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BLAME IT ON RETAIL

Brazil’s shopping center sales and rents are up, vacancies down

BY SUSAN THORNE

The sun is shining again on Brazil’s shopping center landlords and retailers. After four years of fluctuating economic and political conditions, the Brazilian shopping center industry is at last experiencing a pronounced rebound as the national economy stabilizes.

“Rents are rising, arrears are declining, key money is on the rise, and mall managers and leasing agents are making up some of the losses sustained during the first three and a half years of the millennium,” said Paul Duval, president of Shopinvest Planning, Marketing and Development, Rio de Janeiro, which owns several suburban malls.

Indeed, information from ABRASCE, Brazil’s shopping center trade organization, indicates that inflation-adjusted shopping center sales for the first 10 months of 2004 (the most recent statistics available at press time) were up 9 percent against the comparable period the previous year, while rents were up 5.5 percent.

Center vacancies, which averaged 6.03 percent of total gross leasable area (GLA) in 2003 and the first half of 2004, declined to 3.63 percent as of November. Foreign retailers are expanding their operations in Brazil, and the Christmas season saw a strong revival of consumer spending.

All this is a far cry from the situation in the first three years of this century, when high unemployment combined with double-digit inflation cut into shopper spending power. Between 2001 and the end of 2003, inflation-adjusted household earnings dropped by about 15 percent, according to data from Cushman & Wakefield Semco, São Paulo.

The resulting 10 percent drop in retail sales hit small retailers hardest, says João Pessoa Jorge, president of Sonae Imobiliária, São Paulo, a subsidiary of the Portuguese center management and development concern of the same name. Deep-pocketed anchor tenants could ride out the period of lean sales, but small players had difficulty financing their businesses, Pessoa says. And Brazilian shopping centers rely heavily on independent retailers, he adds. The 80-20 rule of thumb at U.S. centers (80 percent chains, 20 percent independents) is reversed in Brazil, where family-run operations make up the great majority of shopping center tenants.

Among merchandise categories, apparel and home furniture and appliances were the most seriously affected, industry observers say. Inflation made installment financing of big-ticket items a costly proposition for consumers, says Paulo Pierotti, founder of Conshopping, a Rio de Janeiro-based retail consulting firm specializing in market research and leasing. “With interest rates as high as 12 percent, buying a TV could cost 50 percent more than the ticket price,” he said. Consequently, 2002 and 2003 were black years for such appliance retailers as Arapua, Casas Bahias and Ponto Frio.

While tenants struggled, shopping centers used various strategies to keep space rented. “Landlords coped by becoming more flexible in their rent schedules, [common-area maintenance] costs and the collection of accounts in arrears,” said Shopinvest’s Duval, whose malls serve the lower middle class, a population particularly hard hit by the crisis; vacancies in these centers climbed as high as 15 percent to 20 percent from a previous level of 5 percent to 10 percent. The company adopted such methods as the temporary lowering of rents, the reduction of late fees or extension of payment times, and, in some cases, negotiation of temporary “sweetheart” deals to attract tenants, says Duval.

Many centers escaped the crisis relatively unscathed, however. Upmarket malls like Iguatemi, in Rio de Janeiro, were sustained by the spending power of their affluent customers. Some premium-price retailers, such as MontBlanc, never stopped expanding. “A market of 180 million people cannot be ignored, even if only 40 million of them are in a position to buy in shopping centers,” said Luiz Fernando Pinto Veiga, executive director of ABRASCE.

Regional malls with a broad customer demographic also avoided severe impact from the middle-class income drop. Rio de Janeiro-based Grupo Multiplan, for example, which owns a dozen regional malls, maintained a fairly consistent occupancy level because its shoppers come from a range of economic backgrounds, says Reginald A. Barnes, AMD, ASM, the company’s director of corporate relations.

Large, professionally managed, downtown malls of between 200 and 300 stores with strong brands did well, says Victor Almeida, principle partner of Victor & Schellenberger, a shopping center management and consulting firm in Rio de Janeiro. Some urban malls with a middle price point, however, adjusted their tenant mix to reach a more upmarket clientele, he says, citing Shopping Jardim Sul, in São Paulo, as one such. That 301,336-square-foot center upgraded its merchandise offerings by adding such retailers as Polo Play (men’s fashion), Vivara (jewelry) and UMA (women’s fashion), among others.

As for new mall development, a handful of projects that had already been in the pipeline were carried to completion during the downturn, but overall, new center construction fell off dramatically. Eight new projects were inaugurated in 2001 and seven each in 2002 and 2003 — versus 19 in 1999 and 18 in 2000.

Those companies that did open new centers found the pool of available tenants much reduced. “We opened a brand-new center in São Paulo — Boavista Shopping Center — and we still have 50 stores vacant of 190 in total,” said Sonae’s Pessoa. Sonae also has 40 vacant stores in a second center, Shopping Penha, which was recently expanded to nearly double its GLA. But Jorge is confident that those premises will be filled during the first half of this year.

More foreign retail players and shopping center investors are arriving now that the crisis is apparently past. The retailers include Burger King and Pizza Hut, both of which re-entered Brazil in 2004 after earlier efforts there had to be aborted.

Another rebounding North American retailer is McDonald’s, which operates 227 of its 549 Brazilian restaurants inside shopping centers. McDonald’s closed 35 restaurants in 2002-2003 because of declining sales. But sales climbed 12 percent last year, so the company plans to open five new stores this year, according to Marcelo Nabih Sallum, real estate and development director of McDonald’s Corp. Brazil.

Brazil’s economic ouput grew by about 5 percent last year, and salaries rose by 10 percent to 15 percent, Cushman & Wakefield Semco data show. Developers are showing confidence through their expansions of existing centers as well as the 14 new malls that either opened last year or are slated to open this year, and which will bring the national total to 236 operating centers, according to ABRASCE.

Paulo Stewart, president of Saphyr, a Rio de Janeiro-based development and management company with six regional malls, pronounced last Christmas the best in 10 years; sales of DVDs, digital TVs and other electronics products, he says, buoyed those sales. He predicts that pent-up demand for consumer goods will propel the country’s retail sales for some time to come.

Stewart is also encountering unprecedented investor interest in shopping center real estate. “A lot of new investment players want to be involved in future projects,” he said. Saphyr has 40 investment partners for Super Shopping Osasco, São Paulo, a 199,140-square-foot center now under construction near a power center with a Wal-Mart store. “This [interest] is something totally new,” he said, “unlike anything I’ve seen in my 20 years of involvement with shopping centers.”