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iCSC OuTlETS aSia China confronts a steep curve Outlet experts met in China to discuss the industry’s future and share information at ICSC’s two-day conference in July. By Joel McCormick iOJ Contributing writer Go smart, not fast was the message that echoed again and again at ICSC’s inaugural Outlets Asia conference in China. The July 28-29 event in Suzhou on the outskirts of Shanghai drew more than 100 developers, retailers and investors from across China, Asia, Europe and North America. Speaker after speaker in 10 educational sessions and a dozen roundtables urged industry participants in China to take the time to understand their target markets, big retail’s needs, and why letting local government determine outlet sites often leads to failure. One after another, experts cautioned against overbuilding, which appears endemic in China. Barely a handful of outlet centers in mature markets in Europe and the U.S. reach the 700,000- sf or 800,000-sf range, noted industry veteran Brad Stipe, president of Brad Stipe consultancy Stipe Property Develop- ment. “And yet when I look at projects already built in China, and projects proposed in China, I see a lot of numbers at the very top of this spectrum.” A former Chelsea executive, Stipe has worked on projects in the U.S., South Korea and Japan. “While mature markets have the majority of tenants available to them,” Stipe said, “in China many of the tenants haven’t even arrived here, much less stabilized their business to the point of taking it to the outlet side of things.” China has 23 outlet centers now and es- 26 InternAtIOnAl Outlet JOurnAl Fall 2011 Outlets Asia, ICSC’s first conference exclusively for the outlet industry in China, drew more than 125 attendees when it was held in July. timates suggest 30 to 40 more will come online over the next few years. Stipe said he sensed a “build it and they will come” mentality. Little wonder: As Beijing drives efforts to expand China’s domestic economy and lessen dependence on exports, the country finds itself in the midst of an unrelenting mall boom. And that was mirrored in conference attendee numbers: Chinese delegates came from a dozen cities, many in the country’s interior – a sure sign that interest in the outlet model is spreading inland from China’s wealthy east coast centers. Citing ICSC data, keynote speaker David Ober, president of U.S. outlet company Global Outlet Management, said in his State of the Outlet Industry report that 11 outlet centers were due to open in China this year and 23 more were planned for the next three years. But growth isn’t unique to China, he said. The U.S., in theory, was projected David Ober to see 47 added to its outlet inventory in the next few years, Canada 16, Europe another 40. “Nearly 50 outlet centers are at one stage of thought or reality in the combined Eastern Europe and the Mideast,” Ober said. “The expansion of outlets is cumulatively outpacing full-price retail across the globe.” What’s behind it? “Six or seven years ago, real estate focused on the outlet industry as lenders realized it was a powerful source of consumer spending,” Ober said, adding that U.S. outlets now outperform many full-price centers, generating as much as 50 percent of operating income for developers and retailers. In the case of publicly-traded REITs, outlet portfolios in some cases now deliver up to 70 percent of bottom-line profits, he said. While China has been accelerating expansion, however loosely “outlet” is defined, Ober said the U.S. has been consolidating and streamlining. Today, 30 years after the first new-construction outlet center opened, the U.S. has just 181 outlet centers. These productive, healthy, strongly tenanted centers average only 35,000 m2, compared to the average Chinese outlet center’s 65,000 m 2 . Eventually, he said, Chinese outlet centers will face the same pressures as fewer, more powerful brands take back their licenses and operate their own retail chains. “We have incredible consolidation,” he said, citing Phillips-Van Heusen (PVH) as an example. The apparel giant’s brands include Calvin Klein, Bass, Tommy Hilfiger and a long list of others. The industry is so brand-driven that of the 47 centers proposed in the U.S. over the
next two to three years, only two have so far been completed. How many of the remaining will actually open “will be decided by the retailers,” he said. Huge and empty Brad Stipe devoted most of his session, “Fundamentals of Conceiving and Developing an Outlet Project,” to design. He stressed the importance of aesthetics, the advantages of racetrack configurations, and the importance of signage and graphics that “can make or break a project.” From a design and land-use perspective, he said, China presents real challenges, particularly the high-density requirements. The need to accommodate high density calls for multi-level outlet centers, a model that hasn’t worked in the rest of the world. “Most successful projects have always been one or two levels, usually just one level,” he said. Citing projects he had worked on in Japan – which had similar density issues – he said developers managed to deal with them and still stay within two levels. Another issue for China is the penchant for constructing more space than necessary. Stipe said maintaining an image of success at all times is critical, thus a project’s size must be appropriate for the market and tenant demand. By developing in phases, the developer both minimizes risk and maintains an image of success by keeping occupancy rates high.” Developers had lots of issues to think about, he said. “The population centers are much, much larger, income disparity much greater, and retail saturation of international and U.S. domestic brands is limited to low. Brand awareness, while higher in the first-tier cities, really drops off precipitously as you get to the third-tier cities.” In the final analysis, Stipe said, China’s outlet industry can achieve success by “following proven methods now, and evolving later.” Partnerships in all shapes and sizes Trying to explain the root of China’s sometimes odd partnerships, Jiang Jun, CEO of Shanghai-based Zaihang Real Estate Consulting, said central government land policy had effectively pushed small operators, residential developers, Richard Hamilton, Taubman Asia’s VP-development, stressed the importance of strong partnership when developing retail centers in China manufacturers and other groups into the same corner. Their common denominator is this: Though they’re all aware of the outlet phenomenon, they had little or no background in retail but they all owned land or had access to it in the suburbs. And many of them, she added, were familiar with planning issues and Jiang Jun maintained close relationships with local government, making them seasoned partners in tasks such as securing land plots and permits. As Jiang put it, “What they’re missing, and what they readily acknowledge, is retail and outlet expertise, brand relationships, leasing and management knowledge.” Obviously they have much to learn, and some outlet players appear keen to fill the knowledge gap. European-based outlet operator Fashion House, for example, addressed just this group in an ad in the Outlets Asia program, offering consulting and franchise services to “any independent developers with suitable land plots, either with relevant permits or the ability to secure planning approvals, along with access to a construction capability but without specialist knowledge of the outlet market.” That said, partnerships can sometimes take strange turns. Richard Hamilton, Taubman Asia’s VP development, offered a foreign investor’s perspective on China and spent a lot of time on the topic of partnership. “In 2006, we were introduced to a project opportunity in Macau for a mixeduse casino resort. Besides the casino, the project comprised four hotels, theater, mall and convention facilities. It was a terrific site,” Hamilton said, at the Macau end of the Lotus Bridge to China, the region’s biggest source of gaming tourism. “The existing partners looked to Taubman to undertake the retail component, some 60,000 m2,” he said. And Taubman liked the odds, reckoning the project would yield a net operating income in excess of $80 million. So the developer signed for 25 percent of the retail component, as much as the partners were prepared to cede. “We started work in 2007 and inherited this terrible plan that had parallel malls, terrible site lines, no consideration of vertical transport [a critical detail since the mall was to be on an upper level] and we got to work and came up with a racetrack design,” Hamilton said. “What we quickly discovered working with our partners was that they were quite dysfunctional. There was a local landowner along with two foreign fund managers who were unaligned in terms of their interests. Very quickly the project stalled.” Decisions couldn’t be made and the financing required to keep the project (continued on page 28) Fall 2011 InternAtIOnAl Outlet JOurnAl 27
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