Private equity real estate firms have differing views on investing in the US mall space, which has been a focus of short-selling activity by hedge funds in recent months.
For example, Blackstone has not been active in the US mall space since 2011 because of the slowdown in the sector, and does not intend to invest in US malls on a large scale for the foreseeable future.
“It’s hard to invest in a space where there are continued macro headwinds and secular headwinds,” said Nadeem Meghji, the firm’s head of Americas real estate. “One can certainly make money on individual opportunities, but to do it in scale, and in a sector that is so heavily exposed, it’s challenging.”
For Blackstone, a mall could become a compelling investment opportunity if it could be acquired at a low enough price to justify the capital expenditures involved to backfill vacancies and reposition the property through the addition of new experiential, food and beverage and fitness tenants. “Remerchandising and spending capital is one way to generate returns, but it’s not without risk,” said Meghji. “That’s why we’re cautious on the space.”
Meanwhile, Madison International Realty has been betting on US malls through stock purchases in A-mall REITs – those that own shopping centers with sales of $400 per square foot or higher – such as General Growth Properties and Taubman Properties.
“We think there is asymmetrical pricing between public and private markets,” said Ronald Dickerman, Madison’s president and founder. “GGP is trading at a 25 percent discount – that’s a six cap, and those are four cap malls. The private market values of those malls is 200 basis points below what the trading value is. The difference between a 4 and 6 cap is extraordinary.”
Not everyone believes that US mall REITs offer actual discounts, however. For example, Meghji disagrees with research analysts’ private market valuations of mall properties – which form the basis for the perceived discounts – given the lack of recent sales involving mall properties. “Sometimes the public markets are right, and sometimes they are wrong and overreact,” he said. “In this context, the public markets seem right.”
For more on how private equity real estate firms and hedge funds are approaching the mall space differently, read the full story from PERE’s Investing in retail supplement.