2009: A pivotal year for the Spanish shopping centre and retail park sector

28 Jul, 2009, Madrid

• Delays to construction of shopping centres and retail parks already under way and halts to others not yet commenced.
• Prime shopping centres and retail parks will weather the current crisis relatively well. However, some centres will experience serious difficulties.
• C&W’s analysis of the sales figures from a selection of prime shopping centres for the first quarter 2009 showed that these had dropped by an average of around 9.9% compared with the same period of the previous year. However, this percentage is higher for secondary shopping centres.
• Lease costs in prime shopping centres and retail parks have largely remained stable. Nevertheless, market conditions are forcing rental costs down and there are few indications of changes to this trend.
• The number of unleased commercial premises on prime shopping streets remains low but on secondary streets, the number of premises up for sale has clearly increased.
• The word ‘cautious’ best encapsulates the mood on the investment market. Commercial activity is limited as investors are particularly careful.
• Triple net profitability has increased to around 6.5% in prime shopping centres and around 7.5% in prime retail parks.

The property consultancy Cushman & Wakefield (C&W) has published its latest report on the Spanish retail market.

According to the Cushman & Wakefield (C&W) report, the market’s 180 degree turn over recent months, reflected in increased profitability and a fall in rents, is currently causing projects that were established on the basis of much higher land prices than those of the current market, to become unviable. Some developers with projects in their portfolios with second licences are delaying construction indefinitely where it has not already been commenced. Others, who have begun construction, have slowed its pace. The downturn on the domestic market, the overall fall in consumption and the change of tactics employed by many operators as a result are not favourable to the creation of new shopping centres, and will engender even greater difficulties if access to finance is removed. Lack of access to adequate credit for developers is, and will continue to be, the reason for a significant number of delays but it is not the only cause for the decline in new projects for.

C&W is cautious in terms of its predictions on the number of new projects to commence between now and 2011. In the unstable conditions forecasted, 13 centres are predicted to open in 2009 compared to 22 in 2008. With the recent postponement to 2011 of the Puerto Venecia project in Zaragoza, the GLA (Gross Leasable Area) forecast for 2010 will come to less than 250,000 m², while predictions for 2011 are lower again.

Nevertheless, despite the ‘crisis’ conditions, consumers refuse to stop following fashion. Low cost brands are gaining ground, as demonstrated by the outstanding progress of Primark and other similar brands on the Spanish clothing market. International operators with no presence in Spain as yet are paying close attention to developments in the country's commercial sector. However one thing for certain is that rental costs in the areas of interest to them tend to be higher than their expectations. At present, we are able to confirm that there are no bargains on offer for tenants in the most successful shopping centres.

According to C&W, the most significant falls in sales were probably registered in 2008, as evidenced by the tendency towards stabilization evident since January 2009. With regard to forecasts for the short term, assuming that the worst of the labour market fluctuations have passed, and that the optimistic predictions for the summer season are accurate, the downward trend may continue over the months to come, but this will definitely be at a gentler pace than in recent months. However, the ascent towards positive figures remains a long way off.

Although demand from operators has fallen over recent months, as have sales figures, for the time being, prime rents remain largely equal to last year. In our opinion, market conditions are the cause of the fall in rental costs and it is likely that over the coming months, changes will be observed in this respect. In any case, this will be heavily dependent upon sales figures and it is for this reason that shopping centres will make readjustments independently. While the sales figures are an important factor, when the time comes for property owners and tenants to renegotiate rental contracts, other factors also come into play, and it should not be forgotten that concessions are granted on an individual basis and not to all the occupants of any one centre at once. What is more, the same operator may be granted concessions in some centres but not others.

With regard to the high-street market, in spite of the crisis and the fall in consumption, the most popular shopping streets of Spain’s largest cities have retained high levels of commercial occupation. Certain operators, particularly those from abroad, believe that Spain represents a weakened market offering rock-bottom lease prices but in reality, where Spain’s prime shopping streets are concerned, this is far from being the case. This does not mean that opportunities do not exist on the best streets, because they do, but rents have generally not come down. It is certain that where potential opportunities do exist, the lease payments expected are very high. Hopefully, over the coming months, some of those occupants who wish to leave their premises will lower their expectations with regard to sale prices in order to avoid incurring greater losses. The situation for secondary streets is quite different, where the availability of vacant premises has grown significantly over recent months. Perhaps the word which best encapsulates the overall feeling of the market, for all its participants, is uncertainty. Developments in sales figures will be a decisive factor in the months to come and will enable each of them to better define their positions in the short term.

Investment market

The reduction in the number of projects undertaken over the last year in the Spanish shopping centre and retail sector demonstrates the caution with which investors are approaching purchase opportunities present on the market. While in 2008 the total amount of investment came to 672 million euros (a 52% fall compared with 2007), in June 2009, only two shopping centres had been sold for an approximate total of 360 million euros. With regard to forecasts for the whole year, we hope that this will be around the same as 2008.

The shopping centre and retail park market has traditionally been dominated by international investors, in particular by large scale investors or investment funds, due to the scale of investment involved. Consequently, ‘triple’ net profitability in Spain (net operating income divided by total costs, including acquisition costs) have become aligned with those of the UK and Western Europe. Given the profitability generated in these countries and the 180 degree turn that has been observed in Spain over recent months, a significant upward trend in profitability has taken place, as can be seen in graph 6.2. While in prime shopping centres, there ‘triple’ net profitability appear to have almost stabilized at around 6.5%, the same is not true of secondary centres. Among these, the most ‘upmarket’ have 'triple' net profitability of around 7.25-7.5%. As regards retail parks, a very similar trend has been observed. Currently, (triple net) profitability in prime retail parks is around 7.5-7.75%, while in the ‘upmarket’ secondary parks, this figure is around 8-8.5%.

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