Many Londoners will head to Westfield Stratford to do their Christmas shopping this month. Britain’s latest megamall only opened last autumn, yet thanks to its position next to the Olympic Park it has already become a familiar feature of the cityscape - attracting 5.5m visitors during the fortnight of the Games alone.
Deck the malls
The most obvious feature of the mall sector is its sheer size. At $47.1bn (£29.2bn), Simon Property is the largest real-estate investment trust (Reit) in the world, with nearly five times the market value of
In the property game, scale often only brings limited benefits - small players who know their local market can outperform larger peers, which is why the market is so fragmented. But the three global mall operators have shown size to be an advantage in two crucial respects. First, they can act as one-stop shops for expanding retailers. A US chain that wants to dip its toe into the continental European market, for instance, can save itself a lot of hard work simply by asking Unibail for space. The American brand Forever 21, for example, has launched its presence in continental Europe by taking outlets in two Unibail malls. Even a more mature retailer such as Apple rents nine of its 15 stores in France and Spain from Unibail.
That gives the mall owner greater negotiating power with retailers than smaller peers, helping it conjure inflation-beating rental growth out of seemingly thin macro-economic air. Despite the eurozone crisis, like-for-like rental income from the shopping centre portfolio was 4.4 per cent ahead in the first half, thanks largely to a very strong performance in France.
Tidings of comfort and joy
The second benefit of scale has become particularly obvious since the credit crisis - access to capital. In a risk-averse environment, investors continue to see the balance sheets of large companies as safe havens, allowing them to borrow extraordinarily cheaply. In October Unibail raised $500bn in five-year secured bonds with a coupon of just 1.625 per cent. That will further reduce its already low interest costs, boosting profits. When Simon Property announced the purchase of a 29 per cent stake in the French real-estate investment trust Klepierre in March, it raised $1.2bn of equity and $1.75bn of unsecured debt at 3.39 per cent overnight. "That's powerful - not many companies can pull that off," says Steve Burton at fund manager CBRE Clarion.
Of course, size is not the only reason investors trust their money with these companies. They also believe in the robustness of the underlying assets, which have long track records of rental growth. With high barriers to entry (malls are very expensive to build and public planners do not want many of them) their properties tend to dominate a regional catchment area for retail sales. And retail sales rarely fall. Despite the impact of superstorm Sandy, like-for-like retail sales were up 1.6 per cent in November for a basket of 17 major US retailers, and that was the weakest figure for over two years.
Moreover, in Europe, including the UK, regional malls are also still taking market share from traditional high-street retailers and small shopping centres. "People are cash-rich but time-poor. They want to be able to compare all the main retailers under one roof," says Marcus Phayre-Mudge, manager of TR Property Investment Trust. This shift in shopping habits is another explanation for Unibail's recession-busting growth figures. Yet another is that its rents are still low relative to turnover, so retailers can afford rate increases even if their sales are flat.
How the internet will affect this trend in the long run remains a moot point, but for now big malls have, if anything, benefited from the growth of e-tailing. Multi-national retailers are retrenching from marginal locations, which can be served by websites, but that makes them all the keener to get flagship pitches in 'destination' shopping centres with pan-regional catchment areas.
Global Reit players
Family get together
Another reason why the global mall players have become popular safe-haven investments is their reputation for cautious management. Both Simon Property and Westfield are family businesses still dominated by personal shareholdings. "My perception is that they're run as if the family money is on the hook," says Mr Burton. Unibail is not family-owned, but fund managers and analysts are nonetheless united in praise for its management, who notably stood high and dry during the 2009 wave of rescue rights issues that will forever scar the track records of the UK Reits.
There are two big drawbacks to investing in these companies from the UK. First, like all foreign shares, there is currency risk to consider. Second, after a very strong year all three shares come at a price, particularly in relation to their book value. In Britain, the premium or discount to book is the primary valuation tool used for property stock picking, which makes these companies look very expensive. But that's not the case either in Europe or in the US, where investors pay more attention to earnings and dividend yields (US Reits do not even revalue their portfolios - properties are kept on the books at cost). By those measures, these companies look fully valued but not over-priced.
The global mall operators are in a league of their own. Even at today's share prices, they tick all the boxes for long-term investments, offering a low-risk income stream with decent growth prospects. The rental cash flow these companies throw off protects investors not just from the worst ravages of recession, but also from the possibility of inflation. That's because rents tend to follow retail sales growth, which is by definition linked to inflation, while the companies' main cost - debt interest - is fixed at very low levels.
Many of the world’s best-in-class shopping malls are owned by Real Estate Investment Trusts (Reits), notably Unibail Rodamco (Continental Europe), Simon Property Group (US) and Westfield Group (Australia, US and UK). In addition to vigorous management, the scale of these listed behemoths in a bigger-is-better market allows an efficient cost base, access to capital markets and some power over the retailers as many leases are negotiated simultaneously across locations.
Meanwhile, complex planning processes, large lot sizes and long development lead times limits competition. Traditional retail channels may be challenged, but malls offer an experience to the consumer and in a low-growth environment the attractiveness of prime versus secondary assets is more pronounced. We are expecting operating income to rise by around 4 per cent per annum.
Unibail Rodamco’s track record is impressive. Over the last 10 years it has returned an average of 20 per cent a year – just under three times the equivalent for global equities in general. How? By painstakingly acquiring and developing a first-rate $27bn mall portfolio, being disciplined on the pricing of acquisitions and by understanding both retailers and consumers. This has been augmented by well-timed Parisian office developments.
Simon is even bigger with a $75bn portfolio, and its 10-year performance is better still in local currency. While we see slightly better value in other US mall stocks, the size of its asset platform and balance-sheet strength mean it is a dominant force in the US mall business, while its executive team is deep and talented. It is looking to export its savoir-faire to the European mall market.
Westfield has been the relative laggard. It too has effective deal makers in its ranks, a solid balance sheet and runs the most productive malls in Australia. Its $62bn portfolio is more global but in Australia, comprising 40 per cent of the portfolio, sales growth has been subdued recently. Asset sales have also diluted returns. However, it does have a $11bn five-year development pipeline, with which it hopes to recreate the success of Westfield Stratford.
All three are excellent companies offering high quality dividend yields with growth potential.
Simon Robson Brown, manager of the Investors in Global Real Estate investment trust
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