Westfield Corp Ltd chair Frank Lowy told the company’s annual meeting in Sydney last week its focus on flagship assets had kept it ahead of the competition. His sons, Peter & Steven, who are co-chief executives, elaborated – including a new focus on apartment development at some sites.
Westfield restructured in 2014, creating Westfield Corp as owner of its northern hemisphere assets and Scentre Ltd as owner in Australia & New Zealand, all still flying the Westfield flag.
Westfield Corp made $US1.4 billion profit in 2016, including over $US1 billion in revaluation gains, which Frank Lowy said was largely driven by the value generated from its development programme: “Our strategy is to create & operate flagship assets in leading markets that deliver great experiences. We are focused on innovation. Our aim is to create a digital platform that complements our physical portfolio and provides a better connection between retailers, brands & consumers.”
Decline of the secondaries
He said 2 factors were impacting the US retail environment: “The first is the decline of what we refer to as secondary centres, and the second relates to the US department store business.
“On the issue of secondary centres – it has been evident to us for some time that the US is ‘over-retailed’. Put simply, there is too much retail space in that market. This has put pressure on any retail asset which is not considered to be the primary asset in the relevant market.
“At Westfield, for more than a decade, we have been discussing publicly the division of the shopping centre industry – between flagship assets & secondary assets.
“Since 2010 we have been steadily reducing our investment in secondary assets and increasing our focus on the best assets in the best markets – the assets we refer to as flagship centres.
“The difference in performance between flagship centres & secondary assets is obvious when you look at our portfolio metrics. Our flagship assets, which today represent 82% of our portfolio, command higher rents and have higher levels of occupancy & sales growth.
“In executing our flagship asset strategy since 2010, we have divested 29 secondary centres in the US & UK, with a total value of $US 7 billion. We have also joint-ventured 22 assets, raising $US4.6 billion of additional capital. Those proceeds have been reinvested in our $US9.5 billion development programme which is now underway – all with the aim of creating the highest quality retail portfolio in the world.
“When our current development programme is completed in 2020 or 2021, we expect that 90% of our portfolio will comprise flagship centres, with 9 of those centres expected to achieve sales of more than $US1 billion, pounds or euros each year.
Department stores finding new life in malls
“The second factor impacting US retail is the well publicised decline in the US department store business. As most of you know, Westfield has been involved in the shopping centre business in the US since 1977. Since the mid-1980s, we have witnessed a decline in the importance of the department store business in that market. The current weakness is the culmination of a trend which has been in progress for a very long time.
“It is now generally accepted that retailers in the US, including the department stores, need less physical stores to service the markets in which they operate. Recognising this trend, in recent years we have bought back department store space and repurposed that space to introduce new & more productive retailers – retailers who have greater capacity to attract shoppers to our centres. Our expectation is that this trend will continue in future years.
“The department stores also recognise the value of locating their stores in our flagship assets. At the moment, a number of different department stores are opening new stores in our developments whilst closing many stores in other locations. It is these factors which have driven us to reposition the Westfield portfolio toward flagship assets to ensure that the changes in the retail environment have a positive, rather than a negative, impact on the company.
In 2016 our flagship centre strategy was in evidence with the launch of Westfield World Trade Centre. Westfield owned the retail component of the Twin Towers on 9/11 and the journey to its rebirth was long & complex, but the result is something that our company, and the city of New York, can be very proud of. Our centre forms part of an incredible landmark, something befitting the history, culture & people of New York.
Westfield advances digital programme
“In 2016, we took a further step in the evolution of our digital programme. In the shopping centre industry we know we must constantly change & evolve. In the digital world we must move at a faster pace, constantly testing new technologies, and using our data to deliver the best experience.
“To achieve this we have created Westfield Retail Solutions to take a broad approach to digital products, data analytics & all aspects of the Westfield business to create seamless solutions for our consumers, retailers and brand partners.”
Peter Lowy told the annual meeting: “On completion of our development programme, we will have a portfolio of between $US45-50 billion, with 9 centres expected to have annual retail sales in excess of $US1 billion and average flagship specialty sales of over $US1000/ft² ($NZ15,480/m²).
“It is worth noting that, in additional to our retail development programme, we have significant residential rental opportunities. We have identified the opportunity to build about 8000 apartments in the US & UK on land already in our portfolio. We plan to partner with third-party capital to fund the construction of many of these opportunities. These opportunities will enhance the value of our portfolio by maximising the value of our existing real estate. In 2018, we expect to commence a 1200-apartment project at Stratford in London and a 300-apartment project at UTC in San Diego.”
Big brands become the new retailers
Steven Lowy said: “We operate in an increasingly connected world, where technology & consumer behaviour moves at a much faster pace than was the case a decade or 2 ago. Retail formats are continually adapting, and not always in predictable ways. It is true that online retailing and the use of digital technology is on the rise. But it’s equally true that this is opening up new & exciting opportunities for Westfield.
“New retail formats that didn’t exist a few years ago are now among the most popular features of our shopping centres. Companies that were never regarded as ‘retailers’ are taking space in our centres – car companies like Ford, Citroen & Tesla are creating exciting new spaces to showcase their latest products. A host of global brands like Pepsi, JP Morgan Chase, Samsung, Lexus & Senheisser now feature on our state-of-the-art digital advertising screens and launch new products from London to New York to Los Angeles & San Francisco.
Other global brands are also increasing their presence in Westfield centres. Technology companies like Apple & Microsoft and the global fashion & cosmetics brands like Zara and H & M and Sephora.
“The food, leisure & entertainment aspect of our business has undergone a revolution – where once we merely provided a shopfront for a retailer selling food, we now host vibrant food concept stores like Eataly, which provide a whole new level of product & experience. In fact, food & dining now plays a vastly more important role in our centres than it used to. At Stratford in London, there are more than 80 food retailers.
“We are able to do this, to stay at the forefront of our industry and respond quickly to change, because we have continued to execute a consistent strategy. This strategy boils down to 2 key objectives: to continually improve the quality of our physical assets while integrating digital & other new technology to deliver great experiences. Both elements of this strategy are reflected in the makeup of our senior executive team.
New type of executive
“Of course, we continue to rely heavily on our traditional real estate & shopping centre management expertise. But we have also recruited executives from the digital, entertainment & advertising sectors. [Westfield Retail Solutions executive director] Don Kingsborough has been building a technology team drawn from companies like Google & PayPal, and we recently acquired a small Broadway production company to build our capacity to create even better experiences in our centres.
The £600 million redevelopment of Westfield London is 6 months ahead of schedule and we expect the project to launch in early 2018. Upon completion, it will be the largest shopping centre in Europe. Our 2 London centres already generate around £2.2 billion of retail sales from 75 million annual customer visits. The $1.1 billion expansion of Valley Fair started last year. Valley Fair is currently one of the most productive centres in the US, with annual specialty sales of around $US1200/ft² ($NZ18,575/m²).
“The chairman briefly described the major changes underway with department stores globally, but especially in the US. Again, by anticipating this long-term trend, Westfield has been able to benefit.
“As underperforming department stores close in less attractive markets, they are opening new stores in our flagship development projects. We will see a new Nordstrom store open at Century City in Los Angeles and another at UTC in San Diego. Bloomingdales will open a new store at Valley Fair in Silicon Valley. France’s biggest department store, Galeries Lafayette, will open their first store in Italy in our new centre in Milan, and John Lewis will have a new store at Westfield London.”
Attribution: Company AGM speechnotes.