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Shopping Centers Today -> December 2007
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PERU’S RETAIL BOOM
PERU’S BLOSSOMING ECONOMY AND VIRGIN MARKET ATTRACT FOREIGN INVESTORS
Steadily streaming into Peru, along with throngs of tourists, are swelling numbers of foreign investors looking to partake in that country’s new gold rush: retail real estate.
“Peru has enjoyed tremendous growth, and this is being reflected by the demand for goods and increased retail activity,” said Augusto Díaz, general manager of Lima-based Valditex, exclusive distributor in Peru of Tommy Hilfiger and Kenneth Cole, of which it operates two stores each in Lima. “The good news is that we have enjoyed sustained economic growth for several years.”
Have they ever. Peru’s gross domestic product grew 8 percent last year and 7.7 percent for the first half of this year, according to Peru’s National Statistics Institute. Now retail development is striving to catch up with the economy. “Peru is a virgin market where only one big mall has been built during the past 10 years,” said Eric Rey de Castro, managing director of Lima-based Colliers International. “This is hard to believe in a country with 28 million inhabitants. To foster real estate investments you need long-term stability, a horizon which Peru has not had until recently.”
A series of military coups interrupted constitutional government between 1948 and 1979, and despite the restoration of democracy, economic turmoil persisted into the 1990s. The country also fought an insurgency during the 1980s and 1990s.
That Peru’s economic recovery is fairly recent, dating back just six years or so, is reflected in the paltry number of shopping centers there — just 14, a figure that includes power centers and small strip centers. These centers account for just 8 percent of Peru’s retail sales, but their role is growing fast. Peru’s mall trade group, Asociación de Centros Comerciales y Entretenimiento de Perú, says shopping centers will sell about $1.5 billion of merchandise this year, up 19 percent from 2006. Its projection for 2008 is $2 billion, after one center each goes up in the cities of Arequipa, Huancayo and Ica, and two in Trujillo.
Almost all of Peru’s existing malls are in Lima, which leaves vast development opportunities elsewhere. Even the prosperous city of Cusco, the departure point for the 500,000-plus visitors a year that stop at Machu Picchu, the pre-Columbian Inca city perched high above the Urubamba Valley, does not have a shopping center or a movie theater. Cusco is home to 304,000 people and registers population growth of about 4 percent annually, according to the Peruvian government.
But change is coming, much of it at the hands of foreign investors. Two Chilean groups have blazed a trail in this regard. The first is Parque Arauco, which owns 45 percent of Mega Plaza Norte, in Lima. The mall developer and operator says it will build Parque El Golf, an upscale mall, as part of a mixed-use project in San Isidro, Lima’s most exclusive neighborhood. Parque Arauco will break ground next year on a mall in Arequipa, Peru’s second-largest city, in partnership with Peruvian agribusiness conglomerate Grupo Gloria and Grupo Wiese. The second group is Inversiones Corporativas Alfa, a joint venture between Chilean retailers Falabella and Ripley, each of which holds a 40 percent stake. (Plaza Oeste, a subsidiary of Chilean mall developer Mall Plaza, owns the rest). Inversiones Corporativas is investing $138 million in three malls going up in Callao, Santa Anita and Trujillo.
Ripley and Falabella already operate department stores in Peru. Sodimac and Tottus, Falabella’s home improvement and supermarket chains, respectively, are also in the market.
Others are checking out Peru, including Chilean mall developer and retailer Cencosud and U.S. investor Kimco Realty Corp. The press has also carried rumors of an impending sale of Empresas Wong, which controls more than half of supermarket sales, to foreign investors. (Empresas Wong declined requests for an interview.)
For Kimco the magnet has been “the strength of the Peruvian economy, consistent low inflation, and real job and wage growth, which have greatly expanded Peru’s middle class,” said Mike Melson, Latin America managing director at Kimco, which was working on some unspecified investment opportunities at press time. “Demand from retailers is strong and supply is very limited, making ownership of high-quality retail assets attractive for Kimco’s shareholders.”
Peru’s attractiveness is enhanced by its equal treatment of foreign and local investors, say Rey de Castro and others.
“We feel very optimistic about Peru’s growth story,” said New York City-based Morgan Stanley economist Luis Arcentales. “Government officials have not only reaped the benefits of a commodities boom and solid global economic growth but also taken steps in the right direction. The current administration has shown a commitment to prudent policies in addition to sending a clear signal that the rules of the game should not change with every new government.”
The government has reduced the country’s external debt and accumulated international reserves. (A free-trade agreement with the U.S. awaited ratification by U.S. lawmakers at press time.) International rating agencies are expected to give Peru an investment-grade rating by the end of 2008 or in 2009. (So far Chile and Mexico are the only countries in Latin America to achieve this.)
But there are still challenges ahead. Nearly half the population lives in poverty, a recipe for political unrest, Arcentales says.
Nevertheless, “Peruvians feel very optimistic about the country’s economic and political situation,” said Juan José Calle, general manager of Jockey Plaza, Peru’s biggest mall. “Optimism spurs retail sales. Shoppers don’t postpone purchases and feel confident taking out credit debt.”
Growth in consumer credit has made this easier, thanks in no small part to Falabella, Peru’s biggest credit card issuer. Its card is usable not just at Falabella stores but at selected other retailers as well. Sales at Tommy Hilfiger and Kenneth Cole stores went up about 30 percent last year, and half the increase was attributable to their adoption of the Falabella card, says Valditex’s Díaz.
Roberto Persivale, a partner of Peruvian retail consulting and mall operating firm Asesorandes, says Peru shows greater growth potential than even Chile, which boasts one of Latin America’s most sophisticated and mature retail markets. Not only is it cheaper to do business in Peru, it is a more centralized country, with a larger population (Chile’s is 16.3 million) and a sizable number of low-income people moving up the income ranks.
Said Persivale, “Peru is an unpolished retail jewel.”
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