UPDATE 1-Simon says owning real estate is best for Target

LOS ANGELES, May 18 (Reuters) - Simon Property Group Inc SPG.N told Target Corp TGT.N the discount retailer would be better served by maintaining ownership of its real estate rather than transferring it to a separate company.

Pershing Square Capital Management, the hedge fund engaged in a proxy battle with Target for weeks, has proposed that the retailer transfer its real estate into a new independently controlled and managed company to be eventually taken public.

In a letter addressed to Target Chief Executive Gregg Steinhafel, Simon President and Chief Operating Officer Richard Sokolov laid out several concerns about the proposal.

“Transferring all of this real estate would constrain Target’s future ability to benefit from the value that could be created in this real estate,” Sokolov said in a letter made public in a filing on Monday.

Among other things, Sokolov questioned whether the proposal would deliver the value creation expected by backers. He added that it also could result in a credit rating downgrade, higher borrowing costs and decreased financial flexibility.

“We believe that Target would be better served maintaining its ownership of the real estate within its structure,” Sokolov said.

Pershing, headed by investor William Ackman, recently disclosed that it owns 24.8 million shares as of March 31, down from 26.8 million shares reported in December 31.

The hedge fund’s 7.8 percent stake in Target, as of May 1, included common stock, options and other over-the-counter securities. (Reporting by Lisa Baertlein; Editing by Richard Chang)