The results from Intu earlier this week looked on the face of it dire, but it is possible that the worst is still to come.

I have taken a quick peek at the numbers disclosed in Intu’s report and here’s the thing..

Net Rental Income is about £450 million, and the vacancy rate is 3.3%

The valuation is based on a Net Initial Yield of (give or take) 5%.

I stressed those numbers a bit to see what happens by moving the vacancy rate out to 6% overall, it is already above that at Merry Hill and St David’s, Cardiff, so it is far from an impossible scenario. Along with that, I moved the net initial yield out by 100 basis points. If large retail centres remain out of fashion with investors and in a market where vacancies were rising, that sort of yield shift would not be unfeasible. (Yields on the Intu portfolio have moved out 62 basis points over the last 12 months).

The result is a 20% fall in values, that would see the Company (so it says) having to borrow a further £43 million to cover covenant breaches. Would Intu’s board of directors do that? The wisdom of borrowing more money in a falling market thus increasing the overall LTV in the business must be questionable. The asset specific borrowings where covenants are most stressed may of course not also be non-recourse which would leave the board with a more limited choice.

It is perhaps time for a plan B, long-term secure income from tenants does not really exist anymore with the rise of defaults and CVA’s. Intu has led the way in branding of its centres, perhaps now is the time to fully embrace the partnerships with retailers and move towards performance and turnover based rents.