Westfield continues to develop its malls one BRIC at a time

Westfield Group is perhaps one of the best run global retail landlords, it’s also one of the largest. The group took an intentional decision a few years ago to offload the bulk of its Australian assets into a separately listed vehicle and redeploy capital for international development opportunities. As the US improves and the UK development pipeline generates results, the shift into places like Brazil has captured our interest. Today’s numbers from Westfield show some very positive trends, the share price is up slightly in early afternoon Sydney trading, but our eyes cannot help but take note of the numbers in Brazil, the first B of the BRIC economies the market has somewhat forgotten about in recent months as Europe, China and the United States dominate headlines.

The very first thing Westfield does whenever it puts out an earnings update is make a statement on its distribution situation, knowing very well that most of its largest institutional shareholders are yield driven. No problem here, prior guidance has been reaffirmed. As a development company, the market wants an update on future projects and again there is no disappointment here either, a firm commitment to manage $1.25-1.5bn in developments next year, of which Westfield will invest $300-500m of its own money.

Now to the most interesting part – Brazil. Around 95.6% of Westfield’s mall exposure in this economy is leased compared to 99.5% in Australia, so there is room for more upside as tenancy trends improve. The proportion of rent tenants in Brazil pay relative to global peers is low at 10.2% of sales, so also more upside in rent increases here. Can tenants afford to pay more rent in Brazil? We think they can and this is underscored by comparable sales growth in Brazil specialty stores of 14.5%. That’s right, 14.5% comparable revenue growth. Even with an improvement in US sales, comparable growth there is only 8.4%. In Australia it’s 1.2%. Cash registers are ringing very loud in Brazil even before the 2014 World Cup, which Westfield will no doubt see as an opportunity to splash around its brand, as it did at this year’s London Olympics.

These numbers above highlight why Brazil is such an attractive development market. Brazil does have much higher inflation which explains part of the story, but inflation is good when you are developing assets. Investors chase infrastructure and property investments. Westfield is likely to increase its presence here gradually and then release capital like it did in Australia when the time is right. Brazil is still only 1% of assets under management, so scope for growth is huge. Should expansion into Brazil work out for Westfield other BRIC economies will no doubt be targeted. This is what makes Westfield such an attractive investment, it is very well placed to export a very successfully development and operating model to the world’s growing middle class.