Fresh tactics
Retail centers in Poland are developing new strategies to meet the challenges
With two months still to go before the end of the year, European shopping-center development has already broken its annual investment record for the third time in a row. By January 1, some 8.3 million sqm will have been delivered in Europe this year, according data from Cushman & Wakefield. Another 11 million sqm is scheduled for delivery in 2008.
However, not everybody in the sector is optimistic. Industry analysts and investors are beginning to take a harder look at the future of the retail market in Europe, as appreciating risk and inflationary pressure associated with the global credit crunch threaten to drive up investment costs and slash profit margins.
Over 100 of the sector's top players met recently in Bucharest to identify the problems facing the market. At the CEE Retail Revolution conference, hosted by the CEE Real Estate Quality Awards, Edgar Rosenmayr, chief investments officer at property giant Immoeast, echoed the IMF's warnings published in its World Economic Outlook and noted that Eastern Europe could be subject to a reversal in the surge of private capital. As a result, markets could reprice credit and equity risk - an issue that is of particular relevance for shopping-center development, as the sector involves both a high volume of investment and high-risk tabulation.
"While the crisis was not initially connected to emerging-market economic fundamentals, there is certainly a risk it could have an impact on these markets, particularly in secondary cities and the sector's frontier markets," Rosenmayr said. The immediate effects are rising yields and shrinking profit margins across less-stable markets.
Too hot to handle?
The dynamic retail growth in Europe is fueled in large part by Russia and Poland, shifting attention away from Italy, Spain and Turkey, which dominated the investment map in H1 of this year. In Russia alone over 4.5 million sqm of gross leaseable area (GLA) will be completed in H2 2007, while a third of that figure, around 1.5 million sqm of GLA, will be delivered in Poland. In the CEE region as a whole, steadily growing consumer spending is fueling strong retail development.
This leads Mark Rea, a partner at Gardiner & Theobald, to cite worries about cost inflation due to a shortage of labor capacity. "The question is how much will we physically be able to build and how much more will it cost?" he asked.
According to Rea, costs in Romania, for example, are rising by as much as 15-20 percent annually. Currently Romania - and its capital Bucharest in particular - has been seeing extraordinary interest on the part of investors who are moving further south in pursuit of a better deal, as markets such as Poland's approach their saturation point.
There are more than 20 shopping centers being developed in Bucharest, which according to Thomas Loeffler, managing director of Geni Poland, is not sustainable. "The 400,000 GLA under development is not in line with spending potential and some centers could suffer," he said.
Richard Petersen, managing partner at Cushman & Wakefield Polska (C&W) agreed, stating, "There will be winners and losers."
Better understanding
Loeffler and Petersen remained optimistic about retail potential in CEE markets, but cited the need to re-evaluate investment potential and to take a new approach to evaluating consumer behavior.
"The trend for building retail centers along highways is not supported by what really happens. For example, if people are taking the highway from point A to point B, they are not [likely] to make a stop along the way," Loeffler said.
Loeffler has been working to implement a more sophisticated system of pin-pointing profitable locations based on a combination of factors, ranging from catchment potential, time-distance ratios, competition and the "living potential" based on real consumer behavior. Purchasing power is another factor, but as Loeffler noted, "If purchasing power were [so big of] an issue, there would be no shopping centers in Romania."
Doris Schumacher, head of European Investment Funds at Invesco Real Estate, said some core investors are currently holding off on new investment projects, waiting to see which direction the market will take. "While the potential effects of a credit crunch have not yet been proven, fundamentals are important and in the future, we will be more careful," she said.
Despite his sobering caveat, Immoeast's Rosenmayr forecasts a "soft landing" for those markets that do end up seeing some trouble.
New strategies
C&W's Petersen sees Poland among the strongest markets in the region and least likely to be affected by fluctuations in regional investment volumes. This is based on rising rents (in mid- to large-sized units), stabilizing yields and a growing middle-income population. According to Piotr Kaszyński, C&W's head of retail in Poland, many leading retailers have already turned their focus toward the 40 Polish cities with populations over the 100,000 mark. Investments in such cities, which feature little or no retail platform, will continue to fuel retail development in the country regardless of global market conditions.
In cities that are already approaching saturation, such as Warsaw, Kraków and Gdańsk, developers are turning to innovative design concepts in the vein of third- and fourth-generation shopping centers while revamping existing centers to compete with the newcomers.
For example, the rebranding and the redefinition of its target demographic is part of the strategy for Warsaw's Reduta shopping center. Its transformation aims to attract young, single professionals and couples without children.
"We took a closer look at our customers and decided to finally pin down our target, which is mainly people under 40 years of age. Families with children still constitute 30 percent of our customers, which means we will continue to organize family events while we shift our focus to the new target," said Iwona Pękalska, head of asset management at Manhattan Real Estate Management, which owns the center. Reduta has launched a youth-oriented advertising campaign and re-commercialized 5,200 sqm of space - bringing in high-profile fashion retailers such as Peek&Cloppenburg, Mango and Esprit.
The next generation
New centers are facing the competition head on by diversifying their offer and getting involved in the life of the community. So-called fourth-generation shopping centers such as Manufaktura in Łód, Silesia Center in Katowice, Millenium Hall in Rzeszów and Wrocław's new Magnolia Park have built multi-functional developments that offer sports, culture and entertainment in addition to their broad retail and service offer.
"From now on we are going to see more fourth-generation facilities, which marks the shift from project development to area development," said Magdalena Galant, a spokesperson for Magnolia Park. Centers like Manufaktura and Magnolia Park often provide a new public forum for cultural life in a city, featuring performance spaces and amphitheaters.
"The opening of Magnolia Park is not the closing phase of the investment," said Gilbert Boulanger, the managing director at Redis, the shopping center's developer. In the future, the center will be expanded by up to 40,000 sqm and will add a hotel-residential complex.
According to Immoeast's Rosenmayr, "This is the time for core investment strategies." Poland's top retail developers appear primed to deliver.
