To Real Estate Investment Trusts (REITs) companies the retail sector has been the fair-haired child in recent years. With consolidation sweeping the US shopping mall industry, top mall developers are now setting their sights across the Atlantic in countries like Spain and Italy and, perhaps, in the future even to central and eastern Europe.
Elsevier Food International, Vol. 7, Number 4, September 2004
Joel Vega

The ‘build-it-and-they-will-come’ slogan of shopping mall developers in the 1970s may sound laden with false bravado in the complex world of retail. Consumers now have more choices than shoppers had in previous decades.
From Tokyo to Paris, the attitude of today’s consumer has evolved from one that merely thirsts for retail therapy to one that seeks ‘added-experience-added-value’. In a 2000 study, PricewaterhouseCoopers found that 140 existing regional malls in the US were already ‘greyfields’ (coined after ‘brownfields’ that refer to contaminated industrial sites), while another 250 malls are tracking the same path.

‘De-malling’ of America
Mall developers are responding, as recently shown in the so-called ‘de-malling of America’. Since local governments loathe seeing a mall go belly up as it represents huge tax losses, US cities and developers have begun breaking up old malls and are bringing the storefronts outdoors to integrate them with the rest of the city.
“People are starved for either plain raw value or they’re starved for something unique and exciting when they finally walk from their computers,” said Jacques Verlinden, senior creative director for Crate & Barrel, in a report in Buildings magazine.
With people looking for a quality shopping experience, lifestyle centres are today what enclosed regional malls were in the late 1980s.
The US lifestyle centres are a far cry from the mega-malls as they are ‘cosier’, and feature an open-air design with parking spaces often located right by the stores. Fountains and benches also dot the centre, creating a laid-back ambience. Although the lifestyle centre concept is not exactly new, as a retail model it has seen remarkable growth in the last few years, according to the New York-based International Council of Shopping Centers (ICSC). For 2003- 2004, ICSC expects around 25 to 30 lifestyle centre openings in the US. Figures show that US lifestyle-centre sales average US$298 per square foot compared to the traditional mall average of US$242 per square foot. Lifestyle centres have between 150,000 and 500,000 square feet of retail and tenant mix tends to be upscale. Shoppers in lifestyle centres also typically spend more money on their shopping trips.
However, lifestyle centres are not yet completely replacing the regional malls. ICSC said there are 568 lifestyle centres compared with the 1,182 regional malls in the US. In 1990, 19 enclosed malls were built compared with 2003 when only three enclosed malls opened. However, five regional malls are under construction this year. Observers also said that the regional mall is far from dead as it is merely adapting to a changing marketplace. But a number of ‘second-tier’ malls are predicted to undergo ‘de-malling’ as people are not only interested in plain retail therapy but also want a sense of place. In other words, as a US architect puts it, the demand is a “quality of life issue”.

Consolidation wave
The Real Estate Investment Trusts (REITs) own or have an interest in around half of the 1,182 malls in the US. Simon Property Group, based in Indianapolis is acknowledged as the US’s biggest mall REIT, followed by General Growth Property. But with little room left to build new malls, consolidation is sweeping the US mall industry (See sidebar article ‘Hot Summer Deals’). Consolidation in the US mall industry began in the late 1990s but has accelerated recently. The announcement in August that General Growth had agreed to buy rival mall owner Rouse Company exemplifies this latest consolidation wave as more REITs buy each other to grow their portfolios and boost shareholder value.

France’s Altarea has built the successful Bercy Village, its first urban entertainment centre in Paris. Opened in 2000, Bercy Village, which conserves the 19th century historic wine cellars, has attracted six million visitors last year to its popular restaurants and retail shops.

Yet, the US National Association of Real Estate Investment Trusts is bullish on the performance of mall developers. Retail REITS posted an 8.9 per cent gain for the year-to-date ended 31 July, surpassing the 5.86 per cent return posted by the Equity REIT index (which includes shopping centres and regional malls). Still, retail insiders insist that the heyday of the enclosed shopping mall has passed with the mushrooming of ‘big box’ builders such as Wal-Mart and other large US chain stores. The challenge for a mall developer is to redevelop existing regional malls and incorporate changes that consumers are looking for. One example is the Mills Corporation, which is transforming or expanding existing malls into its signature mix of entertainment and discount retail. In August this year Mills committed more than US$1 billion to a 50 per cent interest in nine regional shopping malls. Owner of 27 retail and entertainment venues in the US, Mills bills its malls as ‘shoppertainment’ with restaurants, cinemas and other attractions, a strategy that exemplifies the US trend to redevelop centres rather than buy new land and build new malls from the ground up.

Room to grow in Japan
Unlike in the US or in other Western countries, Japanese attitudes toward land ownership is vastly different, with landowners much more reluctant to sell inherited land. Coupled with Japan’s high population density and scarcity of available land, it is not surprising that Japan is way behind the US in terms of shopping centre development. However, the sustained drop in land prices and deregulation has stimulated Japanese developers and retailers to build at a faster rate. Leasable area of Japanese shopping centres tripled in the last 15 years with the development boom taking advantage of the maturation of Japan’s capital markets and the increase in leisure time and consumption patterns.
“Japanese developers and retailers have been building fairly rapidly in recent years and with improvement in the economy, this trend will continue for some time,” said Seth Sulkin, president and CEO of Pacifica Malls. Pacifica Malls is the first foreigner-led development firm to conceive, plan, finance and build a shopping centre in Japan without a Japanese partner, no small feat in a  and that is known as one of the world’s most difficult retail markets. In December this year, Pacifica Malls is due to open its first project, Vivit Square, a 97,000 m² shopping centre located outside Tokyo in Funabashi. Aside from surmounting the challenge to find 30,513 m² of open land in the outskirts of Tokyo, Sulkin’s Vivit Square offers four floors of retail space (compared to the one or two common in most Japanese malls) that houses five anchor stores including a supermarket, home centre, electronics, furniture and sporting goods.
“About 85 per cent of Japanese shopping centres have zero or one anchor store, which makes for a very dull shopping experience,” Sulkin said. “In many cases the mall is owned and run by a subsidiary of the same company that owns the anchor store. So nobody is thinking about the overall shopping experience of customers, or about maximising the profitability of the mall operation itself.”
However, Sulkin noted that despite compelling opportunities in Japan, many international retailers have yet to find the winning formula. Poor business strategies, weak marketing and disagreement with Japanese partners are some of the reasons that contribute to failure.
“Common elements of success among international retailers in Japan are those that have either chosen strong Japanese partners or hired executives with strong local market expertise,” he said. Executive hiring in Japan is far more difficult than in the US as the Japanese stick to a ‘loyalty culture’ and where switching jobs is often seen as a sign of unreliability.
Currently, two types of commercial facilities are attracting shoppers in Japan: the theme parklike shopping centre and the outlet centre.
Gotemba Premium Outlets located in Shizuoka Prefecture is drawing several million visitors to its 355,000 m² space. Gotemba is owned and developed by the US REIT Chelsea Property, which first entered Japan in 1999 jointly with Mitsubishi Estate Company. Chelsea first opened Gotemba Premium in 2000, which was followed by three more projects. Chelsea’s Japanese investments are estimated at around ¥20 billion (US$181 million). Chelsea, which plans to build four or five similar projects in the next five years, said returns on investment (ROIs) in Japan are far higher than those in the US. ROIs in Japan run from 15 per cent to over 20 per cent annually compared to around 14 per cent in the US. Gotemba’s high sales are attributed to the wide variety of designer goods in the outlet malls such as Hugo Boss, Prada and Gap which are a must to attract the brandconscious among Japanese shoppers.

Europe looks east
 In southern Europe, Spain and Italy are attracting the attention of US developers. Mills Corporation opened in May 2003 its first European venture, called Madrid Xanadu. The 1.9 million-square-foot project is billed as Europe’s first big ‘shoppertainment’ centre. Mills is reported to be eyeing six projects in Spain and Italy in the next four to five years, and market insiders say the company is also looking into France to export its unique brand of mall development.
However, in terms of growth, market leaders are looking further east such as the Czech Republic, Poland and Russia.
“Development activity is carrying on apace. There is stable activity in big markets like France and Germany. In France, the development of shopping centres is of course limited by planning restrictions, but it’s beginning to pick up. Activity is stirring,” said Vince Prior, European director of real estate consultants Jones Lang Lasalle (UK).
“In the Benelux and Scandinavia, planning remains tight on new development. There is some activity in Copenhagen and Stockholm but still there is tight control. In the UK, there is a lot of activity, with big emphasis on town centre development and the emergence of mixed-used projects. But it is in Central Europe that you have the most active markets like in Moscow. The markets in Czech Republic andPoland witnessed a lot of development, but it needs to settle down a bit,” Prior added.
Activity is also moving on to the less mature markets of Portugal and Italy. “In Rome there is an ongoing project called Porta di Roma, just to the north of the city centre on the ring road. It is over one million square feet, and is being taken forward with a joint venture between Rinascente and Simon Property Group,” Prior said.

US developers
Prior sees the US interest in Europe as dependent on the ebb and flow of investor’s interest. He noted, however, that in the longer term, one could expect US mall developers to remain active in Europe.
“Activities now will be sustained in the next few years. Of course some players will be discouraged by difficult or slow markets and bureaucracy, but overall the interest will be sustained,” he said.
Meanwhile, Jean-Sylvain Camus, communications director of the Altarea Group, predicts France will see more of the lifestyle centre development that is taking hold in the US. Altarea is one of France’s leading mall developers that are focusing on city peripheries where growth in recent years have picked up.
“Shoppers today prefer places where they can meet and sit, or walk from their offices to have lunch,” said Camus. Altarea owns 14 shopping centres with a total gross leasable space of 160,000 m². It is also developing two projects in Rome and in Genoa, with a total space of around 56,000 m². The company has built the successful Bercy Village, its first urban entertainment centre in France. Opened in 2000, Bercy Village kept the ancient wine cellars and built around it a Club Med World Recreation Centre, restaurants and innovative shops, which attracted six million visitors last year.
Both Prior and Camus expect Europeans to look for more than just retail aspects. “There is cross-fertilisation. Architects in Europe and the US are bringing and using their ideas in other regions like in Asia and the Middle East. Consumers, on the other hand, are more open or are looking for an open environment, more outdoor space. In contrast to the enclosed malls popular in the 1980s there will be a new generation of lifestyle centres that are geared towards mixed-use type of shopping centres,” said Prior.
Prior said there would be less of a ‘big box’ development but whether the US-styled ‘shoppertainment’ will be successful on European soil is difficult to predict as a lot depends on local consumers. He also noted the danger of potential retail oversupply as shown in Budapest but added that in mature west- European markets, retail space oversupply is largely avoided due to the tight control imposed by planning authorities.

Arabia’s mega-malls
Across the GulfCooperation Council (GCC) countries, around 3.8 million m² has already been completed, according to consultants Retail International.
With 2.2 million m² ‘under development’ plus 600,000 m² ‘probable” and a further 2.8 million m2 categorised as ‘possible,’ the Gulf countries would have some 9.6 million m² gross leasable area (GLA). Dubai (UAE) accounts for 631,000 m², followed by Jeddah (Saudi Arabia), Abu Dhabi (UAE), and Riyadh. Dubai leads the Gulf with five mega-malls currently under development, a burst of growth in breakneck speed that elicits some observers to worry about retail space oversupply.
Peter Walichnowski, Australian CEO of Majid Al Futtaim (MAF), remains convinced that mall development in the UAE is feasible if one looks at the potential of tourist traffic coming into the region. “Our research and experience tell us that both the UAE and neighbouring Gulf countries still offer a lot of potential for mall developers. The mall concept is relatively new in the Middle East [...] Malls in the Gulf also tend to be social areas, with many people spending their weekends in and around the mall. Combine this with the need for air conditioned shopping environments in hightemperature countries, and the appeal becomes clear,” said Walichnowski.
MAF’s biggest construction project in the UAE is the Mall of Emirates (anchored by Carrefour, Debenhams and Zara), a ¤676-million pr oject with around 400,000 m² GLA. To open in late 2005, the mall complex will include a 400- room, five-star Kempinski Hotel, a snow dome and what promises to be one of the world’s longest indoor ski slopes. Yet, the Mall of Emirates will only rank third biggest in Dubai after the completion of The Mall of Arabia with around 600,000 m² GLA, and The Dubai Mall (developed by Emaar Properties) at 500,000 m² GLA.
Walichnowski brushed aside worries of a market nearing saturation as he reiterated that a number of Gulf economies are moving from oilbased revenues to tourism. “We see strong growth here in the Middle East regardless of political situations,” he said. MAF has six malls in the UAE, Oman and Egypt, and has another five in the pipeline or under construction in Dubai, Egypt, Bahrain and Lebanon.
Walichnowski sees Dubai as the region’s premier tourist destination and noted that the government is committed to attract at least 15 million tourists a year.
Retail International’s Simon Thomson said complacency in the UAE could be dangerous.
He, however, added that with the country’s growing population increasing retail supply would be absorbed. “With buoyant economies and increasing international and internal tourism the future for retailers and shopping centre owners looks secure,” Thomson said.

Sources: ICSC, Retail International, Jones Lang Lasalle, The Mills Corporation, Altarea, Pacifica Malls, MAP Consulting, MAPIC

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Hot summer deals
• Simon Property Group, the largest US shopping mall owner and developer, agreed in June to buy rival Chelsea Property Group for US$3.5 billion.
• General Growth Properties, the second biggest shopping centre owner in the US, announced on 2 August two separate joint ventures in Brazil and Costa Rica. In Brazil, General Growth entered into a 50-50 joint venture with Nacional Iguatemi Group to own interests in two regional malls and a property management company. General Growth also announced a joint venture with Venezuela’s Grupo Sambil and Costa Rica’s Genesis Fund to construct and manage around 500,000- square-foot regional mall (under development in San Jose, Costa Rica).
• The Mills Corporation agreed on 17 August to buy a 50 per cent stake in nine malls from General Motors’ pension unit for more than US$1 billion.
• General Growth Properties announced on 20 August that it will pay US$12.6 billion min cash and assumed debt to acquire rival mall owner Rouse Group.
• LNR Property agreed on 29 August to be acquired by private investment firm Cerberus Capital Management in a cash and debt deal valued at $3.8 billion.

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