European retail development, once prohibitively expensive for U.S. real estate companies, now looks promising. Simon, for one, is upping its ante with a joint venture to own, manage and develop new shopping centers throughout Italy.

The REIT is partnering with Italian hypermarket chain Rinascente Group in a venture called Gallerie Commerciali Italia S.p.A. Rinascente is contributing 38 shopping centers valued at about $1 billion, and Simon will purchase a 49 percent stake in the venture for about $500 million, at a cap rate of 6 percent. Together, they will develop about $250 million worth of new properties next year, and could build as much as 4 million square feet within the next five years.

CROSSING BORDERS

Until recently, U.S. firms stayed out of Europe. The shortage of developable space meant low cap rates. Italy, for example, has 5 percent the supply of retail real estate per capita that is available in the U.S. But as U.S. space shrinks, and along with it, cap rates, Europe looks more appealing. “The Simon transaction looks expensive on the basis of cap rate, but not quite so pricey on the basis of price per square foot and the price-to-tenant sales ratio,” says Morgan Stanley analyst Matthew Ostrower.

Simon is following Mills Corp. to Europe. Arlington, Va.-based Mills opened its first international mega-mall, Madrid Xanadu, earlier this year. It's also pursuing developments in Seville, Rome, Milan and Florence and may make a major European acquisition in 2004, according to one analyst. And General Growth Properties is rumored to be seeking property abroad.

The REITs are taking different tacks. Where Simon is contributing money and its partner will handle management and leasing decisions, Mills raises joint venture capital and then books development and management fees. “Mills is creating leasing synergies by building retail-and-entertainment projects that are similar to the United States, albeit a bit higher end,” Citigroup Smith Barney analyst Jonathan Litt says.

John Bucksbaum, CEO of General Growth Properties, says his company is evaluating international expansion opportunities, but hasn't found anything yet worth jumping on. “International activity is a logical future step for large commpanies like ours. The retail industry is increasingly globalizing.” Bucksbaum adds that low cap rates are only one of several factors pulling U.S. developers overseas. Opportunities to expand a national platform of marketing and leasing commonalities to international holdings are even more important, he says, to companies that are chasing growth.