A Philippine Shopping Mall Bubble?

Jeff Jordan at the Atlantic Cities on “the Death of the American Shopping Mall” writes,

A report from Co-Star observes that there are more than 200 malls with over 250,000 square feet that have vacancy rates of 35 percent or higher, a "clear marker for shopping center distress." These malls are becoming ghost towns. They are not viable now and will only get less so as online continues to steal retail sales from brick-and-mortar stores. Continued bankruptcies among historic mall anchors will increase the pressure on these marginal malls, as will store closures from retailers working to optimize their business. Hundreds of malls will soon need to be repurposed or demolished. Strong malls will stay strong for a while, as retailers are willing to pay for traffic and customers from failed malls seek offline alternatives, but even they stand in the path of the shift of retail spending from offline to online.

Such developments are unpleasant and mainly represent the angst of a bubble bust more than a shift in social activities through technology.

But at the same time, this article got me thinking “does the Philippines have a shopping mall bubble”? Is the US experience a potential road map for the Philippines?

You see the Philippines own the tiara of the “shopping mall mecca of the world”.

In terms of the 38 world’s largest shopping malls, the Philippines have 9, seven of which are in Metro Manila, while 2 are in cities of Cebu and Davao. And of the 9 malls the SM group owns 6 while the Ayala group owns 3. (Both companies are publicly listed)

For the rest of the world, the US comes second with 8, China 6, Malaysia 5, neighbouring Thailand and Indonesia 2 a piece, and also with Russia , Iran , and the UK. All these are according to data from Wikipedia.org as measured by Gross Leasable Area in sqm. (GLA)

These international marquee of 9 Philippine malls are only teasers to the real thing—a nationwide phenomenon of shopping mall boom.

Considering that the Philippines has 95 million in population, a land area of 300,000 km², and a GDP per capita of $ 4,119 (2011, ranked 121 as per World Bank), compared to the US: 312 million population, land area of 9.83 million km² and a GDP per capita $48,112 (2011 ranked 8^th as per World Bank), one would have to wonder how the Philippines can afford larger and more elaborate shopping malls.

The mainstream has consistently sold the Philippines as a growth economy based on consumption to support such theme. In my view, this myth will eventually be exposed.

I believe that there are three major factors driving today’s shopping mall boom.

First, there is the real or formal economy which includes the OFW remittances.

Next, is the informal economy (or what I call the guerilla capitalism)

As I previously wrote

And this is why I have long believed that the statistics has understated the real savings rate of Philippines. And it is from such unseen sources of savings that has enabled the Philippines to have 3 out of the 10 largest shopping malls in the world (as of 2008).

Yet the informal sector is an offshoot to economies that has been unduly burdened by a labyrinth of regulations, stifling taxes, onerous social security payments, restrictions in the official labor market, mandated wage rates and other labor restrictions, maze of bureaucratic red tape, politicization of economic opportunities and the many other various forms of interventions.

Finally, the negative real rates which has been prompting for the unfolding of the business cycle via loan growth on both consumer and real estate sectors. 

Consumers have been enticed by low interest rates to frontload on consumption expenditures while businesses, most particularly the property sector, partly through shopping malls, have been allured by artificial low interest rates to undertake projects in the anticipation of a sustained boom from a prolonged period low interest rate.

The public doesn’t realize that artificially suppressed interest rates inflate bubbles which eventually pops.

Moreover, mainstream’s optimism about government’s participation in boosting the economy via infrastructure spending has also been misguided.

As I previously wrote,

government or infrastructure spending do not guarantee productivity increases. Government spending is consumption even when applied to public works—they are not engineered to produce revenues or profits.

Yet such projects will have to be financed through the acquisition of more debt, higher taxes or higher consumer prices.

It’s no wonder the current administration has been desperately targeting big industries who gets academic support from foreign institutions to justify the raising of taxes e.g. SIN tax, SMS tax, Mining excise tax and etc…

This government has been trying to squeeze the proverbial goose that lays the golden egg in the name of anti-corruption or good governance…

Higher taxes also means a crowding effect which implies productive output will be substituted, by rechanneling resources, to politically directed consumption activities which will lead to shortages of capital goods.

At the end of the day, it will be productivity via capital accumulation that will drive real consumption.

Debt driven consumption and investments made due to suppressed interest rates will eventually hit a brickwall when resource and input strains will be revealed via higher interest rates.

The current shopping mall boom will not only depend on a sustained low interest rate environment but will likewise depend on the greater rate of growth of income—via economic output from both formal and informal economy and from remittance transfers—relative to rate of growth of supply of malls. Debt will temporary augment spending, but has its limits.

Once supply of malls grows faster than the consumer’s capacity to spend (income and debt), then trouble lies ahead.

I don’t know yet how much of the banking industry’s loan portfolio are exposed to these malls. But given that the Philippine retail industry from which the shopping malls are categorized, accounts for approximately 15% of the domestic economy and 33% of the service sector and employs some 5.25 million people, representing 18% of the Philippines' workforce (according to Wikipedia.org), there is a possibility of significant exposure.

This also implies that shopping malls will be faced with stiff competition among themselves. While this should be a good thing since competition should mean lower rental prices and provide more quality services, unfortunately the policy induced boom has clouded the effects of competition—giving the incentive for both consumer and investors to jump on the debt bandwagon which magnifies on such errors.

It’s one thing to have bankruptcies as a result of failing to satisfy the consumers via competition, and it’s another thing when the public has been enticed to a cluster of business errors (malinvestments) which accrue from price signaling distortion brought upon by manipulated policy rates and from other forms of policy interventions.

And there’s also the risk of contagion, where the prospect of a global recession may impact significant parts of the economy (exports, OFWs and capital flows) to diminish the overrated consumer’s capacity to spend.

And as pointed by the article above, there is the technology aspect where online shopping becomes a real potential competitor to these malls. But this should be more of a medium to long term threat from which the markets will likely adjust without undermining the economy. Such creative destruction will emerge to the benefit of the consumers.

Bottom line: I worry that today’s bubbles in the real economy are being manifested not only through massive increases in the supply of vertical real estate projects and through soaring prices of real estate but also via the shopping mall boom. And it is equally be distressing to foresee a scenario resembling America’s present condition—here.