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American Excess Heads East

In the mid-90s, the King of Prussia Mall outside Philadelphia underwent an incredible transformation.

Its owners, including Kravco and Simon Property Group (NYSE: SPG), renovated and expanded the mall, connecting its two sections (the Court and the Plaza) to turn KOP into one of the largest shopping malls in the U.S. More importantly, the mall saw a huge influx of specialized, boutique and brand-name merchants, as well as higher-end anchor tenants like Nordstrom and Neiman Marcus. Suddenly, King of Prussia was no longer a mall; for the region’s shoppers, King of Prussia was THE Mall.

The enormous growth that turned King of Prussia (now majority-owned by Simon Properties) into a retail mecca was something that occurred throughout the country–a culmination of the 80s’ unbridled consumerism and emphasis of the shopping mall “experience.”

Today, e-commerce is crushing many community malls and power centers, and even the highest-end regional malls (KOP included) aren’t drawing shoppers the way they once did. But the “mega-mall” as we knew it in the 90s hasn’t gone away, but simply migrated to other countries.

Like Russia. 

The New York Times published a fascinating article about the increasing popularity of enormous, American-style shopping malls in the former Soviet nation. NYT’s Andrew Kramer writes,

Instead of bread lines, Russia is known these days for malls. They are booming businesses, drawing investments from sovereign wealth funds and Wall Street banks, most recently Morgan Stanley, which paid $1.1 billion a year ago for a single mall in St. Petersburg.

One mall, called Vegas, rose out of a cucumber field on the edge of Moscow and became, its owners say, larger than the Mall of America if the American mall’s seven-acre amusement park is not counted in the calculation of floor space.

This news highlights one of the key international strategies we’re seeing among investors hungry for returns. Though assets in the U.S. may offer stability, they rarely offer the kind of regular income and potential resale values one finds in the top-tier markets of emerging economies (like Brazil, or in this case, Russia). Retail and shopping malls are essential to these strategies.

Last year, Simon Property made headlines with its acquisition of French retail operator Klepierre. Under its new ownership, Klepierre’s portfolio is being “Americanized,” with properties being remade to look more like American malls filled with many of the brands that Simon has established relationships with.

The strategies of Simon Properties and Morgan Stanley Real Estate Fund VII, among other companies and funds, show increasing confidence among CRE investors that foreign markets are ready for the American retail model–even as Americans are abandoning this model in favor of Wal-Mart and Amazon.

Granted, the shopping model has been tweaked to better appeal to Russian culture. Even with a growing middle class and extra disposable income, this market is emerging from very different conditions than the U.S. has experienced. One distinction to be found in Russian malls, the NYT points out, is their anchor stores, which are more often large grocery stores than department stores (demonstrating modern Russia’s preference for any food source that isn’t a bread line).

To invest in Russian real estate, American investors must be pretty confident in the stability and revenue potential of these malls–despite America’s frosty relationship with the Russian government and mounting fears of political unrest in the country.

Perhaps CRE investors realize that Putin–to prevent further mass protests–must work very hard to keep Russia’s middle class secure. A secure middle class means lots of potential shoppers for the country’s malls.

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