Hammerson sees City rents weakening

The cautious approach of banks to lending to property companies had contributed to a further weakening in UK property values so far this year, Hammerson said in a trading statement on Thursday ahead of its annual meeting.

Rents for City of London offices were weakening, it said, as “several banks are responding to the difficult financial markets by reducing staff numbers” – just as new office space was coming on the market.

The real estate investment trust said that the office market in France was also now showing “some signs of softening”, although the French retail property market was proving resilient.

John Richards, chief executive, said: “There’s been a definite lack of liquidity in the market and that has led to further declines in property values in the first quarter of 2008.” He stressed that the group’s £7.3bn portfolio of retail space and offices in the UK and France was “of the highest quality”.

However, Hammerson said it had arranged further funding, and Mr Richards said it had £400m of headroom after the £330m it still had to spend on current developments. That put it in a good position to take advantage of any opportunities that arose, he said. But he admitted he had yet to see any potential deals that struck him as offering value for the business.

The group has performed better than other property companies as values have tumbled in recent months, and is seen as one of the more likely winners in any shake-out in the market. In afternoon trading the shares were 13p lower at 995p.

Hammerson said it had a low vacancy rate of 2.1 per cent with an average of over 10 years of unexpired leases. It predicted growth in rental income in coming years as it completed and let developments, with annual rents of £36m contracted already and a target of £73m in all.

The group said its City of London properties were more than 99 per cent let at the moment, while its UK portfolio of large shopping centres and retail parks had a vacancy rate of only 2.6 per cent.

In France, where 30 per cent of Hammerson’s portfolio is located, the group’s offices were 93 per cent let and demand for its retail space was “healthy”.

In its development portfolio, Hammerson had let 34 per cent of the space at its new office building at 125 Old Broad Street, in the City of London, which is due to be completed this month. The two main tenants signed up so far were paying rents of £60 per sq ft and £53.50 per sq ft.

Its 60 Threadneedle St development, on the site of the old London Stock Exchange building which is due to be completed in November this year, had yet to sign up any tenants. Mr Richards said that there was a significant level of inquiries about the two City developments, with discussions taking place with a number of potential tenants for the Threadneedle St site.

“There are people looking to do deals, but there is no doubt that it is taking longer,” he said.

Although UK retailers were facing challenging conditions, Hammerson said two large retail schemes it has due for completion in September were 83 per cent and 73 per cent let. A scheme in Paris, also opening in September, was 85 per cent let.

Mr Richards said he was confident that Hammerson would reach its target of having at least 90 per cent of the space let by the time the UK centres opened, although rent-free periods were going to be longer than had been expected earlier.

Simon Mellis, finance director, said retail sales in the group’s UK shopping centres had risen by 2 per cent in the first quarter, despite the gloom elsewhere.

In March the group sold its half share in the office building it had built at One London Wall, reaping a net profit of £67m, just below its December 2007 valuation of £69m. Last month it paid £137m for a long leasehold interest in Bishop’s Square in the City of London, and raised a £400m loan against it.

Including that loan, the group increased its funding facilities by £750m and net debt at the end of March was £2.69bn, up from £2.496bn at the end of 2007. A £370m bond due for repayment in the summer had already been refinanced, Mr Mellis said. Of its gross debt, 64 per cent was at fixed interest rates, Hammerson said.