Appetite for investing

Aneta Cichla, ‘Eurobuild CEE’: ECE has participated in one of the largest ransactions on the retail market this year – the purchase of the Silesia City Center shopping centre in Katowice for over EUR 400 mln. Is it worth buying such product on the Polish market?

Leszek Sikora, the managing director of ECE Projektmanagement Polska: There are many centres in Poland that are ripe for acquisition. In the last few years there were quite a lot of facilities of different categories built. Some have even managed to become old and others are still being built. It is a vibrant market where a lot of transactions are being closed. Such as, for example, the purchase of Silesia City Center by a consortium including ECE and which Allianz is the leader of. On the other hand, it is harder to find a premier league centre – the best on offer. This, again, is reflected in the higher prices that need to be paid for the best centres. Silesia cost over EUR 400 mln. It is one of the largest transactionson the Polish market this year – and of last year too, by the way. Manufaktura was
sold fo a slightly lower price [EUR 390 mln – editor’s note]. I believe that the investment market will continue developing and ECE will be an active participant in this process.

According to Savills, shopping centres could even constitute 70 pct of the total transaction volume on the commercial property market in Poland. What has been driving this?
This is about security. As long as Poland is viewed as a safe country where buying commercial properties is profitable, we will see such transactions being agreed. ECE considers Poland to be a stable market. This is a country with healthy economic indicators and an active population that wants to work as well as a relatively young society. I would compare Poland to Turkey, which is, however, outside the European Union – and this is of key significance for investors. There are quite a lot of large cities in Poland, where purchasing power is growing. The low level of interest rates is also not without importance. The affluence of customers is of course at a different level compared to the West. For us shopping centres are the best investment and in Poland we only focus on this business area.

This means that we might see some more transactions involving ECE?
Yes, it does. We have been monitoring the market closely and there are new opportunities every month. Fortunately, the current situation is contributing to the fact that you can now buy facilities that were not for sale until recently and which the owners wanted to hold on to. Poland is still attractive in this segment.

Which shopping centres is ECE looking at?
I cannot reveal which facilities we are interested in. And if we are only planning to get interested in any – then it is even more of a secret.

Where will you get the money from for this investment?
ECE’s natural investment partner is the Otto family, the owner of ECE Projektmanagement. In addition, ECE has been working with a number of investors for many years, including the Otto family sponsored ECE Prime European Shopping Centre Fund. The ECE fund was raised in 2010/2011 with total capital commitments of EUR 775.5 mln from international high-profile institutional investors with global investment expertise. With a target portfolio valuation of app. EUR 2 bln, the fund is now largely allocated. Importantly, the ECE fund should be differentiated from ECE Projektmanagement. The ECE fund is exclusively focused on the acquisition of existing shopping centres with value-add potential via re-leasing, repositioning or expansion measures in select continental European countries. The ECE fund is leveraged off ECE Projektmanagement’s 48 years of experience as Europe’s leading developer and operator of large prime shopping centres offering investor services, including sourcing, due diligence, property management, leasing, revitalisation, redevelopment, construction, extension and financing services.

What is the geographical spread of your portfolio?
The Fund currently comprises ten prime urban shopping centres across six countries in Europe, including Germany, Poland, the Czech Republic, Italy, Austria, and Denmark, with further acquisitions in the pipeline to complement the existing portfolio until the end of this year. The Fund remains focused on finding interesting investment opportunities in its core markets including Poland.

Will there be a new fund?
ECE believes that the acquisition of existing shopping centres with value-add potential generated via active asset management remains a highly attractive investment opportunity for institutional investors seeking stable returns. Therefore, building on the success of the first ECE Fund, the Fund management team will aim to continue building its fund platform, with a planned successor fund in the future.

Silesia City Center – does this provide a model for the type of centre you are looking for?
We are interested in facilities that dominate in a given city or region. They do not have to be ideal centres – so-called ‘perfect assets’. We are mostly looking for facilities with the potential for extension, redevelopment and optimisation through management as well as recommercialisation. The point is for the value of such a property to grow considerably after a few years and for investors to be happy with the returns. We have some experience in this respect. There are many projects in our portfolio which have improved their profitability thanks to our management. For example, the Elbe-Einkaufszentrum in Hamburg was increased in area by 10,000 sqm (from 33,000 sqm to 43,000 sqm). Around 60 new shops were added and the remaining older section of the centre was modernised. The revenue from rent grew by 70 pct and the turnover also increased tremendously.

So you are looking for opportunities on the market?
Every investor tries to buy cheaper and sell more expensive. We want to pay as little as possible for a centre with the highest possible potential. In this sense we can talk about opportunistic purchases. However, we do not develop an interest in just any old centre. We carefully check not just its financial flows, the quality of the tenants and the competition, but also the technical condition of the building. We are not afraid of difficult projects, but they have to fulfil a number of significant parameters, such as a good location and most importantly the potential for being turned into a good facility. For example, in Denmark the ECE fund bought a centre with a leasable area of 100,000 sqm that has been owner-operated for 30 years and has never been fully refurbished and optimised. The opportunity consists in the fact that the facility can be modernised and restructured to such an extent that it will become a completely modern centre with an optimised branch and tenant mix resulting in
increased revenue.

Will this also be the case with Silesia?
Silesia is a mature facility, but it is still a modern one and does not require such treatment. It has a certain reputation on the market and its potential lies in the improvement of the management and building its value through perfecting the offer for customers, whose purchasing power will undoubtedly grow. We are a minority shareholder in the consortium and ECE’s task will involve providing the centre with professional management and commercialisation.

You participated in the sale of Galeria Dominikańska to Atrium European Real Estate. Why has the mall been sold?
Galeria Dominikańska was owned by a joint venture of the Otto family and Deutsche EuroShop AG. ECE was and will remain the manager of the facility. The centre was modernised last year and is fully leased and stable. The owners were of the opinion that it was the optimal time to sell it.

Do you expect any large transactions on the Polish retail market this year?
I think that we will see at least one large transaction involving a shopping centre within the next few months. I don’t expect that it would be as large as those for Silesia or Manufaktura, but even half the amount would be a significant transaction. It is estimated that the commercial property market in Poland will have annual turnover of EUR 3 bln this year, so even 10 pct of that amount in one substantial transaction would make up a considerable element of that.

Which groups of investors are currently active on the Polish shopping centre market?
I would mainly list the German and Austrian funds, such as Allianz Real Estate and Deutsche EuroShop AG. This is a natural area of expansion for them. The Germans are aware of Poland’s economic strength and are not afraid to invest in our country. Anglo-Saxon investors are also very active. However, I do not see any broader, direct presence from Middle Eastern investors, who traditionally focus on the European markets they have been familiar with for many years, such as Great Britain
or France.

Polish capital is not making its presence felt either...
Polish capital is not so strong. It is difficult to raise Polish capital in such amounts. Besides, the entities which could have it at their disposal are obliged to act within a certain set of legal constraints, such as open pension funds. So far, they cannot invest in commercial properties. However, this is changing. Recent proposals for reforming the regulations involve relaxing these constraints. This would make it possible to establish a basis of the Polish capital, which could then compete more effectively with foreign players.

Looking at the retail market, it could be concluded that developers are becoming more like investors. Inter IKEA Centre Group Poland has bought Wola Park, Atrium continues to build but also buys. Echo, according to Michał Sołowow, will also become more like a property fund. Is the day of the developer over?
The development sector, as we understand it, will never come to an end. Redevelopment and extensions are also development projects. However, cities are becoming more and more saturated and it is becoming much harder to find a spot on the map of the retail market that could be filled with a large and interesting project that would be a success for both developers and tenants. For a few years now ECE has been gaining experience in terms of investment in existing facilities, and this has turned out to be the right approach at this stage of the development of the shopping centre segment. When it comes to the construction of new facilities, we will look at each location very carefully and selectively. We are only concentrating on the strongest markets. In Poland it is Warsaw that provides such opportunities; but still, each project needs to be considered individually.

From developer to director
Leszek Sikora has worked in the commercial property investment market in Poland and Europe since 1997, when he finished his studies in law and administration at Adam Mickiewicz University in Poznań. He joined ECE Projektmanagement Polska in 2005. At first he worked as a developer and in 2011 became the director of the development department. His current position is the managing director of ECE Projektmanagement Polska. He is responsible for ECE’s entire business in Poland, in particular the acquisitions of finished centres, new projects, extensions and the sale of ECE’s comprehensive services. Leszek is a skiing and water sports enthusiast. He is married and has two children.

200 on the scorecard soon
ECE manages 185 shopping centres (including 38 through Mec Metro-ECE Centermanagement) in 16 countries. Around 17,500 stores are located in the shopping centres, which generate a turnover of app. EUR 19 bln per year. Another 15 malls in Europe are at the stage of being designed or built, including a new centre in Bydgoszcz, Skyline Plaza in Frankfurt am Main and Milaneo in Stuttgart. ECE also develops other facilities through its office traffic and industries departments, such as ThyssenKrupp’s offices in Essen, the German headquarters of Philips (Hamburg) and the Steigenberger hotel at the new airport in Berlin. In Poland the company manages such shopping centres as Galeria Bałtycka (Gdańsk), Alfa Centrum (Gdańsk), Galeria Krakowska, Galeria Kaskada (Szczecin), Silesia City Center (Katowice), Galeria Łódzka and Galeria Dominikańska (Wrocław).