Retail property management

Leasing is better option for shopping malls than selling in parcels

By Andy Lee

In August of 2009, the Noon Square shopping mall in Myeongdong was newly reopened after renovation by its owner. The shopping mall used to be sold in land parcels to retail shops. However, when it reopened in 2009, it started leasing instead of selling in parcels. The successful opening of the mall had a special meaning to me because I had strongly advocated leasing of shopping malls.

The key to Noon Square’s success was carefully selecting the types of tenants and brands of the retail shops in order to differentiate itself from other shopping malls in Seoul. The types of tenants are wide ranging, from famous overseas brands such as H&M, ZARA, Mango, Charles & Keith to local designers’ shops. It also includes a cinema, book store and restaurants. Due to the strategy, Noon Square has had a constant occupancy rate of 100 percent since its opening while the average vacancy rate in Myeongdong is around 10 percent.

I have emphasized the importance of leasing shopping malls for a long time because shopping malls that have sold their land in parcels have failed for two main reasons.

Business approaching method

Unlike office or commercial real estate property, retail shopping malls must take customers into consideration first. It is necessary to know and to understand who the customers are, what they need. That being said, attracting tenants who can fulfill customers’ needs faster than the market trends, fomenting and maintaining the shopping mall in order to maximize tenants’ sales is the key success factor of retail. Hence, it is important to consider the final success key of the customer prior to the business planning process.

However, strata title shopping malls only focus on how to sell more spaces to individual investors who are first users in order to maximize developers’ profit, instead of focusing on customers and tenants that are final and secondary users. Therefore, they are unable to provide a store layout that would allow customers to shop in a pleasant environment, resulting in a failure to attract tenants that customers prefer. This lack of consideration for business approach and the customer is the major cause of the failure of strata title shopping malls.

Absence of specialized retail property management service

Three parties are responsible for the successful leasing of a shopping mall ― the landlord, property management company and tenants. They advance and step forward with the same direction for the same goal. Professional property management companies converge and tune different opinions from stakeholders and maintain the original concept of the mall at the same time. However, it is exceptionally hard for those strata title shopping malls to unify or converge opinions due to hundreds and thousands of private owners’ different interests. Thus, it is impossible to manage and retain the original concept of the mall.

While the focus on retail market trends in South Korea was on distribution until 1998, South Korea’s real estate market for retail has faced a brand new phase due to the appearance of foreign capital investment and REITs. High expectation and rigid loan underwriting of financial companies due to the international financial crisis in 2009 has made funding difficult for those developers.

In addition, those small- and medium-sized developers that were lacking developments and operating capabilities could not compete in the market due to high expectation and upgraded consumption of Korean consumers. Therefore, developers with strong funding sources have changed their direction and strategy from distribution to initial lease in order to effectively activate the malls and vend it in the future.

Local and foreign investors have been changing their focus from office to retail properties due to higher office supply along with the lower annual rate of rent increase compared to that of retail properties. Hence, the role of a professional retail property management firm is very important because of the exceptionally high attention and investment focusing on the Korean retail market.

Challenge

After renovation, many aged shopping malls in Seoul are getting ready to reopen. Domestic developers put off selling the real estate, and investors scrambled to invest in the retail real estate market. Consequently, the demand for retail property management has been increasing. However, there are challenges as well.

First, there are not many professional property management service firms in Korea. In other words, it is hard to find experts in property management in Korea. In addition, competition with major conglomerates having large bargaining powers with retailers is inevitable.

Korean conglomerates have gigantic networks throughout Korean department stores, hypermarkets and online businesses, and comprise the majority of retail market share. Therefore, direct competition with these conglomerates is pointless. Rather, providing niche service, having flexibility in organizational decision making and the mobility to fulfill the needs of customers are more vital to survival.

Epilogue

After the IMF crisis of 1998, the Korean real estate market opened its doors to foreign investors, and property management service grew rapidly in a short period. Adoption of transparent and systematic property management and accumulated know-how carries out an important role.

In May 2010, I participated as a member of the panel in a retail real estate forum, and someone asked me, “What is the key to success in retail property management?”

I answered, “Interest in property management with ownership.” Others may say that the key to success is a systemized and well-organized management system. This is also true. However, it is people who create the system. It is also people who manage the property. Thus, the success depends on how much effort the property manager puts in, and their expertise. When the property manager cares for the property as his own, success will come along naturally.

Andy Lee is a director of the retail transaction department at Cushman & Wakefield Korea.