Oct 30, 2014
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Rent squeeze points to frailty of Spain's retail bounce

Oct 30, 2014

MADRID, Spain - Spain's independent retailers remain enmeshed in the fabric of daily life at a time when chains and multinationals dominate in much of the rest of western Europe.

But many could be forced to shut up shop next year when a 30-year-old regime of below-market-rate rents ends, highlighting the fragility of a retail recovery that has helped underpin the country's return to economic growth.

The El Corte Inglés department store in Castellana. Spain's only remaining department store chain cut 3,500 jobs in 2014 | Source: El Corte Inglés - El Corte Inglés

Even though the rental scheme - which has shielded retailers with contracts drawn up before 1985 from significant increases in rent ever since - is widely viewed as an anachronism, it has helped many stay in business during the past five years of intermittent recession.

If rental terms change dramatically when the agreement expires in January, freelance worker unions estimate that just over 100,000 stores, bars and restaurants - between 5 and 10 percent of the national total - are at risk of closure.

Pilar Pina, who has run an opticians in northern Madrid for the past four decades, has already decided to quit.

"I'm closing, I'm giving up," she said, having been unable to negotiate a rise to less than 2,000 euros from the 1,400 euros (1,108 pounds) a month she currently pays in rent.

"I was prepared to pay several hundred euros more and our rent had already been raised, but my landlady was asking for something utopian," said Pina, 69.

The demise of the independents while discount stores prosper is a not uncommon refrain across a recession-hit Europe.

But in Spain, where unemployment well above 20 percent remains a major drag on growth, standalone retailers are part of a huge stock of companies with 10 or fewer staff that employ 4.2 million people or 40 percent of the private sector workforce.

That also makes them a well established backbone of the economy, though their contribution to growth is fading.

Retail sales began rising in Spain last year and have yo-yoed since. They grew 1.1 percent year-on-year in September, the biggest increase since November last year, according to official data, but only thanks to chains and larger stores. Sales fell 0.9 percent among standalone independent shops.

Larger retail chains are making up for only part of the slack in the job market, however.

Discount supermarket store Dia for instance hired over 3,500 people in Spain and Portugal last year and fashion group Inditex, owner of Zara, also added jobs, though top department store El Corte Ingles cut over 3,000.


Some of the minnows affected by the rent overhaul are landmarks that have clung on in expensive city centres.

"It would be a serious problem if we had to pay the market rate here," Alberto Moran, manager of liquor store Mariano Madrueno just off Gran Via, one of Madrid's main arteries.

The Gran Vía, Madrid's most famous street, particularly for shopping | Source: gomadrid.com

Rent at the beautifully-preserved 119-year-old shop, where wooden counters conceal roughly 500 square metres of storage space in what was once a distillery, costs 600 euros a month - evoking a bygone age both socially and economically.

At a push, the liquor store - whose protected lease will expire when its family patriarch retires or dies - could afford to roughly triple its monthly payments, Moran said. Nearby shops including fashion chains are already paying around 10,000 euros.

Despite four quarters of rising household spending, shuttered store fronts are cropping up with increasing frequency in Spanish cities, pointing to problems beyond rent payments.

Nuria Sacristan, a 46-year-old former IT consultant in Madrid, plugged state redundancy payments and savings into launching a spice and fine foods shop Madrid late last year. She worked out costs based indicators from 2012 - the height of the recession - but found things were worse than expected.

"Businesses next door to mine only really starting seeing a slowdown in 2013," said Sacristan, who this year sold a flat she had rented out to help keep her shop going. She attributed part of the demand problem to expiring unemployment benefits for the country's 4.5 million jobless, which run out after two years.

Shopkeepers' struggles are also a headache for landlords, even though the end of the old rental regime could bring higher income for some.

"This has caused a distortion in the market (rent) prices," said Miguel Angel Sanchez Fraile, head of an urban property owners association, who is against proposals from freelance worker unions to extend the moratorium.

But more store closures would also mean more empty real estate that owners have to sit on, at a cost, or try to sell. In Madrid alone, the number of commercial outlets for sale has already more than doubled to close to 4,000 since 2010, figures from property website idealista.com's database show.

"There used to be demand (to rent) commercial outlets and now there isn't," Sanchez Fraile said. "There is still a climate of worry in this recovery that hasn't quite found its feet, although things are starting to get better in city centres."

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