Private equity isn’t Christmas shopping at the malls

Major consolidation is underway in the mega-mall sector, but private equity real estate is conspicuous by its absence.

“With the right vision, expertise and capital, retail assets can be re-invented and thrive as the sector evolves,” said Bruce Flatt, chief executive of Brookfield Asset Management, in the $265 billion asset manager’s Q3 earnings letter to shareholders.

Brookfield put its money where its mouth is in pursuit of the 66 percent of General Growth Properties it does not already own, even if a $14.8 billion bid for the Chicago-based US mall giant was rejected, as Reuters reported at the weekend. On Monday, Flatt reiterated to Bloomberg his belief Brookfield had made a “fair offer” for the 126-property business and intimated the deal by no means was dead.

Whether a transaction materializes or not, it is notable that in a fortnight that saw nigh-on $45.5 billion of the world’s super prime retail real estate become subject to a sector-defining wave of consolidation, Brookfield is the only private equity name in the fray. According to an analyst note from JPMorgan, Unibail-Rodamco’s €13.4 billion bid to acquire Australia’s Westfield announced this week went unchallenged, as, it appears, did UK REIT Hammerson’s $4.5 billion bid for compatriot mall operator Intu, which was made public last week.

So why have the other private real estate capital managers stayed away? Blackstone, Starwood, Lone Star: the behemoths usually linked to the portfolios of scale not securely fastened to the floor have evidently not seen the value of jostling with the mall heavyweights for immediate market share.

Of course, the first consideration should be value. Even after soaring more than 20 percent on its takeover news, Westfield’s share price remains lower than its three-year high; Intu also soared 20 percent, but remains some 7.5 percent cheaper than its six-month high. The ‘death by Amazon’ effect slowly strangling in-person shopping is one weight, even provoking the shorting of retail and retail property stocks alike, but not enough to push them from hedge fund short to private equity fund long positions. According to the US Department of Commerce, at $394.9 billion, US e-commerce accounted for 11.7 percent of total retail sales in 2016, up 15.6 percent on 2015. In that time, Amazon managed $147 billion of sales, up 31 percent, Internet Retailer and ChannelAdvisor Corporation estimated.

Furthermore, private equity has largely determined that cavernous halls in the form of logistics sheds, not people-filled malls, are the best way to tackle the consumer story at present. Indeed, these days, Blackstone is among those generally more interested putting its scalable bets on macroeconomic growth themes versus discounts. The firm would rather ramp up another logistics platform like the Indcor business it built stateside or Logicor in Europe than take a chance on destination shopping centers. Beside logistics bets, high-street retail, retail parks and outlet centers, where goods can be purchased at comparable prices to online, have featured among other private real estate firms’ strategies.

That is not to say there will be no part for private equity to play in the mall consolidations happening today. The Unibail-Westfield merger could see as much as €3 billion of non-strategic asset sales, the Hammerson-Intu deal €1.5 billion, PERE understands, although that is a far cry from the $45.5 billion mentioned above. Again, however, potential deals will come down to pricing.

Regardless, such involvement would further demonstrate that private equity would rather nibble around the edges of retail’s mall world than take mouthfuls – even Brookfield has its limits. In the Bloomberg interview, the journalist suggested the Toronto and New York manager did not have the appetite to increase its offer. Whether he was performing his best poker face or not, Flatt did not correct him.

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