Consequently, rents are at a rock-bottom level and owners of commercial properties have to lower expectations to attract tenants.
According to Hossein Abdoh-Tabrizi, an economic expert of the housing sector, these conditions are indicative of the ridiculously high price-to-rent ratio in shopping malls, stemming from a so-called "earning mirage" and the high rate of commercial real-estate projects over the past years, the Persian-language Donya-e-Eqtesad reported.
“Worse than that is the resistance on the part of developers to consider the price-to-earnings ratio before getting into the business of commercial real-estate development,” Financial Tribune quoted him as saying.
Abdoh-Tabrizi believes that for the P/E ratio to decline, prices of commercial properties need to decrease, otherwise more tenants will move out as new shopping malls open.
“Taking inflation into account, the real prices of commercial properties have decreased, though their nominal prices might have remained unchanged. Real-estate prices normally display strong durability, i.e. they tend to remain constant or adjust slowly despite changes in the cost of producing and selling goods or services,” he said.
“However, this statement might not apply to the prices of commercial units. I believe real prices of commercial units have been constantly declining over the past 10 years. However, it’s only two years now that their nominal prices are showing a decline.”
Asked about when and where this trend began, Abdoh-Tabrizi said the formation of price bubble of commercial properties could be traced back to the 2000s.
“Before that decade, at least in districts such as Grand Bazaar in downtown Tehran, real-estate prices were constantly increasing due to its limited shopping space. However, Tehran Bazaar lost its traction afterward; shops switched from wholesale to retail; some of them were repurposed and price bubbles were formed,” he said.
“In the 2000s, Tehran sprawled out so extensively that the Grand Bazaar wholesale services were not adequate. A significant number of producers and wholesalers, who were mostly importers, moved out of the bazaar. As time passed, price bubble increased across all commercial units in the capital city.”
The economic expert noted that oversupply is shifting the balance of the owners of commercial units, particularly the newly-built ones, and their tenants, with retailers able to negotiate lower rents.
“Currently, it is difficult to ask for fixed rents, as tenants only pay a percentage of their sales to owners. The decrease in rents has given rise to businesses that generate modest revenues such as bookstores and cafes. For example, the number of bookstores in 1990s and 2000s constituted a small fraction of the number of publishers due to the high rents of commercial units,” he said.
“As we speak, such businesses are once again gaining momentum, thanks to the oversupply of commercial units. Twenty years ago, the vacancy rate of shopping malls stood at 5-7% on a good day; now the rate has increased to 15-20%,” he concluded.
Saturation Point
Ali Chegini, a former executive with the Ministry of Roads and Urban Development, has been quoted as saying that a lack of proper feasibility studies prior to constructing shopping malls and in adherence with regulations in Iranian metropolises in the past meant that the number of malls already reached saturation point.
“These malls have been mostly built in the past 12 years,” he told the Persian newspaper Sharq in 2017, adding that many of them are owned by state-affiliated financial companies and institutions.
According to Chegini, when oil revenues increased during the tenure of former president, Mahmoud Ahmadinejad (2005-12), a great deal of the financial resources was shifted to the housing sector, leading to the construction of a massive number of apartments and complexes. Consequently, the construction of shopping malls increased.
International sanctions imposed against Iran over its nuclear program and trade transactions also played a part in channeling investments into the housing sector and building shopping malls in particular.
During the sanctions era, wealthy Iranians avoided holding cash because of the weakening of Iranian rial and rampant inflation, which peaked above 30% annually in 2013. Those trends helped divert capital into physical real estate, including malls, which were seen as hedges against the turmoil, reads a Wall Street Journal article.
Much of the newer mall development has focused on Tehran. At the capital’s metropolitan core, which has a population of around 9 million, consumer spending last year was on par with the Middle East average.
But Tehran’s spending is concentrated: It has the second-highest spending per square kilometer—a key metric for retailers—in all of the Middle East and Africa after Johannesburg, according to chief economist at Planet Retail in Frankfurt.
Municipalities, Tehran municipality in particular, is said to have generated substantial revenues by charging exorbitant fees in exchange for construction permits it has issued copiously.
According to former roads minister, Abbas Akhoundi, half of Tehran Municipality’s budget for the fiscal 2017-18 was estimated to have come from exclusionary housing policies, based on which TM allowed the construction of multi-storied buildings without complying with zoning regulations, such as parking, traffic load and air pollution.
It was reported in September 2017 that more than 1 million square meters of shopping area was under construction across Tehran, particularly in the upscale districts.
“Tehran Municipality is granting permits to almost all applicants wanting to construct commercial buildings like shopping malls and office buildings, without paying attention to the real needs of each district and the worsening traffic congestion in the sprawling capital,” the Persian newspaper Iran quoted Mohammad Haqqani, chairman of the Tehran City Council’s Health and Environment Committee, as saying during a council meeting last year.
TM is said to have invested heavily on the development of new shopping centers mainly to ensure regular rental income. In other words, the current supply of shopping centers is fueled largely by demand from investors, including TM, and not by the needs and demands of consumers.
The problem of traffic congestion has worsened with the growing number of malls that are being erected at or near major highways and busy intersections.
One notable example of the controversial projects is the Kourosh Complex on Sattari Expressway: a 17-story mall that opened in 2014 with over 500 stores plus 14 cinemas each with 2,800 seats.
According to urban planning experts, what is visibly wrong with the huge mall-cinema complex is its inappropriate location and shortage of parking space for both shoppers and staff.