My verdict on Simon's Capital Shopping Centres bid

Posted by: Giles Barrie

15 December 2010

What should Capital Shopping Centres’ directors do as they head off for their meeting to consider US group Simon’s £2.9bn indicative bid this afternoon? Read on to find out.

The argument in favour of agreeing to the bid is straightforward: the UK economy is facing a very choppy next two years, and retail spending will remain under stress.

Retail rents are bound to fall in real terms, and Capital Shopping Centres’ assets will need heavy capital expenditure to keep them ahead of the pack.

In the long term those centres will look tired as a new wave of development from the likes of Westfield, Land Securities and Hammerson sees the light of day.

And Simon may never come back with a bid of this scale if it wakes up to the fact that American shopping centres at 7-8% tend to yield far more than Capital Shopping Centres’ estate.

And yet there are far more arguments for Capital Shopping Centres’ board and its directors to say no to the Simon bid.

Property is a long term game, and while the outlook for UK shopping centres right now looks dull, to real experts like Sir John Ritblat or Capital Shopping Centres’ founder Sir Donald Gordon selling at 425p or even 450p would be mad.

Investors need to look at yields and rents across a property cycle – not between, say, 2007 and 2012.

Net Asset Value is, of course, calculated after debt, meaning that a small improvement in Capital Shopping Centres’ valuations would lead to a disproportionate rise in the NAV.

At the same time, the large South African contingent on the Capital Shopping Centres’ share register is in no rush to sell, largely seeing its holding in the company as a hedge against the economy at home.

Capital Shopping Centres could be valued at 600p in three years time. Nobody sells property at the bottom of the market.

Nobody should be surprised at the explosion of activity around Capital Shopping Centres: in August 2008 I said as such after Simon and Westfield had both taken stakes, in Property Week: `What is clear is that this is the end of the beginning in deciding the destiny of Britain’s third biggest REIT.

`[Capital Shopping Centres’ former parent] Liberty has been surrounded by uncertainty since Gordon stepped down as chairman in 2005 – now the jockeying will really begin’.

Verdict: Reject any bid short of 500p.