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Shopping Centers Today -> June 2004
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EUROPE-BOUND
U.S. developers seek to buy, build centers in EU countries
BY DEBRA HAZEL
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| Hines’ Diagonal Mar |
Attracted by a continent where there is much less square footage of retail per capita than at home (two square feet in Europe, compared with about 20 in the United States), Hines, The Mills Corp., Polimeni International, Simon Property Group and other U.S.-based companies have built retail centers in France, Italy, Spain, Poland and elsewhere in Europe. They all expect to build even more, and other developers are keeping a watchful eye on the region.
“The landscape in Europe is where the U.S. was 10 to 15 years ago,” said Stephen E. Sterrett, CFO of Simon, which is building centers in France, Italy and Poland.
Some U.S. companies, such as New York City-based O’Connor Capital Partners, have been investing in European projects for years. But until the late-’90s, American firms did their ground-up shopping center development right here at home, where legal systems and tenant pool were good and familiar. That is beginning to change, as evidenced by the openings of Diagonal Mar, a joint venture between Houston-based Hines and Jean-Louis Solal Investissements in Barcelona, Spain; Mills’ Madrid Xanadú; the Simon projects; and Polimeni’s developments in Poland. Just last month a partnership of Apollo Real Estate Advisors and Rida Development Corp. paid $840 million for a portfolio of centers and freestanding stores in Poland.
Some might think the main reason for this overseas expansion is the slowdown in development at home. After all, only two regional centers opened in the United States last year, and there are only a handful more scheduled to open this year and next. But the developers themselves say Europe is simply another part of their long-term strategy for growth and that they are taking advantage of the opportunities that come along.
“We had one of the last major developable sites in Barcelona presented to us,” said Scott P. Murray, SCSM, a Hines vice president, referring to the Diagonal Mar retail center that opened there in September 2001. Hines also opened Metropolitan, a retail-office complex in Warsaw, Poland, in September 2003.
Developers say Europe offers the most practical location for those looking overseas, given its political and economic stability compared to other parts of the world, such as South America; currency risks are a particular concern in South America, Murray says.
“We looked hard at Canada, at Mexico; we looked at South America,” said Simon’s Sterrett. Working in Europe “is less a function of identifying a market than [of] being presented with opportunities.”
Simon began its investments in Europe in 1998, when it acquired an interest in Paris-based developer Groupe BEG. At the time, Simon was busy growing through acquisition in the United States, cutting an ever-bigger figure in the world of retail real estate, Sterrett says.
“As we grew in the United States, and as we developed and owned higher-profile centers like The Forum Shops, we started getting more inquiries from outside the United States about exporting our name and expertise,” he recalls. “The French investment was the first that made sense.”
BEG had an existing portfolio as well as a development pipeline, and it promised returns consistent with those in the United States on a risk-adjusted basis, Sterrett says. The venture now has nine malls in France and Poland, along with one under construction in each country.
Late last year Simon also formed a joint venture to co-own and build more than 40 centers in Italy with Rinascente Group (SCT, April 2004).
It might make sense, then, for more developers to look to Europe for opportunity. But there are complexities. For one thing, the return on investment for European centers simply isn’t as high as it is for centers in the United States, says Stewart Drummond, an equity partner at Cushman & Wakefield Healey & Baker, London. Developers expecting returns of between 8 and 9 percent at home should expect to realize about 6.5 to 7 percent in Europe, he says.
“There are any number of variables, including the scarcity of land in Europe,” Drummond said. “The cost of land here is much higher.”
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| Mills Corp.’s Madrid Xanadú retail-entertainment
center, which opened outside Madrid last year. The company has other
European projects in the pipeline.
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Other developers are looking for even higher returns. Garden City, N.Y.-based Polimeni (see story) is focusing on hypermarket-oriented projects in Poland exclusively.
“[Overseas development] is risky,” said Philip Okun, president of Polimeni. “But we look at a minimum 25 percent to 30 percent return.”
This is helped by the fact that construction costs in Poland are about the same as in the United States, he says, though that may change given the country’s May 1 entry into the European Union. Costs have tended to rise after a country gains membership, Okun says.
To help avoid some of the pitfalls of an unfamiliar market, most developers join up with local partners. Retail development in Europe is very different from the United States, and developers say they aren’t going into Europe expecting to re-create the business model they have back home. Not only do European legal and leasing systems differ from those in the United States, they even differ among European countries; key money, for instance (the fees retail tenants pay landlords for the right to operate in the center), is not used much in Spain, but can be found in northern Italy, says Vinson.
“We’re operating as Europeans, not as Americans,” Vinson said. “Madrid Xanadú was built as a pan-European center for the Spanish market.”
With few exceptions, they are not bringing U.S. retailers with them, either.
All agree that developers entering the market have to do their homework; a local partner is critical, they say.
“I just absorbed, absorbed and absorbed” Spanish and Catalan culture, Hines’ Murray said.
Europe poses other problems for developers. The retail per capita is far lower than in the United States, but so is the freedom to develop. Britain has banned out-of-town shopping centers; France and Germany are both very restrictive. And in this relatively restrictive environment, there has already been considerable development by local shopping center builders.
Even in Poland U.S. developers will find the window of opportunity closes sooner rather than later, says Okun. “Ultimately, the real competitive threat will come from the Poles themselves,” he said. “In 10 years they won’t need or want us.”
Elsewhere in Europe, though, there is more activity, especially in the south (Greece, Italy, Spain) and in Eastern Europe.
Nevertheless, some developers are holding back. Even such a major firm as General Group Properties has looked without yet expanding outside the United States. General Growth President John L. Bucksbaum, SCSM, cites staffing issues, the need for a partner and the potentially lower returns as the reasons the company has yet to go overseas — particularly when the company still sees opportunity to build new projects and redevelop older ones right in the United States.
“If you look at retail and the globalization of retail, it’s somewhat a natural extension of our business,” Bucksbaum said. “[But] it’s difficult. It’s a long ways away, whenever it might be.”
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