The TLV fashion mall in Tel Aviv, owned by Gindi Investments 1 Ltd. (TASE: GIND.B1), is facing difficult challenges, following reports of a slowdown in activity at the nearby Sarona site. The BDO accounting firm this week published an unflattering review of the mall. According to a valuation by Moti Dattelkramer, CPO, attached to Gindi Investments' quarterly financial reports to the Tel Aviv Stock Exchange (TASE), the value of the mall as a whole has dropped by NIS 40 million. At the end of June 2017, the mall's value was NIS 1.813 billion, down from NIS 1.853 billion at the end of March 2017.
According to the BDO review, the rented area of the mall declined by 290 square meters, 1% of the mall's total area, for which only a memorandum was signed, without a signed lease. This means that one or more of the customers who signed a memorandum in the second quarter decided to withdraw from the deal, probably because of a lack of activity in the mall. The valuations for the mall have consistently risen since 2014, before last quarter's fall.
The increase in value in previous years was thanks to progress in construction and marketing of the space, in addition to a reduction in the risk elements.
The opinion attached to the valuation states that experience in handling similar malls shows that tenants cannot be charged the full cost of management fees at the outset. As part of the management agreements, the owners of the mall assumed that the management company's monthly deficit between revenue and expenses would be NIS 10 per square meter to be marketed - a total of NIS 4 million per year. The reason is that the mall is in a running in period, and the tenants are currently paying only a percentage of their proceeds, not rent.
28,000 square meters of the mall, 87% of its total space, is currently occupied by 159 tenants. The report states that the average rent in the leases previously signed is NIS 310 per square meter. In leases in the memorandum stage, which have not yet been finally signed, the average rent goes up substantially to NIS 570 per square meter.
Two factors appearing in the valuation are liable to jeopardize the mall's future value. The first is the upward trend in the supply of commercial space, which is likely to have a negative impact on proceeds from rent and management fees in the long term. The current population of Israel is 9.1 million, and the amount of commercial space per resident is 1.07 square meters. The review notes that the ratio of commercial space to the number of residents has risen in recent years from 0.9 square meters per resident in 2009 to 1.04 in 2013 and still further since then.
Another factor liable to detract from activity in the mall is Internet shopping, which currently makes up 5-8% of the market. The review warns that any increase in this share will be at the expense of the market shares of shopping centers, which will affect the sector in the long term.
These assessments come on top of the frustration of the tenants on the site, who have reported a lack of movement since it was opened, despite intensive marketing.
The summer vacation from school ends today, and it can be assumed that the individual successes of marketing operations in the past two months, which are likely to continue until after the Jewish High Holy Days, will probably come to a halt. It is believed that the management of the mall will have to make more strenuous efforts to attract visitors during the winter.
The mall owners hope that the opening of new food businesses, occupation of the apartments in the Gindi towers, and the entry of large companies into offices in the new Azrieli Sarona building will boost traffic in the area.
On the other hand, much new commercial space appealing to a similar market is scheduled to open in the area, such as the mall for prestige brands planned in Sarona Azrieli. Gindi Investments, controlled by siblings Manor, Stavit, Tal, and Kfir Gindi and their families, holds 25% of the rights in the project. Their partners are brothers Moshe Gindi (father of the four siblings) and his brother, Yigal Gindi (25%), and Blue Square Real Estate Ltd. (TASE: BLSR) (50%).
The difficulties facing the mall are part of the birth pangs of any mall. The question is, however, whether all the partners will have the stamina to absorb the losses expected over the first three years.
TLV said, "The mall was opened a short time ago. According to our figures, there is a substantial increase of 25% in the number of visitors from one month to the next, with 550,000 people vising the mall in August. Proceeds of the stores in the mall have accordingly risen strongly. The situation is likely to improve still further in the coming days, with the opening of schools and kindergartens, the opening of the municipal country club in the coming weeks, and the entry of leading and well-known food chains and businesses, such as Cafe Europa, Tatti Givatayim, and wine and flavors stores. A Pealton center for children and dozens of stalls are now opening, and the list of businesses waiting to enter the mall is getting longer, while little area is left to be marketed, and more businesses that have already signed memoranda are signing contracts."
Published by Globes [online], Israel Business News - www.globes-online.com - on August 31, 2017
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