here which originally was going to focus on life insurance. I actually joined in 1985, over 30 years ago now and was fortunate to work very closely with Donald until he retired in 2005, for 20 years.

It’s not just the property that you love; you also are, like him, a chartered accountant.

Yes, a chartered accountant and again, we started here with a view to being life insurance, financial services, and etcetera but over time we just morphed into shopping centres because we found it was a better business than life insurance in the UK. The life insurance interest actually was sold in the mid 1990’s, we focused on property and then five or six years ago we narrowed down again when we demerged the Capital Counties business, so the Central London business, Covent Garden, and Earl’s Court went one way and the shopping centre business went a different way.

It makes lot of sense because I recall a memorable interview with Mr Gordon, Sir Donald Gordon as he’s known here, where he said had he discovered property he would never have gone into insurance and for the founder of Liberty Life, that’s quite a statement.

Yes, I think Donald always came at it from a financial angle. As you probably remember he was obsessed with compound interest and that was why life insurance was so fascinating to him, but he also loved tangible assets where he could look at them and know that no one could take them away from him. Yes, he was a great inspiration. He was the founder of the company and I suppose for the last, gosh it’s now more than 10 years since he retired, we’ve carried on over the last ten years. The last ten years obviously we’ve had difficult periods with the crash in 2008 and now of course we have another exciting period in the UK which no doubt we’re going to talk about it.

Intu is a substantial business now. It’s got R200bn of assets, £10bn, 18 shopping centres, and nine of the top 20 in the UK. Was that always the intention from the outset that you were going to almost take from the learnings that your original parent had in South Africa through Eastgate, Sandton City, etcetera and apply it here?

Yes, that was one of the attractions of the business here when we first got involved was, it already had shopping centres in Newcastle, Nottingham, a couple of other places in the UK. We then expanded that business quite significantly with a big development programme round the M25, Lakeside, Watford, Bromley etcetera and it really came from there but actually it hasn’t slowed down. The last six years since the demerger which was May 2010, we’ve more than doubled in size and we’ve really strengthened our market position in the UK to as you say, having nine of the top twenty centres, so we do nothing else in our lives. We just focus on shopping centres. There are no escape clauses. We had to make them work and at the moment their defensive qualities are going to come to the fore.

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Were you sad when you did the demerger; Covent Garden, that whole complex which was part of your business until that period in time, was it something that you were a little sorry to lose?

I guess we were sorry to lose it for sure but it’s worked out fantastically well for the shareholders because that Covent Garden piece and the Elson Court piece wasn’t massively income-producing and for a company where we’re mentioned very much in terms of income and income growth it wasn’t being properly recognised so I think on its own, Capco has been a very attractive counter for investors and they’ve done really well, so I think it’s been a huge benefit for the shareholders. We got the tough assignment which was the UK shopping centres, but I think also Covent Garden was a very different business to running a big shopping centre and you’re talking about a city centre, you’re talking about listed buildings, you’re talking about small units and really quite a different exercise to running a big shopping centre.

The business didn’t stop doing deals or acquisitions. The significant one where you brought in a shareholder in John Whittaker; that was the deal in the Trafford Centre in 2011 pretty much the time of that demerger. Has it worked out well?

Yes, the Trafford Centre deal has really worked out fantastically well for us. The successful shopping centre groups around the world, an awful lot of them have strong family shareholders. If you look at the Lowy family of Westfield, the Simon family at Simon Group, etcetera and obviously with Donald retiring we no longer had that factor in our business so it was great to bring in Peel and John Whittaker and the Trafford Centre into our affairs and so we have the Peel Group, we still have 25 percent shareholding in the company and the Gordon family just under ten percent, so still very strong family shareholding and you need it because this is a very, very long-term business and you need the sort of long term horizons provided by private individuals, families, etcetera.

As a long-term business it must perplex you the way the share price has been reacting to Brexit. Last Thursday you were sitting at, call it£3.20 per share?. Today I see it’s at £2.87. It got as low as £2.55 but that is volatility that one doesn’t expect but again you didn’t expect Brexit or many people didn’t, did you?

I think in the period of the last few weeks the best thing is to switch off the screen and not look at the share price, just focus on the business. I think it was a very good comment yesterday made by the Chief Executive of Barclays, I think it was, where he said, “Look, this is a political crisis, it’s not an economic crisis, or not yet an economic crisis for sure”. At the moment it’s all going on in Westminster. Actually the impact to date on the real economy has been very, very limited.

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Well, it’s only been a week.

Exactly, it’s only been a week. Our shopping centres are still full, the tenants are still doing deals, so it’s very early days and I think there’s a slightly more measured approach of the Conservative Party obviously picking a new leader and when the new leader’s there come September then they can start to take decisions on what happens next for the UK and I think that’s good for business so a more measured approach is being taken.

David, in the last annual report, you said that the economic improvement that was coming from the Southeast of England and from London seemed to be spreading to where your shopping centres are, which is outside of that hub primarily. Are you concerned now that with the way the economists are talking you could see that being stillborn?

Look I think everyone has to look at what is the macroeconomic picture going to be and it’s very hard really to judge that. At this point it’s still too early post the unexpected Brexit vote. As of now, I think in some ways the regions for the next period may be the best place to be because a lot of the volatility will be in London, in city offices, tenants making big decisions to come in and out of London. What’s going to be the impact on the banking sector? Those are the more pressing issues. In fact, what we’ve seen in the stock market is that the companies which are exposed to the Central London offices have actually been even more volatile than our own share price because investors clearly are focusing on that as the frontline of what’s going to happen if the Brexit bandwagon continues.

You did a big deal just before the vote last Thursday, a £400mn transaction on a shopping centre where you bought out your partner. Any regrets today?

Absolutely none, no I think it was a great opportunity for us. We acquired half of Merry Hill two years ago. It’s one of the eight super-regional centres in the UK. It’s 1.6mn square feet, it’s about the same size of the Trafford Centre, but it was valued at 40% of the Trafford Centre and the rents are less than half the rents of Trafford, about half the rental levels at Lakeside. We think there’s a huge upside in that centre. It hasn’t been particularly well managed over a period. For us it was great to be able to get our hands on 100% of the asset. It’s an asset which definitely needs some active management applied to it.

We’ve already done quite a bit in the two years since we acquired the first half, but to have a free hand now to get on and do some obvious things like increasing the food and beverage component, more leisure, introducing new tenants. There haven’t been a lot of new tenants coming into the centre over the last few years. I think there’s a huge amount of opportunity there and who knows if we’d waited till after the vote it might never have happened, so we’re really delighted to have got our hands on it.

Are you seeing that Amazon Prime and the Amazon effect are having an impact yet on your businesses?

Yes, the whole of e-commerce is a huge subject. It would take us more than the half an hour we’ve got for a conversation now. Over the last decade we’ve had to confront the crash of 2008 which had a big impact on the UK economy and the whole rise of e-commerce, but I think the picture in many ways on the e-commerce side is now much clearer. The major retailers, they understand the value of the physical presence and in particular they want to have flagship stores in prime destinations. They may need fewer stores, they may need less space overall, they may in certain cases, particularly the big space users, need less space but they do want to be in the right places and what they’ve learnt is that the physical space drives the online sales and the online sales drive people to the stores.

We find for example, that less browsing goes on now than may have done ten or 15 years ago because people are better informed when they arrive at your shopping centre. They’ve been online, they’ve done their homework, they’ve checked out the product but they still like to look at it before they buy it and they come to the shopping centre and of course if they’re spending less time shopping because they’re better informed and more targeted they’ll go and eat, so you’ve seen over the last ten years, a massive rise in the number of food and beverage outlets we’ve got. I suppose, actually the shopping centre is becoming a place to relax, a social place, not just a functional place where people buy and sell things.

Clicks and Bricks is how one of your clients I’m sure, as the Steinhoff Group has suggested or described.

Yes, absolutely. For sure a retailer would say that if they close a store in a given area they’ll lose online sales. If they open a new store in an area they haven’t been in before they’ll see growth on their online sales, so the two move hand in hand, particularly with Click and Collect and you can order it online and you can pick it up at the centre, you can try it on. If it’s not the right size you can sort it out there and then. You don’t have this terrible business of getting a package at home and having to repack it and put it back in the post and do that, so it’s very convenient and the retailers obviously like Click and Collect as well because very often when somebody comes back to the store to pick something up, well they can’t just pick it up and go home, they’re going to use the opportunity to do a bit of extra shopping.

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In your annual report you said you’ve had 400-million visitors, in other words the foot traffic to the shopping centres, has that been rising on a like for like basis in the last few years despite e-commerce?

I think our focus has really been not so much on driving footfall. It has steady footfall of 400-million, that’s a million people a day. It’s fantastic but actually the real opportunity for us is keeping people in our centres for longer. What we say is; the total sales in our centres are approximately £5bn and taking both the city centre and the out of town centres together. The average stay is about 100 minutes, so that’s £55mn a minute. Keep people there for another ten minutes on average is a huge opportunity, so for us it’s actually easier now to generate a better return through keeping people for longer than on trying to attract that marginal person because with 400-milion already if you can’t make a living out of that 410-million aren’t going to help you, so keep people there for longer.

We focus very much on the shopper experience and making sure that we have some good measurement tools on customer experience in terms of what we call the Tell Into Programme. We do that both physically in the centres by asking people but do it online as well, so we get instant feedback from our customers which means we can respond to their wishes and make it a great shopping trip, a great experience.

It’s getting more scientific all the time but why did it take the UK so long to kind of click to this American phenomenon of the shopping centres, which South Africa picked up on apparently a little bit earlier?

I don’t think it’s true that the UK’s been slow to pick up on it. The first covered shopping centre in the UK was the Victoria Centre in Nottingham, which is one of our centres. That opened in 1972, so Victoria Centre Nottingham in 1972, Eldon Square in Newcastle was 1976, so we’ve had shopping centres 40 plus years but the place where they haven’t had shopping centres has really been Central London. Most major cities in the UK had a decent quality shopping centre long before Central London which was really with the Westfield Centre in 2008/2009.

The UK’s been pretty much a fast follower of the US but obviously it is a small crowded island chiselling out space in the city centre in the UK, particularly in a historic city is quite challenging, so with the timescale between having an idea or to saying I would love to put a shopping centre there and actually getting planning permission and getting it open and then getting it trading and making a good return of it is, now you’re talking well over ten years for that. That explains why it may have appeared slow but I think there’s been a lot going on in the UK.

The replacement value then must be reflected presumably in your valuations. Your valuation last year was up four percent but if it takes so long as you say to chisel out some space to put a shopping centre in, how is that reflected in the valuations?

Yes, I wouldn’t say there’s scarcity value in the UK. It’s just that now most major cities have a good quality shopping centre and given what’s happening in the retail world, there’s probably not massive demand in the UK for a whole new ground out shopping centre. There may be a few opportunities across the UK. Most of the opportunities in the UK now are for extending, improving your existing centres and we’ve got a big expansion programme of our existing centres. In terms of the value of the centres, ultimately that depends on the income stream and what rental levels you can drive across the centre and yes, at the moment I would say that shopping centres are valued very defensively compared to, for example Central London property and Central London offices or whatever where there’s been obviously a great boom in Central London offices and in residential too.

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It sounds a bit to me like the old newspaper business where a city could afford to have one newspaper which was profitable but the minute it brought two in they both struggled. In this instance with a crowded island as you say perhaps that is an advantage once you have a shopping centre but are you seeing competitors?

I think the shopping centre business, there are stacks of competitors out there in the sense of… first of all there’s other shopping centres, there’s retail parks, there’s the superstores selling non-food, there’s online, but probably the biggest competition of all is things that people do with their time and their money but have nothing to do with going shopping and that’s why it’s so important to make it a good experience so that when a family is deciding well, what are we going to do today, we want the vote of the family to be, let’s go to the shopping centre, so we’re definitely shifting our emphasis maybe from female fashion which maybe might have been 15 years ago more towards family friendly fun day out and more leisure attractions, more food and beverage, and get retail food and beverage and leisure all working together to provide a family offer.

You’re planning or you were planning before Brexit to invest pretty heavily over the next three years, a figure of £600mn was mentioned in your annual report. Is it likely that that’ll be challenged at the next board meeting?

Well I think I said earlier in this interview that it’s very early days. It’s only a week since the vote and we’ve obviously had a political crisis going on, at both major political parties in the UK, we don’t yet have a new Prime Minister and we won’t know that till September and then the whole business starts of how do we extract ourselves from the… It’s going to take time and I think that’s where the stock market is going to be volatile for a bit and we really can’t tell what impact this will have in the economy. Of that £600mn you referred to, Watford is already on site and a significant level of pre-leads there, so that project will definitely continue.

I can’t really see any reason why we wouldn’t press on with the other projects too because they’re all about strengthening and improving what you’ve already got and most of them will have a significant level of pre-lead before we start them because those sort of extension projects generally are lower risk than starting a new shopping centre from scratch. None of that CAPEX is a whole new ground out project, it’s nearly all extensions, so I’d be surprised if we don’t see that expenditure through over the next few years because what we know, that it’s damaging to a business like ours is stop start. You know there’s a constant level of investment you need to make to keep your centres fresh and appealing to the public. They like change; they like to see new things. If you stop then getting it started again, you know there’s a delay and that’s not good for business.

In the wake of Brexit, in the wake of the political crisis, we’ve seen the stock market take a knock; we’ve seen the Pound take a knock. There will surely be some people panicking. Are you in a position to take advantage?

If you look at the history of large shopping centres, the sort that we deal in the top 25 centres in the UK these are generally held by financially strong organisations, quality companies and businesses, so the opportunities to pick up one of those high quality centres on a distressed basis in the UK, I think those opportunities will be very limited. We did, as a matter of interest go into Spain after the crash and we picked out some great assets in Spain. We took a few sites; we took a couple of completed centres. We have two of the top ten centres in Spain now, so we certainly arrived in Spain when it was distressed and picked up good opportunities. The market then recovered really quickly and Spain and the market for shopping centres is nothing like as distressed now, so yes, we can be opportunistic but I doubt you’ll see fantastic opportunities in the UK to buy real quality assets at a bargain price.

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But if they come, you’re ready.

You always find a way yes. If there’s a good enough deal someone will always come along and back you and there will always be somebody out there who will help.

David, you do have exposure to Northern Ireland. With the Brexit process now presumably starting to happen, is that particularly exposed?

It’s a very small asset. We have, essentially a retail park called Sprucefield just on the border between the republic and Northern Ireland. We have plans to enlarge that asset, we’re working very closely with Lisbon Council to do that and I don’t think our plans there would really be affected because it’s just such a great location really straddling both sides of the border and the asset’s performing perfectly respectably but I think there’s a lot of upside there.

You’re a big company on the London Stock Exchange, one of the top 100, one of the top 40 in the Johannesburg Stock Exchange, that’s a historic reason. Have you any intention of changing that into the future?

Absolutely no plans to change our South African listing, it’s great to have a good following in South Africa, about 30 percent of our share register is still held in South Africa. In London we’re in the FTSE 100. We’re around somewhere in 90 plus, somewhere between 90 and 110 at the moment, depending on which hour of the day you look at it, but yes, no plans to change that. London listing is important to us and…

My point really was, after Brexit would there be motivation for a European listing perhaps?

Possibly, if the UK becomes a little island of its own from a regulatory point of view as well then yes it well make sense to have a European listing somewhere. If London doesn’t do the job but I think all the indications are that London will continue to do the job for the whole of Europe.

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You must be better positioned that most people who live in London ahead of the vote, the big referendum vote, given that your assets are primarily outside of the M25 or outside of greater London area. Did you get a sense that this seismic political shift was going to happen from your staff, from your customers?

I think it’s dangerous for me to stray into politics. I think if we look at what actually happened, clearly some of the cities of the UK that had not performed as well as others over the last decade saw a bigger protest vote for bigger turnouts, bigger votes in favour of exiting the EU but you’re talking of degrees, a few percent here or there. I think it’s certainly a message to central or to Westminster based politicians that they mustn’t neglect investing out in the cities and this was a theme already, the whole theory of regional devolution and locally elected mayors and a degree of decentralisation, the UK became a very centralised government and money being dished out from the centre and I think that has to change. The best place for decisions to be taken has to be closer to where the people are in the individual cities.

That won’t hurt your business as well.

We’ve always focused on the UK’s big cities, cities like Glasgow, Newcastle, Manchester, Nottingham, Birmingham, etcetera. There aren’t many other big cities in the UK where we are represented and yes, I think those cities will have their day.

David, just to close off, it’s an interesting name, it was first of all Liberty, in fact before that it was Transatlantic Holdings, then Liberty International, then you became Capital and Counties, then Capital Shopping Centres and Intu, which is quite a big change from that with a little bird as your logo. What motivated that?

Yes, we’d grown up in the shopping centre business asset by asset and we got to a point where we had 20 centres and they all had their own logo and their own way of presenting themselves, their own marketing literature, their own marketing department, their own website and we just sat back and said, “Look this is crazy now. We’re missing a huge opportunity” and we took what I would say, I think was a bold decision to rebrand but actually it’s been fantastic. Instead of that ragbag of different names and different ways of doing it and 16 different websites etcetera, we now have one name, one website, we have 50 people working on the website, so it’s a much better website that we had before. I dread to think the costs now trying to run 16 websites. It’s worked really well. It’s had a big impact on our staff, our employees.

The bird is designed to bring a smile to your face and that’s how we like to present ourselves at the centres. Everyone feels a part of, great impact on customer service. It’s had a good impact on the shoppers. We have put in really good high quality Wi-Fi in all the centres and into is very quick, say four digits to get into the Wi-Fi. We’ve built up a big database of customers as a result, 3,5-million have subscribed to our Wi-Fi, and I just think it’s really worked beyond our wildest expectations. It was a big exercise. We had to take down at least 9000 signs and replace them across the UK but actually the new signs have refreshed the whole look and feel of our centres, so it’ has certainly not been money wasted at all. I’m so pleased that we did it.

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