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FEWER LATIN DEVELOPERS SELLING MALL SPACE TO TENANTS

By María Bird Picó

Signs reading “For Lease” are displacing those reading “For Sale” in Latin America’s shopping centers, as landlords opt to retain control of their properties rather than sell them to retailers.

This trend has taken hold in Costa Rica, Guatemala, Peru and Venezuela, where tradition and economic circumstances had favored tenant ownership of centers. Most new centers in these countries are only leased to their retailers, or at most sell a tiny fraction of their properties to their occupants. Even Colombia — where condominium ownership is still the norm in new malls — boasts a handful of new ones operating under a leasing structure.

Developers have adopted the leasing structure as economies have stabilized and grown more sophisticated. In particular, developers now have access to hitherto expensive or nonexistent financing, which means they are under pressure to sell mall space to recoup their investments.

Consequently, they have been gaining expertise as landlords and control over their properties, and this has had a beneficial influence on the quality of the shopping experience, proponents of the leasing structure say. No longer are retailers in such malls free to do as they wish with their spaces nor are they at liberty to open when they like.

This transformation is evident in Venezuela, for instance, where Grupo Sambil built its first lease-only mall — Sambil Caracas — in 1998. Venezuelan shoppers now expect all mall tenants to open seven days a week and keep the same hours.

Executives say the change has also allowed retailers to focus on their primary function: retailing. “Our main business is to operate the malls, freeing retailers to concentrate on their core business, which is selling, and not real estate,” said Alfredo Cohen, vice president of Grupo Sambil, which owns six malls in Venezuela.

In some Latin American countries — notably Argentina, Brazil, Chile, Paraguay and Uruguay — landlords have long retained ownership of their malls. But in Colombia, Ecuador, Peru and Venezuela, the developer was in it for the short term, selling space to retailers once construction was complete. “The change of mentality has come hand in hand with the transformation of macroeconomic conditions in a country,” said Eric Rey de Castro, of Lima-based Colliers International, an international real estate consulting firm. “A change of vision has made businesses think long term. In the past, however, you did not know what would happen in two years, so mall developers built and pulled out right away.”

Developers in some of these countries are finding greater access to attractive long-term financing, helped by pension funds, real estate trusts and financing institutions eager to put their money into retail property.

In some countries, though, notably El Salvador, Costa Rica and Venezuela, landlords are taking a middle ground, leasing and selling space in some malls. “The presale injects capital to recover part of your investment so you can continue the development of the property,” said Ricardo Auspurg, president of El Salvador-based Plaza Mundo, which is 30,000 square meters (323,000 square feet). “But the financing industry here is very competitive and offers good terms and interest rates if you are a good candidate. The decision to sell or to rent basically rests on the business strategy of the developer.”

The two-year-old Plaza Mundo in San Salvador is 100 percent leased. “The main advantage is that the mall can execute marketing and operational strategies under a unified and agile vision,” said Auspurg.

Carlos Pérez, president of Venezuela-based Ferretodo, a hardware chain, says he can immediately tell the difference between a mall that is owned by a landlord and one owned by the occupants. “Malls built before Sambil Caracas were anarchic boxes with many locales and owners without the capacity to agree to minimum norms of operation,” said Pérez. “This did not foster a favorable business environment.”

A leased mall can also renew its tenant mix as needed, and embark on expansions and promotions without the need to consult with a lot of co-owning occupants, executives say. “The management of these shopping centers is more professional and these properties tend to have a longer life,” said Uruguay-based Carlos Lecueder, a mall developer and manager.

But managers of malls partially or completely sold say they are not powerless to regulate these properties. The secret lies in the bylaws enclosed in a condominium agreement’s legal structure, they say. “We came up with bylaws that force the buyer to stick to the norms of the malls, such as tenant mix and extended operating hours,” said Arnold Moreno, president of Caracas-based Martex. “Our retailers readily agree.”

Of Mantex’s shopping centers, Metropolis Valencia is fully rented while the Metropolis Barquisimento, scheduled to open December 2006, will be 90 percent leased. Moreno says the company decided to sell a 10 percent stake in the latter to secure capital to build malls throughout the country.

Another advantage of selling a portion of a mall is that it secures a commitment from an anchor that might otherwise leave, says José Gerardo Chavarría, general manager of Costa Rica-based Desarrollos Mega, owner of three malls in that country. For instance, in its Paseo de las Flores mall, in the city of Heredia, the first phase was all leased but in the second phase, now under construction, the anchor tenant, an Almacenes Carrión department store, has bought its space.

For mall executives such as Augusto Aninat, however, the long-term success of a mall hinges on the freedom to undergo periodic tenant-mix reviews, remodelings and a coherent marketing strategy. “You cannot afford to pause in a dynamic market such as this,” said Aninat, assistant commercial manager at Santiago, Chile-based Parque Arauco, one of that country’s major malls.

Colombia, though, is a notable exception to the growing trend of leasing space. Although a handful of new malls are operating under a leasing structure, the majority of centers under construction are for sale or have a sale-leasing mix, executives say.

Colombia has seen considerable retail development lately as its economy has improved. But for all this progress, most retailers in Colombia still prefer to own their own retail space, according to Ciro Aurelio Plata, manager of the 50,500-square-meter Unicentro Cali, and president of Cali-based Asociación de Centros Comerciales de Colombia, which groups 30 shopping centers in Colombia. Unicentro Cali, one of dozens of malls owned by its retailers, has 250 owners.

From the financing angle, leasing is costly for retailers, Plata argues. The premium or bonus a retailer pays when first leasing in a mall can be put toward the purchase price of the space in a condominium shopping center, he says. To operate the mall, Unicentro Cali owners elect an administrative board, comprised of seven principals and seven substitutes. The board meets every month and decisions are executed by the manager. Once a year there is a general assembly where the mall’s annual budget is presented and approved.

The handful of for-lease malls now entering Colombia have adopted this structure only because they enjoy certain advantages, Plata argues. For example, Centro Comercial Único is a former factory retrofitted into an outlet mall at a small cost.

Retailers have embraced leasing because it gives them the opportunity to use capital to open other stores they would otherwise have spent buying a space, says Sandra Tenorio, general manager of Jardin Plaza Shopping. “Their business objective is not to invest in real estate,” she said.

Soon leasing structure will be adopted even in Colombia, observer say.