I got a call from the writer asking very intelligent questions about mall developers, retail, and Chinese consumers. This is exactly our sweet spot...

From the October 2011 issue of Shopping Centers Today

By Curt Hazlett

Foreigners in Beijing often turn to the Internet for practical answers to that city's mysteries, such as where to find the best bars and nightlife, or which malls offer the most bang for the yuan. Sometimes, though, their questions are rhetorical. As one newcomer wrote on a local blog in rather fractured prose, using slang for the Chinese capital: I just arrived to bj and I'm curious. Why beijing malls are empty? A few of shopper!

This is a question that could be asked of malls all over China, and India too, for that matter. These two powerhouses of retail development -- where shopping centers have sprung up like cabbages over the past decade -- have seen some reversal of fortune. Many of their shiny new luxury malls are devoid of both shoppers and tenants -- sometimes remarkably so.

In New Delhi six malls opened in the first quarter of this year. Five of them were nearly empty, with occupancy rates of only 7 to 10 percent, according to Jones Lang LaSalle Meghraj. Nationwide, some 17.3 million square feet of mall space opened in 2010, but only 9.3 million square feet of that would wind up leased, according to a Jones Lang LaSalle Meghraj estimate. So bad is the leasing environment that the two-year-old Mallum Mall, in Mumbai, was demolished in June to make way for a residential and office project. The small center's owners had failed to find a single tenant.

"As of now there are close to 225 shopping centers existing across the country," said Amanpreet Singh Banga, manager of retail agency for the Knight Frank India brokerage, in Delhi. "There are just a dozen or 15 which are actually surviving well."

In China stories abound of luxury malls being built in a frenzy, only to open to an indifferent public. At 6 million square feet, the Golden Resources Mall was the world's largest when it opened seven years ago in a Beijing suburb, and yet it has never drawn more than a trickle of shoppers. Still, it has performed better than the New South China Mall, in Dongguan, which succeeded Golden Resources as the world's largest mall in 2005. Designed for 2,350 tenants, New South China Mall now has about a dozen.

"There are empty malls all over China," said Vernon Martin, the principal of American Property Research, a Los Angeles appraisal firm with clients in the U.S. and Asia. "We are dealing with a country whose median income is about 10 percent of the United States. But the developers give them malls full of Sephora cosmetics stores. It doesn't seem rational."

To be fair, successful malls can be found. Sophisticated developers like Singapore's CapitaLand and New Delhi's DLF Group have done well through their careful planning and sound management. But many less-experienced companies have lost uncounted millions. Following we present just a few of the more common problems -- the seven deadly sins, as it were, of emerging-market development.

Overconfidence: How hard could developing be?

There is no lack of self-esteem in China and India. The economic rise of those two countries generated a wave of entrepreneurialism that brought riches to those with the best ideas and the most pluck. And once someone has built a fortune in fast foods or the import-export business, how hard could it be to build a shopping center?

"I recently had a discussion with a potential developer who made a fortune importing lumber," said Corbett Wall, head of CW Associates, a Shanghai firm that works with developers and retailers to expand in China. That entrepreneur had in mind to build a mall, Wall recalls. "More than likely that mall would be a disaster," he said. "His company is a group of people who have never done this before and have no idea what they are doing. You have a lot of those projects -- the independent developer who is convinced that Louis Vuitton and Cartier will come to their mall."

In India excessively confident developers have given short shrift to the desires of both consumers and tenants, says Banga. "This country is new to organized retail," Banga said. "Mom-and-pop is the predominant factor, and these developers don't understand that. They treat shopping centers as they would commercial or residential projects. They are not."

Overbuilding: Bigger is not always better

Life in China and India takes place on a grand scale. Why should their shopping centers not be grand too? In China, where the government owns all the land, those companies granted permission to build have often been so eager to maximize space -- and hence profits -- that they have lost sight of their markets, says Richard Poulos, a partner and executive vice president of The Jerde Partnership, a Los Angeles-based architecture firm with extensive Asian experience. When the government approves a project, it determines the maximum floor space that can be built, Poulos says.

"Say you can build a building with six times the land area," said Poulos. "By the time you get done with setbacks and open areas, it might be something like 3 million square feet. The Chinese say, 'We've been given that FAR [floor area ratio], so we can build that.' But we say that's not market research, it's maximizing what you can build. It creates the problem of building way too much. You can't get the tenants."

Government involvement is one of the differences between developing in China and India, says Poulos. "In China, if the government decides to do something, it just goes and does it. In India ... they struggle with going and doing it."

And yet such relative inefficiency has not prevented overbuilding in India. Jones Lang LaSalle notes that over the past decade, Indian retail development expanded from first-tier cities, such as Mumbai and Delhi, to second-tier ones, such as Bangalore, Calcutta, Hyderabad and Pune -- each of which saw the completion of between seven and 10 malls by the end of 2007. Retail development since then has been marked by "considerable rightsizing," according to Jones Lang LaSalle, but the building boom has not gone bust. The firm predicted last year that 37 million square feet of retail space would be added in India's top seven markets between the fourth quarter of 2010 and the end of 2012.

Getting bad advice -- or none at all

Unfettered expansion raises a question: Why does market analysis not dissuade developers from risky projects? "What 'market analysis'? " quipped Wall. Many of China's inexperienced developers shunned outside expertise during the hottest years of the boom, he says. "When the economy is on fire, people aren't going around trying to measure things," Wall said. "When people have made a lot of money, it is incomprehensible to them that they aren't going to make more money." Moreover, he adds, "this is a discount culture. They would have to pay for it. Services are very low on the totem pole, and nobody wants to admit they don't know something. Nobody wants to hear that their grand idea isn't going to work."

Even when consultants are hired, their advice is not always sound. The developer of the New South China Mall, who made his fortune in the instant-noodle business, engaged a Chinese research firm to analyze the market in Dongguan, an industrial city. "I read the feasibility study," said appraiser Martin, who also visited the mall. "Their attitude was that if you built the biggest mall in Dongguan, people would come. They completely overestimated the trade area, thinking that everyone would drive to it. There was no consideration of spending power. It didn't make sense."

Trading quality for speed

As is often the case in booming economies, mall developers in China and India learned quickly that moving fast meant bigger profits. In China two things are driving that hurry-up-and-get-it-done attitude, Poulos says. "First, they are impatient entrepreneurs and they want to get it finished," he said. "The other is that the government wants things done as well. It has anti-speculation policies in place. It doesn't want people holding onto land. So there is a very tight time frame before they pull the land back. That hurry-up mode causes mistakes to be made."

Wall notes that many Chinese developers have no experience in the business and neither have they any desire to stay in it. He describes their attitude as: "We'll do the best we can and then get out of it." Such malls usually are sold off in pieces to local retailers with the result that the property is in effect unmanaged. "Who is going to manage something they can't collect fees from?" he asked. "You have this mall that no one takes care of or manages, and eventually it deteriorates and becomes a ghost mall."

The desire for quick profits has hurt Indian malls as well, says Banga. "Many developers will capitalize the value of a center by selling it," he said. When that happens, "you have practically lost management control over the shopping center. It is a big, big reason for failure."

Indeed, the pressure to reap profits was so great that until recently almost 95 percent of India's malls had multiple owners, sometimes hundreds of them, Anshuman Magazine, chairman of CB Richard Ellis South Asia, told the Indian business press. "If a mall doesn't have single ownership, it loses direction," he said.

Leasing left for last

Given the haste with which many properties have been developed, it may come as little surprise that the hard work of finding quality retail tenants has often been put off until the end, with disastrous results. Many Chinese developers did not even think about tenants at the start, says Poulos, who has had long experience in China. "You'd ask how leasing was going and they'd say, 'What do you mean leasing?' The feeling was, build and they will come."

Banga echoes that. If an Indian mall is 60 or 70 percent leased, its operator is very happy, he says. "That's the reality," Banga said. "The lesson is that pre-leasing has to be done before the project goes up."

Lack of a strategy

Retail development has a steep learning curve, and developers in China and India are quickly discovering what works and what does not. In current Chinese centers "we are now seeing much more sophistication," said Poulos, but early malls "were just stacked up like a bunch of donuts, and the merchandizing was random. Wherever someone wanted to go, they just put them there." Many of them lacked any tenant or merchandising strategy, "meaning that there isn't a road map of the types of tenants that should go where within the project."

Wall, who has spent much of his life in Asia and has lived in China for 20 years, says the retail concept most familiar to the Chinese is the department store. "We know that department stores and malls are completely different animals," he said. But in China the department store model has been widely applied to malls. "The merchandise is all crammed in -- that's the mentality. There is really no merchandising. The people who used to run department stores are the people they are hiring to run malls. You can't find an experienced mall manager. The ones who have experience are imported from Hong Kong or Taiwan."

Location, location, dislocation

It should go without saying that the key to successful retail, whether in a developing market or an established one, is to be in the right place to serve a chosen market. A center's tenant lineup needs to mesh with consumers' needs and spending ability, and shoppers need to be able to get to the center with a minimum of hassle.

Yet industry observers say poor location is among the biggest reasons for the rash of failed malls in China and India. A good example is New South China Mall, which is connected to neither train nor subway lines and is in a pedestrian-unfriendly neighborhood, according to Martin. "The successful Chinese retail districts are near train stations," he said.

Said Wall: "There are malls that are very well built but in the wrong place. They got the opportunity to build a mall, they got a good architect, it's beautiful -- but it's in the wrong place." One such is Beijing's massive Golden Resources Mall, built in a difficult-to-reach area of the city. How difficult? As one blogger advised a prospective visitor traveling from the city's main rail station:

Take subway line 2 to Xizhimen station, then transfer to subway line 4 to Renming Daxue (Peoples University). Walk about 200 meters to Sitongqiaoxizhan, take bus 365 or 355 to Yuandaludong and walk about 300 meters to Golden Resources Mall.

Such inconvenience has registered in the mall's results.

There are, of course, many other reasons malls can falter, ranging from ineffective design to poor management, and newcomers can be expected to make such mistakes. But those who have worked with developers in both China and India make it clear that this emerging wave of developers is learning quickly.

Indian developers have embarked on a more cautious course, says Banga, and new projects "are being delivered on a global standard. They are much better in terms of location, design and accessibility." Among these are Select City Walk, in New Delhi, and Inorbit Mall, in Mumbai.

And in China, savvy developers are catching on to the interconnected nature of the retail business. "There are groups here now that understand that retailing is an ecosystem," said Wall. "At the end of the day, the tenants you have and the mix of those tenants determine what type of people comes in and spend money. They are starting to get that."

Said Poulos: "The Chinese are really smart. They are watching things and learning quickly."

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