John Richards - chief executive , Hammerson

City of London rents could drop 10 percent this year, as tenants in London’s financial centre shy away from signing new deals, the chief executive of Hammerson Plc (HMSO.L: Quote, Profile, Research) told Reuters on Friday.

John Richards, the CEO of Britain’s fourth-biggest listed property company, said a rapid correction in UK commercial property prices was three-quarters complete but prices would fall another 5 percent this year before finding a floor.

“There will be a continued slowing of occupational deals in the City of London, and for those developers and landlords that are less well-capitalised than us, there is compelling pressure to cut deals, and that will lead to falling rents,” Richards said.

“No-one wants to take a new property on in case they find out two months down the line their biggest client has gone bust and they need to cut 10 staff instead of hire another five.”

Research from property broker Atisreal showed average annual central London rents were 1,760 euros per square metre in the fourth quarter of 2007, and Richards said City rents could drop about 10 percent in 2008, although this could vary from building to building.

Speaking on the final day of the MIPIM property trade fair in Cannes, Richards said he was encouraged by letting prospects in Hammerson’s speculative City office development pipeline, at 125 Old Broad Street and 60 Threadneedle Street.

But he added Hammerson expects its office vacancy rate climb from about 3.5 percent to about 10 percent by end-2009.

“HEALTHY RETURNS”

However, because the company had bought the sites cheaply, Richards said Hammerson would still profit even if they missed original rental income expectations, unlike some rivals.

“Our break-even rents are not too challenging. And that doesn’t mean to say we intend to let buildings at over-generous prices but it does mean that if the market softens a bit, we will still show healthy returns,” he said.

FTSE 100-listed Hammerson owns or has interests in more than 7 billion pounds ($14.2 billion) of UK and French retail and office property.

While Richards said an increase in retail tenant defaults in 2008 was “inevitable” given testing global economic conditions, this would have a negligible impact on Hammerson’s prime shopping malls and retail parks.

Richards said 97 percent of Hammerson’s retail property was let and he was confident they could fill any vacant units even in tough market conditions. He added Hammerson’s bad debts in 2007 were 250,000 pounds on a rent roll of more than 300 million pounds.

Richards said he was “mildly optimistic” Hammerson could achieve a similar single-digit positive net asset value (NAV) increase in 2008, after it trumped market forecasts with a 3 percent NAV rise against the odds in 2007.

“Given the embedded rental growth in our portfolio, given our asset-management track record, given my expectation that French retail will stay solid, and the developments due to complete—it is not irrational to say it could happen, in fact it’s wholly rational to say it might,” Richards said.

“ABSOLUTELY DREAMING”

Hammerson, and many other British real estate investment trusts (REITs), trade at a big discount to net asset value. But Richards said barren credit markets made big deals in the sector almost impossible.

“Do I feel happy that our NAV is over 15 pounds and our shares are somewhere around 11 pounds? Of course not,” he said.

“But if anyone is thinking, ‘We’ll make a bid for Hammerson when we raise six or seven billion pounds of debt,’ – good luck. All the bankers I have met this week would say you are absolutely dreaming.”

Richards said he had 600 million pounds of cash and credit to spend on French or UK acquisitions but tempting opportunities to buy top-quality sites were thin on the ground.

“My gut feel is that where we will only see signs of distress - therefore real bargains - (is) in secondary property. And as a broad rule of thumb, we are not going to depart from the safety of prime,” he said. (Editing by Quentin Webb)