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DON’T CRY FOR ARGENTINA

Its retail industry and economy are in a strong rebound

BY MARÍA BIRD PICÓ

The opening of the first two malls in the city of Rosario during late 2004 was a cause célèbre for Argentina’s economy in general and the country’s retail real estate industry in particular.

The long-awaited inaugurations in that city, the second-largest in Santa Fe province, marked the revival of an industry plagued since 1998 with severe recession, low sales and the 2001 banking and financial debacles. Retail sales plummeted by more than 30 percent in 2002, and the two proposed Rosario malls were among retail’s most prominent casualties when developers decided to stop construction on them for a year.

For executives like Gustavo Lôpez Baasch, financial manager at Galerías Pacífico in Buenos Aires, one of the country’s most prominent centers, the crisis is a closed chapter — at least for now. The mall industry in this country of 39.14 million people is one of today’s stellar performers.

Argentina’s Instituto Nacional de Estadísticas y Censos reports that shopping center sales were up 36 percent last year over 2003, more than four times the country’s gross domestic product growth of 8 percent.

“The prognosis is good, and the outlook is even better,” said Lôpez. Others concur, and with equal enthusiasm.

“Shopping centers are ringing up Argentina’s strongest retail sales,” said Alejandro Gustavo Elsztain, general manager of Buenos Aires-based Alto Palermo Shopping Centers. “We are going through one of our best periods.”

Elsztain’s company, which owns nine malls in Argentina, six of them in Buenos Aires, is a subsidiary of Inversiones and Representaciones, the largest real estate developer in the country.

The resurgence in sales is good news for a relatively young industry here. After the first mall opened in 1991, growth came in a large spurt. By 2001, 51 shopping centers had been built. But developers have added only five to the roster since then (all of them opened last year), and this has left Main Street shopping supreme in Argentina; the Cámara Argentina de Shopping Centers estimates that malls account for only between 12 percent and 15 percent of all retail sales.

Until recently, economic conditions simply wouldn’t support more malls. But in 2003 malls started reaping the fruits of an export-and-tourism-led economic boom. In addition to the malls opened last year — which included the two in Rosario, 186 miles northeast of Buenos Aires — at least five more could break ground this year.

“For the shopping center industry, the economic crisis had both an ugly and a pretty side,” said Florencia Aguilar, director of research at the Buenos Aires office of Cushman & Wakefield Semco, noting that a devalued peso has at least boosted tourism and exports. “We are finally seeing the pretty side.”

The rosy picture includes plans for new malls and expansions, a zero vacancy rate and higher sales volumes. A salient point is that several projects are being financed with the companies’ own capital. Money has been flowing since January 2002, when the government abandoned the peso’s 1-to-1 peg to the U.S. dollar and let the currency float. (One U.S. dollar now yields three Argentinean pesos.) What was once considered an attractive but prohibitively expensive tourist destination has become hot not only for visitors from neighboring countries but also from Europe. In 2003 alone, a record 3.3 million tourists visited the country.

“The influx of tourists has been a windfall for our industry,” said José Roteda, president of the Cámara Argentina de Shopping Centers. “We estimate that between 15 to 20 percent of sales taking place in Buenos Aires malls are made by foreign tourists.”

Malls near hotels or tourist destinations, such as Galerías Pacífico, strategically located on the centric Florida and Côrdoba avenues in Buenos Aires, have particularly benefited.

Galerías Pacífico is in a national historic building that once housed the railway company’s administrative offices. The building is famous for its architecture and murals by renowned artists. The fashion-oriented mall, spanning 331,413 square feet of leasable space, thrived during 2002 as foreigners rang up 80 percent of its sales. (Before the slump, Argentineans were responsible for 70 percent of sales, Lôpez says.) Locals are shopping again too, accounting for 40 percent of Pacífico’s sales.

The uptick owes something to the currency devaluation and to tight levels of consumer credit, both of which encouraged Argentineans to shop domestically.

But even at the height of the crisis, Galerías Pacífico lost only one tenant: Spanish retailer Zara, which closed several of its mall stores in Argentina. Other European retailers, including Prenatal and Mango, left the country completely, but Zara retained a street-front store near Galerías Pacífico.

Mall executives say it is only a matter of time before these retailers return, given Argentina’s sizable market. Versace, for instance, which shut down in 2003, is back, next to the racks of Dolce & Gabanna and Gianfranco Ferre at the Mondo retailer in Patio Bullrich, a small Buenos Aires mall with 125,131 square feet of gross leasable area (GLA).

But if the currency plunge and resultant sociopolitical instability scared some foreign retailers away, the domestic merchants have become comparatively inured to the ebbs and flows of the local business climate.

“Our retailers are used to the swings of the Argentinean economy; they know how to weather these crises,” said architect Gabriel F. González, a director at Celayeta González Orlando Arquitectos, a Buenos Aires-based design and consulting firm with experience in shopping centers. “Our economic scenario has never been favorable.”

Meanwhile, it is not just shoppers in Buenos Aires that are loosening their purse strings. Elsewhere, too, retailers and mall owners serving mainly the hitherto struggling middle class are seeing shoppers return.

Rising prices for raw materials produced outside the capital city have cranked up the manufacturing and agriculture sectors. In 2003 foreign trade equaled about 33.7 percent of Argentina’s GDP, up from 11 percent in 1990. And this affluence is spurring demand for consumer goods and entertainment. Shopping centers, in particular, are benefiting, because consumers perceive them as a safe, crime-free place to shop.

The retail sales improvement has lifted leasing values, which are matching and in some cases exceeding precrisis levels in Argentinean peso terms. This is a notable achievement, given the struggles of the nonretail real estate sector, notes Hector Condomiña, manager of the commercial division at the Buenos Aires office of CB Richard Ellis. One reason for the quick recovery is that malls lent their tenants a hand during the crisis, lowering leasing rates by an average of 30 percent. They also reined in operating expenses by about 20 percent, says Cámara Argentina’s Roteda.

These steps allowed the industry to retain most of its tenants. In October 2002 malls boasted a mere 8 percent vacancy rate, less than half of Main Street’s 18 percent rate, according to a Cushman & Wakefield report.

Malls are posting even fewer vacancies these days, and most have long waiting lists. The owners of the Coniglio children’s clothing chain, for instance, complain they cannot find space in malls.

It comes as no surprise, then, that Argentina’s two main mall developers, CencoSud and Alto Palermo, scurried to put the finishing touches on their malls in Rosario. The city of 1.12 million people has experienced an economic revival thanks to exports of agricultural products, most notably soybeans, to Asian countries. Rosarinos and their neighbors no longer need to drive two and a half hours to do their serious shopping in Buenos Aires. The two malls will be inaugurating movie theater complexes this year.

At 753,480 square feet of GLA, CencoSud’s Portal del Rosario is now the country’s second-biggest mall, and its largest outside Buenos Aires. It was 99 percent leased by inauguration day, says Jorge Agustín Justo, general manager of CencoSud’s shopping centers division. The Chilean company has 12 shopping centers in Argentina and owns the Easy and Jumbo chains.

CencoSud started building Portal in 2000, when Rosario’s economy was weak. The project was put on hold a year later. By the time the $40 million mall was completed, the market had turned out to be more favorable than expected.

“Portal del Rosario has been one of the few exceptional things happening in our country,” said Justo. “Our company has been here for 25 years, through the good and difficult periods. We do not only have confidence in this market, but show it every day with our commitment.”

That investment paid off handsomely last year, when sales at CencoSud’s shopping malls rose 40 percent.

Shopping centers in other regions report healthy sales too. They’re up 60 percent at the Alto Noa Shopping, a mall in Salta, in Argentina’s north, says Elsztain. It boasts 187,627 square feet of GLA.

Out in Mendoza, in the heart of Argentina’s wine country, Alto Palermo has expanded its stake in Pérez Cuesta S.A.C.I., holding company of another regional mall, Mendoza Plaza Shopping, from 18.9 percent to 68.8 percent. Mendoza Plaza had 25 vacancies in 2003; by the end of last year, all but four had been filled. At press time Elsztain was predicting that those would all be leased by early this year.

“The sharp improvement in our agro-industry has had a positive and major rippling effect on regional retail sales,” said Elsztain.

The success of these malls has whetted appetites for other projects outside Buenos Aires.

Alto Palermo plans to invest $15 million in a mall in Neuquén, one of Argentina’s 23 provinces out west in the Andean Patagonia region, and build a smaller one in El Caballito, a part of Buenos Aires. CencoSud has plans for malls in Côrdoba, in the country’s heart (440 miles from Buenos Aires), and San Miguel de Tucumán, capital of the Tucumán province, in the northeast (813 miles from Buenos Aires).

As for Buenos Aires, there is talk of building small malls and expanding existing ones. Plaza Liniers Shopping Center, for instance, is negotiating the purchase of adjacent properties for a future expansion. The economic picture is good for now, but things aren’t entirely rosy, executives caution. At about 15 percent, Argentina’s unemployment rate is still one of the highest in South America. After the 2001 crisis, more than half the population is officially poor. The government is still grappling with a December 2001 default on $95 billion in debt, among other major issues.

“The conditions are out there for Argentina to enjoy sustained, long-term growth,” said Roteda. “It’s a matter of restoring credibility and trust with investors and waiting.”

Economically, there’s only one direction for the country, some say. “It’s impossible to default on defaulted debt,” Elsztain quipped. “The bubble already burst, and from now on the economy can only head up.”

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