In our article on the merits of managed purpose built student accommodation (PBSA) set against other property investments, we painted a very bearish, pessimistic picture of the outlook for retail space with regard to future asset growth and rental yields.
We have now seen reports in the Daily Mail that the hedge funds in Wall Street and London are taking big short positions against companies with exposure to retail assets.
‘Short’ in this context means an expectation of a decrease in value or share price.
1) Alder Hill Management
Alder Hill Management is a New York based hedge fund run by Eric Yip. He is gambling that the US is facing a retail implosion.
Using a previously little known index, he is betting that bonds containing mortgages paid by shopping malls default on payments as stores go bust.
The Wall Street Journal has reported that Yip has bet $80m of his $155m hedge fund on these bonds – known as CMBX6. This is an enormous bet, even by hedge fund standards.
Yip has written a dossier on the outlook for US retail, which he is circulating. As a former investment analyst who worked for the legendary Carl Icahn, he has a point of view to which the market will listen. The CMBX6 is a credit default swap that bets on whether mortgages on shops will be repaid. Of the 1,500 loans, 40 are retail mortgages – most of whose businesses are producing consistently weak sales data.
With more retail bankruptcies reported in the first quarter of 2017 than in the whole of 2016, Yip’s timing looks inspired.
The biggest threat to US economic stability would be a sharp rise in US interest rates. Were this to happen, Yip’s bet would come good very quickly.
The nature and size of this bet is reminiscent of the big short positions taken in US subprime debt just before the credit crunch in 2008. Bets against the owners of shopping malls are climbing steadily, with the emphasis on the small malls collapsing first.
2) UK property shares
Currently, 2.84% of Capital & Counties real estate company is being shorted in a £76m bet.
Intu Properties, which owns the Trafford Centre in Manchester, is being shorted by Odey Asset Management. They have a short position of 1.94%.
Key conclusions for investors
- Reinforces the view that property equities and direct property funds are high risk investment vehicles
- Managed purpose built student accommodation remains the safest option