ANALYSIS-General Growth's good stuff attracts suitors

Fri Feb 19, 2010 8:52pm GMT

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By Ilaina Jonas

NEW YORK Feb 19 (Reuters) - General Growth Properties GGWPQ.PK at first glance doesn't appear to be a company that can afford to spurn a $10 billion takeover offer.

For one, the nation's No. 2 mall owner, in bankruptcy since April, has been grappling with falling rents and rising vacancies.

But Chicago-based General Growth can afford to be choosy. It owns a number of malls that generate tremendous cash, and demand for such properties hasn't waned.

"They own a lot of prime assets that are income-producing," said Dan Fasulo, managing director of real estate research firm Real Capital Analytics. "There is still a tremendous amount of the capital around the world that needs income, and still there are only a finite amount of assets to buy that can provide not only capital preservation but income."

On Tuesday, Simon Property Group Inc (SPG.N), the nation's largest mall company, went public with its offer. General Growth has said it needs to consider other offers, as well as attract investors so it can operate as a stand-alone company.

Toward that end, the company is seeking to raise as much as $2 billion from the public markets, a source familiar with the situation said on Thursday, and General Growth's premium properties will be the draw.

The sought-after properties -- including malls like the Ala Moana Center in Honolulu, and Fashion Show in Las Vegas -- are located in densely populated or difficult-to-build areas. Others such as Valley Plaza Shopping Center in Bakersfield, California, and Tucson Mall, in Arizona have low mortgages and throw off a lot of cash.

To be sure, some of General Growth's malls are duds and the company has been shedding them over the past year.

Still, General Growth overall can expect a premium because of the scarcity of high-quality malls available for sale.

That's because about 70 percent of such malls are in the owned by a handful of publicly traded companies. In other types of commercial real estate, such as offices or apartments, publicly traded company ownership concentration is about 10 percent to 15 percent, said Jim Sullivan, Green Street Advisors managing director.

"Because the mall business is so consolidated versus other property types, portfolio deals are few and far in between," Sullivan said.

With their long-term leases and municipal and cost barriers that hold down supply, high-quality well-located malls are a magnet for large institutional buyers seeking steady returns, such as insurance companies, pension funds and sovereign wealth funds.

"They all have long-term income needs, and they're all fighting over assets that can provide that feature," Fasulo said.

The interest in General Growth reflects investor demand for high-quality steady income-producing commercial properties of many types. Investors who were holding out to buy great assets at distressed prices may be sorely disappointed.

Lenders have been extending loans, which has translated into few sales of any property types.

"There's so little product on the market that when something does come out, it's getting a real premium," said a top U.S. broker who was not authorized to speak to the media.

"That means you get an increase in pricing, and I think the pricing could be 30 percent off the bottom roughly."

Even with the premium, buyers are not paying anywhere near peak prices, the broker said.

"You still are going to get it cheaper than in 2007," he said. "It's not 50 percent cheaper."

For example, the Helmsley Carlton House hotel on Madison Avenue in Manhattan is up for sale and has attracted more than 30 well-qualified bidders. In San Francisco, real estate investors are eagerly awaiting for 333 Market Street, which is fully leased to Wells Fargo & Co (WFC.N), to hit the market.

The value of U.S. commercial real estate is off 40 percent since prices peaked in the second quarter 2007, according to the MIT Center for Real Estate.

But there is plenty of money sitting on the sidelines waiting for a price they and the seller can agree on.

Since 2006, about $105 billion have been raised by U.S. closed funds for U.S. commercial property, according to Real Estate Alert, a weekly financial new letter published out of Hoboken, New Jersey. That money can be used for distressed buying. New active funds seeking $58.8 billion have raised $8.8 billion within the last few months.

The logjam may be breaking. In the fourth quarter, sales volume for commercial real estate in the Americas was down only 6 percent from a year ago, a much smaller decline than the 67 percent for all of 2009, according to Real Capital Analytics.

The supply of properties available for sale are falling into two categories: Those with lots of empty space or in sub-prime U.S. markets and those that are fully leased, income-generating properties in key U.S. cities.

The latter are attracting bidders who are running up prices.

(Editing by Steve Orlofsky)

((ilaina.jonas@thomsonreuters.com ; +1 646 223 6193; Reuters Messaging: ilaina.jonas.reuters.com@reuters.net )) Keywords: GENERALGROWTH PRICING/

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