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European landlords view cinemas as crucial tenants

By Mark Faithfull

Declining audiences and other woes might drive some to conclude that Europe’s cinema industry is “up the pictures,” a movie-going expression used by cockney Britons when something isn’t working. But retail developers are sticking by movie theaters, viewing them as valuable tenants in new and existing centers.

Audiences fell about 11 percent across the first 11 European Union markets to report for 2005, in stark contrast to a 25-nation European Union high of 1 billion box-office admissions in 2004. What’s more, audiences are only projected to grow a modest 7 percent between now and 2009, according to Screen Digest magazine.

“Our main concern,” said Gontran Thüring, director general at French mall developer Ségécé,, was “is 2005 just an ‘air-pocket’ or a long-term trend against competition with home cinema and so on?”

In Germany the problem of declining audiences has been compounded by overbuilding, says Charlotte Jones, who wrote the box-office statistics report for Screen Digest. Spain, too, has seen plenty of cinema development. The screen count there has ramped up 17 percent since 2001, thanks to a property boom and a proliferation of malls. Many Spanish shopping centers have cinemas to encourage foot traffic, sometimes as loss leaders. But a spate of price cutting of tickets is indicative of overscreening and an audience slump.

“The threat is we’ll go the way of Germany, where nobody makes money,” said Pablo Nogueroles, development director for Spain’s Yelmo Cineplex chain.

Spain has seen much upheaval in its cinema industry, with some pulling back and others investing heavily. Belgium’s Kinepolis has frozen development there since 2004, and South Africa’s Ster Century pulled out in 2003. But Terra Firma, a London-based venture capitalist firm, is investing heavily. The firm acquired AMC’s four multiplex cinemas in Spain and one in Portugal through its Cinesa chain. The move builds on Terra Firma’s acquisition of Warner Bros.-Lusomundo chain Sogecable in May of last year and the purchase of Cinesa in 2004.

Attendance is down in Central and Eastern Europe too, but the effect is less serious there because multiplex cinemas are nowhere near as numerous. And these regions continue to draw the interest of retail and entertainment developers.

“From our perspective, these markets and countries, like Turkey, with very low attendances per head, are very interesting,” said Martin de Moye, leasing manager at Multi Development, a Dutch retail development and management firm. “The people in these countries are spending more money, and the only way from such a low base is up.”

Dedham, Mass.-based National Amusements has established two huge cinemas in Moscow in partnership with Moscow-based Soquel Ventures. Both are going up as part of Ikea retail developments.

Clearly, then, the marriage between shopping centers and movie theaters is destined to last, experts say, current travails notwithstanding. “Cinemas really are part of almost every retail scheme in Spain,” said Neil Varnham, director of retail property at Henderson Global Investors, a London-based investment management firm. “They form a fundamental element of the offer as far as that market is concerned.” This is also increasingly true of northern Europe, he says, particularly the U.K. Indeed, the U.K., along with Ireland, is set for strong audience growth over the next five years, according to Screen Digest. After some misjudged approaches by major operators, eight-to-14 screen multiplexes attached to shopping centers are proving to be a successful formula, says John Sullivan, CEO of OzSeeker, a London-based leisure development consulting firm.

“If you go back to the 1980s, operators came in from the U.S., Australia and South Africa and applied the strategy that worked at home: big, stand-alone schemes on the edge of town, with huge potential catchments,” said Sullivan. “For some reason, they just didn’t work. However, around 2000 we saw a sea change. Town planners started to want cinemas back in cities and shopping centers, the mall operators began to see the advantages, and investors became more confident.”

The number of cinema chain operators in Britain has halved in recent years, says Mark Watkins, head of retail at international property agent Jones Lang LaSalle. “Now we have a core of five or six who are much more cautious about their approach,” Watkins said.

To help the cinemas, landlords have cut rents in half since 1995, Sullivan says, and some of the rent charged today is based on ticket sales. “Ultimately, the cinema operators can only pay what they can pay, and shopping center landlords can see what else they bring to the mall.”

Cinemas generate food and alcohol sales for mall restaurants, and possibly additional business for stores, operators say. “Landlords view a good multiplex as an important element of the leisure mix and are looking at the peripheral benefits,” said Watkins. “Often landlords are prepared to take at-cost rents because of the additional revenues.”

But cinemas, though a mainstay for retail developments, will have to show some flexibility of their own when it comes to what they offer, says Sullivan.

“Cinemas are competing with everything from home entertainment to bowling, football, pubs and casinos,” Sullivan said. These alternative venues have tried to make themselves more entertaining, and even luxurious. So too must cinemas, Sullivan says, citing U.K.-based Vue Cinemas, which has invested heavily in refurbishment and digital projectors to allow screening of live music events. “Cinemas need to offer luxury too,” he said. “There needs to be the same sort of revolution — a real ‘wow’ factor. If a shopping center operator has a 1989 cinema in the mall and believes that it can put a tick against the leisure box, then it should think again.”