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Dearth of New U.K. Malls Boosts Current Landlords

May 5th, 2010

A dearth of new shopping centers being built in the U.K. will make it easier for mall owners to raise rents and increase occupancy rates, according to the biggest company in the industry.

“The supply pipeline has diminished rapidly and that’s in our favor,” David Fischel, Liberty International Plc’s chief executive officer, said in an interview. The company owns almost a third of the Britain’s biggest malls. Its MetroCentre in northeast England is the country’s largest shopping center.

The amount of shopping-center space under construction in Britain fell by half from 2007 to 2009 as values dropped and retailers delayed store openings, according to CB Richard Ellis Group Inc. A similar fall in London office construction intensified competition for a declining amount of prime space, boosting rents and prompting developers to restart projects.

Liberty, which will be renamed Capital Shopping Centres Group Plc next month when it spins off its London-focused real estate unit, has no plans to build any new malls, Fischel said. It will spend 500 million pounds ($768 million) to extend its Lakeside, Braehead and Victoria Centre malls.

“There will be very few new centers for a long time,” Fischel, 52, said in an interview. “You won’t start a big shopping center without big retailers willing to sign up. There is really nothing being started right now.”

The largest malls, owned by Liberty and companies including Land Securities Group Plc and Hammerson Plc, slumped in value from May 2007 to June 2009 as the U.K. endured its worst recession in more than half a century. Liberty’s net loss last year narrowed to 338.8 million pounds from 2.45 billion pounds a year earlier, the company said in March.

‘Tenant’s Problem’

“The lack of availability of quality new space, which was once seen as a landlord’s problem, is becoming a tenant’s problem in terms of their ability to expand in key markets,” Mark Disney, head of U.K. shopping center leasing and development at CB Richard Ellis, said in an interview. “The lack of alternatives will lead to upward pressure on rents in some locations.”

Liberty had to change 298 leases in its shopping centers last year, about three times more than usual, as retailers went out of business, Fischel said.

Many of the new leases agreed in 2009 were for less than five years and at lower rents as Liberty sought to fill empty shops. That enabled the company to lift its occupancy rate at the end of 2009 to 98 percent from 94 percent a year earlier even though it hurt revenue, the CEO said. Rental income fell in the past two years on a same-store basis, the first time that’s happened at Liberty, Fischel said.

Fuller Is Better

“It was more important to maintain occupancy to keep the centers vibrant, interesting and attractive to the shopper and not have a lot of dark areas,” he said.

Turning the discounted leases into long-term agreements at market prices “is the single most important factor in the performance of the business,” the CEO said. Contracts expiring in 2010 and 2011 give Liberty a chance to recoup 20 million pounds in higher rents, the company said in a March presentation.

The largest shopping centers, which have longer opening hours and a wider choice of retailers and catering, did better than smaller ones during the recession, Fischel said.

Liberty owns nine of the 30 largest malls in the U.K. and about one third of the 48 million square feet (445,000 square meters) of retail space located in out-of-town regional centers and in the middle of Britain’s largest cities and towns.

The 1.9 million-square-foot Westfield Stratford City shopping center, close to the site of the 2012 Olympics in east London, accounts for about 30 percent of all mall space currently being built in the U.K.

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