RIP Intu. More to follow?

Intu Properties, the biggest shopping centre owner in the UK, plunged into administration today after last ditch rescue talks with creditors collapsed.

The writing had been on the wall for months, if not years, for Intu but the covid-19 pandemic finally pushed it over the edge. But what does Intu’s collapse mean for the wider property sector and will other companies follow suit?

Intu was laden with debt – to the tune of almost £4.5bn – that it piled on during the retail hayday of the 2010s. This is far more than any other listed property company.

In 2016 that debt amounted to a loan to value (LTV) of around 43% – a level considered slightly high but manageable, especially considering its portfolio was worth £10bn.

The problem was that it never saw the ecommerce boom coming. As more and more retail sales moved to online, from 13% in 2016 to around 20% today, retailers started closing stores or renegotiating rents down.

Eventually the UK had a huge oversupply of retail stores, which put a downward pressure on rent and consequently capital values.

As the ‘V’ in the LTV ratio started to plummet at Intu, that debt pile became more and more of a burden – its LTV moved from 45% in 2017, to 53% in 2018, and to 68% in 2019 – until it inevitably breached debt covenants last year.

It has been at the mercy of creditors ever since. The enforced shutdown of most of its centres was the final nail in its coffin, collecting just 40% of rent for the quarter of March to June.

Most other listed property companies are in much stronger positions to survive the pandemic, with far less debt piles.

The worry will be cash collections going forward. March rent quarter day was somewhat of a bloodbath for retail, leisure and hospitality landlords.

Early indications show that June’s rent quarter day, which fell on Wednesday, will be even worse.

Initial surveys show that collection of advanced rents on Wednesday for the quarter to the end of September 2020 was just 18.2%, according to data from Re-Leased.

It is important to stress that this figure is from an analysis of 35,000 leases across the UK property sector and doesn’t necessarily reflect that of listed property companies.

The figure compares to 25.3% that was collected on March rent quarter day. Two-thirds of rent (67%) was collected 60 days after the March due date.

It is expected this will be even lower this quarter, with the majority of tenants closed down for a large part of the past three months.

Intu’s demise illustrates the importance of a low LTV ratio.

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