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NO VANILLA IN MANILLA

The Philippines boasts some of the world’s most innovative retail projects

By Joel Groover

Asian developers hunting for new retail concepts often ask Scott Harris for a list of must-see malls in the U.S. But Harris, who, as ICSC’s vice president of business development, monitors activity in Africa, Asia, Latin America and the Middle East, likes to show these seekers that a Grand Tour of American Malls may not even be all that necessary.

“If you want to see some really interesting, creative stuff that is working,” Harris tells them, “go to the Philippines.”

With the help of U.S. and European business partners and consultants, developers in China, India and the Middle East are rapidly mastering shopping center basics. In the Philippines, however, a handful of local developers have been putting up modern regional malls and mixed-use projects for decades. “Their properties are well designed and very professionally managed and operated,” said Harris. “These are people who understand the business.”

It is a hallmark of the industry’s maturity that Philippines developers — Araneta Group, Ayala Land, Robinsons Land Corp. and SM Prime Holdings among the dominant names — spend much of their time strategizing about how to reinvent, expand and differentiate aging properties. Some malls in the Philippines, such as Ayala Land’s 700,000-square-foot Greenbelt, in Manila’s Makati Central Business District, have undergone multiple remakes in the past few years and yet continue to evolve along with the country’s fast-growing consumer economy. Ayala Land plans to open the first and second phases of Greenbelt 5, a 336,000-square-foot fashion, luxury retail and fine-dining expansion (so named because it will be the fifth retail component to be built at Greenbelt) in October 2007 and August 2008, respectively. This year SM Prime Holdings completed a five-level, 820,000-square-foot expansion of one of the first malls built in the Philippines, SM City North Edsa, which has grown from one building to four since opening in Quezon City in 1985.

New malls, too, are on the drawing board, particularly on the outskirts of metro Manila and in the high-growth provincial cities. SM Prime, which owns 27 malls amounting to a total 38.7 million square feet, will open as many as six malls per year during each of the next four years, says Jeffrey Lim, the firm’s executive vice president for finance and administration. SM Prime opened five malls this year, including SM Mall of Asia, a behemoth that made international headlines and for whose May 21 opening nearly 1 million people turned out. The 4.2 million-square-foot center, which occupies 19.5 hectares in Pasay City, next to Manila Bay, is the largest mall in the Philippines and the third-largest in the world, behind only China’s Golden Resources Mall, in Beijing, and the South China Mall, in Dongguan. Besides some 700 local and international retailers and approximately 150 indoor and outdoor dining outlets, the Mall of Asia is home to the country’s first Imax cinema and its first Olympic-size skating rink. Perhaps more impressive, though, is the fact that this mammoth property is over 90 percent leased. “Sometimes it is difficult to imagine how the Philippines can hold a mall of this size,” Lim said.

The flood of international tourists visiting the mall clearly helps. But the real driver of mall development in the Philippines is the extra cash that now fattens the wallets of many local shoppers, observers say.

Some of that cash comes from the mass migration of business process outsourcing (BPO) outfits to the country. Tess Fernandez, head of research at Jones Lang LaSalle’s Manila office, writes in an October report that the Philippines now ranks second to India as the outsourcing destination of choice for multinational corporations. Fernandez cites government data showing that as many as 150 outsourcing firms, which earned revenues of about $2.4 billion in 2005, have set up shop there. The BPO industry’s annual growth rate stands at between 75 percent and 100 percent. “The boom in outsourcing is driving growth in other sectors, most notably in the real estate industry,” Fernandez wrote.

Indeed, retail real estate property holders reap manifold benefits from this boom. A shortage of office space in the Philippines means that BPO firms must pay higher rents for offices at mixed-use developments. It also means that they are more likely to move into Philippines malls.

Computer maker Dell operates a large outsourcing branch at the Mall of Asia, and Robinsons Land has wired up high-tech call centers at five of its shopping centers.

And young BPO workers love to shop, of course. “BPO workers are normally between the ages of 22 and 30, with very strong purchasing power,” said Nilo S. Mapa, general manager of Robinsons Land’s commercial centers division. “These are people who are likely to be single, and in the Philippines, even at that age, so long as you are single you live with your parents. This gives [these workers] a huge propensity to spend.”

They cannot spend that disposable income, however, if the malls and restaurants they would patronize are closed when they finish their shifts. “Interestingly enough, their work hours are during our nighttime, when the mall is closed,” Mapa said. “When they get out at 6 o’clock in the morning, they need some places where they can spend some recreation and eat. We now have to open certain sections of the mall to be able to accommodate them.”

Other economic factors buoy consumer spending too. During the Asian financial crisis of 1997, the sheer volume of remittances from overseas Filipino workers enabled the Philippines to weather the storm better than some of its neighbors. In 2005 an estimated 10 million Filipinos in 180 countries sent $10 billion back home. The Filipino population now stands at 89.4 million and is growing at about 2 percent per year. The median age is just 22.5.

Beyond macroeconomics is the centrality of shopping in Philippines culture, which long ago coined the term “malling” as a national pastime. On weekends it is not unusual for Filipino families to spend about four hours at the mall, says Miriam O. Katigbak, executive vice president and head of Ayala Land’s mall division. A foreign visitor might be surprised to see churches in the country’s shopping centers, but for Filipinos, a Sunday of malling often begins with mass, right on the property. “The Philippines basically has two seasons, the rainy season and the very hot summer season, and so an enclosed, air-conditioned space is a luxury for many,” said Katigbak. “Also, we don’t have that many open parks and museums and places to entertain, so the mall has become a gathering place for everyone.”

To be sure, the Philippines’ shopping center industry is not without challenges. A typical mall is a one-stop-shopping site measuring between 540,000 and 860,000 square feet, Lim says. Occupancy rates at these properties are high — Mapa estimates north of 90 percent for the portfolios of Ayala, Robinsons Land and SM Prime. But many of these tenants are local mom-and-pops, and the anchor stores are frequently owned and operated by the mall owners themselves.

“There are lots of good entrepreneurs in the Philippines, but their access to capital is not as high,” Mapa said. “So oftentimes the domestic retailers aren’t as excited to expand as aggressively as we are, especially when it comes to the provincial areas.”

Mapa, for one, would like to see the major owners do more to set themselves apart from one another by offering distinct tenant mixes. If more international retail chains stepped up their presence in the Philippines, this would be easier, Mapa says. But as columnist William Esposo noted in a recent article for Philippines news site Inq7.net, international investors often have an exaggerated view of the risks of doing business in the Philippines, in part because media coverage focuses on violent crime in Manila, Muslim and communist insurgencies in the provinces, government scandals and the gap between rich and poor.

Still, the major mall owners are working toward differentiation. Ayala puts a major focus on special events and now has some 18,000 event days across its eight-mall portfolio. (The company has five expansions and/or new developments in the pipeline.) Its Greenbelt reinvention, in fact, is a good example of the role creativity can play in differentiation. Before its 2002 redevelopment, Greenbelt was an unremarkable jumble of specialty and convenience retail anchored by a bus terminal, a supermarket and two open-air centers.

The goal of the redesign was to offer something new to Filipino shoppers by overturning the regional mall concept to which they have long been accustomed. Rather than a department store or supermarket, Greenbelt’s primary anchor is a 300,000-square-foot park that, with its lagoon and tropical landscaping, serves as an oasis for up to 100,000 daily visitors.

The standard mall here is an air-conditioned, enclosed box that shields shoppers from the elements. Greenbelt, by contrast, defied skeptics — and the Philippines’ tropical climate — by adopting an open-air format and streetscape design, all in a country where outdoor cafés cooled by misters and shaded by trees and awnings are ubiquitous. The mall further defied conventional wisdom by emphasizing exterior architecture and nonretail elements such as an art museum and a chapel. Some 70 percent of its 250 tenants serve food.

Ayala wants the Greenbelt 5 expansion to showcase local talent. “What will make Greenbelt 5 unique is that, aside from having more restaurants featuring the best chefs, we are also going to have a Filipino zone that will feature the best Filipino artists in fashion and home,” said Rowena Tomeldan, vice president and deputy head of Ayala Malls Group. “The Philippines has a lot of top exporters, but they don’t sell their product in the country.”

Given the resiliency of Filipino shoppers and the creativity of these mall owners, it’s no wonder Harris is bullish on the country. “It qualifies as one of those hidden opportunities that is not normally mentioned when people talk about emerging markets,” Harris said. “I went earlier this year, and every place I visited was really crowded. People were shopping, and there was a lot of vibrancy.”