Merger of the malls

Reports that Liberty may combine with a major rival to create the world's largest shopping-centre owners have fuelled a wave of enthusiasm for industry consolidation. By Nick Clark
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The Independent Online

There aren't many positives to be had in the commercial property sector right now, but this week one aspect of the market, shopping centres, has found itself thrust into the limelight as a result of renewed speculation that the industry may be ripe for consolidation.

The Independent reported this week that talks have taken place over combining Liberty with a major rival to create the world's largest shopping centre owner, according to sources close to the negotiations. The source added that the company may not have been approached directly.

It is understood that the key to a deal lies with the group's founder, Sir Donald Gordon, who could finally be prepared to listen to offers for his 21 per cent stake. News of the talks saw Liberty's shares jump almost 10 per cent on Wednesday.

Consolidation speculation has hung over the sector for some time, and Martin Allen, an analyst at Morgan Stanley, said in the wake of the news: "Lots of people are pushing M&A in the sector as an idea."

In a research note on Wednesday, Mr Allen had pointed out that Liberty was a strategically attractive asset, with a dominant position in the UK's regional and super-regional shopping centre market. "We think the type of assets it owns and its high market share could make the company very attractive to a whole range of international investors, including both quoted property companies and institutional investors," the note said.

Liberty was set up by Sir Donald in the UK in 1980, as the international arm of Liberty Life Association of Africa. The South African financial services group had itself been set up by Sir Donald in 1958.

Liberty owns 14 shopping centres worth £6.48bn through its Capital Shopping Centres subsidiary, including the Manchester Arndale, Lakeside in Thurrock and a majority stake in Gateshead's MetroCentre. The group, which also bought London's Covent Garden in 2006, converted into a real estate investment trust in January 2007.

The companies linked as possible bidders for Liberty included the Australian giant Westfield Group and the real estate arm of Singapore wealth fund GIC. A merger would make the group the largest owner of shopping centres in the world, above rivals Simon Property Group in the US and Corio, Klépierre and Unibail-Rodamco in Europe.

Shopping centre companies on the acquisition trail are often looking to build scale in the operations, as well as tap into previously unavailable markets in the belief they can manage assets better than the existing management.

One market expert said: "Property owners in the sector are pretty much interested in building their size and scale." Some of the bigger companies have upped their exposure to shopping centres as the rewards have grown. The expert said that landlords are renting the spaces out at high rates as retailers increasingly can't afford to miss out on prime selling location.

Mr Allen added: "Major shopping centres are very defensive, with a low cyclicality because they are not a commodity like offices. Major retailers have to trade from the most successful shopping centres in order to get volume, and it probably takes at least 15 years to go through all the planning hoops required to develop a major new shopping centre."

Yet, the rental rates will be squeezed along with consumer spending. "When retail and the high street is under pressure with weaker consumer spend, that can directly hit the property developers," one sector source said. "The rents are reviewed on a regular basis and with lower spending comes lower rents."

Mr Allen tempered the wave of merger enthusiasm. "The simple truth is that in property there are very few synergies from merger and acquisitions."

Companies in the sector have seen their share price plummet during a devastating market in the past year. Mr Allen believes those shares have further to fall, along with the value of the assets the companies hold, and potential bidders will wait for at least a year.

In 2002, a consortium of Westfield and Simon Property bought Dutch-listed property company Rodamco North America, which held 35 shopping malls. Last year France's Unibail merged with Rodamco Europe, to form the largest commercial real estate group in Europe Unibail-Rodamco.

Aside from the interest surrounding Liberty this week, the group announced its financial director was set to leave after a decade. Aidan Smith will be replaced by the former SeaContainers chief executive Ian Durant.

Mall giants

Corio

The lion's share of Dutch real estate company Corio's portfolio is made up of shopping centres across Europe. Created through the merger of VIB and WBN in 2000, it has seen the value of its portfolio rise since from €2.7bn (£2.1bn) to €6.5bn. Of that, 83 per cent comprises malls in the Netherlands, France, Italy, Spain and Turkey.

Klépierre

The property portfolio of French group Klépierre was €10bn as of last June. It has built up its exposure to shopping centres, following an acquisition drive in France and Spain with Carrefour at the turn of the century, and a deal for 20 malls in Italy two years later. Malls have grown from 51 per cent of its portfolio in 2000 to 86 per cent last year. It was founded in 1990 after the break-up of Locabail Immobilier.

Simon Property Group

The S&P 500 company is the largest mall owner in the US. The group, founded by Melvin Simon in 1993, is based in Indianapolis and operates almost 200 malls and 70 community centres in the US. Its international arm runs properties in six European countries, Japan, South Korea and Mexico.

Unibail-Rodamco

The Franco-Dutch group is the largest real estate company in Europe, with a property portfolio valued at €25.2bn at the end of December. It was created last June following the merger of France's Unibail and Netherlands-based Rodamco Europe. It now owns 95 shopping centres in 14 countries.

Westfield Group

The retail property powerhouse holds assets worth A$41bn (£18.9bn). The ninth largest company on the Australian Stock Exchange, it was set up in Sydney in 1959. It owns 118 shopping centres spanning its domestic market, New Zealand, the US and the UK.

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