By Iain Withers, Andres Gonzalez

LONDON (Reuters] – London’s West End is poised to be dominated by a smaller group of landlords.

Over the weekend, neighbouring developers Shaftesbury & Capco announced a merger agreement worth 3.5 billion pounds ($4.31 trillion). This is as recession fears accelerate a rush for consolidation in Europe’s scattered real estate market.

Experts told Reuters that further tie-ups will be inevitable as those developers who survived the COVID-19 lockdowns were able to reshape their cities in the wake of a pandemic.

Will Kirkpatrick (partner at Gerald Eve real estate advisory company) stated that the market had changed.

“Covid is a good company in some aspects… Many people are saying that we should merge or create different ways forward.

Shaftesbury and Capco would combine nearly 3 million square feet worth of prime real property, which includes tourist hotspots Covent Garden Chinatown, Carnaby Street, and Chinatown.

According to the terms proposed, Shaftesbury shareholders will receive 53% of the combined firm, while Capco investors would take the rest.

Norges is the major shareholder in the companies and will continue to hold a dominant stake with 20%.

Capco, which has a 25% stake of its competitor two years back, is already a shareholder at Shaftesbury. This adds to the momentum behind this deal.

Refinitiv reports that the deal will become the most significant real estate sale in Britain since Blackstone’s 2017 purchase of Logicor to China Investment Corporation in London.

Deutsche Wohnen and Vonovia, Germany’s largest listed landlords (OTC:), reached an agreement last year to merge their resources in an 18-billion euro deal.

As developers are faced with rising costs of maintaining their investments, property consolidation is expected to continue in Britain.

Capco will be able to use the cash reserve of Shaftesbury to finance expansion projects and redevelopment, as per a Stifel report released Monday. The West End pair are trying to take advantage of a rebound in tourism after COVID-19 restrictions on travel were relaxed globally.

Stifel said that it was possible for the deal to be referred back to competition authorities. Although vast areas of West End land are only owned by a small number of landlords, including Grosvenor Estate and Crown Estate, the analysts indicated that there was still an overwhelming amount of property owners in the region.

Shaftesbury stock shares dropped 3% on Monday and Capco was down 7%.

DOUBLE WHAMMY

Although people returned to London’s shops, offices, and shops in large numbers, London has not seen a rapid recovery from lockdowns like other British cities. Many people continue to work remotely, avoiding long commutes into central London.

Valentine Quinio of Centre for Cities said, “London’s strength was turned into weakness when Covid hit.” Although some workers returned, others are not returning and spending their money in the West End or on the High Street.

The average weekday footfall for central London in March was 63%, which is below the pre-lockdown level in the last week.

The pandemic has passed, but landlords face an economic recession and rising cost of living. That could mean less money in shops and restaurants.

Analysts said that Capco and Shaftesbury made a good deal to lower overheads and increase their negotiation power with tenants.

Numis, a broker, stated in a report that “Due to the overlap in strategies and portfolios there is no need for two corporate entities operating as close together.” It added that it believes their combined administrative costs could be reduced by at least one fifth.

INVESTMENT DEMANDS

Property experts say that landlords are attracted to the idea of bulking up to be able to undertake larger redevelopment projects, especially when the demands on their tenants change rapidly.

The pandemic has affected office and retail demand, but residential demand is stronger, which has prompted a review of portfolios.

Investors and occupiers are both pressing for greener properties. Investment is required.

Simon Rawlinson of property consulting Arcadis, said that scaling up is a key driver.

Capco and Shaftesbury will not be ignored by the influx of development occurring in London’s West End.

Quinio of Centre for Cities stated, “The crisis is sweeping the high streets.” However, the future of London’s City Centre Economy is not in question due to its fundamental strengths.

($1 = 0.8118 pounds)