Can houses save the mall?
The Westfield owner gave investors a glimpse of what shopping malls could look like in the future – part advertising platform, part real estate complex. But the makeover plan is just window dressing until he can sell his US properties for financing.
1st listed commercial real estate in Europe in terms of gross assets, Unibail Rodamco Westfield,
told an investor day on Wednesday that it would make a bigger push into residential real estate development and advertising. Unibail’s share price is more than a third below its pre-pandemic level, weaker than its main European and American rivals in shopping centers. The stock has also fallen more than 60% since Unibail bought Westfield in 2018, a costly deal the mall owner is now trying to undo by selling its US properties. Heavy debt, equivalent to 16 times earnings before interest, taxes, depreciation and amortization, is the main reason many investors consider its stock too risky.
Unibail wants to diversify its rental income by leveraging more advertising and brand launches. The company has already made 23 million euros, or $26 million, from advertising on the 1,700 digital screens installed in its shopping centers in 2021 and aims to double this figure by 2024.
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As regulations make it harder to track consumers online, Unibail believes running ads in its European malls, which see an annual footfall of 550 million, will be attractive to brands. Although an owner will not have the same quality of customer data as a retailer, Unibail expects revenue from advertising and brand partnerships to reach 200 million euros by the end of the decade.
Soaring real estate prices are the biggest opportunity. Institutional investors invested 102.6 billion euros in multi-family residential real estate in Europe in 2021, according to CBRE, almost the same amount invested in offices.
Unibail owns land in major European cities that can be sold to residential developers. It can also sell stakes in projects to institutional investors or do the construction itself. Unibail has applied for planning permission to build 1,700 homes next to its Westfield shopping center in London. In total, it has the potential to develop nearly 16,000 homes across Europe.
But not much can happen until Unibail reduces its debt, which it hopes to do by selling US malls, including Westfield flagships in New York and San Francisco. The company expects this to happen in 2023, but it’s unclear if serious talks are still underway. Chief executive Jean-Marie Tritant said several potential buyers sounded as Russia’s invasion of Ukraine sent European stocks plunging, wondering if Unibail would be forced to sell its US malls on the cheap.
Unibail has sufficient funding for at least two years, so it is not yet under pressure to sell. But borrowing costs are rising. The mall owner has raised debt twice in the bond markets since the start of the pandemic, at a low cost of around 1%. Today, he would probably have to pay 2.5%. High inflation in the United States, currently at 7.9%, will make it more difficult to sell shopping centers at a good price. Unlike continental Europe, US shopping center leases are not indexed to inflation.
Unibail could sell its assets at 30% below their 2021 valuations and still hit its loan-to-value ratio target. Hopefully that kind of discount won’t be necessary, but only a sale of its US malls can provide better prospects in Europe.
Write to Carol Ryan at email@example.com
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