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Shopping Centers Today -> January 2008
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Mall REITs good ports for a storm
U.S. mall REITs are well positioned to ride out economic turmoil, says a new report from UBS Investment Research. The firm examined mall REIT performance during the consumer-led recession of 1990 and found that even with declining sales, malls enjoyed healthy leasing spreads, rent growth and occupancy rates. “In the 2001 recession, where sales slowed or turned negative for the regional mall players, NOI [net operating income] growth may have slowed, but it remained positive across all the regional mall players reviewed,” wrote analyst Jeffrey Spector in the report. “We found that it has previously taken almost two years of slowing sales before malls face declining rents.” Further, the report says, occupancy levels on the retail side have remained more stable during recessionary times than those of the hotel and office sectors.
Dollar doldrums
Will U.S. investors miss out on the global shopping center development bonanza because of the weakness of the dollar? Not necessarily, experts say. The aggregate volume of U.S. investment in foreign retail might well suffer over time. But there will still be retail property opportunities that work, regardless of currency fluctuations, sources say. “We haven’t been impacted by the decline of the dollar, because our joint venture in Brazil was negotiated in dollars,” said Katie Reinsmidt, director of investor relations at Chattanooga, Tenn.–based CBL & Associates Properties, which recently signed a deal with Brazilian retail developer Tenco Realty to develop a shopping center in Macaé, Brazil. CBL will initially invest about $15.3 million to acquire a 60 percent interest in the development.
The U.S. dollar, battered though it may be, is still the prime international currency in many parts of the world. For deals that convert to local currency, however, there remains a straightforward way for investors to mitigate currency risk, at least in the short term. Forward contracts are fairly simple ways for the buyer to fix the exchange rate at the time of the sales agreement, say, rather than when the actual payment is made a few months later, when exchange rates might be very different.
Finally, some overseas markets are simply going to be worth investing in, barring a catastrophic decline of the dollar. Whatever currency risk is involved at the time of purchase is mitigated by the strong returns the investor will realize. In fact, once established overseas, an investor will benefit from taking returns in a currency that is strengthening against the dollar, just as Simon Property Group has done with the 60 European and Asian properties it has acquired over the past decade.
In short, currency risk is just one factor. A canny U.S. investor can still find retail properties in strong markets, and given enough savvy, make the numbers work.
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