Choosing the right size

Most Polish agglomerations are saturated with retail space. For a few years now developers have been filling niches in ever smaller cities. Not only are they facing the question of where to locate, but also what to build By Beata Socha Poland’s saturation of retail space, at 227 sqm per 1,000 inhabitants is getting increasingly close to that of Europe’s mature markets. It has already surpassed the European average of 196 sqm per 1,000 people, and once all the space that is currently in the pipeline is completed, it will reach 245 sqm, a stone’s throw away from Western Europe’s average of 260 sqm. Over the first three quarters of the year, as much as 340,000 sqm of new retail space was delivered reaching a total of 12.2 million sqm of GLA, according to JLL. The format that clearly dominates the retail landscape is shopping centers, with 8.76 million sqm distributed across 376 schemes. New malls are being built all over the country, mainly in cities with a population between 100,000 and 200,000. The two latest additions to the market are Galeria Warmińska (41,000 sqm) in Olsztyn, northern Poland, and Brama Mazur (17,250 sqm) in Ełk, the first such scheme in a city of 60,000 people. No longer too small A few years ago many of these markets would likely be regarded as too small to even consider, but as Poland’s retail map is getting increasingly dense, developers are forced to learn the country’s geography a little better. “The size of the city is not key to the success of the investment, as failed projects can also happen in the largest agglomerations,” said Anna Wysocka, head of Retail Agency at JLL. “The most important thing is to choose the right format for the location,” she added. There are still many cities that have yet to see their first modern shopping mall. “Cities such as Chełm, Zawiercie and Mielec [each with a population below 100,000] have zero saturation level in terms of shopping centers. There are also low saturation levels in Ostrowiec Świętokrzyski, Elbląg, Biała Podlaska, Ostrołęka, Siedlce, Konin, Łomża and Gniezno, all of which are small and medium-sized cities,” Wysocka explained. Rise of retail parks But are shopping centers the only answer to the demand in such cities? Not necessarily. Given the inherently higher risk of investing in small markets, developers are slowly taking to the retail park format, which is both cheaper and, as it often turns out, more convenient for the customers. “Clients in smaller cities tend to prefer single-floor schemes,” Wysocka admitted. “There are some 700 retail parks across the UK and only a few dozen in Poland,” said Jonathan Tinker, Board Member of Helical Poland, a retail developer which has developed retail parks in Wrocław and Opole. Developers seem to be catching on rather quickly, though. Two out of the four new schemes delivered in Q3 2014 are retail parks: Saller’s project in Nowa Sól (5,700 sqm) and Immofinanz’s STOP.SHOP in Kętrzyn (5,400 sqm). There is also 70,000 sqm of space within 12 retail parks currently being developed, most of which are located in cities with less than 200,000 inhabitants. What a retail park needs to be successful is “good visibility, very good car parking and they have to be inexpensive to operate and to run. So the service charges are very low,” Tinker explained and added that the concept “tends to work well in an established retail destination. We built our park next to the existing Castorama and the Korona center. It’s an ideal location. It compliments what’s already there.” [big percent= "340,000 sqm "]of new retail space was delivered to the Polish market over the first three quarters, bringing the total stock to 12.2 million sqm, according to JLL[/big] Management-intensive Given the increasingly high saturation levels and the number of “green islands” quickly coming to an end, the retail development industry will soon have to face a serious issue. “The question before us is what will happen to the oldest schemes, which make up a significant part of the total supply in Poland. Clients tend to prefer more modern schemes, which have more to offer not only in terms of retail, service and entertainment, but also make clients ‘feel better’ and give them a better shopping experience,” explained Wysocka. Active asset management, including refreshing the tenant mix and adding complimentary functions to the existing schemes seems to be the most frequently prescribed course of treatment for any scheme over 10 years of age. For some of the older ones, the trend may have come too late, though. “Few of the first Polish shopping malls have managed to defend themselves against the growing competition. It is noteworthy that the scale of the first retail projects was in most cases overestimated and was brutally verified by the changing market and customer tastes,” said Łukasz Derlacki, CEO of ARS Retail+Shopfitting, a company specializing in designing and fitting out retail schemes. Yet, there is hope for them. After all, they can boast the best possible location, coupled with an established position as a retail destination. “Good property management is more than half of what makes an investment successful,” said Wysocka. “That includes maintaining good relations with the tenants and monitoring their opinions and needs, as well as planning and carrying out effective marketing campaigns,” she added. What’s not to like? Where are investors in all of this? Are they interested in smaller schemes in smaller cities? Figures seem to indicate they are. “In 2014, twelve transactions were made, seven of which were for less than €10 million each,” said Łukasz Lorencki, senior surveyor from the Capital Markets Group at Cushman & Wakefield. The largest transaction this year was the sale of Poznań City Centre for €225 million. The runner-up, Galeria Mazovia in Płock, was sold for well over €50 million. “The acquisition of Galeria Mazovia by CBRE Global Investors indicates that owing to the limited availability of large prime properties institutional investors will look more favorably at cities with a population between 100,000 and 500,000,” said Lorencki. According to Cushman & Wakefield’s analysis, the share of cities with a population of less than 500,000 in the total transaction volume rose from 20 percent in 2013 to around 44 percent this year. Naturally, the profile of the investors is changing as well. “Due to the scarcity of large assets, investors with a higher risk profile are increasing their market share. They tend to invest with a five-year investment horizon to achieve an above-average rate of return by raising rents, reducing service charges, extending shopping centers or selling properties at the peak of the economic cycle,” Lorencki explained.