Spending in Spain

An economic growth of four per cent, GDP growth of 3.2 per cent and unemployment down to 8.5 per cent is boosting the construction of retail shopping centres across Spain. Though high street retail is thriving in the major cities, quality space is at a premium making modern shopping centres attractive to retailers. However, there are fears that the number of shopping centres now in the pipeline will become identical, simply offering more of the same, hence the need to attract shoppers by offering leisure activities including such exotic attractions as indoor ski slopes.

Think Spain and you are unlikely to think skiing. Yet property developer Duprocom is building the country’s second indoor ski slope in the hope of enticing the people of Valencia into its new shopping centre, Neutopía. The first, in Xanadú shopping centre in Madrid, has proved popular enough to demand a second.
Skiing is not the real issue though, it is retail. According to Cushman & Wakefield research, Spain has the largest shopping centre pipeline in Europe over the next two years, with just under two million m² expected to come onto the market by the end of 2008.
This year has already seen a spate of high profile deals, including the property company British Land’s record €350 million purchase of Nueva Condomina shopping centre in Murcia, only a stone’s throw from Thader centre, which is owned by the Spanish property company Metrovacesa. Swiss bank UBS achieved a record-low yield for shopping centres when it bought the shopping centre Metromar in Seville last month. At 4.60 per cent, below the market average of 4.75 per cent – five per cent, yields are decreasing because overabundant supply simply is not meeting demand.

A maturing retail market
Spain continues to enjoy a healthy economy. Annual GDP growth for 2007 is expected to be 3.2 per cent, the sixth fastest in Europe. The population according to the National Office of Statistics will rise from around 45 million this year to 50 million by 2030. Unemployment has dipped to 8.5 per cent, with 50,000 more people finding jobs last month alone, adding to the army of consumers in the country.
The Spanish retail market is reaching maturity, with a steady pipeline of around 500,000 m² of shopping centre floor space added every year since 1990. According to King Sturge research, over the next decade retail sales growth in Spain is forecast at 24 per cent, tracking the European average of 25 per cent. Consumer spending on the other hand is moderating, with growth this year at 2.6 per cent and expected to drop to 2.4 per cent the next.
“The economy is not showing any signs of cooling off,” says Steven Weaving, director of retail investment at Jones Lang LaSalle in Spain. “There is a lot of new supply and demand from operators, and many centres are opening with 85 per cent to 90 per cent already leased. The economy is maturing and not changing radically.”
The expected rise in interest rates could be a spanner in the works for the retail market as consumers have to tighten their belts. “With interest rates going up families have to devote more money to their mortgage payments, so consumption is being affected by that,” say Carlos Hernández, an analyst at Planet Retail. “But the economy is still going strong, growing by four per cent, one of the highest rates in western Europe. The forecast for 2008 shows a growth of almost four per cent, so consumer confidence is high.”

Strict planning laws
Planning laws in Spain are both a blessing and a hindrance for the retail market, especially out-of-town shopping centres. The smaller, high street retailers still wield a substantial amount of power, so it is relatively difficult to gain planning permission for large developments. The upside is that once permission has been granted, there is little competition in the area to undermine any business.
“The commercial licenses take ages to get,” says Carlos Monreal, managing director of the Spanish property developer Duprocom. “We have 18 laws with each region with its own laws. It’s very complicated and political.”
Cataluña has some of the tightest restrictions in the country, with a ‘moratoria’ law prohibiting shopping centres of more than 2,500 m². Yet its shopping centres are successful, largely due to the lack of competition. In Barcelona for instance, the shopping centres Diagonal Mar and Maremagnum were snapped up for high prices by foreign investors in the last two years, proving the market to be lucrative.
High street retail is thriving in Madrid and Barcelona, with streets such as José Ortega y Gasset in the capital and the Portal de l’Angel in Barcelona as good examples. Supply of quality space in both is scarce, however, and the focus remains on shopping centres.
Spain’s most rigorous development is now happening in provinces like Andalucia where planning laws are less stringent. Shopping centres are due to open in Valencia, considered Spain’s third city, Zaragoza and Guadalajara.

No differentiation
“A number of centres will become obsolete and will need renovation or expansion,” says Ed Farrelly, head of capital markers research at CBRE in Madrid. “We can no longer put up a centre without competition like ten years ago. Especially where planning laws have been less stringent, you see that if you put up a centre, you will have to compete. A lot of times the centres that exist no longer cater to current consumer preferences.”
The slew of shopping centres has been met with criticism. Although Spain’s market is not as saturated as France’s, there is concern among investors about the proximity of some of the new schemes. “What worries me about shopping centres is there is nothing to differentiate one from the other,” says James Preston, head of Rockspring Iberia. “They are all absolutely identical and pop up one next to the other. Look at the situation in Murcia, how do you buy one that is on the same motorway junction as another? There is just going to be a bloodbath for supremacy.”
The majority of successful shopping centres are anchored by a major food retailer. Nueva Condomina was half owned by Eroski, the Basque supermarket chain, which also has a 50 per cent stake in Duprocom’s Plaza Imperial shopping centre in Zaragoza. Eroski recently bought a 75 per cent majority stake in Caprabo, another Spanish supermarket chain, a deal reportedly worth €1.1 billion.  

Format development
Last year Spain generated €91.7 billion in food retail, the fifth highest in Europe, while the total retail market was worth €168.62. According to the IGD, the food industry research company, both these figures will drop by four per cent this year.
“The sector is quite consolidated already,” says Hernández. “You’ll find the out-of-town hypermarkets, the medium-sized supermarkets in town, the convenience stores in the high streets. Hypermarkets and supermarkets are the most popular formats. Because of the planning permission restrictions for large retail development in the last few years, the smaller sized supermarket has dominated. As a lot of recent shopping centre developments in Spain used supermarkets as anchor, there is still scope for new hypermarkets to open. France has three or four more times the amount as Spain.”
Fashion retail, although one of the more fickle forms of the sector, has done well in Spain with home-grown brands Zara and Mango being two of the more successful chains. “A lot of times the centres that exist no longer cater to current consumer preferences,” says Farrelly. “The percentage share that food and clothing get is trending downwards, while other elements such as leisure and communications will trend upwards. That’s normal for an economy that matures. It’s not ‘what I need, but what I want’. With new centres that are coming onto the market, the hypermarket is important but they have so many different things to offer. We’d always refer to the hypermarket as the anchor, now it’s good for a good retailer to make it as an anchor.”

Foreign investment
Companies are looking to other formats to lure in customers, with go-karting, ice-rinks and the nascent ski slope. According to one European retail fund manager based in Madrid, however, leisure is no longer such a lucrative venture. “Leisure is suffering, so we won’t buy anything with over 20 per cent leisure,” says Jaime Navarro, head of Pradera’s office in Spain. “Cinemas rental revenues are declining and in restaurants you only eat once, whereas with fashion you can shop all day.”
“At the moment our economy is doing well and the market is still not as consolidated as other EU countries, so there is still scope for growth,” says Hernández. “There have been so many new centres in the last few years that some people are saying there are too many, and that may cause problems.”
Foreign investment, although not as prolific as last year, will continue on the Spanish retail market, however, with several more deals to come this year. “Each one will have its own risk profile and will be looking for big regional trophy centres in smaller towns,” says Farrelly. “With yields coming down and prices going up, we will see some property owners taking advantage of the high prices and changing around the structure of their portfolios or spinning off non-performing centres. This certainly won’t imply an excess of supply. We’ve got such strong demand, and it makes for a liquid market.”

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Ed Habershon is reporter for EuroProperty, a news, research and information service for Europe’s property market. www.europroperty.com