When it comes to real estate investment, shopping malls are a unique and potentially lucrative asset. However, as the market evolves, investors need to carefully weigh the benefits and risks of Mall REITs (Real Estate Investment Trusts) before committing their capital. This article breaks down what Mall REITs are, their advantages, challenges, and potential alternatives for investors seeking more control over their investments.

What is a Mall?

A shopping mall is a commercial property designed to offer retail goods and services in an enclosed environment, with stores typically facing inward and connected by common walkways. The parking lots are situated around the mall’s perimeter. Malls are often large, with anchor stores such as department stores, along with a variety of smaller retail options, ranging from clothing to electronics and jewelry. However, as e-commerce continues to grow, the role and profitability of traditional malls are facing challenges.

What is a REIT?

A Real Estate Investment Trust (REIT) is an investment firm that specializes in owning, operating, or financing real estate properties. REITs are required to distribute a significant portion of their income as dividends to shareholders, which provides tax advantages. REITs can be publicly or privately traded, and investors can purchase shares in them to earn a portion of the income from the properties the REIT owns.

In the context of malls, a Mall REIT is a firm that owns and manages shopping malls, such as Simon Property Group, one of the largest owners of mall properties, managing over 191 million square feet of retail space.

Why Invest in Mall REITs?

Mall REITs can be appealing to investors for several reasons:

• Liquidity: Publicly traded REIT shares offer liquidity similar to stocks or mutual funds, allowing investors to buy and sell easily.
• Diversification: A Mall REIT may own numerous malls, each with a wide variety of tenants. This provides investors with exposure to different businesses and locations, helping to spread risk across multiple assets.
• Income: Mall REITs typically offer high dividend payouts, providing investors with passive income. When combined with property value appreciation, these investments can deliver strong total returns.

However, Mall REITs are not a one-size-fits-all solution for every investor.

Who Should Consider Mall REITs?

Mall REITs are ideal for investors seeking liquidity, income, and diversification within the commercial real estate sector. These investments also offer tax benefits, making them attractive for certain portfolios. However, potential investors should be aware of the risks involved.

Key Metrics for Evaluating Mall REITs

Investors should consider several key metrics when assessing the financial health of a Mall REIT:

• Funds from Operations (FFO): This metric calculates the cash flow generated by the REIT’s operating activities, excluding non-cash expenses like depreciation. A healthy FFO is essential for profitability.
• Net Asset Value (NAV): NAV indicates the total value of the REIT’s assets minus its liabilities, divided by the number of outstanding shares. Comparing NAV to share price can help investors gauge whether a REIT is undervalued or overvalued.
• Cap Rate: The capitalization rate (Cap Rate) measures the return on a property based on its net operating income (NOI) divided by its market value. Lower cap rates generally indicate higher property value.

Types of Malls and Their Investment Potential

Within the Mall REIT sector, different types of malls offer varying opportunities and risks:

• Super Regional Malls: These large malls, with over 1 million square feet of leasable space, typically feature three or more anchor tenants and hundreds of smaller retailers.
• Regional Malls: Slightly smaller, these malls have between 400,000 and 800,000 square feet of space, typically with two or more anchor stores and up to 80 non-anchor tenants.
• Factory Outlets: These centers, ranging from 50,000 to 400,000 square feet, feature discounted brand-name goods and cater to shoppers from a wider trade area.

Each type has its own appeal depending on factors like size, tenant diversity, and location.

Risks of Investing in Mall REITs

Despite the potential rewards, Mall REITs come with several risks:

• E-commerce Competition: Online shopping continues to outpace physical retail, reducing foot traffic and sales for mall tenants. This shift poses a significant challenge to the profitability of mall properties.
• Interest Rate Sensitivity: Rising interest rates can increase the cost of financing, potentially impacting the REIT’s ability to generate returns.
• Tax Changes: While REITs benefit from tax advantages, shifts in tax laws could undermine these benefits.
• Liquidity Risks: Unlike stocks, real estate investments in Mall REITs often require time to appreciate in value. As malls face increasing irrelevance, liquidity becomes more challenging.
• Market Conditions: Each mall’s success is influenced by local market dynamics. In declining markets, the risk of investing in Mall REITs grows, while properties in thriving markets can perform better.

Why a Single Deal Private Equity Syndication Might Be a Better Choice

While Mall REITs offer diversification, they do so at the cost of transparency and control. With a REIT, investors contribute to a blind pool, meaning they have no control over which properties the fund will acquire.

In contrast, a single deal real estate syndication allows investors to know exactly where their money is going. This structure enables investors to conduct thorough due diligence on the property’s market, tenants, and physical condition, even visiting the site if desired. Additionally, it allows for more personalized portfolio diversification, where investors can choose to invest in deals they believe in and avoid those that don’t align with their strategy.

For instance, while many traditional malls may be losing relevance, grocery store-anchored retail centers remain stable and offer strong long-term potential. Single-deal syndications can offer more attractive opportunities like these, giving investors greater control and transparency.

Conclusion

Investing in Mall REITs can offer benefits such as liquidity, diversification, and income, but the risks involved, especially in light of e-commerce competition, may not make them the best choice for every investor. For those seeking more control and transparency in their real estate investments, a single deal syndication structure may offer a better alternative.

By choosing where to allocate capital more strategically, investors can build a portfolio that better aligns with their financial goals and risk tolerance.