Waiting for Westfield

A shift from ownership to development promises to deliver the goods for Westfield shareholders. But when?

It may be the heavyweight of the Australian property industry, but Westfield Group (WDC) has outlined a future that encompasses a far more nimble approach than in past years.

The strategy shift, however, has yet to pay off. After delivering a 35.7% drop in first half earnings that largely was in line with guidance, joint chief executives Stephen and Peter Lowy plan to continue their focus on shopping mall development and management with a reduced reliance on ownership (see my earlier article, Stark choices when shopping for Westfield).

After raising almost $5 billion in sales, the disposal of non-core assets will continue, as will the shift towards joint ventures – seeking out partners to tip capital into existing assets – and redeploying that capital into new development opportunities.

The shift in consumer behaviour towards more online transactions has wreaked havoc on traditional retailers in the past five years, with the shockwaves moving up the chain to landlords.

As the world’s biggest mall operator, Westfield has been forced to adapt to the changes. In some areas, though, it has met with only mixed success.

Its foray into Brazil – in partnership with a domestic entrepreneur – was dissolved during the period after divisions over strategy emerged, highlighting the company’s determination to move on when things don’t work out.

The divestment program proceeded at a cracking pace. In March it sold a half share in six Florida properties – raising almost $700 million – to private equity group O’Conner Capital Partners.

That followed similar global joint ventures with the Canada Pension Plan Investment Board, Starwood Capital Group and Hammerson and follows the 2010 spin-off of the Westfield Retail Trust (WRT).

Due to watertight agreements, however, Westfield retains management rights within the joint venture arrangements. In fact, the parent company could sell down to a minimum 25% ownership of most of its malls but still operate them.

The effect of that strategy shift was reflected in the accounts, as net property income dropped 5% and management income rose 7%. Rent growth, however, remains sluggish.

The upside for Westfield rests largely on its $12 billion development pipeline and particularly its UK developments.

The Lowy family recently sold its stake in the domestic based Westfield Retail Trust which delivered a result that was slightly ahead of expectations.

With domestic retail conditions remaining tough, particularly in the New Zealand portfolio, that strategy appears to have been sound.

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