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Recovery slow in Thailand, Malaysia, Philippines

By Susan Thorne

It has been more than two years since the Asian flu sent Southeast Asia's fast-growing national economies into decline, taking retail spending and shopping center development with them.

While the worst of the crisis is over in three of the affected countries with extensive shopping center development — Thailand, the Philippines and Malaysia — recovery is uneven.

Shopping center designers make good gauges of an economic recovery, because they are consulted early on when any new developments are considered. Mark Marshall, senior research analyst with Design International, Toronto, a design and architecture firm with an extensive Southeast Asian portfolio, said that in the last eight months his company has been getting busy with new projects in the Philippines and Malaysia as well as Thailand.

So how does the region's economy look from his perspective?

"The development [in Malaysia] is back, and things have picked up; a lot of projects were deferred and will now go ahead," he said.

"Thailand has always been a step ahead of the others, more open to the world, with far higher tourism; they didn't overbuild to the extent that Malaysia did, so I don't think they will take as long to revive."

The Philippines may not have been hit as hard as other parts of Asia, while Taiwan, an important regional player, suffered the least from economic problems. But political upheaval in Indonesia makes progress difficult there, he observed.

In Bangkok, Ravi Sirianukul, associate partner of Andersen Consulting's Thailand office, reports that overall economic conditions in Thailand are generally on the upswing, helped by government measures and sales tax cuts. Several major retailers are seeing year-over-year, same-store sales growth of 10% to 15%, following negative growth the year before in some cases. One hypermarket retailer, Makro, reported a dramatic 38% profit increase in 1999.

Retail rents are starting to recover. Sirianukul says shopping center owners expect to see yearly average rents of 12,000 to 13,000 baht per square meter ($29 to $32 per square foot) for ground floor space in prime retail centers in 2000, an increase of 8% over 1999. Some shopping center owners had lowered rents during the economic crisis but are considering raising them soon. Central Pattana, a Thai shopping center owner, may drop its 10% discount on rent after the second quarter of 2000, for example, if the economy recovers sufficiently.

New mall projects are another indicator of improvement. The Mall Group and Central Pattana, leading Bangkok-based developers, are teaming up to develop some shopping complexes in secondary markets, representing the biggest commercial property project since the crisis, Sirianukul said. Center owners in Thailand are also renovating or adding to a number of locations; Seacon Square, Fashion Island and the Imperial Department Store in Bangkok are all being expanded.

The retail vacancy rate in Bangkok is still high — 16.7% compared with 4% to 5% before the economic crisis, or about 6.2 million square feet of the roughly 37 million square feet of retail space in the city. Yet retailers and consultants are positive about growth in the market, Sirianukul says, as demand for retail space pushes some rents higher, particularly for specialty shops and restaurants in central Bangkok ground floor premises.

Malaysia's recovery is not so far advanced. But most of the country's shopping centers are beginning to recover from the downturn, and should do well over the next 12 to 18 months, said M. K. Sen, managing director of leading developer Mid Valley City, Kuala Lumpur. Sales have strengthened at most centers over the last few months, he said, although rents, which sank during the downturn, will only grow as individual tenancies come up for renewal. He takes encouragement from his company's own 1.7 million-square-foot Megamall in Kuala Lumpur, opened just last fall, which is 95% leased and seeing strong shopper traffic.

Generally, Sen said, this is a period of consolidation throughout Asia, with most center owners focusing on keeping their existing properties profitable rather than expanding their portfolios.

It is too early to talk of significant recovery, although things may have stopped getting worse, said Sunny Lai, a Kuala Lumpur-based partner with Jones Lang Wootton, the global commercial real estate services firm.

"Retail suffered the worst and will probably be the last sector to come back," he said. Average retail rents, still 35% less than rates at the 1996 peak, have not improved since last summer. Yet Lai acknowledged that Kuala Lumpur, which has much of Malaysia's modern shopping center stock, is a multitiered market with a lot of diversity. He identified pockets of strong performance such as the upmarket Lot 10 and Star Hill Centers and Kuala Lumpur City Center Suria, which stands at the foot of the landmark Petronas towers.

Certain economic indicators point to better times ahead.

"I think purchasing power is definitely higher and improved; disposable income is better, and job security is better," Lai said. Can shopping be far behind?

In the Philippines, economic woes appear to have made the leading players stronger in the shopping center industry. Two prominent developers, SM Prime Holdings and Ayala Land, both based in Manila, are back on track with new and revived projects. Prime owns the Mall of Asia, a 5 million-square-foot, mixed-use property in metro Manila, and has five other malls in the pipeline. Ayala Land developed the Greenbelt urban retail entertainment mall in Makati City, two neighborhood malls and is expanding the 850,000-square-foot Alabang Town Center. Another Filipino developer, Robinson's Land, is constructing seven new malls.

Recovery is slow, and consumer spending has not yet returned to pre-1997 levels. Winnie M. Nazareth, senior division manager of Ayala's Commercial Centers Group, reported that spending on basic goods like groceries has increased recently, but sales of nonbasic items, especially high-end merchandise, have slumped. Sales per square foot in malls have also been reduced due to increased competition from new malls, she said, and growth in rent has not kept pace with inflation. Predictions are for an increase of 5% to 7% in rents in the next two years.

Will Southeast Asia's reviving shopping center scene look like that of 1997, before the crisis struck? One big difference is the extent of foreign retail participation. In Thailand, a number of foreign retailers have taken advantage of depressed prices to enter the Thai market or to buy into Thai retail companies. Multinationals are particularly numerous in the supermarket sector, which now includes Tops (Netherlands); Food Lion (Belgium); Casino and Carrefour (France); with Makro (France) and Britain's Tesco (which has a controlling interest in Lotus) active in the cash-and-carry format. Boots, Carrefour and Watson have announced aggressive store expansion in Greater Bangkok. Sirianukul anticipates that continued foreign investment will help retailing to get back on its feet this year.

In the Philippines, interest from foreign players is also strong because national legislation is being brought in this year permitting non-Filipino-owned companies to operate there. Nazareth said that at least eight foreign retailers are reportedly interested in entering the country: Carrefour, Casino, JC Penney, Wal-Mart, Selyu of Japan, Welcome of Hong Kong and Ahold of the Netherlands.