March 23 (Bloomberg) -- Westfield Group, the world’s biggest shopping-center owner, is making a $1.2 billion bet that its new mall in east London will thrive long after the 2012 Olympic Games are over. That’s because it’s targeting some of the country’s wealthiest consumers.
“We see two completely separate markets,” Peter Lowy, one of Sydney-based Westfield’s joint managing directors, said in an interview. “There’s strength in London and much less strength in the rest of the country.”
Westfield Stratford City will be Europe’s largest urban mall when it opens close to the main Olympic site in September. Many of its customers will come from the City of London and Canary Wharf financial districts and neighborhoods such as Shoreditch and Islington, where disposable incomes are higher than the national average and the risk of government job losses is lower.
“It’s easily within commuting distance” for financial-district workers and residents of Essex and east London, said Matthew Churstain, a Peel Hunt analyst based in the capital. “If you’ve got an hour for lunch and you can get there in five to 10 minutes, you can spend 30 minutes looking around the mall and hop back on the tube.”
The 1.9 million square feet (177,000 square meters) of space in the shopping center will be divided into 300 outlets, according to Westfield. About 79 percent of the space has been leased to retailers including Marks & Spencer Group Plc, the U.K.’s largest clothing retailer, and John Lewis Partnership Plc, owner of the eponymous department-store chain.
“It’s a really exciting opportunity for us to be in Stratford,” Andy Street, John Lewis’s managing director, said in an interview. The company, which operates stores offering clothes, electrical items and furniture, will be the anchor tenant. Street said that although it is located in an economically disadvantaged area, the mall will be “attracting crowds from across east London” after the games.
The development also includes 1.1 million square feet of office space, two hotels, a 12-screen cinema, apartments and parking for 5,000 cars. Four million people live within 45 minutes of Stratford City by car or public transport, according to the company.
Westfield has 2 billion pounds of assets in London, compared with 600 million pounds elsewhere in the country, Lowy said. The Australian company’s only other mall in the capital, Westfield White City, is near BBC Television Centre in the Shepherd’s Bush neighborhood. It opened in October 2008, a month after Lehman Brothers Holdings Inc. failed, roiling world financial markets.
Weak Consumer Confidence
The 1.6 million-square-foot west London mall reported 2010 sales of 870 million pounds, an annual increase of 19 percent on a same-store basis and more than Westfield’s other seven shopping centers in Britain.
U.K. households had the biggest three-year decline in real incomes since the early 1980s, the Institute for Fiscal Studies said March 21. The Confederation of British Industry’s retail-sales index fell to an eight-month low in February.
The nationwide surveys don’t reflect the strength of London and the southeast of England relative to the rest of the economy. For example, all but two of the top 25 highest-vacancy town centers with more than 400 stores are in the Midlands or the North, according to a report last month by the Local Data Company, a firm that produces research on retail property locations. Property prices and employment have held up better in the southeast too.
The gap may widen this year as Prime Minister David Cameron begins to implement the deepest spending cuts since World War II. That’s because the proportion of government jobs in London, the Southeast and east England are the lowest in the country.
Westfield generates about 10 percent of its revenue from the U.K., with the rest coming from Australia, New Zealand and the U.S. The company reported a 39 percent drop in second-half earnings, partly because of the Australian dollar’s appreciation against other currencies and costs from last year’s spinoff of a unit owning stakes in its Australian and New Zealand malls.
The company has 55 malls in the U.S. and owns 50 percent of Westfield Retail Trust, the listed company that operates 56 Australian and New Zealand malls.
Westfield Group has dropped 5.6 percent in the last six months, the same as CFS Retail Property Trust GPT Group, another Australian property trust that invests in shopping centers.
While the Olympics will introduce Westfield Stratford City to thousands of visitors passing on the way to the games, the mall may see a decline afterward, according to Scott Courtney, the Sydney-based head of REIT research at Morningstar Australasia Pty.
“In Sydney immediately post-Olympics, we saw enormous amounts of money coming in from visitors, but afterwards it fell,” said Courtney. “London will see a bubble, Stratford will see a bubble.”
In November, Westfield sold 50 percent of Stratford City to Dutch and Canadian pension funds for about 872 million pounds ($1.4 billion). APG Algemene Pensioen Groep NV, the manager of Europe’s biggest retirement plan, and the Canada Pension Plan Investment Board each bought 25 percent.
The partial sale of the property raised cash for other projects, Courtney said. It’s too early to predict what the mall will contribute to Westfield’s sales or earnings, he said.
“In the short term it might be difficult, but longer term, the return potential is excellent,” Robert-Jan Foortse, APG’s head of non-listed European property investments, said in an interview. He didn’t disclose the returns being targeted.
The Canadian Pension Plan is “confident in the success of the project and the revitalization of the area,” the company said by e-mail in response to an interview request.
“These projects create such a buzz and excitement that people will be drawn to it,” said Malcolm Pinkerton, an analyst at market researcher Verdict Research. “It’s so self-contained and will be a premium destination. It will still have that pull and the immediate catchment will increase with the flats.”
The builders will return to Stratford after the 9.3 billion-pound Olympic Games to turn the main arena into a soccer stadium and adapt four other venues for the public. At the same time, work will start on the construction of as many as 11,000 homes that will create five neighborhoods close to the Olympic Park.
Workers in the City of London financial district are closer to One New Change, a mall that includes 220,000 square feet of retail space, than Stratford. It may be difficult for Westfield to attract wealth to pay a visit, according to Matthew Hopkinson of the Local Data Company.
“The jury is out,” Hopkinson said. “There will have to be pretty busy Olympic venues after the games to create a flow of people. The area needs to attract an influx of wealthy people to either live there or be willing to visit for the day.”
The mall will be in one of London’s poorest areas. In 2007, the London borough of Newham was ranked the sixth-most-deprived district in England, according to state data. More than 350 were assessed. More than 40 percent of the 250,000 population is under 25 at a time when youth unemployment is at a record in the U.K.
Given the amount of work that needs doing to the area, retailers may be able to drive down rents in the mall and secure shorter leases with get-out clauses, Hopkinson said. Prime rents in London shopping malls are generally 400 pounds to 450 pounds a foot on an annual basis, which is likely to be higher than the Stratford mall, according to Harm Meijer, an analyst at JPMorgan Chase & Co. Westfield declined to say how much it’s charging.
“They may have to do some deals in terms of incentives,” said Winston Sammut, managing director of Maxim Asset Management. “The rents are going to be reasonably strong, but whether they’ll equal the premium rents remains to be seen.”
Morningstar’s Courtney expects rents to be at lower end of the prime retail rent scale because it’s in a less favorable location than Westfield White City.
The mall will also be one of the best-connected destinations in London, according to the Olympic Park Legacy Company. Nine rail lines will serve the area, including connections to mainland Europe as well as the planned Crossrail stop at Stratford Regional Station, beginning in 2017.
Westfield doesn’t intend to sell any more of the Stratford mall, Lowy said. The company does aim to sell off other assets, predominantly in the U.S., and some in the U.K., and use the proceeds for development projects.
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