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Sep, 10 2010

RECESSION OVER, RESURRECTION ON

INTERNATIONAL reality retail sector is moving up but at its own pace, marred by sluggish growth. The impact of recession on retail property had been severe, primarily in the US and Europe.

INTERNATIONAL reality retail sector is moving up but at its own pace, marred by sluggish growth. The impact of recession on retail property had been severe, primarily in the US and Europe. Shopping malls and high streets, long preferred as ideal retail business destinations, are yet to show steady signs of recovery.

Are malls dying?

With recession denting the growth and development prospects of international retail in realty sector, shopping malls across the globe were the worst victims, especially in the US. The once-glorious malls closed down across the country, giving rise to the question, are malls dying a natural death in the US? From the Harundale Mall closing down and emerging as a simple shopping plaza to increasing number of websites on 'dead malls' across the US, the devastating impact of the downturn stands out clear. The alarm bells had sounded prior to recession in fact, with malls, both in cities and suburbs, losing out to chain discounters like Walmart and Carrefour, and to bigger, better and freshly built malls across the country. According to Cushman & Wakefield report-2009, credit crisis and the resultant global recession had a severe impact on the shopping centre development market. This is prevalent from the sliding rental rates and increase in vacant spaces in malls.

What lead to malls closure?

Apart from the huge credit crisis, what are the factors that have lead to closure of sizeable chunk of shopping malls across the US? Industry reports blame it partially on the shifting focus of consumers towards open air lifestyle centres, mushrooming in both urban and countryside locations, along with the surfacing of high streets as outlets for convenient shopping.

The recession had dealt a severe blow to mall owners and developers in terms of mall management. “A year ago, it was all about cutting every operating expense and leaning heavily on cost savings,” says Mike Kercheval, CEO & President, International Council of Shopping Centres (ICSC).

Meanwhile, realty retail in other parts of the world, especially in Europe and the Middle East, is still reeling under recession. According to the Cushman & Wakefield report, the first half of 2009 saw the effects of credit crisis and global recession leading to a drop in shopping centre completion levels across Europe. The recession had a sluggish effect on the retail property development market. The development in European nations is expected to decline to 7 million sq.mt, which would be the lowest level in five years.

The Middle East, considered a hub of growing retail property, underwent the downturn of depression. This was marked by a nosedive in the rental of retail properties, primarily in Dubai. Data from Jones Lang LaSalles's Dubai Real Estate Market report reveals a dip in the average retail rents in the fourth quarter of 2009 to about Dirham264 (US$72) a square foot, down 29 per cent from the corresponding quarter in 2008.

Real estate resurgence

With slowdown easing away, shopping mall owners and developers across the world are adopting the policy of 'pretend and extend' on a cautious note. Explains Kercheval, “Getting our shopping centres back to full strength is happening because of the growth of new retail concepts. However, retail chains, which oversaturated prior to the global financial crisis and were forced to cut back on their store portfolios, are not likely to return simply to the kind of freewheeling expansion of the old days.”

Retail vacancy rates are expected to increase in 2010 before they begin to level off in early 2011, as the consumer confidence rises and the economy emerges from a deep recession.

Comments Dan Jasper, Spokesperson, Mall of America, “Mall of America had positioned itself well before the recession hit and is now poised to come out of it in a very strong way. We anticipate that our strategies of aggressive marketing, strong leasing initiatives and continued tourism have drawn our sales and foot traffic will grow more significantly this year and in the coming years.”

Meanwhile, big retail brands are making the most of the situation, created by the dip in retail rental rates. Kercheval elucidates, “Retailers, who were in a position of competitive strength before the recession, have been opportunistically expanding into space that their weaker peers have vacated. Also, smaller retailers, who previously had limited access to prime shopping centre space, are now finding opportunities opening up in the best centres. All of this is good, fresh retailers and fresh concepts mean livelier shopping centres.”

On the European front, recovery is round the corner with mall owners and developers vying to acquire retail properties as old as five to six years. Allianz SE and Corio NV have joined up for the 440 million-euro purchase of Italy's largest shopping centre, Porta di Roma, a deal for which was signed in May this year. In Western Europe, Italy recorded the highest amount of new shopping centre space. In total, 18 new shopping centres opened, adding 3,70,000 sq.mt to the retail real estate market of Italy.

Unibail-Rodamco SE, Europe's largest owner of shopping centres, registered 3.9 per cent rental growth last year for the properties it owned throughout 2009. Its vacancy rate was stable and the number of shoppers visiting its malls stayed the same. The tenants reported an average 2.8 per cent increase in revenue in the first quarter from a year earlier. Unibail-Rodamco, Chief Executive Officer, Guillaume Poitrinal, in a press interview to a website had stated, “There was no shortage of retailers wanting to open stores in the company's malls, helping support rents and keeping vacancy rates low.”

With retail developers and landlords continuing to lower lease rates, tenants, especially big names in the international retail industry, have started expanding internationally.

“The Dubai Mall has more than 70 signature stores in Fashion Avenue. Galeries Lafayette, France's leading lifestyle retailer, and Bloomingdale's, America's leading department store, are the key anchors here and this marks their opening stores in the Middle East region for the first time,” states an Emaar Malls Group executive. According to reports by Colliers International, over 70 per cent of the shopping mall supply that the Dubai market had between 2008 and 2010 is already pre-let, suggesting that retailers remain bullish on Dubai's growth prospects.

Even though recession dented the prospects of realty retail growth, the retail industry is on a well-defined trajectory. This is mostly due to the revenue sharing model that has been adding yields to the mall developers, even in the worst times.

According to industry reports, 50 per cent of the international brands follow revenue sharing agreement, especially in large malls, besides the pure rentals format.

Survival strategies

The international realty sector is experiencing changes in trends, which is seen as a strategy for survival for malls in the long run. This has been promoted by the drastic change in lifestyle, choice in shopping and spending habits of consumers across the globe.

Meanwhile, owners and developers of regional malls in the US are taking steps to address shifting demographics. Re-development in properties is the new surviving strategy. Consumers thronging large urban malls are primarily headed for entertainment zones positioned inside these malls. The Mall of America reports that in 2009, 30 per cent of the mall's visitors came specifically to visit the park, not to shop.

Post-recession, there has been the emergence of shopping malls, especially in Italy, where high fashion streets predominates. With rise in acquisition bids for the biggest malls, shopping experience is all set for a steady growth in the years ahead. According to the German Council of Shopping Centres (GCSC), the centres that are being planned up to 2012 have an average size of 27,000 metre square, which is 20 per cent less space than that of 1998.

It is believed that recession has brought about innovations in Dubai-based malls, which are considered major 'pull factor' for realty business. “Retailers promote malls as leisure destinations to increase footfalls. Shopping centres in Dubai have facilities such as indoor ski slopes, rock climbing, aquariums and indoor skydiving,” says an Emaar Malls Group executive.

High street segment

Apart from malls, high fashion streets form a significant segment of shopping experience across the globe as part of the international realty retail. According to a Cushman & Wakefield report, Fifth Avenue in New York accounts for the highest rentals with $1,700 US/sq.ft/year. Recession has failed to make an impact on several premier shopping streets in Central London, which have remained resilient and rents have continued to swell in some locations in the capital. Yet, decline in retail sales had an impact on the high street rentals in the US, which fell by 14 per cent over the year.

However, global high street rentals did not undergo a sharp nosedive like that of mall properties. Accounting to the stability of high streets, Kercheval states, “The advantage of being on a high street for a retailer is that there is a high concentration of wealthy consumers living or working nearby.”

Fifth Avenue in New York, Champs De Elysees and Avenue Montaigne in Paris, Kurfurstendamm in Berlin are some of the high streets that were successful to preserve their rentals and positions even during the recession. With luxury brands and high footfalls, high streets have turned out to be the most preferred retail outlets along with malls. So what are the similarities that exist between malls and high streets as formats of realty retail? States Kercheval, “In some respects, a high street is similar to a shopping centre as the combination of stores clustered together draws a critical mass of consumers that benefit all the retailers on the street.”

However, differences dominate. “The downside to being on a high street is that there are no shared expenses among retailer for marketing, air conditioning, heating and lighting, like there is in a shopping centre,” he explicates.

Long road to steady growth

With organised retail generating business across the globe, the state of retail real estate, especially in the western countries, is yet to witness a steady rise and growth. Till then, it is the retailers who are perhaps making most of the situation with preferences for bigger and better malls and dipping retail rentals adding to the retail business booty.

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