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Is a central London powerhouse REIT on the cards?

Capital & Counties this week confirmed it was in talks to buy a 26.3% stake in rival West End landlord Shaftesbury in what would be the first steps in a long-mooted merger of the two groups.

Capco, which owns huge swathes of Covent Garden, is in discussions to buy Hong Kong billionaire Samuel Tak Lee’s stake in neighbouring landlord Shaftesbury.

The reason a merger of the two companies has been long-mooted is that their combined portfolios would create a central London property powerhouse.

Combined they own £6.6bn of property in London’s West End. Capco owns a £2.6bn estate in Covent Garden covering 1.2m square foot of shops, restaurants and offices, while Shaftesbury has a £4bn property portfolio that spans 15 acres of the West End including Carnaby Street, Chinatown, Soho, Covent Garden and Fitzrovia.

The timing of the deal is interesting for both parties. Shaftesbury had been trading at just under £10 per share as recently as October last year, but now finds its shares at around the £6 mark.

It would be a huge bet on the strength of London as a tourist destination post-covid-19. There is no doubt that Covent Garden and Carnaby Street are big tourist hotspots. Whether they get back to the numbers seen before the pandemic remains to be seen.

If tourists do once again flock to London, there is no doubt that a combined Capco/Shaftesbury would be a dynamic proposition for investors.

Although the retail and leisure sectors have been problematic for a long time, way before the covid-19 pandemic escalated issues, the central London market has been somewhat shielded.

This has in great part been due to London’s attraction to tourists, both domestic and international. Retailers are generally downsizing their store estates, but central London will also be a destination of choice. Bars, restaurants, and leisure operators too, are focused on London.

Capco’s potential move comes after it finally rid itself of the Earls Court residential development site, which had been haemorrhaging value in recent years as the luxury residential market in London cooled.

It sold the estate last year for £425m before converting to a REIT. The deal boosted Capco’s cash reserves and at the end of March 2020, it said it had £250m of cash with a further £120m due from the sale of Earls Court.

If the deal to buy the stake in Shaftesbury did progress, Capco would need the support of Norges Bank for any future takeover. Norges Bank owns 25% of Shaftesbury, and interestingly also owns a 13% stake in Capco.

Norges Bank may yet hold the key to any potential takeover deal.

There are many moving parts and hurdles to overcome, but if a central London, retail and leisure-focused property powerhouse is formed it could be just the boost the REIT sector needs.

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