Malls: Pronounced Dead Or Adapting To New Environment?

22 May 2018 | World Views | Mark Mayer

More than two years ago, while working at Raging Bull award-winning asset manager, Reitway Global, one of the portfolio managers (Grant Lowton) penned a piece entitled "The death of the mall is exaggerated". The disruption caused by the online segment of the retail market was devastating to the traditional brick-and-mortar model, but the A-class malls would survive, and depending on their ability to adapt to the changing environment, even thrive.

It is difficult to take a view contrary to that promoted by the media - the noise that is created by doomsday prophets and market commentators can be deafening. Although the coroner’s report was signed, more skeptical professionals preferred to take a closer look.

It was with interest then that I read a report this week by Anil Ramjee, Global REIT Analyst at Sesfikile Capital entitled: "Retail Apocalypse" and "the mall is dead" narrative oversimplified? The piece can be found in Glacier Research’s Funds on Friday, volume 958.  

Online vs brick-and-mortar stores sales growth

From the time Grant Lowton had written his article at Reitway Global (2016) to now, the relentless growth of online retail or e-commerce sales has resulted in the online segment expanding from 8% to 10% of global sales. Considering that online retail spending amounted to just 3% in 2007 of the total pie, the rise of e-commerce has been a concern to retail property owners. In 2017 alone, online sales growth came in at 23% which translates to a total annual figure of $2.3 trillion. And the rate of growth is expected to continue at an annualised 21% through to the year 2020.

In the United States, by far the biggest listed mall REIT region by market capitalisation globally, consumer disposable income has been rapidly increasing over the last decade, yet new retail developments have tapered off dramatically as growth rates in physical store sales are expected to come in at 2-3% per annum over the next few years.


How disruptive is the online retailer?

Macy’s, a well-established store franchise in the US, have been closing hundreds of stores for several years now due to increased online retail activity. According to Anil Ramjee’s article, 81 Macy’s stores were closed in 2017 alone. Store closures across business brands hit a record high in the US of 6,985, this according to research by Fund Global Retail and Technology. Most of these store closures are in the apparel segments of the market and more critically, for property investors, is the fact that these closures are mostly relegated to B and C grade malls. The A-malls have fared significantly better.

The majority of the 3,433 store opening during 2017 came in the form of grocery stores, an area of the market that online stores still seem to be struggling to penetrate properly. Amazon of course have been working on a proposition in this space, but to be fair, are still in the early phase of development.

Back to A-malls then. These are generally classified as such if they generate >$500/sq. ft. in sales. They are often located in wealthy areas, contain luxury shops among their mix of tenants and enjoy significantly higher levels of consumer spending. Shoppers at these malls are viewing their visits as an experience. Shopping is merged with socialising over lunch or watching a movie at the cinema. Malls that offer value over and above a place to buy an item, should continue to attract foot-count.

US retail REIT positioning

There seems then, to be a place under the sun for the A-mall, but it will have to accept that it needs to do things differently in order to survive. The good news for investors or potential investors in US mall REITs, is that US mall REITs own 15% of total US mall inventory, providing an attractive slice of the market. Further, 80% of the malls they own is made up of A-grade quality. For investors looking to operate exclusively in this A-mall segment, there are options. For one, Grant Lowton points to the largest retail REIT operator, Simon Property Group (SPG) - they only own A-malls.  

Lowton also highlights a fascinating stat where only three of SPG’s top ten tenants in 1993 existed in their same form in 2016. It demonstrates that even though conditions change and tenants come and go, grow and diminish, REITs can still position themselves to add value, expand and grow their business.

The US mall owner will need to recognise the changing face of the industry and adapt accordingly. The right mix of tenants has never been more important. Anil Ramjee explains that they still have a lot to do in this respect, as US regional malls have a 46% department store exposure and only 14% exposure to food and entertainment. European malls are exhibiting a very different dynamic, with only 8% department store exposure and a much bigger leaning to food and entertainment at 34%. Even South African malls are better positioned, having strong grocery store anchor tenants, which adds to their defensive nature - at least until Amazon unleashes a new wave of disruption in that space.



Mark Mayer
Investment Specialist at Discovery Invest

Mark graduated with a Business Science Degree from the University of Cape Town in 2007. He then joined Sharenet, during which time he also completed his B.Com Honours through UNISA. Mark has helped to build, launch and manage derivative and share trading brokerage businesses. He is also a JSE Registered Securities Trader, and has worked on the trading desk at Sharenet. After seven-and-a-half years at Sharenet Mark then moved to Reitway Global (a specialist Global Listed Property Fund Manager) where his passion for property was further kindled. Mark currently works for Discovery Invest as an Investment Specialist on their Investec Managed fund offering. He has over ten years of experience in the equity and asset management sector and can be reached at:

The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Discovery Invest.

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