Operation Modernisation

The word 'young' is automatically associated with 'pretty', which is related to the word 'attractive'. Who would not like to possess such attributes? Exactly - we all want to appear to have the attractiveness of youth. Shopping centres are no exception. Commercial property owners have realised that customers prefer to go to shopping centres where they feel good and which they regard as clean and well looked after. Developers tend to think more about the investors who buy shopping centres, who not only appreciate the aesthetic features of a mall, but are mainly interested in those that are filled with "real customers". The owners of such properties are now faced with a new challenge - changes in consumer behaviour. This is forcing investors and developers to aim for a new level of quality: a place where people want to stay and do their shopping at the same time. One of the elements of this approach involves making a mall more visually attractive. "There are various reasons for modernising shopping malls. Three types of centres whose owners often opt for changes can be distinguished. The first group are first generation centres, the second applies to those malls that are changing or strengthening their position on the market, and the third type includes those that function well and want to maintain their dominant position in a given region," claims Maciej Wójcikiewicz, a senior director in the valuation department at CBRE.

The first do not want to be last
There were 416 shopping centres in Poland at the end of Q1 2013. Many of these facilities are over ten years old. According to Jones Lang LaSalle, the oldest centres (built before 2002) make up 48 pct of the centres in operation; those built between 2003-2007 amount to about 27 pct, while the latest (built in 2008-2012) make up 13 pct of the total. The research carried out by JLL shows that around 100 shopping centres are to be modernised by the end of 2014. This is being increasingly fuelled by the arrival of more and more opportunistic investors onto the market looking to buy shopping centres and modify them. So we can conclude that shopping centres owners have not been sleeping and have been keeping a careful eye on the market. This is particularly so when it comes to owners of first generation malls built around hypermarkets. "In the case of the oldest retail centres, these activities often involve decreasing the size of the hypermarket in favour of the shopping arcade. The dominance of large hypermarkets in centres has gradually been on the wane and grocery operators currently lease smaller units. Because of this, developers are extending the shopping arcade sections. This provides additional leasable space, which will make money after the commercialisation process and could increase the value of the centre," claims Maciej Wójcikiewicz. Developers that have been set up by hypermarket chains, such as Immochan, are quite active in this field. Last year the company renovated the Auchan shopping centre in Bydgoszcz and is now preparing for the extension, redevelopment and modernisation of its centre in Piaseczno just outside Warsaw. The PEEF fund, which is managed by Pradera Europe and is the owner of the 13-year-old Pasaż Łódzki mall, has responded to the market changes in a similar way. The company has renovated the interior of the centre, reduced the size of the Real hypermarket, and introduced brands such as TK Maxx. British hypermarket chain Tesco is another that is following this trend. The company has been renovating its facilities and converting them to the Tesco Extra format. Around 20 out of its 69 hypermarkets operate at this higher standard, which involves refurbished interiors for the stores and shopping arcades. The new features also apply to the layout of the sales hall, which has been extended and opened up to attract more customers. "Areas earmarked for multimedia, audio and video equipment have actually ceased to exist in some hypermarkets, as this kind of retail has been moving to the internet. However, we have noted customers' increased interest in textiles, which we are now providing more space for. Toys, fresh food and the catering offer are equally as popular," explains Ryszard Tomaszewski, the president of the board of Tesco Polska. Because of this, Tesco Extra now includes special areas for the F&F clothing brand department and its new catering concept Bistro, where you can have dinner, a coffee or try some ice-cream. Tesco has also been changing the façades of their renovated hypermarkets. Future generations of centres will not be built around the grocery anchor. "One of the goals of shopping centre owners and managers is to make customers stay for longer. This is why newly-built facilities are not just places for shopping but also for spending your free time. Hence the presence of cinemas, bowling alleys, fitness clubs, and (last but not least) a broad catering offer. However, it should be remembered that there are a lot of shopping centres on the market that were built a dozen or more years ago. In order to hold their own against the new competition it will be necessary to modernise them or even change their entire profiles in extreme cases," says Wojciech Zawierucha, the operations director of DTZ.

Any reason is good
There are lots of arguments in favour of modernising older facilities. The construction of Galeria Bałtycka, owned by ECE Projektmanagement, has considerably changed the picture of the retail market in the TriCity. The centre, which was opened in 2007, has established itself as the dominant mall, prompting the owners of other centres in the area to look around for new ideas to keep their customers. "The current owner of the Manhattan shopping centre, Australian fund APN Poland Retail bought the centre in 2006, when it was two years old . In the meantime the state of the TriCity shopping centre market has been transformed, as have, as a consequence, customers' requirements and aspirations. However, the modernisation that took place involved not only its architecture and interior design, but above all required changes to the tenant mix. This is why we decided to introduce the '4Re' strategy: recommercialisation, remodelling or significant changes to the interior design, repositioning, which involved the introduction of new marketing programmes, and rebranding," explains Jakub Miciński, the asset manager of Sirius Investment responsible for APN's portfolio in Poland, which includes the Manhattan shopping centre. The company has spent around EUR 1.5 mln on the implementation of the 4Re programme. The amount includes the costs related to the redevelopment of the centre and the creation of large areas for new brands. There are 23 new tenants in the centre (and 70 new retail units), including Charles Vögele, KappAhl, Empik, CCC, Starbucks, Yes and MK Bowling. "The recommercialisation was supplemented by the remodelling of the centre, which started in 2010. We introduced changes to the passageways and shopping arcades in order to improve access to the new outlets. Starting from last year we have been gradually introducing a new system of visual communication. For example, we have installed 12 LCD monitors in the shopping arcades, which mainly serve as information carriers to display the shops' offers," says Jakub Miciński.
Another TriCity shopping centre has also opted for changes. One of the crucial reasons for doing so in this case was to lower its expenses. "The Madison shopping centre was opened in 2003. Two years later it was bought by Javin Investments, a company established by Irish investors - the Turley family. We decided to implement the changes because of the passage of time. We still want to be attractive so we are trying to improve and modernise our centre. This year we undertook major renovations to our main attraction - a fountain powered by stainless steel mill wheels. We are also implementing modern technological solutions that allow us to reduce the operating costs of the mall at the same time. Ten years ago the standards were different. Nowadays energy efficiency and current service costs are determining the choice of the technology. This is why we have been replacing the lights for LEDs throughout the entire shopping centre," emphasises Anna Thomas, the director of the Madison shopping centre for Javin Investments. A lot has changed in the Madison centre. The five-storey facility has gained an extra escalator and additional lighting. The next stage, which is to start in the summer, will involve the renovation of the toilets. "We have energy efficient flushing systems and modern ventilation and air-conditioning systems. We have also been reviewing contracts with our suppliers as part of our active facility management. Thanks to these efforts we have managed to obtain a PLN 200,000 reduction in electricity bills. The money saved was returned to the tenants," says Anna Thomas. The modernisation, which cost app. PLN 1 mln, is expected to pay for itself within 3.5 years - mainly due to the considerable lowering of the electricity consumption in the common areas. However, not everything is perfect in terms of savings. The representative of Javin Investments emphasises that despite the reduction in water consumption due to the implementation of modern technologies, the owner was still fined for water pollution. Due to its location there is no possibility of extending the mall. It currently houses 100 stores over a retail area of 18,000 sqm. The managers of the Manhattan and Madison shopping centres stress that the modernisation work was carried out at night to limit the inconvenience for tenants. Shopping centre owners across the TriCity now have to prepare themselves for more changes in terms of market conditions. The extended Riviera mall (formerly Wzgórze) is to be opened at the end of October, while ECE Projektmanagement has announced an expansion of Galeria Bałtycka.

Foodcourts in vogue
Foodcourts are among the most frequently modernised areas of malls. One example is Galeria Mokotów in Warsaw, where the redevelopment of the restaurant floor on the second level is being carried out as part of its 1,500 sqm extension. Thanks to this the number of restaurants will grow from 11 to 19. Its owner, Unibail-Rodamco, has promised a completely new format. It will have regular restaurants for customers who want to stay for longer and that will even be open until late. Also, the entrance to the restaurant area will be moved (it currently faces the car park on the roof of the mall). The owners of the Blue City shopping centre in Warsaw (the Blue City company, owned by Dutch fund Singspiel Investeringen) have chosen a similar approach. Their plan involves more space for catering and entertainment, while the foodcourt will be moved from the first to the second floor. This will allow the number of foodcourt tenants to increase from ten now to around 14. However, the work has not yet started. Meanwhile, modernisation work has been completed on the restaurant areas of Sadyba Best Mall in Warsaw and Focus Mall in Rybnik. The Warsaw centre focused on changing the interior decor and giving it a fresh look. The furniture has been replaced and the area reorganised and divided into three sections. You can now choose a seat in the general area, which includes some sofas, or a seat in the fast food section with bar stools, or you can sit in the parent area with special seats for children. The centre in Rybnik focused on creating a cosy place where customers can have something to eat and talk or have a rest. "We noticed that customers' aesthetic expectations and requirements with regard to the places where they eat had changed. So we decided to renovate and modernise our foodcourt area," says Sonia Kostecka, the director of Focus Mall in Rybnik. Three colours dominate in the restaurant area: cream, orange and brown. New S-shaped sofas have appeared. Tables and chains have been replaced over the entire restaurant area, while new flower stands, as well as lamps and chairs for children, have been added. Customers can also use Wi-Fi free-of change. Do the introduction of Hot Spots and Unibail-Rodamco's announcements concerning the opening hours (the foodcourt is also to remain open till late) represent a willingness to change the restaurant area into a magnet for attracting and keeping customers in the centre for longer, in the same way that entertainment tenants have done up until now? "Foodcourts are a prominent element of the communal area and one that gets run down fairly quickly, which is why owners are right to modernise them, as it helps to increase the value of the mall at the same time. Such an approach follows the trend for creating places in centres that are suitable for meetings and spending time, attracting customers with something more than just fashion," comments Klaudia Woźniak, the head of the retail department at Colliers International. Wojciech Zawierucha agrees. "The presence of a given centre on the market for a few or a dozen or so years makes it possible to effectively evaluate the potential of the location. This can often result in the restaurant section being extended (if the technical conditions allow) at the expense of other areas in the centre. The standards in such locations have also changed - customers are expecting ?more and better' and their expectations need to be met. This is why the colour scheme is also changed during modernisations, in line with the current fashions. The quality of the foodcourt furnishing has also been improving," adds Wojciech Zawierucha.

Balance in the black
The modernisation of a shopping centre, understood as the renovation, refurbishment or redevelopment of the centre, is time-consuming. Of course everything depends on the scale of the changes, but taking into consideration the particulars of any given mall, the expenditure required also tends to be rather on the steep side. Is it profitable to embark on this course of action? "Each facility needs to be considered individually. Changes to the interior decor will be the only necessary change to bring some centres up to current quality standards. It has become hard to maintain the value of malls bought by investors in 2006/2007, so you need to manage them actively. Changing their image or refurbishing the interiors is important, but does not always generate profits. Of course, if it translates into higher turnover for tenants, it is a very good thing. The majority of tenants settle their bills on the basis of turnover rent, which has a real impact on the revenue of the centre's owner. The best way to increase the value of a mall is by extending it, as this provides additional revenue from the extra space," explains Maciej Wójcikiewicz. Owners investing in this way are pinning their hopes on the fact that higher footfall and turnover will compensate for a necessary outlay of several million euros. "Since the modernisation we have seen a continuous upward trend in terms of footfall in the Manhattan shopping centre. In 2012 we had a 10 pct year-on-year increase, while for the first seven months of 2012 we registered a double-digit month-on-month increase in terms of footfall. When it comes to turnover, directly after the first stage of the changes in 2011 it went up by 26 pct on the previous year and in 2012 by 10.2 pct y-o-y," claims Jakub Miciński. Anna Thomas is also happy with the changes made to the Manhattan shopping centre. "We have noticed a higher footfall in our centre after the modernisation. It is currently at a stable level of around 500,000 people per month. It is important that customers like the changes. They are also appreciated by tenants, pleased with the fact that we are looking after the centre," says Anna Thomas. The director of Focus Mall Rybnik also concurs that such changes are profitable: "The changes to our foodcourt have been very much welcomed by customers of the mall and the tenants, which is also important. The recent opening of the Lunch Station restaurant is one example of the increased interest of tenants," says Sonia Kostecka. Modernisation projects, therefore, can be seen as not just a way of keeping up with the competition, but also fighting for a better position of a shopping centre and improving its profitability.