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Shopping Centers Today -> February 2008
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THE BUDDY SYSTEM
IN ASIA, DEVELOPERS AND RETAILERS WORK TOGETHER TO BUILD SHOPPING CENTERS
Singapore's CapitaLand Ltd. knows the value of local allies. Southeast Asia's largest developer has carved itself a leading position in the Chinese market in part by teaming up with leading retailers already on the ground.
There is no better example of a strong Chinese partner these days than Beijing Hualian Group, one of the country's biggest department store operators. CapitaLand has formed a partnership with the retailer on three Beijing Hualian-anchored malls already, with more on the way, and in November they made a deal under which Beijing Hualian will provide marketing and retail management for any properties that CapitaLand acquires in China.
"This partnership provides us with a head start in the retail business in Beijing and north China, and the outlook for our cooperation is rather positive," said Liew Mun Leong, president of CapitaLand, just after the deal was struck.
The partnership model is finding wide use these days as non-Chinese developers try to tap the burgeoning market. In many cases they are teaming up with Chinese developers to share experiences and risks, but they also are turning to retailers for the local connections they need."There are interested retail parties that have growth and expansion plans, and when they find quality developers, they work together to find locations and projects," said Robert F. Welanetz, CEO of Shanghai Kinghill, the real estate subsidiary of Thailand-based Charoen Pokphand Group.
Much of that interest is coming from big-box retailers and hypermarkets, Welanetz says. "You'll see Wal-Mart, Carrefour and hypermarkets try to find good developers to do business with, and you'll see people like Ikea and Decathlon Sports and those types of tenants also trying to seek out good relationships," he said.
This is similar to the early days of U.S. shopping center development, Welanetz says, when such leading department stores as Sears joined forces with up-and-coming developers to build centers in the burgeoning suburbs. In the U.S., of course, the path to projects was relatively straightforward - a matter of finding good locations, strong tenants and enough capital to build. In China shopping center development is a far more complicated enterprise. "China is so different from other places in the world," said Brian Castle, senior vice president in China for Montréal-based developer Ivanhoe Cambridge. "Language, culture and the speed with which it is developing all mean that you need knowledge and contacts." In addition, the government favors partnerships, and government approval is essential to getting deals done, he says.
Teaming up with a strong retailer is a clear way to speed the process, says Castle. "Some Chinese retailers quite clearly have an asset base that can give a developer a springboard," he said. Department stores dominate the retail industry in China, especially in the second-tier and third-tier cities, he says, and forming joint ventures with them can provide developers with a springboard into those markets.
"Those cities have all had department stores start up as local state-owned enterprises, and quite a few chains have developed out of that. You have huge department stores with great influence in different regions of the country," he said. "If you are coming into China, you want to have that scale, and you want to have their insights."
Beijing Hualian is one such retailer. China's fifth-largest chain, it has a portfolio of 68 properties - department stores, shopping centers and hypermarkets - in 35 Chinese cities. But Beijing Hualian is facing tough competition in the hypermarket arena as such foreign retailers as Wal-Mart and Carrefour set their sights on China. Carrefour opened its 105th Chinese store in December, and Wal-Mart operates 194 stores there. Partnership with an established developer allows it to concentrate its expansion efforts on retailing, not bricks and mortar. "The partnership works very well," said Pua Seck Guan, CEO of CapitaLand Retail, a subsidiary. "We are the investor in the real estate, and they are the key anchor. We both see the benefit. Both of us can establish our footprint much faster. Once we have established a working relationship we both know the requirements, and we can move very fast." Because CapitaLand owns and manages the buildings, Beijing Hualian spends less on maintenance and operations and can focus on its core strengths, Pua says. "In the long run they spend less money," he said. "It has very good benefits for both of us."
Beijing Hualian is not the only retailer with whom CapitaLand is forming a partnership in China. In 2004 CapitaLand joined with SZITIC Commercial Property Co., retail property division of the state-owned Shenzhen International Trust & Investment Co., to build Wal-Mart-anchored shopping centers throughout China. Under that three-way partnership, CapitaLand will either own or manage 26 Wal-Mart-anchored properties in China by the end of this year. (SZITIC struck a similar deal with General Growth Properties and Morgan Stanley Real Estate Fund, under which five Wal-Mart-anchored centers will be opened by 2009.) "CapitaLand is the big dog in China right now," said Castle. "From their perspective, a relationship with Hualian will give them more access to many more deals in China."
These partnerships are a natural consequence in a fast-emerging market, says Welanetz. "The basis of the shopping center industry is the synergy between developers and retailers," he said. "It creates a critical mass of retail that draws foot traffic and generates sales. The parties are linked in the business model, and it's no different in emerging markets. When you find someone who is capable of delivering the right kinds of support and amenities and public infrastructure, it is invaluable."
PARTNERSHIPS MOLDED U.S. RETAIL PROPERTY SCENE
As fashionable as retailer-developer partnerships are becoming in emerging markets, they are nothing new in the U.S. shopping center industry, which was brimming with such collaborations in the early days. Department stores were eager to tap growing suburban markets, and savvy builders saw opportunity in creating the shopping centers and malls to accommodate that eagerness.
That was a different world. In the 1950s and '60s, "every major department store company had its own real estate company as well," said Michael P. McCarty, senior vice president of research and corporate communications at Simon Property Group. "Oftentimes the development opportunities were identified first by the department stores, and at some point they said, ‘If we're the catalyst for this development, why don't we get a piece of the development action?' "
"A lot of the leading retailers demanded a business arrangement where they would anchor a project but not pay any rent, and sometimes in addition they would ask for participation in the deal," said Benjamin M. Carter, chairman of Ben Carter Properties and an Atlanta developer whose father developed malls.
The partnership model "worked well for a couple of decades," said McCarty, a veteran of The May Department Stores Co., Federated Department Stores and Homart Development Co., the development unit of Sears, Roebuck and Co., one of the leading developers of the time.
They faded as development and retailing itself grew more competitive. Retailers began concentrating on the core business of "making their stores more profitable, versus what might be considered a side business of being involved in someone else's real estate ownership," Carter said. Developers, meanwhile, amassed the capital and the clout to go it alone, especially at coveted properties.
"Every one of the department stores said, ‘We don't want to take this development risk - it isn't what we do.' They either sold off or closed down their real estate businesses, to the point where now you won't find any department stores or anchors joint-venturing," McCarty said.
At least you will not in the U.S. In China, India and other emerging economies, these kinds of partnerships are once again helping companies manage the risk of entering new markets.
McCarty says Simon has formed partnerships with Wal-Mart and local developers to build Wal-Mart stores in China. It has used the model in Europe too, in partnerships with French giant Carrefour Group to develop hypermarket-anchored centers. "Carrefour would identify a site, acquire it, take the site through the approval process, then bring us in. We would buy half of it," McCarty said. "They would build their store, and we would build an enclosed mall around it." The upshot: The retailer took the upfront development risk, while Simon took the development risk on the small-tenant space and handled leasing and management. "It's a way for them to offload some of the cost in creating the critical mass they need," McCarty said.
And it's another sign that partnership still works.
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