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Land Securities Buys More Bluewater – Beware Retail Commercial Valuations

Tim Worstall
Tim Worstall trader
Updated 23 Dec 2021
  • Land Securities has bought more of the Bluewater shopping centre at a low valuation
  • That could be good for Land Sec, buying cheap
  • That could also be bad for the entire sector, providing a low valuation standard for all commercial retail

Land Securities Group PLC (LON: LAND) has announced that it is buying more of the Bluewater shopping development. Their stake is to go up from 30% to 55%. The interesting question is the price they’ve paid for this. We might think this should be simple because if someone buys a bargain then they profit, right? Except commercial property doesn’t quite work that way. There’s the difficulty of what this valuation – this Bluewater bargain – for Land Sec means for all the other valuations of Land Sec’s portfolio. 

In fact, this example spreads out to other commercial property companies like Hammerson PLC (LON: HMSO) as well. We can’t bother ourselves with Intu as that has already gone bust as a result of the same impetus.

A commercial property company is valued, just like any other, on the net present value of all future income streams. But within that, there’s a twist. Near everyone is geared – they’ve borrowed against the value of those properties. So, the value of the equity is what is left after the deduction of the value of the borrowings from the value of the properties. What happens when property prices fall? That gap diminishes and as happened to Intu can end up with the debt being more than the properties. At which point the equity is worth nothing.

So, property valuations against debt levels are a vital valuation tool. We all also know that retail property is falling in value as internet shopping makes such great strides. This also all hasn’t been helped by lockdowns.

Finally, property valuations are generally what people say they are. Until there’s an event that crystalises those assumptions into a checkable and real market figure. Here, Land Sec bought 30% of Bluewater some time ago. It’s on the books at £259 million. That means this new 25% should have cost it £216 million. But it only paid £172 million. OK, that’s a bargain, profit! Except that real and observable market price might mean that the £259 million valuation of the other 30% should be written down to this new price.

Now, within Land Sec this will all have been thought about and a useful assumption is that they wouldn’t have done the deal without concluding that the net effect was positive. However, the real implication of this is on all the other retail commercial property holders out there. Bluewater is pretty much a top-notch, no-nonsense, first-grade asset. There’s not much better other than say Regent Street and that’s owned by the Crown Estate.

If the values of top-notch assets are all that 15% below current valuations – and we’d expect lower-grade assets to be worse – then what’s the implication for the other property companies? 

The biggest influence for the Bluewater deal might not even be on Land Securities that is. And the less of a bargain Land Sec has in this transaction the more that might be true – if this isn’t a cheap price for the asset but is the new normal then the problems for others mount up. 

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Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.