Bloomberg News

Mall Owner Sonae Sees Tough 2012 for Retail in Southern Europe

November 24, 2011

Nov. 23 (Bloomberg) -- Sonae Sierra SGPS SA, the Portuguese mall owner that offered lower rents and other incentives to keep its southern European tenants this year, expects 2012 to be even tougher as the sovereign debt crisis roils economies using the euro.

“We need to help tenants and do what we have to do to keep occupancy at the maximum level possible” at the company’s 31 malls in Spain, Portugal and Greece, Chief Executive Officer Fernando Guedes de Oliveira said in an interview. Next year “will be even more challenging than 2011,” he said.

The European Commission cut its 2012 euro-region growth estimate by more than half this month and said the risk of recession is increasing. Retail sales at Sonae Sierra’s 21 Portuguese centers fell 8.4 percent in the first nine months from a year earlier and by 1.9 percent at its nine Spanish malls, less than the national averages in both countries, the CEO said last week at the MAPIC trade fair in Cannes, France.

The closely held company kept tenants and attracted new ones this year by offering lower rents and incentives such as rent-free periods, lower service charges and paying fit-out costs, especially at malls in Greece, Portugal and Spain. In exchange, retailers often signed longer leases, Oliveira said. Retail sales at the company’s 39 European malls fell an average of 4.9 percent in the nine-month period.

Brazilian Stake

The vacancy rate at the 49 malls operated by Sonae Sierra fell to 3.2 percent as of Sept. 30 from 3.7 percent a year earlier, the Maia, Portugal-based company reported Nov. 9. Sonae Sierra operates four malls in Italy, three in Germany and one in Romania. It owns a 35 percent stake in Sonae Sierra Brasil SA, which sold shares in February and owns 10 centers in Brazil.

“It’s better to have tenants on low rents than empty space,” Oliveira said. “We are much more involved with tenants than in the past. In 2013, we will see some stability and, I hope, some growth.”

Sonae Sierra is scheduled to open Le Terraze, a 38,500 square-meter (414,400 square-foot) center in La Spezia, Italy. in the first quarter of next year. The 125 million-euro ($169 million) project is a venture with ING Real Estate Development and will be the fifth center opened in Italy alongside malls in Biella, Brescia, Padova and Venice. Tenants have already signed up to take 90 percent of the space, Oliveira said.

Sonae Sierra is a venture between Grosvenor Group Ltd., owned by the family trusts of Britain’s Duke of Westminster, and Sonae SGPS SA, controlled by Portuguese businessman Belmiro de Azevedo.

Cyprus, Morocco

The company’s 49 malls, held either directly or through two funds it manages, were valued at 6.5 billion euros at the end of the third quarter. Sonae Sierra also manages 20 other centers for investors and advises on mall development in Colombia, Croatia, Cyprus, Morocco and Serbia.

Backers of the company’s two funds include some of the world’s biggest investors, such as New York-based TIAA-CREF, Germany’s largest real estate mutual fund manager Deka Immobilien Investment GmbH and APG Algemene Pensioen Groep NV, the manager of the world’s third-largest pension fund.

“Our portfolio in Europe has been very stable and resilient during the crisis so far,” Oliveira said. Rental income remained steady or increased at centers on the continent.

Sonae Sierra reported earnings excluding items and changes in asset values, of 44.2 million euros in the first nine months, a 1 percent decline from a year earlier. Income grew both in Europe and at the Brazilian unit, where the company reduced its stake following the IPO in February.

Reinvesting

The company plans to raise a third fund that will buy its directly owned Italian and German malls, raising proceeds to reinvest in projects in faster-growing economies. The company is scheduled to open a mall in Germany and one in Romania in 2013.

Sonae Sierra Brasil, 70 percent owned by a venture with DDR Corp. of Beachwood, Ohio, is benefiting from the country’s rapid commodity-based economic expansion. Retailers at its malls had sales growth of 10 percent from a year earlier in local currency terms, Oliveira said.

The company has three malls under construction and an extension to an existing center costing 700 million-reais ($390 million).

“It’s a huge investment because we didn’t want to lose the opportunity,” said Oliveira, who is also chairman of Sonae Sierra Brasil. “I hope to announce another two new developments in the near future.”

--Editors: Ross Larsen, Jeff St.Onge.

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net


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