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PACE PICKS UP FOR EMERGING-MARKET RETAIL DEVELOPMENT

BY STEVE MCLINDEN

American shopping centers have had more than 60 years to evolve. But emerging mega-retail projects in China, India, the Middle East and Eastern Europe are going through that evolution process in less than a decade, says Chris LeTourneur, a partner at Vancouver, British Columbia-based Thomas Consultants. LeTourneur was a panelist at a Spring Convention session titled “Emerging International Retail Markets: Who is Recognizing This Opportunity?”

Ikea is anchoring Russian malls, Wal-Mart President and CEO H. Lee Scott Jr. just returned from seeking expansion opportunities in India, and teams of Western developers are spanning the globe in search of lifestyle center sites, said LeTourneur.

A Goldman Sachs study, “Dreaming with BRICs: The Path to 2050,” says Brazil, Russia, India and China (the so-called BRICs economies, from the acronym formed by the countries’ names) will be among the world’s fastest-growing economies over the next half century. “They will become a much larger force in the world economy, perhaps even overtaking the U.S.,” said Alexander Berman, head of GGP Ventures, the international arm of General Growth Properties.

One of the drivers of global retail expansion is the swelling world population of 6.4 billion, which dwarfs the U.S. population of 300 million, says Berman. “World cities with more than 10 million in population now number 24, compared to just two in the United States,” he said. “Today more than two-thirds of the world’s gross domestic product lies outside the United States.”

Along with the growth comes an improved international demographic that is creating a pent-up demand for the latest retail goods. “Many emerging markets have high growth potential and now have a greater opportunity for development than ever,” said Berman. Costa Rica and El Salvador, where General Growth holds mall interests, are among these.

Morgan Parker, president of the recently formed Taubman Asia division, says he has seen “an amazing amount of attention paid to international expansion … coupled with a convergence of [universally popular] trends and appetites. Retailers are becoming more the same wherever we go … while local merchandisers are becoming a smaller presence. The challenge is: How do you create something that is different from all of this?”

A second conduit to international retail growth has been the bridging of language and culture gaps. “If English was a business, it would be one of the fastest-growing businesses in the world,” Parker said. “That, along with [more universal] music and fashion trends, is providing a vehicle for international behavior.” A Gucci handbag, even in economies where people must scrimp to afford the basics, is still a popular purchase for those occasional bouts of discretionary spending, he says.

In South Korea and Japan, Taubman Asia has seen consumer spending fall at department stores but rise at lifestyle shopping centers, says Parker. China, currently in frantic catch-up mode to supply infrastructure and retail services to its enormous population, has in recent years witnessed a of more than 13 percent rise in consumer spending.

“Disposable income is rising at a rapid rate, resulting not only in a rapid increase in demand for retail and leisure products and services, but a fundamental change in personal spending,” said Hong Zhang, executive director of Beijing Blue Harbor Properties, Beijing. “For example, you have to book a restaurant months in advance for the Chinese New Year.”

Blue Harbor is spearheading Beijing’s planned Solana downtown development, on the waterfront, which is slated to open before the Olympic Games come to the city in 2008. Solana is located on a corner of the sprawling Chaoyang Park, in a trade area of at least 9 million residents. Many of them are between 20 and 49, the peak spending bracket in Beijing, Hong says. “Solana is trying to become the outdoor living room of Beijing — a gathering place. It will also be a place for Olympic celebrations.”

New Chinese shopping centers are posting $600 per square meter ($56 per square foot) in sales, not as much as the densely packed traditional local markets, “which can generate sales up to $1,900 per square meter,” said Hong.

Such Western retailers as Ann Taylor, Ethan Allen, KFC, Tesco and Wal-Mart are well established and successful in China, and more are coming.

But the challenges to U.S. retail development in China are still numerous, says Hong. They include a lack of reliable market and trade data, complicated application processes, rising land costs, and difficulties in forming partnerships with leading international retailers, investors and developers. Most international retail venues, China’s included, lack the kinds of shopping center executive networking cultures found in the U.S., which help address such issues, the panelists said.

That is one reason General Growth prefers to enter new international markets through joint ventures with local partners, says Berman. “We spend a lot of time getting to know our partners,” he said. “We prefer them to be market leaders with excellent reputations and extensive real estate experience.”

Some East European cultures are still climbing out of economic holes but are gaining strength, says Paul S.

Chehab, senior vice president of acquisitions and dispositions at Montréal-based Ivanhoe Cambridge.

Turkey, with its population of about 70 million, presents numerous opportunities for retail expansion, particularly in Istanbul, which by some estimates contains close to 15 million people, Chehab says. Forty-seven new or expanded centers are in the planning for the next five years across Turkey. That, he said, “should adjust the extremely high rental rates there.”

Chehab says he believes that solid retail demand is imminent in Poland, though the country of 38.3 million, which is to adopt the euro in 2010, will have to correct a shaky footing — unemployment at 19 percent, while 30 percent of average household income goes solely for food. And there may be some over-retailing in the mix too, Chehab noted. “Too many centers have expanded … but we expect Poland to stabilize.”