Hammerson plc (“Hammerson”), together with its joint venture partner Allianz Real Estate (“Allianz”), has successfully secured the ownership of Dundrum Town Centre (“Dundrum”), Ireland’s pre-eminent shopping and leisure destination as part of a portfolio of market-leading retail assets in Dublin, Ireland.
Hammerson and Allianz acquired loans secured against a portfolio of retail assets in September 2015 from the National Asset Management Agency (“NAMA”) for €1.85 billion (£1.53 billion), a discount to the face value of the loans.
In accordance with its original objectives, Hammerson has achieved a consensual agreement with the borrowers to transfer the underlying properties delivering immediate ownership of Dundrum, the Dublin Central development site (“Dublin Central”) and land adjoining the Pavilions shopping centre, Swords. Hammerson and Allianz will take over direction of the Ilac Centre, Dublin (“Ilac Centre”) and the Pavilions shopping centre, Swords (“Pavilions”) pending a pre-emption process with the co-owners and regulatory approvals. On completion, Hammerson’s total consideration for its share of the portfolio, including fees, taxes and transaction costs, will be €1.23 billion (£1.01 billion), in line with expectations at the time of acquiring the loans.
- Delivers significant market share and ownership of the largest retail property asset in Ireland, Europe’s fastest growing economy
- Aligned with Hammerson’s strategy of investing in high-growth European retail markets and enhancing income growth prospects
- Accretive to 2016 EPS and with opportunities for valuation growth, the portfolio provides an attractive projected five year ungeared IRR of 7-8%, excluding development returns
- Portfolio acquisition equates to an initial yield of 4.0% and a reversionary yield of 4.6%
- Hammerson will apply its expertise in leasing and asset management to bring a fresh approach to the assets and drive returns
- Dundrum is an award-winning super-prime European retail and leisure destination with a modern retail environment and flagship store formats producing strong retail sales growth of 6% (12 months to 31 March 2016)
- Costs for the acquisition have been funded by recent debt issuance; group credit metrics will be strengthened by the ongoing disposal programme
Hammerson CEO, David Atkins, said: “Having successfully reached an agreement with the borrowers, this portfolio provides us with a unique opportunity to enter the Irish market. Acquiring Dundrum, one of Europe’s leading shopping destinations, is a game-changing step for Hammerson and increases the diversification of our prime European retail property portfolio.
Ireland stands out from other European territories for its powerful economic growth and dynamic consumer recovery. Furthermore, against the current backdrop of UK market volatility and political uncertainty, the Irish economy continues to hold a number of competitive advantages as a European hub for business activity in a wide range of sectors.
This will provide us with immediate scale and market leadership from which to capitalise on the strong consumer backdrop in Dublin. Dundrum’s performance over the period since acquiring the loans has reaffirmed the potential within the portfolio, and we look forward to implementing our asset management and longer term development initiatives to drive value.”
Annette Kröger, CEO of Allianz Real Estate Germany, said: “We see this transaction as a valuable opportunity to invest in the Irish real estate market and diversify our portfolio into a high-growth European economy as part of our global investment strategy. Thanks to our collaboration with Hammerson, we have a distinguished and leading real estate expert at our side with whom we have been working successfully over many years.”
Portfolio overview and financial effects
Dundrum encompasses 140,000 m2 of prime retail and leisure space and becomes the largest of Hammerson’s assets by lettable area. The centre provides 120 shops, 38 restaurants, a 12-screen cinema as well as 3,400 car park spaces. Hammerson has acquired 50% of Dundrum and the adjoining development site (“Dundrum Village”) and will asset manage the centre on behalf of the Allianz joint venture.
Hammerson has also acquired significant development land with a strategic site located adjacent to Pavilions and the Dublin Central development site offering the opportunity for significant future returns.
The wider portfolio also includes co-ownership of the Pavilions shopping centre, Swords and the Ilac Centre, Dublin. Hammerson’s ownership of Ilac Centre and Pavilions is subject to a co-owner pre-emption process and any necessary regulatory clearances and is expected to be concluded by the end of 2016. Pending that, a loan vehicle jointly owned by Hammerson and Allianz has direction of the 50% interests in Ilac and Pavilions.
In total, including Dundrum, the total portfolio of Dublin assets encompasses over 200,000 m2 of high-quality shopping centre space, home to 320 tenants and achieving annual footfall of nearly 50 million with a further 27 acres of development land.
Hammerson’s share of the total contracted rent on the underlying properties of the portfolio will be €45 million (£38 million). The initial yield on the property portfolio (excluding development properties) is 4.0% with a reversionary yield of 4.6%. Agreements over the last six months underpin our confidence in the returns achievable and provide clear evidence of the over 15% rental reversion opportunity at Dundrum.
The proactive approach to asset management under Hammerson’s ownership is expected to drive future rental value growth and result in an attractive projected five year ungeared IRR of 7-8%, which excludes potential material future returns on the 27 acres of development land acquired.
The portfolio is expected to be accretive to forecast EPS in 2016 and the delivery of value-enhancing leasing initiatives and the unlocking of rental reversion are expected to deliver NAVPS accretion.
Irish economy and growth
Ireland achieved the fastest GDP growth in Europe in 2015. Thanks to its well-educated work-force, competitive tax regime, robust legal system, English-speaking business environment and ease of access to London and other major international cities, Ireland is expected to continue to hold its competitive advantage in attracting business activity going forward. The Irish Central Bank currently forecasts GDP growth for 2016 of 5.1% and for 2017 of 4.2%. Performance in the Irish retail sector continues to be compelling, driven by an increase in disposable income as the unemployment rate continues to fall (9% in Q4 2015, 8.3% in Q1 2016 and 7.9% in April 2016). Irish retail sales grew by 6.4% year on year in Q1 2016 (8.4% by volume) and in May 2016 were up by 5.3% year on year (8.1% by volume).
Dundrum, located in the affluent and densely populated southern Dublin catchment, is a unique retail location with excellent regional accessibility via the Dublin M50 ring road and LUAS light rail. The centre provides 120 shops, 38 restaurants, a 12-screen cinema and 3,400 car park spaces. The centre is anchored by Harvey Nichols, House of Fraser, M&S, Penneys and Tesco and is differentiated by its modern large-format flagship stores which position it well in light of current trends in retail. It is the gateway for international brands many of which debuted in Ireland at Dundrum including Hollister, H&M, Jamie’s Italian, Starbucks and Hugo Boss.
As Ireland’s premier shopping centre, with annual footfall of 18 million, Dundrum is well-positioned to capture the growing retail spend and delivered like-for-like sales growth of 6% in the 12 months to 31 March 2016.
The centre is currently at 99% occupancy with total passing rent of €60 million (£50 million) per annum. The centre has estimated reversionary uplift of over 15% and there is potential for above-trend rental growth. Rent reviews concluded in the last 12 months with Zara, Oasis, Pull & Bear, Bershka, Karen Millen and Coast provide clear evidence of this rental reversion.
With a wealth of experience in managing assets to enhance the customer experience and in building the optimum tenant proposition, Hammerson has already identified a number of operational improvements around the car-park offering, commercialisation and food court to drive income growth at Dundrum.
Hammerson has identified significant opportunities to enhance the retailer and restaurant line up, leveraging existing relationships with international retailers and caterers looking to enter the Irish market. Following the successful upsizing of Zara and the Massimo Dutti re-fit, fashion retailers including River Island, BT2 and H&M have begun discussions with Hammerson to enlarge their stores while a number of new brands have also indicated that they are interested in taking space at the centre.
Popular restaurant brands which have rolled-out across the UK are now set to underpin rental growth at Dundrum and Hammerson is ready to introduce new dining concepts to the centre following successful openings across its UK retail schemes.
Dundrum also has a significant development opportunity at Dundrum Village, an adjacent six acre site owned by the joint venture, which has previously been granted planning permission for a scheme with a gross area of 110,000 m2 and would lead to a further increase in the centre’s prominence through delivery of a mixed-use scheme.
Located close to the airport in Dublin’s northern suburbs, Pavilions is anchored by Ireland’s largest retailer, Dunnes Stores, and includes a strong tenant line up including international brands such as Zara, H&M, Next and Tommy Hilfiger. The centre is currently 99% let with contracted rent of €14 million (£12 million) per annum.
The centre has benefited significantly from rising consumer confidence with sales up 10% over the 12 months to 31 March 2016. There is appetite from a number of the key fashion retailers to upsize their units. A planning application has recently been submitted for the reconfiguration of part of the first-floor to create three new restaurant units as part of a plan to refresh the centre’s catering offer.
Ownership of Pavilions shopping centre is subject to a pre-emption process with the co-owners which is expected to be concluded by the end of 2016.
Hammerson has secured ownership of 100% of the adjoining development land and the centre’s car park, which has a recently-extended planning consent for 110,000 m2 of mixed-use development which would further enhance the centre.
Ilac Centre is one of Dublin city centre’s largest malls with footfall of over 18 million per annum. It is adjacent to Henry Street, the busiest shopping street in Ireland, and is home to 80 retail and catering units, including H&M, River Island, TK Maxx and Argos. The centre is currently operating at 98% occupancy with contracted rent of €10 million (£8 million) per annum.
In recent months, Hammerson has worked with the current owners to achieve the successful conversion of a number of temporary lettings into long-term leases, improving the tenant covenants and introducing new brands. Footfall at the centre was up 2% in the 12 months to 31 March 2016.
Ownership of the Ilac Centre is subject to a pre-emption process with the co-owners which is expected to be concluded by the end of 2016.
Dublin Central is a five-acre urban retail development site which offers significant regeneration potential within the city centre. The site fronts onto both Henry Street and O’Connell Street, Dublin’s main city thoroughfares.
With planning consent for 130,000m2 and a mix of uses permitted, the site provides the ability to pursue multiple development scenarios that are sympathetic to the neighbourhood’s history.
Chartered Land will act as development manager for the site and has an option to purchase 50% of Dublin Central prior to 1 June 2017.
Hammerson’s Irish Office
To support the new Irish platform and Hammerson’s role as asset manager of Dundrum, a new office has been opened in Dublin, headed by Simon Betty, Director of Retail (Ireland). Around 130 employees who have been working together on the assets to date, will transfer across to Hammerson, the large majority of whom are operational and centre-based staff working at Dundrum and will largely be covered by service charge income.
Over the next 12 months, new Hammerson employees will be integrated into the Group’s operating structure with a focus on leveraging existing knowledge and relationships to deliver the asset management strategy.
Hammerson will also utilise its central marketing, digital and retail teams’ expertise to run the centres.
Costs and funding
In September 2015, Hammerson and Allianz jointly acquired a loan package on a 50:50 basis for €1.85 billion (£1.53 billion). Hammerson’s share of the consideration was €0.93 billion (£0.77 billion).
Hammerson and Allianz will own Dundrum in a 50:50 joint venture. Hammerson is making a balancing payment to Allianz for the underlying interests in the non-Dundrum assets.
The total additional cost including the balancing payment to Allianz, fees, taxes and transaction costs associated with the loan conversion, is €0.29 billion (£0.24 billion). Therefore, the total consideration for Hammerson is €1.23 billion (£1.01 billion), in-line with our expectations at the time of the loan acquisition.
The payment of the additional €0.29 billion (£0.24 billion) will be phased over the next six months depending upon completion of the regulatory approvals and the co-owner pre-emption process at Ilac and Pavilions.
Hammerson’s consideration will be funded by available debt facilities and disposal proceeds. Since September 2015, Hammerson has raised almost £1.2 billion from two bond issues and a new five-year revolving credit facility. A disposal programme of £300 million was announced in February 2016. In June 2016 Thurrock Retail Park was sold for £93 million and discussions continue regarding future transactions.
Note: All EUR values converted to GBP at FX rate as at 30 June 2016 (GBP 1 : EUR 1.208)
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