Bloomberg

(Bloomberg) -- Think twice before chasing the rally in Brazilian mall stocks.

That’s the message from analysts surveyed by Bloomberg, who overwhelmingly advise against adding to investments in developers like Multiplan Empreendimentos Imobiliarios SA, Iguatemi Empresa de Shopping Centers SA and BR Malls Participacoes SA.

Mall operators have held up better than many of the retailers that fill their centers, and that resilience has helped their stocks rally 54 percent this year, according to a weighted average of seven mall owners. That’s almost three times the return for the benchmark Ibovespa.

But as much as Brazilians love to shop, the worst recession in more than a century -- not to mention the presidential impeachment crisis -- will probably undermine prospects for a turnaround in mall occupancy. An analysis by Credit Suisse Group AG published last month showed that one-third of major mall retailers were facing serious financial distress, led by apparel companies, which take up 63 percent of mall floor space. The real-estate companies that count on them for rental income are hardly immune.

Replacing Tenants

Credit Suisse analysts including Nicole Hirakawa and Luis Stacchini said they no longer see malls as a wise bet on Brazil and that net income will probably fall this year across much of the sector for a second year.

“Vacancy and delinquency risks are higher, and the key factor will be the ability to replace retailers reducing store fleet and the ones that will go bust,” they said.

A total of 12,000 mall stores stand empty, according to a recent Ibope Inteligencia study. That’s about 15 percent of the total square footage. If grouped together, the space would equal that of 58 phantom malls of 323,000 square feet (30,000 square meters) each.

Vacancy levels are higher in malls that opened in the past three years, the Ibope study shows. In newer centers, as much as 45 percent of stores are empty, while fewer than 10 percent are vacant in malls opened before 2012, prior to the economic slowdown and eventual collapse.

Like new condominiums and suburban housing projects, the proliferation of malls was among the most visible signs of Brazil’s economic boom in the previous decade, which helped shepherd some 40 million people out of poverty and into the middle class. In the go-go years, Brazilians not only had money but were willing to spend it. A McKinsey & Co. report showed that 46 percent of Brazilians considered shopping among the best ways to spend time with their families.

Boarded-Up Space

In the heart of Vila Olimpia, a bustling commercial district in Sao Paulo, at least 30 boarded-up retail spaces stand out in the ShoppingVilaOlimpia mall. The complex, which opened in 2009, had a 94 percent occupancy rate in December, compared with an average rate of 98 percent among all the malls in the portfolio of its operator, Multiplan.

Multiplan said it’s always changing the retailers in ShoppingVilaOlimpia to meet the needs of consumers. Some of the available retail space is under negotiation for rent and some is about to be leased, according to the company.

“The flow of people into the ShoppingVilaOlimpia mall grew 21 percent per year on average since 2010 and sales almost doubled in the same period,” the company said in an e-mail.

Saturday Crowds

It’s not all bad news for malls, of course. A notable exception is Catarina, an 18-month-old outlet center about an hour-drive from downtown Sao Paulo. On a recent sunny Saturday afternoon, Catarina was packed, with most visitors holding multiple shopping bags. The mall caters to Sao Paulo consumers on weekend trips to the countryside as well as middle-class shoppers from nearby towns. It features a wide range of clothing stores, from Hering -- a Brazilian version of Gap Inc.’s Old Navy -- to luxury retailers such as Tory Burch and Armani.

Catarina’s sales grew 69 percent in the fourth quarter, compared with the same period last year, JHSF Participacoes SA, which owns the mall, said in an e-mail.

Among other retail developers, Iguatemi and BR Malls still have growth potential, according to Marcelo Motta, an analyst at JPMorgan Chase & Co. in Sao Paulo. He has an “overweight” rating for both, and “neutral” recommendations for BR Properties and Multiplan.

Bargaining Power

Iguatemi and BR Malls have scale, which gives them bargaining power with store owners to keep their malls full. Iguatemi’s centers cater to wealthier shoppers, who are less affected by the economic crisis, and to the Sao Paulo market, which has been less hit than Rio de Janeiro, Motta said. As for BR Malls, Motta expects Brazil’s benchmark interest rate to drop this year, which would benefit the company’s debt payments. He also sees malls as an entertainment alternative even during crises.

Brazil’s middle and upper classes see malls as a safe haven in developing cities with high crime rates and poor options of public spaces, another reason bulls think malls are a good bet.

“We are very well positioned to endure this moment of crisis,” Iguatemi Chief Financial Officer Cristina Betts said. “It is much nicer for the consumer to go to a beautiful, well-located mall, and the retailer wants to be in a place with high traffic.”

BR Malls declined to comment. Last week, O Globo reported that the company had hired Itau BBA to negotiate a stake sale, with Blackstone Group LP among possible buyers. It didn’t say how it obtained the information.

Until now, some retailers’ rapid Brazil expansions -- Burger King, Havaianas flip-flops and L’Occitane among them -- have helped sustain occupancy. But at least some of the expansion-minded companies are nearing their full potential, according to the Credit Suisse report, auguring even harder times ahead.

Erna Akvoort used to shop for books and gifts at the Villaggio Shopping Mall in Sorocaba, near the court in which she works as a judge. The last time she went there, about a year ago, she said the experience had become depressing, with dozens of vacant storefronts. Now, the entire mall is closed.

“It has never been a busy shopping mall,” Akvoort said. “But certainly consumption as a whole fell.”

--With assistance from Adriana Arai To contact the reporters on this story: Fabiola Moura in Sao Paulo at fdemoura@bloomberg.net, Jonathan Levin in Rio de Janeiro at jlevin20@bloomberg.net. To contact the editors responsible for this story: Crayton Harrison at tharrison5@bloomberg.net, Mark Schoifet, Lisa Wolfson

©2016 Bloomberg L.P.

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