An economy growing by 4% a year and a plummeting unemployment rate could mean a bright future for Spanish high street shops and retail centres – unless interest rates rise
Think Spain and you’re unlikely to think skiing. Yet property developer Duprocom is building the country’s second indoor ski slope in the hope of enticing the people of Valencia into its new shopping centre, Neutopía. The first indoor ski slope, in the Xanadú shopping centre in Madrid, has proved popular enough to warrant building a second.
Skiing is not the real issue though. It is retail. According to Cushman & Wakefield research, Spain has the largest shopping centre pipeline in Europe over the next two years, with just under 2m m² expected to come on to the market by the end of 2008.
This year has already seen a spate of high-profile deals, including British Land’s record €350m purchase of Nueva Condomina shopping centre in Murcia, only a stone’s throw from Metrovacesa’s Thader centre. Swiss bank UBS paid a record-low yield for a shopping centre when it bought Metromar in Seville last month. At 4.60%, below the market average of 4.75-5%, yields are decreasing because supply simply isn’t meeting demand.
Spain continues to enjoy a healthy economy. Annual GDP growth for 2007 is expected to be 3.2%, the sixth-fastest in Europe. The population will rise from around 45m this year to 50m by 2030, according to the national statistics office. Unemployment has dipped to 8.5%, with 50,000 more people finding jobs last month alone, adding to the army of consumers in the country.
The Spanish retail market is reaching maturity, with around 500,000 m² of shopping centre floor space being completed every year since 1990. According to King Sturge research, over the next decade, retail sales growth in Spain is forecast to be 24%, tracking the European average of 25%. Consumer spending, on the other hand, is easing, with growth this year at 2.6% and expected to drop to 2.4% the next.
“The economy is not showing any signs of cooling off,” says Steven Weaving, director of retail investment at Jones Lang LaSalle in Spain. “There is a lot of new supply and demand from operators, and many centres are opening with 85% to 90% already leased. The economy is maturing and not changing radically.”
The expected rise in interest rates, however, could be a spanner in the works for the retail market, because consumers would have to tighten their belts as the result of a rise. “With interest rates going up, families will have to devote more money to their mortgage payments, so that would effect consumption,” says Carlos Hernández, an analyst at Planet Retail in Madrid. “But the economy is still going strong, growing by 4%, one of the highest rates in western Europe. The forecast for 2008 shows a growth of almost 4%, so consumer confidence is high.”
High street retail is thriving in Madrid and Barcelona. Streets such as José Ortega y Gasset in the capital and the Portal de l’Angel in the Cataluñan city exemplify this strength. Supply for quality space in both is scarce, however, and the focus remains on shopping centres.
Spain’s smaller towns are where the country’s most active development is taking place, with shopping centres due to open in Valencia, Zaragoza and Guadalajara.
Centres in need of renovation
“A number of centres will become obsolete and will need renovation or expansion,” says Ed Farrelly, head of capital markets research at CBRE in Madrid. “We can no longer put up a centre with no competition like you could 10 years ago. Now the situation is such that if you put up a centre, you will have to compete. A lot of times, the centres that exist no longer cater to current consumer preferences.”
The influx of shopping centres has been met with criticism. Although Spain’s market is not as saturated as that of France, there is concern about the density of some of the new schemes. “What worries me about shopping centres is that there is nothing to differentiate one from the other,” says James Preston, head of Rockspring Iberia. “They are all absolutely identical and pop up next to the other. Look at the situation in Murcia. How do you buy one that is on the same motorway junction as another? There is just going to be a bloodbath for supremacy.”
Planning laws in Spain are both a blessing and a hindrance for the retail market, especially out-of-town shopping centres. The smaller, high street retailers still wield a substantial amount of power, making it relatively difficult for large developments to gain planning permission. The upside is that once permission has been granted, often there is little competition in the area to undermine business.
“The commercial licenses take ages to get,” says Carlos Monreal, managing director of Duprocom. “We have 18 laws for each region. It’s very complicated and political.”
Restrictions in Cataluña
Cataluña has some of the tightest restrictions in the country, with a “moratoria” law prohibiting the opening of shopping centres of more than 2,500 m². Yet its shopping centres are successful, largely owing to the lack of competition. Diagonal Mar and Maremagnum were snapped up for high prices by foreign investors last year.
The majority of successful shopping centres are anchored by a major food retailer. Nueva Condomina was half-owned by Eroski, the Basque supermarket chain, which also has a 50% stake in Duprocom’s Plaza Imperial shopping centre in Zaragoza. The company this month bought a 75% stake in Caprabo, another Spanish supermarket chain, in a deal reportedly worth €1.1bn. The arrival of French supermarket chains Carrefour and Auchan helped start the shopping phenomenon.
Last year, Spaniards spent €91.7bn on food, the fifth-highest total in Europe, while the total retail market was worth €168.62. According to food industry research company IGD, both these figures are expected to fall by 4% this year.
“The sector is quite consolidated already,” says Hernández. “You’ll find the out-of-town hypermarkets, the medium-sized supermarkets in town, the convenience stores. Hypermarkets and supermarkets are the most popular. Because of the planning permission restrictions imposed during the past few years, the supermarket has dominated. There is still scope for new hypermarkets to open. France has three or four more times the amount of hypermarkets that Spain has.”
Fashion, although one of the more fickle parts of the retail sector, has done well in Spain, home of successful chains Zara and Mango. “A lot of times, the centres that exist no longer cater to current consumer preferences,” says Farrelly. “The percentage share that food and clothing get is on a downward trend, while other elements such as leisure and communications are edging upwards. That’s normal for an economy that matures. It’s not ‘what I need’, but ‘what I want’.
“With new centres coming onto the market, hypermarkets are important, but they have so many different things to offer. We’d always refer to the hypermarket as the anchor, now it’s better for a good retailer to be the anchor,” he says.
Companies are looking to other formats to lure customers in, with go-karting, ice-rinks and indoor ski slopes. But, according to one European retail fund manager based in Madrid, leisure is not such a lucrative venture any more. “Leisure is suffering, so we won’t buy anything with more than 20% leisure,” says Jaime Navarro, head of Pradera’s office in Spain. “Cinemas used to get about €10 per m2 per month in rent, now they get around €6. And with restaurants you eat only once, whereas with fashion you can shop all day.”
“At the moment, our economy is doing well and the market is still not as consolidated as other EU countries, so there is still scope for growth,” says Hernández. “There have been so many new centres opening during the past few years that some people are saying there are too many, and that may cause problems.”
Foreign investment into the Spanish retail market, although not as prolific as last year, will continue, however, with several more deals to come this year. “Each one will have its own risk profile and investors will be looking for big regional trophy centres in smaller towns,” says Farrelly.
“With yields coming down and prices going up, we will see some property owners taking advantage of the high prices and changing the structure of their portfolios or spinning off non-performing centres. This certainly won’t imply an excess of supply. We’ve got such strong demand, and it makes for a liquid market.”
