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Simon Extending Retail Boundaries

The largest U.S. real estate investment trust is raising its international profile.

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WWD ICSC Preview issue 05/05/2008

Simon Property Group Inc., the largest real estate investment trust in the U.S., has a growing global presence.

This story first appeared in the May 5, 2008 issue of WWD.  Subscribe Today.

Simon may be best known for regional shopping centers such as the Galleria in Houston and trophy properties like the Forum Shops at Caesars Palace in Las Vegas, but the company has been doing business overseas for more than a decade and has amassed a strong international portfolio.

The bulk of Simon’s holdings are U.S. malls, along with the Mills Corp., acquired in February 2007, and Chelsea Property Group, a 2004 acquisition. International accounts for 6 percent, but that number is increasing.

“We’ve been at international for about 10 years and we’re further ahead of the curve of other [developers], buying or forming joint ventures with partners,” said Stephen E. Sterrett, executive vice president and chief financial officer of Simon. “Business in the U.S. is okay, but the economy’s clearly slowing down. We’re looking for opportunistic international growth where can we invest our money profitably.”

Simon’s first foray into Europe, a joint venture with J.P. Morgan Chase & Co., led to a dozen projects in France and Poland. The Arkadia mall in Warsaw, which opened in 2004, is the largest mall in Poland and Eastern Europe with 180 stores, 25 large flagships and 25 restaurants. Arkadia is owned by European Retail Enterprises, whose main shareholders are Simon and the Peabody and Argo investment funds managed by J.P. Morgan and the O’Connor Group Inc. BEG Ingenierie Polska and Cefic Polska, which is involved in shopping center management, operates the center.

Simon’s next stop was Italy, where it formed a partnership worth almost $1.1 billion with department store and hypermarket operator Rinascente Group to own and manage shopping centers throughout the country. Most of the centers are anchored by Auchan. Simon in June unveiled Porta di Roma, a 1.3 million-square-foot mall, a joint venture between Gallerie Commerciali Italia, Simon’s Italian partnership with Groupe Auchan. Porta di Roma is Italy’s biggest mall, but two other Simon projects in Naples and Milan stand to eclipse it; each will have 1.7 million square feet of space.

“If there’s one common theme to France and Italy it’s that we have good local people,” Sterrett said. “Given our experience in the [U.S.] and given the size and complexity of the U.S. market, we have some pretty unique ideas about leasing, management. We’ve done a really good job of helping our local management teams build better products. They’re the local experts and they know how to get properties entitled and built.”

Finished shopping centers in continental Europe can be vastly different from regional malls in the U.S., where department stores or mass merchants occupy anchor space and smaller spaces are leased to luxury brands.

“The concept of the department store as we know it doesn’t exist,” Sterrett said. “Centers are mostly enclosed and mostly filled with moderate to better goods. Most of the true luxury tenants tend to be in the old palazzos and city centers. You won’t see luxury goods at our centers.”

For example, Porta di Roma is anchored by Auchan and features a 14-screen UGC movie theater. Other tenants include Ikea, Coin, Décathlon, Douglas, Fnac, Hennes & Mauritz, Zara, and Zara Home. Sterrett sees enticing opportunities abroad, where many countries are still considered understored. The U.S. has 20 square feet of retail space for every man, woman and child, while in continental Europe the number is about 2 square feet. “Our centers in Europe and Japan are, if not 100 percent leased, then very close,” he said. “Our ability to charge rent is very good and sales productivity seems to be pretty high.”

Simon’s Chelsea outlet division unveiled the third phase of Gotemba Premium Outlets, Japan’s largest outlet center located 60 miles west of Tokyo. Gotemba opened in 2000 and 170,000 square feet were added in 2003. The latest 95,000-square-foot expansion brings the total gross leasable area to 485,000 square feet.

The Japanese penchant for high-end brands is apparent at Gotemba, where Giorgio Armani, Bottega Veneta, Dolce & Gabbana, Gucci and Polo Ralph Lauren have outlet stores. Marni, Jil Sander and Issey Miyake and Y’s are among the recent additions. Gotemba has even become something of a tourist attraction.

“Gotemba sits in the shadow of Mount Fuji,” Sterrett said. “People call it the Woodbury Commons of Japan.”

Elsewhere in Japan, Chelsea Japan, a joint venture of Simon, Mitsubishi Estate Co. Ltd. and Sojitz Corp., owns and operates six Premium Outlet Centers in the Tokyo, Osaka, Kobe, Nagoya and Fukuoka markets. An outlet center is under construction near Sendai City and is scheduled to open in the fall, while a mall in Ami, northeast Tokyo, is slated to bow in 2009.

Outlet malls are growing in popularity in many parts of the world. Simon built an outlet center in South Korea and will begin construction on a second, Sterrett said. The company also developed an outlet center in Mexico. “We’re looking at two or three other markets,” he said.

Working with Morgan Stanley’s real estate fund and Szitic, the regional development fund of the Chinese government, Simon’s strategy for China calls for five malls to be built with Wal-Mart as the anchor and several hundred thousand square feet of smaller shops. The first mall is set to open this summer with the remaining four launching early next year.

Simon isn’t importing American retailers to its centers overseas.

“There are certainly U.S.-based retailers who are interested in China and the fact that they have the opportunity to deal with an American owner and developer in leasing is a plus,” Sterrett said. “Are we systematically trying to drag U.S. retailers abroad? No. Once they make the decision to expand internationally, their relationship with us may make it be easier to get a deal done.”

Of all the BRIC (Brazil, Russia, India and China) countries, Simon has penetrated only China. “We’ve been working on forming a joint venture with an Indian organization,” Sterrett said. “We’re not quite done with forming that joint venture, but it’s a country we’re interested in.

“In Russia, much like India, we’ve gone down the path twice with potential partners, but haven’t gotten to the finish line,” he said. “We’re interested in all the large emerging countries, Brazil, Russia, India and China. The one that happens to be the farthest along is China.”

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