When malls stall

DeadMalls.com is a website dedicated to shopping centres that have “ceased to be” in the United States. It details the history of such ex-malls: from the cradle to the retail grave. Some were closed down due to the bankruptcy of their owner; others were simply ill-conceived in the first place, while others were left adrift when abandoned by their anchor tenants. We can come across some rather similar cases when reading about the Romanian retail market. In H1 2013 several companies declared their insolvency: BelRom’s subsidiaries that owned three shopping centres in Craiova, Focşani and Bacäu, and Omnium Invest, which did not manage to finish the construction of its shopping centre in Focşani. The retail parks owned by BelRom have been put up for sale – as has the Armonia shopping centre in Brăila after its investor, RedManagement Capital, went bankrupt. The mall is still waiting for a buyer after several attempts to auction it.
Closing down a retail centre, while not something that is unheard of, happens rarely in Poland. “The economy in Poland is doing better than in Romania. The retail market is also in a much better condition. Our country is bigger while the purchasing power of Polish consumers is stronger. So far I have not come across a closure of a shopping centre in Poland, but this could change,” cautions Maciej Wójcikiewicz, the senior director of the evaluation department at CBRE.

Testing time
According to experts the eventual closing of Auchan’s acquisition of the Real hypermarket chain could pose a threat to some shopping facilities in Poland, as does the company’s new strategy for the operations of some of the Real hypermarkets. “After the official finalisation of the transaction Auchan could be forced to give up on certain locations. The most likely to close down would be the first generation ones – stand-alone centres with small galleries around a hypermarket, which Real has a lot of,” remarks Maciej Wójcikiewicz. However, Auchan Polska has yet to disclose any details of its strategy. “We will talk about this only after the transaction is concluded. Until then we will not provide any information concerning the company’s strategy with regard to the Real centres,” declared Dorota Patejko, Auchan Polska’s spokesperson. When can we expect the deal to be done and dusted? “Everything depends on the decision of the Office of Competition and Consumer Protection (UOKiK), which has yet to be made,” stresses Dorota Patejko. If Auchan closes down some of the Polish hypermarkets, it will be bad news for owners of many retail facilities. “A centre will not survive without a major grocery operator and it is difficult to re-lease a huge post-hypermarket area. Discount and delicatessen chains are the formats which thrive best on the grocery market nowadays, and they do not need such large areas. A discount store with a DIY market or a cinema might be one alternative, but this option could turn out to be very costly,” explains Maciej Wójcikiewicz. A problem with an anchor tenant was the reason for closing down the Suceava Mall in Suceava in northeast Romania, when Penny Market moved out of the centre. Alain Ickovics, the president of the board of the owner GTC said at the time: “The closure of Suceava Mall is part of our current strategy, which involves improving our operating profits. In the case of this facility we could not count on that. Suceava Mall is not our most important asset due to its size and the lack of synergy with other retail facilities in this region.” The company’s search for a new owner in this case succeeded. “Suceava Mall was sold. But we cannot comment on the transaction,” GTC representatives have informed us. It remains unclear when the transaction was concluded and who the buyer is.
Mayland Real Estate, meanwhile, was in a slightly different situation as it had to cope with the loss of a grocery tenant – a Real hypermarket in the Jantar shopping centre in Słupsk. Real terminated its lease contract and left the mall at the end of 2012, even though the centre itself was performing quite well. The owner reacted quickly. The area vacated by the hypermarket was divided into smaller units. A Media Markt electronics store was opened over an area of 3,000 sqm and another 2,500 sqm was occupied by a different grocery operator – an Intermarché supermarket, which opened in August. These new tenants will also be joined by a Decathlon sports store (2,500 sqm). However, it seems that Mayland RE will have to use its experience of difficult recommercialisations once again. The developer is planning to start working on a new concept for Fort Wola in Warsaw. The idea involves exploiting a gap in the market. “We have prepared a new concept for the Fort Wola shopping centre. The leases in the facility are coming to an end, so we can finally start its redevelopment with a new retail programme and, of course, a new name. We want to cut ourselves off completely from Fort Wola’s past and start a new chapter with new tenants in a completely different building. The neighbouring residential projects being developed right now have made the location of the centre more attractive. We want it to be a place that is mother and child friendly. Apart from the children’s offer it will also contain a play area and a food court offering healthy meals. The ground floor will include services such as a pharmacy, a drycleaner, a chemist, a hairdressing salon and a bank. We want the place to be completely family-friendly. The redevelopment of the centre should be completed in the next two or three years, but the speed of this will of course depend on the progress of the commercialisation,” reveals Grzegorz Latała, a leasing director of Mayland Real Estate.

There are many reasons
However, losing an important tenant is not the only reason for the collapse of a shopping centre. There are many other factors that can impair its operations. Browsing through the DeadMalls.com website you can also see that quite a few malls in the United States which were simply built in the wrong place, with concepts that couldn’t work in that particular location. A large number of malls were also closed down due to the financial problems of their owners. The story is the same with many of the defunct projects in Romania, where the bankruptcies of several retail developers have occurred (such as the aforementioned BelRom subsidiaries, Omnium Invest and RedManagement Capital). Still, the Cocor centre in Bucharest has managed to stay afloat – just. In 2008 the owner of the facility – Cocor – borrowed EUR 18 mln from Banca Comercială Română in order to pay for the modernisation and extension of the centre, from 6,000 sqm to 10,000 sqm – and later failed to repay EUR 14.9 mln of the loan. So the bank announced that an auction of the foreclosed centre was to have been held on November 16th this year. However, in July both parties reached an agreement to spread the repayment of the loan over a period of 24 months while waiving the interest.
In Poland, there are no such cases of malls being closed due to the bankruptcy of their owners, even though the fate of Gant Development – the owner of the Marino shopping centre in Wrocław, which was put up for sale to support the company financially – is currently being decided. The company has filed a petition for bankruptcy open to arrangements. However, this is one of only a few examples. “Large shopping centres in Poland, despite varying degrees of success, do not get closed down. However, first generation formats or small centres built in the 1990s, such as estate malls created by converting a building into a shopping centre, could suffer this fate. Particularly in smaller towns, where newer concepts are being intensively developed. In spite of this, they should not be given up on straight away. However, they require active management,” emphasises Maciej Wójcikiewicz. In Poland facilities with a considerable area that function badly and do not come up to the investors’ or tenants’ expectations can be counted on one hand. Is the business so profitable that it is still immune to closures? “In such cases there are two strategies. The first involves passively waiting to see what happens. But the second involves getting out of the situation by moving forward: acquiring new tenants, recapitalising the facility, and extending or redeveloping the centre in order to make it more attractive,” adds Maciej Wójcikiewicz.
The second option was chosen by GTC for its problematic centres in Buzău and Piatra Neamţ. The company decided not to give up and carried out some changes to both facilities. “A Penny Market supermarket contributed considerably to the change in the situation at Pietra Neamţ by making it more attractive and more modern. In addition, popular clothing brand C&A opened a store there and we opened a summer school for children during the holidays, which improved the footfall in the centre. When it comes to the mall in Buzău, the area of a popular fitness club is being enlarged at the moment and a new large grocery store is due to be opened. Moreover, we are considering a few revolutionary changes, but we do not want to reveal our plans at this stage of the planning,” explains Mariusz Kozłowski, the foreign shopping centre director at GTC.
In Poland the auctioning off of centres by the banks is a rare occurrence. The Stary Areszt shopping centre in Piotrków Trybunalski has recently been put on the list of properties that are being prepared for auction by Bank Zachodni WBK. The centre, with an area of 3,000 sqm, was opened in 2011. In 2010 the investor took out a construction loan with BRE Bank Hipoteczny (PLN 9.2 mln), which a year later was refinanced by BZ WBK (PLN 11 mln). “The problems started when two important tenants went bankrupt. We had no possibility of replacing them. They were local tenants, who jointly occupied an area of 900 sqm. This resulted in liquidity problems. BZ WBK demanded additional capital from the investors, but the majority shareholder blocked the possibility of recapitalising the project. The loan instalments would have accounted for 60 pct of the eventual projected revenue and equalled the revenue at the time. So the conditions for securing financing were very difficult. Measures proposed by the company and accepted by the bank were implemented – the sale of units. The money raised by this is to cover the liabilities towards the bank. Negotiations with the bank are still in progress, but I hope that it will be possible to recover the project because I believe it can succeed,” comments Michał Obarzanowski of G2o, which holds a 30 pct stake in the project (60 pct belongs to the Kinkel family and 10 pct to a private individual connected with G2o). BZ WBK declined to comment on the situation when we asked them, nor would it comment on the general condition of Polish investors from the perspective of an experienced financial institution.

Looking for a solution
Some shopping centres had to come a long way before changing their usage as a result of mounting problems. One interesting example is the Romanian shopping centre City Mall. The mall was built under the communist regime of Nicolae Ceauşescu as one of the state food complexes colloquially known as ‘circ al foamei’ or ‘hunger circuses’. After the demise of Ceauşescu’s government, such places were mostly converted into modern shopping centres. This was the case with Plaza Romania and Bucureşti Mall (both located in Bucharest). In 2005 Jaguar Development took on the redevelopment of City Mall. Upon the completion of this, the centre offered a retail area of 19,000 sqm and had 120 shops on four floors. In 2006 City Mall was sold to a Greek investor, Ioannis Papalekas, for EUR 46 mln. He did not hold on to the property for long, though. A year later he sold the centre to the APN fund for twice the price (EUR 103 mln). But the fund's subsidiary Victoria Holding took out a huge bank loan to finance the transaction, which it later failed to repay. This led to the bankruptcy of the company in 2010 with debts of app. EUR 75 mln. Its main creditors were the UniCredit (EUR 37 mln) and Bancpost (EUR 5 mln) banks. Casa De Insolvenţă Transilvania was appointed the administrator responsible for the sale of the centre. At the first auction on March 31st 2011, the starting price for the mall was EUR 33 mln. A fifth auction took place at the end of June that year, with the starting price reduced to EUR 21 mln. However, there were still no offers. Consequently Casa De Insolvenţă Transilvania decided to sell City Mall Sofia in a direct offer. This was when six interested investors came forward. The centre eventually went back into the hands of Ioannis Papalekas via his company Star Imob Construct for EUR 17.3 mln – much lower than the price he got for it a few years earlier. For a long time Ioannis Papalekas would not disclose his plans for the building. It was even rumoured on the market that it would become a medical centre. But in March 2013 it was revealed that the facility was to be converted into an office building offering an area of 20,000 sqm with some retail space on the ground floor. The centre has now been included in the portfolio of the newly-established Globalworth Real Estate, which was founded to raise funds from the AIM market of the London Stock Exchange. The first public offering took place this July this year and raised EUR 53.6 mln. Construction work for the conversion of the mall into the office building should be completed by the end of the year. In the same way that this investor realised that the facility could no longer function as a shopping centre and seized the opportunity to enter the office market, Szczecin-based company Ariadne, the owner of Galeria Górska in Jelenia Góra, has come to a similar conclusion. The building is finished but retailers will not be moving in. Instead, there are plans to convert it into a hotel and negotiations with hotel chains are already in progress.



Zofia Nachiło-Morbiato
the brand development director of Venezia
The tenant’s view
There used to be and still are malls where you can operate with excellent results. There are professional companies that competently manage shopping centres, they know their tenants and control the centre’s costs. But new shopping facilities need more and more time to be accepted by customers, as can be seen in tenants’ turnover. It is also easy to lose this acceptance. Older centres whose owners have failed to appreciate the dynamics of market changes will have to change their characters entirely – by a gradual replacement of chains and their more selective offer with cheaper and more local tenants and all the consequences that follow. Non-basic purchases will become much less frequent in large urban shopping centres, even though the offer best corresponds to customers’ needs. The identification of these needs will be the key to the success or failure of a centre. Some centres, including over-sized urban malls, can struggle with incomplete and chaotic commercialisation, even several years after opening. This situation is a result of an overestimation ofcustomers’ purchasing power leading to the construction of new centres where they are not needed. Tenants present on thePolish market are unable to accept high operating costs in centres when their turnover does not grow. Moreover, there is also a problem with the availability of units with sizes that correspond to those expectations, in addition to a lack of tenants who could add variety to existing centres.