ICSC set the stage to both inform and inspire an industry on the global opportunities that exist in today’s market at its 2012 Retail Real Estate World Summit held last week in Shanghai, China. The comprehensive program tackled a variety of issues ranging from the latest development trends to investment opportunities in emerging markets, and the ICSC’s line-up of industry experts did not disappoint.
ICSC considers its recent 2012 World Summit to be one of the most important global events that the association has hosted in its 57-year history. The last time the ICSC convened its World Summit was half a decade ago in Cape Town, South Africa. “A lot has transpired over the past five years, and it is now critical that once again we bring our industry together to discuss our present and our immediate future,” says ICSC President and CEO Michael P. Kercheval.
In the wake of the global real estate recession, the retail industry is in the midst of a dynamic shift marked by slowing growth in developed nations across North America and Europe. Simultaneously, development is accelerating across emerging markets throughout South America, Asia, the Middle East and Africa. The lack of expansion opportunities in mature markets is prompting retailers, developers and investors to look beyond their own borders for growth opportunities.
Add to that the revolutionizing changes sweeping the retail industry due to the rise in social media, smart phone technology and continued explosive growth in the online sales platform and there was certainly a lot to discuss at the 2012 World Summit. Rather than feel threatened by technology, retail industry leaders discussed ways to leverage technology to connect with customers that are increasingly reliant on mobile devices for entertainment, social connections and the practical aspects of how and where they shop.
Ultimately, the goal of the conference was to share ideas and best practices and delve into the opportunities for growth that exist today and in the years to come. “Right now, global real estate is the most important thing happening to our industry and this is far and away the most important global retail conference,” says Brad Hutensky, ICSC chairman and president and principal of Hutensky Capital Partners in Hartford, Conn.
The global retail conference, which was held at the Shanghai International Convention September on Sept. 11-14, included nearly 1,200 registered attendees and 76 speakers from around the world. “It is really a collection of the foremost people on retail real estate globally,” says Hutensky. The conference featured a host of industry experts across all aspects of the retail real estate field from top developers, owners and investors to architects, retailers and consultants.
Retailers eye global growth
Retailers ranging from Apple to Wal-Mart are clearly stepping up their international expansion. According to a 2012 CBRE retail report that surveyed 326 leading international retailers in 73 countries, nearly half (47 percent) have expanded outside of their home countries with a presence in the Americas, Europe, Middle East and Africa (EMEA) and Asia Pacific.
Ironically, the Internet, which many had feared would threaten the demand for brick-and-mortar stores, is in fact helping to fuel that growth. Retailers are using the Internet to promote their brands and products to consumers in markets around the globe. Establishing an e-commerce platform allows retailers to enter new markets and gather valuable point-of-saleon target customers to determine market opportunities before extending the capital on a physical store strategy.
“Retailers have more options than ever before when it comes to brand building possibilities. At the same time they are branching out across multiple distribution channels, and they are looking to increase their physical presence in new markets,” says Kercheval. Although many retailers are drawn to emerging markets and the compelling demographics of an expanding middle class, they also are interested in bringing their brands to mature markets where they don’t currently have a presence. For example, the financial crisis in Europe has forced brands such as H&M, Zara, Topshop and Armani to look outside of their own borders for growth. Those retailers are adding new locations in emerging markets such as China, as well as targeting expansion opportunities in the U.S.
Participants at the World Summit made it clear that there are no one-size-fits-all solutions to international expansion. The dynamics differ vastly from country to country and city to city with disparate socioeconomic, political and cultural differences at play.
The overarching theme within developed markets is that slower growth is shining a spotlight on redevelopment opportunities. Pockets of new development persist, but by and large the main source of activity is the renovation, expansion or repositioning of existing properties. Emerging markets stand in stark contrast with a surge indriven by enormous demand for new retail outlets.
The lure of emerging markets
There was a lot of buzz about growth opportunities in what many in the industry view as lucrative emerging markets. The sales performance from some leading retailers is further stoking interest in those emerging markets. Over the past five years, for example, U.S.-based Wal-Mart Stores, France-based Carrefour, U.K-based Tesco and Germany-based Metro Group have all seen their revenues in developing countries grow two-and-a-half times faster than revenues in home markets, according to a recent retail research report by A.T. Kearney.
Such success stories are fueling a tremendous appetite for retail real estate and a sizable development pipeline. It is predicted that two shopping centers will open per week in emerging markets from now until 2030.
The growing middle class in China and throughout emerging markets such as India, Brazil and Russia is creating a compelling argument for international expansion. Last December, Ernst & Young released a report forecasting that the global middle class would reach 5 billion people in the year 2030 with an increased spending power of $56 trillion. In addition, by 2030 as much as 40 percent of that global middle class spending will come from Asia, where today it represents a mere 10 percent.
China represented an ideal venue for a conference focused on international growth. “China is the most explosive retail market right now,” says Hutensky. China is by far the dominant country when it comes to development activity. That activity is driven largely by its large population and growing middle class. The growing middle class means more disposable income and more discretionary spending.
As of mid-2012, seven of the top 10 most active development markets in the world were located in China. Both Shanghai and Beijing have seen explosive retail growth in recent years, and rising land costs have pushed developers out to second tier cities. Currently, the most active cities in China include Tianjin, which had some 26.0 million sq. ft. of new retail space under construction at mid-year, followed closely by Shenyang at 23.5 million sq. ft. and Chengdu with 20.3 million sq. ft. of construction, according to a 2012 retail report by CBRE.
China, along with the rest of the BRIC (Brazil, Russia, India and Chinca) countries, continues to attract the lion’s share of the retail industry’s attention. However, retailers, developers and investors are clearly looking beyond that short list to a myriad of opportunities ranging from Columbia to Malaysia and all points in between. According A.T. Kearney’s 2012 Retail Development Index, countries that have moved up the list to round out the top 10 in the past year include Chile, Uruguay, Georgia, UAE, Oman, Mongolia and Peru.
Building for the future
The retail industry is known for its ability to constantly reinvent itself, and shopping center developers are continuing to anticipate the needs of future customers at projects rising around the globe. The key to long-term sustainability for developers is to build centers that can be flexible in meeting retailers’ changing needs, whether that is contraction, expansion or multi-level retailing.
People get bored easily these days and shopping centers are going to have to be constantly evolving and hitting the refresh button to give shoppers a reason to keep coming back, notes Peter Walichonowski, CEO of Majid Al Futtaim Properties in Dubai. That means building centers with flexible walls, ceilings and floors as opposed to structures that cannot be modified easily. The need for “future proofing” tomorrow’s shopping centers demands that developers create more open, plug-and-play retail that can be changed regularly, he adds.
Tomorrow’s shopping center will also push developers and owners to continue to introduce digitalization into bricks-and-mortar real estate. In an iPad world, the focus is not necessarily on building the biggest mall, but on creating the most popular mall. “What it’s all about now is how to make our shopping malls the most liked shopping malls in town, and the digital experience is going to be a big part of that,” says Walichonowski.
The first phase of that shift focuses on using technology to deliver traffic counts and patterns, basic mall information and online shopping. The second phase is going to be using technology to reach out to customers beyond the point of sale with tools such as facial recognition software. The technology will increasingly capture information on who is shopping the malls, and not just what stores they are visiting, but what they are looking at while they are shopping. There will undoubtedly be a third and fourth generation as technology and its capabilities continues to evolve and deliver new tools for capturing more information and engaging future shoppers.
Malls will be increasingly called upon to multi-task―entertain, provide an efficient shopping experience and be an important fixture in its community. For developers, connecting shopping centers to transportation hubs and other mixed-use projects will be increasingly important, especially in markets such as China that are facing increased urbanization and more congestion due to large populations.
Despite the focus on technology and the changes it has brought to the industry, developers and owners adopt a “Back to the Future” strategy. Yes, the industry needs to continue to look for ways that technology can complement the brick-and-mortar store experience. Tomorrow’s shopping centers need to transform to accommodate the Generation X and Y shoppers. Buildings need to embrace technology by creating an interactive experience. Developers also will be challenged to build centers that bring people together.
“I think we’re going to see bricks-and-mortar retail working harder to capture the spend in the future,” says Guy Bradley, CEO of Mainland China, Swire Properties in Hong Kong. “The way these centers are going to have to do that is by offering a much more entertaining experience rather than the standard shopping experience of yesterday.” That is going to involve greater investment in public spaces for example and much more collaboration between landlords and the arts, communities and local governments to active those public spaces. “Only by doing that will you activate those spaces and hopefully capture consumer’s spending dollars,” he adds.
Weighing risk vs. return
Cross-border investment activity, which accounted for less than 25 percent of sales volume back in 2004, now accounts for nearly half of all retail property sales. Asia Pacific continues to grab a bigger share of those investment dollars. The region’s contribution to global investment activity has increased from 11 percent in 2004-2006 to 22 percent since 2009. In addition, a record $37 billion has been traded in the region over the past 18 months, according to Jones Lang LaSalle.
Rapid economic growth, high rates of urbanization and a growing middle class are all factors piquing investor interest in developing markets. “The challenge is how do you execute at a local level to access those opportunities to generate the kind of returns that on a risk-adjusted basis justify taking on all of the risks associated with doing that,” says Allen Smith, CEO of Prudential Real Estate Investors (PREI) in Madison, N.J.
Further adding to the complexity of investing in emerging markets is that the world remains fraught with uncertainty, whether that is the Eurozone crisis, the political impasse in the U.S. or other geopolitical hotspots in other countries. “The potential for volatility and uncertainty persists and has a huge impact on people’s thinking on where and how to allocate capital,” adds Smith.
Regardless of whether investors are looking at investment opportunities in developed or developing nations, no investment is entirely without risk. Risk aversion remains high in developed markets such as the U.S. and Europe.
“The quest for yield and security is very persistent and is evident in the demand for the best properties in the best markets around the world,” says Smith. The deleveraging and distress in those mature markets is creating opportunities to invest in various debt-related strategies. For example, PREI is finding some attractive return opportunities to provide mezzanine financing in Europe. However, the absence of meaningful economic momentum in developed makes it very hard to place macro bets on the recovery of the market.
One of the discussions that hit home with attendees was about the challenges associated with entering emerging markets. The rewards can be very high, but there is no “free lunch” as one speaker pointed out. Investors want immediate gratification, but investors need to have the patience to build a strong operating platform. “It is a marathon and not a sprint. You have to take your time to make sure you are doing things right,” says René Tremblay, ICSC pastchairman and president of Taubman Asia in Hong Kong. For example, it took Taubman seven years to find a strategic partner in China. “You have to go step by step, be patient, and it will take time,” says Tremblay.
Developers and investors agree that finding the right local partner is a critical component to international expansion. Competition is fierce in emerging markets, and it is essential for international investors to team up with local players. “I think foreign developers can compete if they team up with local operations,” says Tremblay. “If we don’t do that, then we are at a disadvantage.”