Hedge Fund Bet Turns Sour As Retail Recovers

Bloomberg reports that shorting the CDS index composed mostly of retail mortgages has posted a +8% gain this year, causing pain for hedge funds who took the short side of the trade. These indexes have been rising together with the SPDR S&P Retail ETF (XRT), which is at an important support level:

Source: Bloomberg

These hedge funds would love to see XRT broke this trendline, taking the two CDS indexes with it.

Disclosure: We don’t have any positions in XRT.

 

Malls vs Other REITs

US Mall REITs underperforming the rest of the industry:

Source: In a U.S. Mall Owner’s World, ‘Boring’ Is Actually Pretty Good

After taking a look at European REIT’s US mall problems, on the other side of the Atlantic things still look pretty dim for retail-oriented landlords. It is interesting to see that in Europe the concerns are just starting to surface, while in the US mall REITs’ share prices are stabilizing and even started to improve.

Unibail Falls on US Mall Concerns

Things have been pretty quiet on the European property market recently. So I thought I should look at it and this is what I saw.

This is a daily chart of Unibail-Rodamco-Westfield, which fell after reporting Q2 numbers and US mall concerns due to its Westfield acquisition:

Source: Bloomberg

Back to March lows, with a pretty ugly chart. This is a bit of a concern as Unibail is one of the biggest components of European benchmarks, which have fared pretty well recently.

 

Disclosure: We have no positions in URW.

Where Are We in the Cycle?

Source: Commercial Real Estate Outlook: Are Cap Rates Heading Up?

Based on this, commercial property prices are slowly turning lower, lead by the malls which have been hit hard by retail store closures. The Industrial and Manufactured Home segments look more compelling.

And this is how the different US real estate segments performed in the past 12 months:

Source: Bloomberg

The difference is striking: while the whole sector declined by more than 8%, the Manufactured Homes and Industrial segments are up more than 8%, Regional malls declined almost 14%, and Shopping centers are down 24%! This is quite a dispersion among REITs, and based on the above forecasts can last for a while.

 

Disclosure: we are long VNQ.