Selling happiness

Every shopping centre owner wants to generate the highest turnover possible. There are a number of ways of achieving this. "The factors that determine the value of a shopping centre include an improvement in the tenant-mix (that is, the selection of tenants which best suits a given centre), a properly prepared repositioning, and the modernisation of the centre. The latter has an influence on its attractiveness to customers that could translate into increasing both the footfall and the amounts of goods in shopping baskets. Short-term leasing of the so-called ?shopping islands' in the passages can also be a tool for generating higher revenue. Profitability can be additionally increased by way of reducing operating costs thanks to green solutions," says Anna Staniszewska, the director of the Central Europe consulting and financial analysis team at DTZ. For facility managers there are also other important issues. "We have our properties valued several times a year. For us the most important factors are rent levels and the length of leasing contracts. From the developer's point of view, this criterion is the most reliable and profitable. However, a lot of other factors have an impact on the rents in shopping centres. These include the quality of the tenants and their location on the mall map, the transport layout of the centre, the appropriate use of commercial and communal space, and the number of visitors to the centre," claims Michał Bogaczyński, the director of the Promenada shopping and entertainment centre in Warsaw, which is owned by Atrium Poland Real Estate Management. According to Agnieszka Pyzanowicz-Francke, the director of the Bielany Shopping Park in Wrocław (owned by Inter Ikea Centre Group Poland): "When calculating the value of a shopping centre we take many criteria into consideration. The most important are related to the technical condition of our buildings, the level of profits generated by a given centre, the length of the most important leases, the location, and the number of visitors. The quality of the installations and the maintenance of communal areas, green areas, car parks and all the architectural elements of the centre also have a bearing on this. Actually, all the activities associated with the day-to-day management of a shopping centre have an impact on its value. The upkeep of the building and its effective functioning, marketing campaigns resulting in an increase in custom and good leases are the most important factors helping to increase the value of a centre."

Paying less, paying more
How should a building be managed effectively, then? "This process starts with the original concept and the choice of location. Another step is to create an interesting mix of stores. A well thought-out group of tenants guarantees customer interest," explains Elżbieta Sobolewska, the director of Galeria Świdnicka and Pasaż Grodzki, two centres developed by Legnica-based Rank Progress. The presence of recognisable brands with a strong financial and market position is definitely an advantage. However, anchor tenants have their own requirements when it comes to rents and other factors, and they have significant bargaining power. "It has been accepted that anchors are necessary in shopping centres. They form an axis and determine the character of the commercialisation strategy of the building. It is obvious that these tenants pay less per square metre because of the length of the lease and the size of the area, and that the lessor should make up the difference. Relinquishing part of the income from anchors, however, means that the other tenants pay more. This mechanism is understood and the anchors take on some extra responsibility due to it. It is a mutually beneficial arrangement," adds Michał Bogaczyński. He also emphasises the importance of the location of particular shops in the mall layout. "During the construction process we determine the estimated rental value, which is the anticipated income from rents. It is no coincidence that an anchor is located in a certain place and that other units around the anchor have smaller areas. Service outlets work best in the proximity of food operators. Every lessor designs the shops, the length of shop windows and access to the delivery zone during the construction stage, and they do this in a way that maximises the value of the investment," stresses Mr Bogaczyński. A store's location within the mall's layout also influences the rent levels. It is important whether a shop is located at a fork or at the intersection of lanes, passages or corridors. "The location can be designed in a way that exposes the shop window as much as possible, which itself is of great value when estimating the rent. In the case of already existing shops, it is important to redesign the store and, if possible, have a display window instead of a wall, which has a positive effect on the profitability of the shop. The tenant is then willing to pay more for such units," explains Michal Bogaczyński.

Short-term leases are another issue that engage facility managers. More often than not, short-term leases apply to the use of common areas through the creation of the so-called islands', i.e. kiosks. "They are definitely a good idea if their offer supplements the main, attractive offer of the centre,'" adds Elżbieta Sobolewska. It is also important for the kiosk areas to be more expensive, since although the leases last for only a few months they generate substantial profits. It is similar in cases where a tenant is relocated. The relocation of a shop also means an increase in the rent.

The value of a shopping centre is also increased by the modernisation of installations and the implementation of energy-saving solutions. Although there tend to be fewer improvements of this kind after a few years, they are usually welcomed by tenants. "The refurbishment of a centre is not a sufficient argument for rent increases. Tenants are more interested in the modernisation of the installations, such as the air-conditioning, escalators and ventilation systems. Such measures can justify rent increases, resulting in an increase in the value of the shopping centre. And this applies also to the implementation of eco-friendly solutions. At the moment we are changing to LED lighting, which is not only cost-saving in terms of reducing our monthly electricity bills, but also generates less heat in the building. Sensor-activated taps, in turn, allow us to save a lot of water," says Michal Bogaczyński.

Not only the rents
The success of a shopping centre is not only about ensuring that high rents can be charged. It is the customers and their wallets who determine the success of a mall and whether it can claim to be the city's leading centre. "The tasks of a facility manager include constantly strengthening the positioning of the centre, and this involves building up its image and recognisability. Organising events and marketing in a broader sense are among the ways used to attract the greatest possible number of customers. Increased footfall translates later into the tenants' financial results, and these figures are the best evidence of the quality of a given centre," claims Elżbieta Sobolewska. Meanwhile, Aneta Rogowicz-Gała, the director of the property and asset management department at Cushman & Wakefield, emphasises cooperation with tenants. "When preparing events, it is very important to plan the marketing budget in detail and think about working with the tenants. It is always worth involving them in such activities. In this way this is not just a promotion of the centre itself as a place but also of the tenants' offer," adds Cushman & Wakefield's expert. Agnieszka Pyzanowicz-Francke has a similar opinion: "Good relations with tenants and the desire to attract the largest number of customers is the recipe for success. One has to be aware of the fact that an increase in the value of a centre in customers' eyes equates directly into an increase in the value for a developer or a potential investor," adds the representative of Inter Ikea Centre Group Poland. This is why a shopping centre's offer is often supplemented with cinemas, bowling alleys and recreational areas. Virtually every big centre, planned or already under construction, has similar amenities. "It certainly increases the turnover of a shopping centre. Additional functions form the character of a given place, allowing the developer to create a suitable atmosphere and stand out from the competition, working like a magnet and attracting customers," adds Anna Staniszewska.

Products for sale
Most developers build shopping centres as products to sell on. The big money, however, can only be made out of prime facilities. Despite this, investors are also interested in other types of properties. "King's Street Retail focuses on the acquisition of shopping centres characterised by good locations, diversified portfolios of reputable brands, high footfall and further development prospects. The centres are located in big cities and in key regional markets," reveals Paul Kusmierz, president of the Master Management Group.
Experts regard the current situation as an interesting one. "Active investors are looking for two types of properties: dominant shopping centres in big cities, as well as smaller and older facilities outside the biggest conurbations. However, in order for a given property to ignite their interest it has to fulfil a few conditions," says Michał Ćwikliński, the director of the investment department at Savills. "What counts in centres of the first type is the rent-to-turnover ratio, which should ideally be at the level of 10-15 pct. Smaller facilities, on the other hand, can only expect to attract such attention if they have long-term leases secured by contracts that make it possible for an investor to obtain favourable credit terms and a higher return on capital," claims Mr Ćwikliński.

But these are only some of the factors that have to be taken into account - there are in fact many more. Those who study the market with a view to purchasing retail properties also have to take into consideration such factors as the location, the economic status of the local people, their average earnings and disposable income, the amount of retail space per inhabitant, sales per sqm, and sales-to-rent ratios. In the case of older generation shopping centres, investors lay great importance on whether the centre is fully-leased and on reducing the debts owed by the tenants. In this case it is important to help tenants increase their financial liquidity and improve their payments of current bills by preparing payment schedules or arrears payment schedules. Thanks to this the owner of a given centre can reduce vacancies. When evaluating a shopping centre and its attractiveness for potential buyers the key factors are the rent levels and the rates of return. "It is worth considering turnover-related rents, which could bring in additional revenue in the future. In the case of grocery anchors, ten-year leases are the norm, but investors are looking for facilities which have 15-year tenancies. In such a case the value of the centre increases despite the lower rents because investors are willing to buy them at a lower yield. Besides, it is important that the contracts signed are of an institutional character, i.e. that they are developer-friendly, index-linked, and that there are clear provisions concerning shared payments," emphasises Michał Ćwikliński. Slightly more effort is needed in the case of several-year-old facilities. "The process for preparing a centre for a possible sale should be planned in advance. Investors lay emphasis on the mall's commercialisation status, the quality of concluded lease agreements, the timeliness of rent payments, the turnover generated by tenants and the technical state of the building. That is why a comprehensive approach to all the issues that have an influence on the centre's results is so important. The role of the property manager also involves helping tenants achieve optimal financial results. Relations and flexibility in agreeing the targets have a considerable influence on that," explains Aneta Rogowicz-Gała.
A shopping centre's value, therefore, can be summed up as a happy trinity: a happy customer, a happy tenant and a happy developer.

Sold and those for sale
According to Savills' investment data on the Polish commercial property sector in Q1 2012, the country's retail market remains attractive for investors. The volume of transactions in this period exceeded EUR 728 mln, and 80 pct of it was accounted for by 'shopping centre acquisitions. A few deals had a major influence on these figures: the sale of ING's 77 pct stake in Złote Tarasy in Warsaw for EUR 475 mln (the buyer was a fund managed by Axa Real Estate and CBRE Property Fund Central Europe LP), the sale of Alfa Centrum in Olsztyn by Arka Property Funds to the Rockspring Property Investment fund for EUR 84 mln, and the sale of Galeria Tęcza by Rank Progress for EUR 37 mln. The buyer of the latter, Blackstone Real Estate Group, has actually set up its own shopping centres platform, King's Street Retail, which now comprises Magnolia Park in Wrocław, Galeria Twierdza in Kłodzko, Galeria Twierdza in Zamość, Galeria Pestka in Poznań and Wzorcownia in Włocławek. Blackstone is also considering another purchase. Its target is Galeria Leszno (the company has neither confirmed nor denied having an interest in the property). According to Cushman & Wakefield, the value of transactions concluded in Poland in Q2 2012 amounted to EUR 127.8 mln - more than EUR 200 mln lower than the previous year. Among the malls still waiting to be bought are Karolinka in Opole and Pogoria in Dąbrowa Górnicza, both of which are owned by MGPA and managed by Mayland Real Estate. Negotiations being held by Immofinanz about Silesia City Center in Katowice could also bear fruit. ?Meanwhile, other active investors include Invesco, GLL Partners, Rockspring, Atrium European Real Estate and Blackstone, as well as Heitman, which bought Galeria Tarnovia in Tarnów for EUR 95 mln from TK Development at the beginning of July. In August it also finalised the acquisition of a shopping centre project in Jelenia Góra. At the end of this year Apsys should also finalise a deal to sell Manufaktura in Łódź to German fund Union Investment.

Aneta Cichla