A Capital idea?

This week, the business completed its demerger from London development arm Capital & Counties, which is now a separately listed non-Reit (shareholders received an equivalent number of CapCo shares upon the split).

Value creation is the aim - but can this really be achieved? Challenging conditions in the retail market have resulted in two rocky years for Liberty, whose shares have tumbled 19 per cent since last autumn. Last year, shareholders were tapped for equity not once, but twice. Debt worries have lessened, but trading conditions remain tough. Fears over property valuations have not subsided either (for more on this subject, see on Hammerson).

Investors can now plump for a mature, UK shopping centres business or a higher-risk London development play - but both have mixed attractions.

Shopping around

Capital Shopping Centres is now a Reit in the purest form, with income distribution from 13 established UK shopping centres the prime attraction for dividend-hungry investors. The problem? Even with a promised full-year dividend of 15p a share, the shares currently yield 4 per cent (compared with 6.5 per cent at British Land).

Fears surrounding the future for retail rents could push the share price lower, and by virtue improve the yield. Liberty's like-for-like net rental income dipped 3.4 per cent in 2009, and had fallen by 4 per cent the previous year. "If we simply recover what we've lost, that will have a 10 per cent impact on the top line immediately," argues Mr Fischel. "Moving the top line is our main mission - then valuers will be more confident about the value of the assets."

Following a surge of retailer failures in 2009, 15 per cent of mall space was let on short-term leases, struck at up to 35 per cent below previous rental levels. One in six of these discount deals are currently being renegotiated, and management is confident this will lead to an uplift (potentially, £20m could be added to rents if they all revert to previous levels). However, rivals suggest that the lower rents are a stark reflection of the market, and the company accepts it may take "years" to recapture totally.

New development is off the agenda, but £125m has been earmarked to refurbish current centres, and in the longer term three major extensions are planned. "There is a much lower risk attached to extending existing centres than building new ones from scratch," says Mr Fischel.

Now the demerger has been finalised, management time can be focused on building up rents. Prime centres should weather the consumer downturn better than most, but with a subdued growth outlook, real estate analyst Harm Meijer at JPMorgan believes the shares would have to dip below 320p before they are worth buying (they are currently 373p).

The best laid plans

Investors seeking growth would be better suited to Capital & Counties. Here, the challenge lies in unlocking value from three portfolios of central London assets - Covent Garden, the Great Capital Partnership joint venture, and the sprawling Earls Court exhibition centre.

The latter is the most lucrative - but also the hardest to unlock. CapCo is masterplanning the wider area with surrounding landowners, Hammersmith & Fulham Council and Transport for London. Theoretically, the conference centre site could accommodate 8,000 residential units. Winning a planning consent would boost values from £6m an acre today to as much as £40m an acre (JPMorgan estimates this would add 55p to the shares, which is not factored in to current NAV estimates).

The earliest planning could be achieved is mid-2012, but the sheer size of the scheme - and the political nature of CapCo's development partners - could drag this out. Planning costs of £30m have been factored in, but if other giant London regeneration schemes such as Wembley and Kings Cross are anything to go by, the final figure could be far higher.

And then there's the level of social housing provision. The mayor's London Plan desires a minimum 50 per cent; some believe 25 per cent might be achievable. An inspector's report due this autumn will deliver greater clarity.

All these factors lead Nomura real estate analyst Robert Duncan to forecast a much more conservative value uplift to £15m an acre if planning is granted. Not bad - especially considering the growth potential elsewhere in the portfolio. But, beyond that, development profits from a 10-15 year project will be lumpy, and CapCo is too small to develop it without a partner.

Market value

Covent Garden market is CapCo's other star asset, and chief executive Ian Hawksworth says he will concentrate on building up the experience: "Heritage, entertainment and really high-quality retail, food and beverage," he sums up.

Peers view a letting to the Apple store as a major coup (it is expected to open later this year) and the group behind London's Ivy restaurant have also come on board. "It is a very rare part of London to have property concentrated in three majority ownerships who share similar objectives," he says in a nod to listed peer Shaftesbury and livery company the Mercers who own most of the surrounding area. "My philosophy is if the neighbours do well, you do well."

Footfall has been boosted by London's tourist boom (visitors rose 5 per cent to 45m in 2009) but CapCo will focus on improving the experience, increasing dwell times and per capita spend. "We inherited quite traditional leases, but we're open to shorter ones, and we do want to participate in turnover rents as we think sales densities will improve," Mr Hawksworth adds. Analysts comment that average lease lengths of nearly eight years will drag on how quickly space can be upgraded (paying surrender premiums to get tenants out is an effective, if expensive option). The company has also identified 70 residential conversions.

Nevertheless, downward pressure on the shares seems inevitable - CapCo will leave the FTSE 100, causing index-tracking funds to sell their holdings. And Liberty's large South African shareholder base may also head for the exit due to the need to preserve their foreign investment allowance (although there is a two-year window). The intentions of international retail giants Simon and Westfield, who each had small stakes in Liberty, is a further unknown.

Splitting in two means each company is more vulnerable to potential takeover approaches - although market watchers believe the shopping centres arm has broader appeal (names including Land Securities, British Land and London & Stamford have been mentioned). CapCo's London assets are unique, but speculation that the shares will trade at a premium seem far-fetched.

"If there was a queue of suitors, then why didn't Liberty sell CapCo rather than demerge it?" questions one competitor. JPMorgan's Mr Meijer sees value below 140p (shares were changing hands at 122p this week). For investors prepared to hang in for planning upside, this seems a good strategy. In the meantime, Mr Hawksworth is not going to let the rumours distract him. "My job is to create shareholder value, so we'll crack on and deliver it."

*NAV 2010 estimates JPMorgan Cazenove