Philippine Economy’s Achilles Heels: Shopping Mall Bubble (Redux)

Early December, my daughter went with her cousins to watch a movie at one of the long established popular mall. I went to fetch my daughter after. And as we exited the mall, my wife’s relative made a striking remark, “This is strange. It’s December. But the crowd seems distinctly sparse compared to last year.”

Such observation doesn’t seem to meld with the overall atmosphere which is supposed to showcase an economic boom. Thus my initial intuitive response was to ignore this, thinking that perhaps this had been merely been a mall and time specific quirk.

And given the holiday ambiance, I didn’t have the motivation to pursue further research on this fresh micro perspective. Yet somehow, her piquant observation stuck into my mind: has there been a shopping mall bubble in the Philippines?

The perspective of the shopping mall bubble got rekindled and reinforced when I came across an article which narrated of the demolishment and of the impending deconstruction of some shopping malls in the US.

It dawned on me that the Philippines could be faced with a real risk of a shopping mall bubble bust. So I delved further.

Shopping Malls have not just been a way of life for the Philippines.

Instead, the Philippines have become the shopping mall mecca of the world, hosting 9 of the world’s largest 38 malls, according to Wikipedia.org[1]. The Philippines essentially beat the US and China or any developed economy for that matter.

Moreover, the Philippine international marquee malls are mostly located in the Metro Manila area. To consider, these 7 Metro Manila establishments are collectively larger than the combined 8 biggest malls in the US, considering that on a per capita basis[2], the US has $48,112 (World Bank 2011) or $48,328 (IMF 2011) which dwarfs the Philippines at $4,1119 (World Bank 2011) or $4,080 (IMF 2011).

And we are just talking of the largest malls, which are manifestations of the broader picture/pathology: a shopping mall bubble. There are countless of smaller scale malls which compete for the same peso from the Filipino consumer.

Aside from the publicly listed SM and Ayala, other competitors[3] are publicly listed Robinsons, Gaisano, Megaworld Lifestyle, Walter Mart Malls, Ortigas Malls, Starmalls, Greenfield Development, the NCCC Mall and many more

In short, while the public has been mesmerized by financial and economic growth prospects from a supposed ‘consumption economy’, nobody seems to even question the basic economic premises: How can a consumption based economy be sustained?

Everybody has been made hardwired or brainwashed to believe that consumption has been an incontrovertible ‘given’ or a fact. Nobody dares question the limits of the Philippine consumer.

This reminds me of the logical fallacy of the proof of assertion[4] embodied by Vladmir Lenin’s famous quote “A Lie told often enough becomes the truth”

And the behavioral reason why people readily embrace myths is the intuition to seek certainty via ‘cognitive ease’ or ‘coherence’

As Nobel Prize winner Daniel Kahneman explains[5],

An unbiased appreciation of uncertainty is a cornerstone of rationality-but it is not what people and organizations want. Extreme uncertainty is paralyzing under dangerous circumstances, and the admission that one is merely guessing is especially unacceptable when the stakes are high. Acting on pretended knowledge is often the preferred solution.

Thus political agents and their academic and institutional accomplices has mastered on how to indoctrinate society via plausibly coherent but false theories which essentially feeds on the bubble mentality.

But basic economics suggests that the rate of Shopping Mall boom relative to consumer spending or demand seems unsustainable.

ON the demand side, based on the consumer spending trend chart from Tradingeconomics.com[6] (sourced from National Statistics Coordination Board) from 1998 to early 2012, the average growth rate has been about plus or minus 6%.

ON the supply side, which is guesswork on my part—based from past growth rates, estimates on future growth rates and capex announcements of some the largest malls, perhaps we can deduce that the Philippine shopping mall industry operate on a baseline rate of 10%.

In 2012, SM Malls in the Philippines expanded by 10% according to SM Investment’s 3^rd Quarter media and analysts briefing presentation[7] (based on Gross Floor Area).

Yes, SM [PSE: SM] has exposure to China which we exclude from this analysis.

In 2010, in a speech[8] by Teresita Sy-Coson, eldest child of magnate and SM founder Henry Sy Sr., Ms. Coson noted that SM malls have grown from 23 in 2005 to 37 in 2010 or an average growth rate of 12%.

In addition, SM Investment’s reported capex which will fund shopping mall and other property projects has been slated to increase[9] by 16% to Php 65 billion in 2013 from Php 56 billion in 2012.

So the SM group will likely expand their shopping mall business at the baseline rate of at least 10%.

On the other hand, Ayala Land [PSE:ALI] will like raise capex to SM levels.

Ayala has reportedly been targeting a capex of P70 billion in 2013 from the original target of P37 billion due to “unbudgeted property acquisitions”, according to the Manila Standard[10]. Of the Php 34.9 billion capex for 2012, 11% has been allotted for shopping malls.

Ayala’s “unbudgeted property acquisitions” reveals of the current accelerated pace of snapping or bidding up of land areas to increase inventory for prospective development. Property developers seem to be in a frenzied pace of momentum land acquisition.

Robinson’s Land Corporation [PSE: RLC] has also reported an increase shopping malls by 11%, that’s according to their analyst briefing last August 15 2012[11]. The planned mall expansion will translate to over a million of sqm of Gross Leasable Area (GLA) [see right window]. This has been backed by a reported Php 20 billion in capex[12] over two years, which does not cover the $1 billion gaming complex recently concluded partnership with Japanese gaming tycoon Kazuo Okada. 

The bottom line is that from the supply side perspective, major malls, as benchmark for the industry’s growth, seem to have set the 10% level as the baseline growth for the retail shopping mall industry.

If the rate of supply grows faster than the rate of demand then eventually we will have an oversupply, Economics 101. Applied to the above, theoretically, if consumer spending demand grows at a sustained rate of 6% per year, while supply swells at a constant 10% over the same period, then, whether you like it or not, there is bound to be an oversupply and the consequential undesirable effects that go along with it.

And at the rate of 6% growth, Filipino consumers would need to nearly double consumption in the hope to fill in such a chasm. This means we should expect a miracle in productivity growth in the domestic real economy and in the global economy (to increase the rate of remittances from our OFWs). This may well be a delusion considering that this government, like all the rest, seeks every opportunity to tax away productive opportunities.

The other means is to resort to the depletion or of the running down of savings rate, and or by massively resorting to the use of credit, which represents the frontloading of consumption at the expense of the future.

Of course, foreigners may be lured to compliment spending, but this will still remain small given current political environment.

As I recently posted on my blog[13], (italics original)

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.

Once the tipping point has been reached where an oversupply becomes apparent, and where markets begin to awaken to such economic reality, then we are likely to see an increase in bankruptcies at the margin. Smaller malls are likely to suffer first.

If such insolvencies are funded merely be cash flows from retained earnings or from equity, or from bond markets then this won’t be much of a problem because the impact would likely remain isolated. Those who will suffer the losses would be the shareholders of the malls or bondholder-non bank creditors.

However, it’s a vastly different story when these projects are bankrolled by debt from the banking system as repercussion to artificially low interest rate regime, and or, if bonds used to finance shopping mall expansions have used as collateral to acquire related or non-related loans, and or, if such liabilities have been acquired or held by banks in their balance sheets.

The likely consequences will be a contagion via an increase in the number of foreclosures, a tightening of lending standards, calling in of loans, negative feedback loop via sharp downside adjustments in prices of equities and collateral values and higher interests rates or a chain link of effects from a bursting bubble as accurately identified by the late economist Irving Fisher as debt deflation[14] (italics original)

(1) Debt liquidation leads to distress setting and to

(2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes

(3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be

(4) A still greater fall in the net worths of business, precipitating bankruptcies and

(5) A like fall in profits, which in a " capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make

(6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to

(7) Pessimism and loss of confidence, which in turn lead to

(8) Hoarding and slowing down still more the velocity of circulation.

The above eight changes cause (9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.

And such ensuing bubble bust will likely hit the banks, malls and the property hardest, but the negative effects will spillover to consumer spending too, aside from the business channels, the transmission mechanism will be felt through labor via rising unemployment, falling wages and restrained access to credit.

However, instead of a swelling of the US dollar, as noted by Prof Fisher, we will likely encounter capital flight and a meltdown of the local currency, the Peso, ala the 1997 crisis.

Again, all these will depend on the degree of leverage by the industry, and or, of their exposure to the banking system.

Finally, shopping malls exist to serve the consumer, and thus, are subject to the market discipline of profits and losses.

This also implies that programs undertaken by malls to draw in crowd, signifies as means to an end—serving the consumer through sales of goods and services—where the social benefits of ‘assembly’ or ‘gathering’ are ancillary.

No shopping malls exist to provide free lunches unless these are subsidized from other more profitable lines of other businesses by the same company, or as redistribution from social policies via the taxpayer funding.

Let me be clear: This is NOT to say that the current inflation of the shopping mall bubble will extrapolate to a BUST tomorrow, perhaps not in 2013 yet.

Rather this is to say that IF the current trend (or growth rate) of the industry persists without substantial improvements in the demand side via real economic growth—and not statistical growth from government spending or zero bound rates or credit expansion, then economic imbalances will continue to mount or worsen which essentially increases the risk of a bubble bust sometime ahead.

Prudent investing means that we should scrutinize at potential risks instead of swallowing mainstream disinformation hook, line and sinker.

I end this article with a poignant warning from French social psychologist, sociologist and author[15] Gustave Le Bon on paying heed to the wisdom of the Crowd[16] 

The masses have never thirsted after truth. They turn aside from evidence that is not to their taste, preferring to deify error, if error seduce them. Whoever can supply them with illusions is easily their master; whoever attempts to destroy their illusions is always their victim.

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[1] Wikipedia.org List of largest shopping malls in the world

[2] Wikipedia.org List of countries by GDP (PPP) per capita

[3] Wikipedia.org List of shopping malls in the Philippines

[4] Wikepedia.org Proof by assertion

[5] Daniel Kahneman Thinking, Fast and Slow Farrar Straus and Giroux p 263

[6] Tradingeconomics.com PHILIPPINES - NATIONAL STATISTICS

[7] SM Investment Corporation 3^rd Quarter Media and Analyst Briefing Presentation

[8] Teresita Sy-Coson Keynote Address Philippine Stock Exchange 06 May 2010

[9] Manila Standard Today SM Group allots P65b in 2013, November 9, 2012

[10] Manila Standard Today Ayala Land increases capex target to P70b November 12, 2012

[11] Robinson’s Land Corporation QUARTERLY INVESTORS’ BRIEFING August 15, 2012

[12] Philstar.com Robinsons Land sets P20-billion capex for 2 years, January 7, 2013

[13] See A Philippine Shopping Mall Bubble? January 7, 2013

[14] Irving Fisher THE DEBT-DEFLATION THEORY OF GREAT DEPRESSIONS St. Louis Federal Reserve

[15] Wikipedia.org Gustave Le Bon

[16] Gustave Le Bon The Crowd: A Study of the Popular Mind, Google Books Page 53