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Chinks emerge in the armour of prized malls
22 July/23 July 2017 | Financial Times | Miles Johnson.

A defining feature of the financial crisis was a group of hedge funds making vast sums by wagering against supposedly AAA-rated mortgage debt well before markets imploded in 2008.

Now some believe a similar story will play out for US shopping malls — that the most risky investments will end up being those that investors now believe to be the safest. Central to their premise is the idea that too much faith may be being placed in a classification system used for shopping malls that is little known outside of the real estate sector.....investors are also actively leaving the office and conducting field research.

In April researchers from a large US hedge fund travelled to the outer boroughs of New York to a shopping mall that is home to Apple and Armani among other retailers....To their surprise the researchers quickly came across a pop-up shop selling cheaply manufactured stuffed teddy bears and plastic toys. Two months later the store had disappeared....
The stock market has until recently appeared to believe that prime “A” malls are largely insulated from the pain being felt across a US retail sector being shaken by e-commerce.

Shares in Washington Prime, an operator of lower quality B and C classed malls, are down by half since the start of 2015. However, until recently shares in “prime” mall operators Simon Property Group and GGP had held up, underpinned by the belief that their A-quality malls in prime locations were safe from the challenge of online shopping.......Yet there is growing evidence to suggest that these prime malls, which have been treated by investors and lenders alike as rock solid bets in the face of the internet headwinds, are not as protected as once thought.

Shares in Simon Property, the largest Reit in America with a market value of $50bn, are down by almost 30 per cent over the past 12 months, having held up strongly to the middle of 2016. Short interest in Simon, which tracks the amount of shares hedge funds have borrowed to bet that its value will fall, rose to the highest level since the financial crisis last month, with bets worth more than $1bn.....The hedge funds wagering against the highest quality malls believe that the wider market will come to believe these A-quality malls are far more similar to lesser ranked ones. “This idea that there are these magic malls in America that are immune to secular change is a myth,” the US-based hedge fund manager says.

Some argue that the market under-appreciates that A class mall operators and B and C class mall operators all have very similar tenant bases, in spite of being in different locations. L Brands, the owner of lingerie chain Victoria’s Secret, is the largest single tenant for prime operator GGP, according to company filings.....it is also the biggest tenant for the lesser ranked CBL and second largest for Washington Prime.....Russell Clark of Horseman Capital notes the vulnerability malls have to the loss of single big brands, known as anchor tenants, with their departure often triggering a wave of rent loss with other tenants.

“Many tenants have a clause in their lease to reduce rents should an anchor close a store. Thus, even though the loss of rent due to an anchor closing is minimal, the knock-on effect of reduced rents from the remaining tenants is a serious concern,” he noted.....the hunt for opportunities to bet against quality malls outside the US. The share prices of Intu Properties and Hammerson, the UK’s largest publicly listed shopping centre operators, have not yet followed the falls seen in the shares of their largest tenants.
shopping_malls  commercial_real_estate  real_estate  MappedIn  mapping  hedge_funds  primary_field_research  pop-ups  store_closings  pretense_of_knowledge  illusions  under_appreciated  retailers  vulnerabilities  anchor_tenants  REITs  L_Brands  A-class  B-class  C-class  Victoria's_Secret 
july 2017 by jerryking
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