Hammerson plc (“Hammerson”) has exchanged contracts with Birmingham City Council to acquire the new Grand Central shopping centre in Birmingham for £335 million.
In addition, Hammerson is in advanced discussions with an existing joint venture partner on other assets about entering into a 50:50 joint venture for the future ownership of Grand Central.
Grand Central, which opened in September 2015, provides 435,000 sq ft of high-quality prime retail space, anchored by a 250,000 sq ft John Lewis department store. It was developed by Network Rail and Birmingham City Council as part of the £750 million New Street Station regeneration project.
With an iconic design the centre provides an attractive retail setting for 40 premium stores including Monsoon, Fat Face, Hobbs, The White Company, Cath Kidston, Joules, Kiehls, Jo Malone, L’Occitane and MAC. A significant share of space is dedicated to restaurants and cafés across 20 casual dining brands including Carluccio’s, Yo Sushi, Pho, Ed’s Easy Diner, Caffe Concerto, Giraffe, Handmade Burger Co and Tapas Revolution, many opening in Birmingham for the first time. There are over a dozen pop-up units on short term leases as well as an additional income stream from the ‘Eyes’ – large digital advertising screens on the exterior of the scheme.
The centre sits above redeveloped New Street Station which with Grand Central now makes up a world-class ‘gateway’ to the heart of the city and is the busiest train station outside of London, expected to see footfall of over 55 million passengers per annum. A new car park at the centre adds over 400 car park spaces to the existing 11,000 provided within central Birmingham.
The retail is close to fully let (96% occupancy) with topped-up annual net rental income of £13.9 million. The current weighted average unexpired lease term to break is 10.4 years. Based on the price paid for the retail space the acquisition represents a net initial yield of 4.0%, an equivalent yield of 4.7% and a reversionary yield of 4.9%. The expected 5-year IRR is 7-8%.
With growing demand for retail space in prime UK shopping centres and the lower average prime Zone A rents in Grand Central compared to average prime Zone A rents in the city there is potential for strong rental growth at the centre, which would further increase the reversionary potential.
The centre has demonstrated strong performance since opening, attracting average footfall of 62,000 per day in its first three months of trading with up to 105,000 per day over the Christmas period. Many retailers have reported trading well ahead of budget since opening.
The acquisition supports Hammerson’s long term commitment to investment in Birmingham as shown by Hammerson’s success at Bullring. According to latest ONS data, household disposable income growth in the West Midlands is the fastest in the UK with Birmingham growing at 3.5% per annum. Significant public sector infrastructure investment in Birmingham, including the future HS2, has supported a surge in business investment and a record level of office take-up as an increasing number of international firms choose to locate in Birmingham.
Hammerson has acquired a 150 year headlease on the centre and the freeholder is Network Rail. As part of the transaction Hammerson has also acquired Ladywood House, a 95,000 sq ft vacant office building adjoining Grand Central with a value of £10 million.
Total acquisition costs, including fees, are £350 million. Hammerson will fund the transaction with an expanded acquisition credit facility of £1.1 billion which has maturities of March 2017 (£734 million) and September 2017 (£367 million). After completion of the acquisition of Grand Central, Hammerson’s LTV will be 39%, based on estimated values as at 31 December 2015 and disposals announced to date. Following the recent sale of Villebon 2, Hammerson has realised total proceeds of over £360 million in the last twelve months, and has completed the first £200 million tranche of disposals to fund its acquisition of the Irish portfolio, anchored by Dundrum. A further £300 million of disposals are planned during the course of 2016. Following these asset sales, the proposed 50% joint venture on Grand Central and conversion of the Irish loans to underlying properties we forecast LTV reducing to 37%.
David Atkins, CEO of Hammerson, said:
“The acquisition of Grand Central, a highly-prized trophy asset in the UK’s second city, is fully aligned with Hammerson’s strategy of owning top-performing retail destinations in prime locations, as demonstrated by our recent transactions in Ireland and growing exposure to European Premium Outlets. By deploying our expertise from Bullring, as well as other shopping centres around the UK, Hammerson is well placed to further enhance the consumer offer in Birmingham and achieve high returns through skilful management of Grand Central. We are strong supporters of the future of Birmingham and this acquisition provides us with additional exposure to the city’s fast growing economy.”
Councillor John Clancy, Leader of Birmingham City Council, said:
“Hammerson has been a long-standing partner in Birmingham and we are delighted they share our vision for the city. With the addition of John Lewis anchored Grand Central, Birmingham has become the only UK city outside of London boasting the ‘big six’ leading department stores, reinforcing our position as one of the leading national retail destinations.”
Stuart Kirkwood, Development Director, Network Rail, said:
“The development of New Street Station and Grand Central significantly enhances the attractiveness of Birmingham. New Street Station is already the busiest train station outside of London and considered a world-class gateway delivering significant footfall to the city. We are pleased to be working with Hammerson as the new operator of Grand Central and together delivering a seamless customer experience at New Street Station.”
Andy Street, Managing Director, John Lewis Partnership, said:
“The development of Grand Central is great news for Birmingham and it cements Birmingham’s position as a retail destination of choice. Our new shop has enjoyed a wonderful reception in the city, and given Hammerson’s proven expertise in managing shopping centres it can only go from strength to strength. I am delighted to see them take on the ownership of Grand Central.”
Hammerson was advised by CBRE and Birmingham City Council was advised by Cushman & Wakefield.