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Emira’s R1.74bn retail property escapade in the US

Sharply focused on ‘power retail centres’ in secondary nodes.
Warren Buffett is also hot for retail; 2017 saw him put $377m (R5.4bn) into Stone Capital, which owns 1 750 retail properties. Photographer: Patrick T Fallon/Bloomberg

Emira Property Fund’s investment escapade in the US is targeted to hit US$120 million (R1.74 billion) by 2020 as the world’s largest economy booms on the back of strong consumer demand and despite President Donald Trump’s trade war with China.

The JSE-listed mid-cap real estate investment trust (Reit) already has more than R400 million of retail property investments in the US as part of a ‘co-investment’ relationship with Dallas-based Rainier Group. Emira CEO Geoff Jennett told Moneyweb at a media briefing on Thursday (November 1)  that the company is targeting $80 million (about R1.1 billion) to be invested in the US by the end of its 2019 financial year, and $120 million (R1.74 billion) by 2020.

“This is part of our diversification investment drive in the US, where we have found ideal local partners in the Rainier Group,” he says. “We really hope we reach our investment target for the US, which presents an exciting growth opportunity for Emira. We are being very strict about the retail properties we are co-investing in with Rainier, but if we achieve our target of $120 million by 2020, it will see our investments in the US represent 12% of business.”

Emira is the only South African Reit currently investing in the US. The Central and Eastern Europe region has received the most interest and investment in recent years from several major SA listed and unlisted property companies, including sector heavyweights Growthpoint and Redefine.

Jennett says Emira – with an office, retail and industrial portfolio worth R14.5 billion – is similar in size to the Rainier Group. Emira also has a R940 million stake in Growthpoint Properties Australia, but its offshore investment strategy for the next few years will focus largely on the US.

Rainier Group principal Danny Lovell, who is in South Africa presenting to listed property analysts and investors, says the partners are targeting grocery-anchored dominant retail power centres in secondary nodes in the US.

These centres have had limited exposure to troubled department store players like Macy’s and Sears, and are performing better in the face of growth in online retail.

No retail Armageddon

“Many headlines in the last few years have been about a retail apocalypse or Armageddon for bricks and mortar stores and malls, with the growth of e-commerce and online shopping. But the fact is that bricks and mortar stores are here to stay and are growing,” says Lovell.

“Despite the growth of online retail, 90% of total retail sales still take place in the bricks and mortar space, either at stores or with bricks and mortar brands. Shopping centres that have huge department stores have been affected, but many other centres are still doing well,” he adds.

“You are not going to see total retail sales from bricks and mortar brands dropping from 90% to say 50% anytime soon. Also, you’re seeing e-commerce players like Amazon opening bricks and mortar stores, while traditional bricks and mortar retailers, like Walmart, are growing online.”

Lovell’s comments echo those of Bill Kistler, a director of the International Council of Shopping Centres, who spoke at the SA Council of Shopping Centres’ Congress in Durban recently. “Rumours of the demise of the shopping centre industry and bricks and mortar retail are greatly exaggerated,” says Kistler. “The perception is that it’s all about e-commerce and technology, but technology also has a lot of benefits for the shopping centre industry and retailers.”

Store openings continue apace

There were in fact more store openings than closures in the US in 2017. “Store closures grab the headlines, not store openings,” says Lovell, adding that there were some 14 000 store openings in the US last year, compared to 10 000 store closures.

He points out that Warren Buffett is betting big on retail, citing the master investor’s $377 million investment last year into Stone Capital, which owns 1 750 retail properties in 48 US states.

Emira and Rainier are looking at over 50 power retail centre investment opportunities in select locations, but only a small number of these will translate into actual deals due to the partners’ strict assessment criteria.

Lovell adds that the US is showing strong growth of between 3.5% to 4%, with consumer spending buoyed by President Trump’s tax cuts as well as increased employment. The power retail centre segment boasts retail occupancy rates higher than 95%.

The four power centres the partners have invested in so far are ‘Class A’ open-air retail centres dominant in their areas and with lower risk tenants: Moore Plaza in Corpus Christi (Texas), Belden Park Crossing in North Canton and 32 East in Cincinnati (Ohio), and Stony Creek Market Place (Indiana).

“Moore Plaza, which we purchased for US$70.6 million, is our largest acquisition yet as part of this partnership,” says Lovell. “It has an occupancy level of 99% and is home to dual grocery anchors, Target and H-E-B. Texas is booming with a lower unemployment rate than nationally. We are looking for such opportunities in the central and southern US.”

Lawrence Koikoi, listed property analyst at Stanlib, says Emira had done good work in reducing its exposure in the challenging office sector, with proceeds from these sales now being used by Emira as part of its offshore diversification into the US, as opposed to most of its SA peers, which are investing in Europe and the UK.

“The jury is still out on Emira’s diversification into the US, especially given the proliferation of online shopping and the saturation of the US market,” he says. “However, Emira seems to have partnered with an experienced local player in Rainier and they are being very specific about the type of retail centres they are investing in.”

Evan Robins, portfolio manager at Old Mutual Investment Group, says US retail property is a contrarian investment in many respects. “The market is wary, with concerns around oversupply and increasing online sales. However, convenience and grocery (retail) should be less vulnerable to online than some other segments. Rents though may not be immune to downward pressure.”

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