May the Force be with you

In 1959 two Hungarian immigrants pioneered retail shopping in Australia. Frank Lowy, a small goods retailer and John Saunders, a one-time milk bar owner, raised capital to construct a shopping centre at Blacktown in the western suburbs of Sydney. It was a huge risk but ultimately they raised enough money to create Westfield Investments Pty Ltd.

In 1977 a young filmmaker pioneered motion picture special effects by creating Star Wars. George Lucas was contracted by Fox Studios and in 1975 he was attempting to finance Star Wars: From the Adventures of Luke Skywalker. It was a huge risk but ultimately Fox was able to approve a budget.

The first Westfield Centre cost £250,000. Today the Westfield Empire is worth $70 billion.

The first Star Wars movie cost $11 million to produce. Today the Star Wars empire has grossed $27 billion in box office and merchandise sales.

There are recognisable correlations between these two remarkable success stories. Growth was driven by the imagination, vision and drive of highly intelligent, resourceful individuals. Both used existing archetypes to create their vision. Both experienced growth beyond the realistic expectations of their creators and both grew to become global behemoths.

While the success of the two franchises is undeniable, in recent times both have been dogged by claims of greed and self-indulgence.

In 1999 George Lucas expanded the Star Wars universe to include the three prequels, beginning with Star Wars Episode 1: The Phantom Menace. Gone were the special effect miniatures, the myth of “the Force” and the easy to follow storyline of two droids and a rebellion. In their place were computer generated imagery (CGI), something called midichlorians, subplots involving trade blockades and a character so irritating you’d have to wonder whether any child would like him: Jar Jar Binks.

While no film was ever going to match the expectations created by the earlier instalments, the cynical merchandising of the new series and lines like, “I’m haunted by the kiss that you should never have given me,” inevitably lead fans to question the motives and sensibleness of the new trilogy. It has been parodied by The Simpsons, South Park and Robot Chicken, and was even the subject of the documentary, The People vs. George Lucas. Just as we may ponder whether a young George Lucas would approve of his new movies, we must ponder what a young Lowy would make of the current corporate actions that have been forced on the Westfield Empire.

Like each new Star Wars instalment, each Westfield restructure is met with anticipation and speculation. Throughout the Westfield Group (WDC) saga there have been numerous capital restructures, cross listings and new company creations. The most recent corporate action has been the most controversial. Westfield Retail Trust (WRT) made history with the adjournment of its meeting just moments prior to the scheduled vote on the proposed restructure when it became clear it didn’t have the numbers.

Many WRT shareholders, including John Pearce from Unisuper, were strong critics of the restructure. The new structure of WRT changes its underlying assets to include some higher risk development projects and with them additional leverage. WRT investors also felt they were entitled to more shares in the newly created Scentre Group than the proposal offered. WRT shareholders argue the value given to managing assets is overvalued. The perception of a controlling empire overwhelming a small group of rebels has tarnished the Westfield brand. The board has pushed through a restructure that seemingly benefits shareholders of WDC with all the subtlety of Governor Tarkin of the Death Star negotiating with Princess Leia over Alderaan.

The actions of the Westfield board have an enormous impact on the Australian property market and can potentially have an enormous impact on your property portfolio if your investments are weighted based on market capitalisation. WDC and WRT together make up over 30% of the S&P/ASX 300 Index. There are many A-REITs on the ASX with quality assets, low gearing and low premium to net tangible assets. Only the Market Vectors Australian Property ETF (ASX code: MVA) tracks an index that caps individual securities at 10%, meaning it is much less exposed to Westfield securities than other property ETFs, making for a better diversified portfolio. In the twelve months to 31 May 2014 the index that MVA tracks has returned 9.28% against the comparable S&P/ASX 300 A-REIT Index, which has returned 6.46% (source: Bloomberg).

George Lucas recently sold the Star Wars franchise to Disney. These days Disney has a well-diversified stable of franchises, including Marvel, Pixar and its many Disney original properties.

Like Disney, you should diversify your portfolio so that it is not dominated by a single company and is not exposed to the whims of a few influential creators.

With MVA you can get diversified exposure to an alliance of 15 A-REITs in a single trade on the ASX.

May the Force be with you.

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