Morgan Parker's travel schedule is a lesson in why international expansion is not for the faint of heart.

As president of Taubman Asia — an initiative that Taubman Centers Inc. launched 16 months ago — Parker rarely spends an entire week in one country. Though officially based in Hong Kong, he attends meetings in India, Korea and Japan every two to three days. He flies to the U.S. for shareholder conferences — and the occasional trade show, like the ICSC Spring Convention. He also sits down with project architects at least once every quarter. In all, he's on the road for more than 100 days a year.

It's exhausting, but it also pays off. “It's important to be there physically, to show commitment to the country, to the market, to the deal you are working on,” he says. Parker's flesh-pressing has helped Taubman get in on some of the most important developments going on in Asia beyond China and India. The biggest coup is Taubman's role as lead retail developer for Gale International's $20-billion master-planned New Songdo City, a new metropolis for at least 350,000 people, being built from the ground up 40 miles south of Seoul, South Korea. Taubman is already developing a 1.2-million-square-foot mall in the project and has the option to develop the rest of a projected 10 million square feet of retail space — although it hasn't fully committed to that. If it were to come to fruition, the Korean projects could total almost half the 23 million square feet that Taubman has developed in half a century in the U.S.

That growth potential is an indication of just how much development is going on in Asia beyond China and India. While those two nations, with 3 billion people and rapid industrialization, are emerging as top global economies, Western retail developers and investors are also seeing opportunities across the region — in Korea, Vietnam, Singapore and even the Philippines.

Nobody, including Taubman, can afford to neglect China and India, which are expected to rack up GDP growth of 8.6 percent and 7.1 percent respectively this year. But the rest of Asia is also attracting more U.S. deals and dollars. Simon, through subsidiary Chelsea Property Group, has a portfolio of outlet centers in Japan and is opening its first project in Korea. Urban is part of joint ventures to develop projects in China and Korea. And that doesn't even cover private real estate investors and developer like Colony Capital, Prudential Real Estate Investors, Hines and Morgan Stanley, who all are operating in the region.

Japan, the world's number two economy, is still emerging from a long period of slow growth, but every other major Asian nation is expected to post GDP gains of 4 percent or higher in 2006. South Korea, with projected 5.1 percent GDP growth, is the third-largest economy in the region, behind Japan and China, but its retail industry is generally considered to be a few decades behind Western standards.

Singapore, a bustling finance and business center, is expected to show 6 percent GDP growth this year. With a relatively large middle class and a significant presence of multinational corporations and banks, Singapore is a major shopping destination. But there is more development opportunity: The vacancy rate in retail properties is less than 1 percent.

Among developing markets, Vietnam posted 8.4 percent GDP growth in 2005 and is projecting similar growth in 2006. It actually ranks above China on AT Kearney's Global Retail Development Index (see chart, p. 29). Half of its 84 million residents are under the age of 30 and consumer spending now accounts for 70 percent of the nation's total GDP. Vietnam so far has largely caught the eye of regional players, with major chains from Singapore and Japan now setting up shop. But it has yet to attract any Western developers.

This makes Vietnam a fairly good bet for both experienced real estate developers and global hyper-market and discount chains. German wholesaler Metro Cash and Carry already has six locations in the country and Costco is said to be looking. If Wal-Mart opens a Vietnamese division, it will be the first time that local residents will be able to do all of their shopping in one place and have a guaranteed standard of hygiene and quality, according to Bryn Davies, director of retail services for Asia Pacific with CB Richard Ellis

Even Japan, stuck with a stagnating economy for more than a decade, is showing signs of growth. The Bank of Japan finally put an end to its five-year-long easing policy and raised interest rates from 0.0 percent to 0.25 percent, with hopes of eventually raising rates up to 2.0 percent.

Perhaps, the riskiest spot in the region for developers is Indonesia. The island archipelago has been racked by political corruption, financial crises and the rise of Muslim fundamentalism in recent years. Retail vacancies stand at nearly 20 percent, and Americans — and American investment — are scarce following the 2002 Bali nightclub bombings, which killed more than 200 tourists. “If I am an American, I would be very careful,” says Christine Lee, cofounder and executive vice president for the Pacific Rim division with NAI Capital. “The country has a history of political instability.”

Local competition

Even in nations that are more welcoming, Western developers and investors in retail real estate face strong local incumbents including Australian real estate giants like Westfield Group and Macquarie, Japanese firms Mitsubishi Estate and Mitsui Fudosan Co. and Hong Kong-based conglomerates including Sun Hung Kai Properties and Hong Kong Land. Moreover, a new crop of REITs are emerging in Singapore, Japan, Korea and Hong Kong ready to deploy money in the region.

In the wealthier economies, Western developers have run up against competitors every bit as sophisticated and aggressive as those they face at home. “In Singapore, for instance, Capital Mall Trust and Capital Land are very strong investors,” says Timothy Bellman, head of research and strategy for the Asia Pacific with ING Real Estate. “In Japan, the major retail chains own their real estate and all the major companies are involved in the retail sector.”

But Bellman says the Americans can bring something to the party — a greater understanding of the latest retail formats.

In rapidly developing parts of Asia, the competition can be downright flaky. Dozens of fly-by-night operations have swarmed into the region with exaggerated claims about their experience and capabilities. Parker estimates up to 90 percent of shopping centers built in the region fail because these parties — and amateurish local partners — choose inappropriate sites and have no concept of how to generate store traffic.

The challenge for Western investors is to translate their savvy into local formats and projects that will appeal to a very different kind of clientele. “It's difficult to just get on the plane to, say, Jakarta, and expect to develop a detailed knowledge of the market overnight,” Davies says. “People forget that the most successful international companies have been here studying the market for nearly two decades.”

Many Americans parachute in with what Davies calls a “CNN report” view of the continent. They read in the papers that China or India is the next big thing and rush in with unrealistic notions of how quickly they can get in and make money.

“I think one of the big myths that is propagated by those based in North America and Europe is that investors can immediately get higher returns than in the home market,” Bellman says. “There is no systemic reason why that would be the case. There are strong local forces that are investing in real estate and they are investing as local capital ought to do, with low risk premiums.”

The companies that have been the most successful in international expansions are those that take the time to study the market thoroughly and find a strong local partner. The example of how not to do it would be Wal-Mart, which came into South Korea in 1998 with its U.S. store model. What the retailer failed to consider was that Koreans were used to very high levels of customer service and quality products. As a result, Wal-Mart pulled out of South Korea earlier this year, as did French retailer Carrefour, for similar reasons.

Lesson: Not all Western concepts will travel. “Just because Vietnam might be the next great market doesn't necessarily mean that it's right for your business,” says Davies. “You have to have the ability to localize quickly — it might be about making sure that you have parking spaces for scooters instead of cars, or that you [sell live seafood] in your store, but you have to make concessions to the local [tastes].”

That is precisely the reason Taubman and other U.S.-based developers have targeted Asia where they can bring a growing market their expertise in developing retail centers.

In some ways, developers are picking up where things left off nearly a decade ago when the 1997 “Asian Flu” halted the rapid advance of the so-called Asian Tiger economies. The sudden collapse, sparked by currency crises in Thailand and Indonesia, led to the abandonment of many projects. The ensuing years brought gradual improvement, as new economic controls and investor-friendly reforms were instituted in most of the Tiger nations.

Setting up shop

Taubman decided it was safe to enter the region two years ago. The company got to know Parker when it first began looking at the New Songdo City opportunity. Parker was involved with Morgan Stanley's retail development and management business, which is helping finance the project.

Parker had lived in seven Asian countries in 10 years. Prior to that, he had a background in real estate investment banking and had worked for such companies as Macquarie Bank and Lend Lease.

Bringing Parker on board sealed Taubman's commitment to the region. Moreover, it marked Taubman's official commitment to New Songdo City.

Since then, things have only gotten more hectic. What started as a one-man office has now grown to more than 100 people — throughout Asia — including both locals and Americans. Once more projects start coming in, Taubman plans to establish on-site teams in whatever country it's working in.

Simon Property Group, meanwhile, got its start in Asia when it purchased Chelsea Property Group in October 2004. Chelsea had built a portfolio of outlet center in Japan. In the two years since the acquisition, Simon has broadened its efforts in the region.

In April 2005, Simon/Chelsea International announced a joint venture to develop outlet centers in Korea, with the first project, Yeoju Premium Outlets, serving Seoul. Simon will announce an addition two to four centers in Korea in the coming years.

Chelsea CEO Les Chao, who hails from Hong Kong, also heads up the Asian operations. In July 2005, Simon and Chelsea opened an office in Hong Kong to oversee its real estate activities in Asia at the same time as it formed an alliance to develop shopping center projects in China, all of which will be anchored by Wal-Marts.

Simon also operates satellite offices in Japan and Korea. Simon has more than 60 people on the ground in Asia — 40 at its Japan office, 10 in Korea and 12 in Hong Kong.

The newest addition to Asia is Urban Retail Properties. In May, it forged an alliance with MGM Studios to produce six massive mixed-use proejcts, two of which will be located in the Asia Pacific Region. The first announced project of the venture will be a 700-acre center in Buson, South Korea, that will include a theme park based on MGM properties. The project will open in 2009 or 2010.

Urban is not a complete newcomer to the region. It has providing consulting services to international firms for 16 years, including on projects in Hong Kong, Indonesia, Japan and Taiwan.

How these American companies fare in the next few years will be an important story to monitor, especially as other firms — including as Developers Diversifed Realty, which is entering China with the help of its Australian partner Macquarie Bank — prepare to join the competition in the region.

What companies do today in gaining experience in markets throughout Asia will also lay the groundwork for the more extensive projects that will surely come as India and China continue to liberalize their economies and open the door for more development by foreign owners.

MOST ATTRACTIVE MARKETS
2006 Rank Country Region Risk Market Attractiveness
1 India Asia 55 34
2 Russia Eastern Europe 43 59
3 Vietnam Asia 43 24
4 Ukraine Eastern Europe 42 37
5 China Asia 58 40
6 Chile Americas 67 57
7 Latvia Eastern Europe 58 50
8 Slovenia Eastern Europe 78 52
9 Croatia Eastern Europe 57 51
10 Turkey Mediterranean 46 59
11 Tunisia Mediterranean 58 40
12 Thailand Asia 57 39
13 South Korea Asia 68 73
14 Malaysia Asia 66 49
15 Macedonia Eastern Europe 32 32
Source: AT Kearney

Indonesia

Population: 245 million
GDP purchasing power: $865.6 billion
GDP per capita: $3,600
GDP growth rate: 5.6 percent

Indonesia has the largest population in Southeast Asia and healthy GDP growth, but high-quality shopping centers are hard to come by. The Indonesian retail landscape is still dominated by mom-and-pop shops.

Robert Northfield, associate vice president with the Development Design Group, has spent a considerable amount of time in the country working on the Pondok Indah Mall expansion in Jakarta, and can attest that there is plenty of demand for new projects. In particular, Indonesians like shopping centers that incorporate entertainment venues. Pondok Indah, for example, will contain a multiplex cinema and a food court, in addition to a large department store and more than 100 specialty retailers.

Centers tend to feature opulent designs and pricey brand-name stores, like Prada, Christian Dior, Gucci and Salvatore Ferragamo.

But, according to Marisa Wilmana, an Indonesian-born architect who currently lives in Seattle, bribery and corruption are still big problems in Indonesia, so an investor's ability to get permits and approvals might depend on who his local partners are. The most expensive shopping center development in the country, for example, is owned by the ex-president's son.

“You can guess [how] that permit was not difficult to get,” Wilmana says.

Singapore

Population: 4.5 million
GDP purchasing power: $124.3 billion
GDP per capita: $28,000
GDP growth rate: 6.0 percent

Singapore offers limited opportunity because it's a fairly saturated market. The fundamentals are strong — the country has one of the highest GDPs per capita in the world at $25,207, with 59 percent of the population in the middle- and high-income brackets. There are plenty of international chains on the scene and retail occupancy across the island is currently at 99.1 percent.

But more than 6 million square feet of new projects are already in the pipeline and Colliers International expects widespread renovation programs to start at the country's existing malls, as shopping center owners prepare to compete with the influx of new product.

The good news here is really for the retailers: As the amount of new retail space is expected to peak around 2008-2009, Singapore is poised for the entry of names like Victoria's Secret, Abercrombie & Fitch and J. Jill.

Japan

Population: 127.5 million
GDP purchasing power: $4.02 trillion
GDP per capita: $31,500
GDP growth rate: 2.7 percent

Japan's political stability, consumer wealth and foreigner-friendly business laws make it another attractive regional destination. Japan's retail market has traditionally been dominated by large department stores, but Western-style malls are becoming more prevalent. The total sales at shopping centers now account for 20 percent of the market, up from 11 percent 15 years ago.

Japan is one of the most popular markets for international retailers, especially when it comes to luxury and mid-market fashion chains. Banana Republic has recently announced that it will be adding five new stores to its eight existing Japanese locations by the end of 2006, and the Spanish chain Zara, which has opened 18 stores in the country since 1998, is often held up as an example of the kind of success that a smart retailer can have in North Asia.

Entry into Japan is not easy. Suitable retail space in prime locations is hard to come by — vacancy in downtown Tokyo was at only 2 percent at the beginning of this year, while rents can be as high as $278.52 per square foot — and it takes a long time to negotiate new deals.

Philippines

Population: 89.5 million
GDP purchasing power: $451.3 billion
GDP per capita: $5,100
GDP growth rate: 5.1 percent

The Philippines is in dire need of new development, with only 2 percent of the market belonging to shopping centers and department stores. It is one of the biggest countries in Asia, but more than 37 percent of Filipinos live below the poverty line, subsisting on $2 a day, and wouldn't be able to afford Western goods even if they wanted to.

There are also concerns about political instability — former president Joseph Estrada was impeached on charges of corruption in 2000 and current president Gloria Macapagal Arroyo has had limited success reigning in the Moro Islamic Liberation Front. As a result, development opportunities in the Philippines are limited.

South Korea

Population: 48.8 million
GDP purchasing power: $965.3 billion
GDP per capita: $20,400
GDP growth rate: 5.1 percent

The largest private development in the world is the $20-billion New Songdo City project. The development will include 40 million square feet of class A office space, residential units totaling 30 million square feet, 5 million square feet of hotel accommodations and 10 million square feet of retail.

Local retail projects are still a few decades behind modern trends. International-level shopping malls are virtually non-existent, according to Gale officials.

Still, building 10 million square feet of retail in Korea involves a fair amount of risk, as the country's retail sector is close to spinning out of control. According to an NAI Global report, the number of existing hyper-markets already exceeds the government's suggested level of one store per 150,000 people and a few closings are likely to take place in 2006.

Vietnam

Population: 84.4 million
GDP purchasing power: $232.2 billion
GDP per capita: $2,800
GDP growth rate: 8.4 percent

In Vietnam, 90 percent of retail sales are still completed at traditional mom-and-pop shops. Shopping centers are a rare sight — there are only 30 currently on the market and another 35 in the pipeline.

“It's day one of the process,” says Davies. “The shopping center concept is extremely new and there will be a transition period over some years as people's habits change and they get used to being in an enclosed, temperature-controlled environment.”

There are risks, however. The Vietnamese tend to be mistrustful of outsiders, and big regional players are more likely to gain entry into the market than American or European investors. In addition, regulations on foreign direct investments are still fairly strict.

“The major players are still Asian — they have ties with the language, they have ties with the trade and it makes it a lot easier for them to expand,” Davies points out.