Minis still in fashion

In 2011 and 2012, the retail market was dominated by plans for the construction of smaller facilities in towns of less than 100,000 inhabitants. The investment focus shifted from typical shopping malls to retail parks, mixed-use projects and so-called strip malls. But since then these concepts have been adapted and even introduced to cities as an additional offer to fills gaps in the local retail offer. Developers were rubbing their hands in glee at the prospect of devising concepts for entering new markets, which could even be towns of less than 10,000 people. While preparing this survey we identified a number of companies that have opted to build their own chains of mini centres. These include large well-known developers, such as Rank Progress, which a while ago announced the development of a chain of small retail facilities. Out of the 81 locations the company looked at, mini mall projects have got off the ground in three: Oleśnica, Miejsce Piastowe and the already opened Grudziądz. Local investors have also seen a chance for expansion. Things have since calmed down a bit, even though the number of construction sites is not getting any smaller. The main traffic zones in smaller towns are particularly popular – most often these are bus stations and their immediate vicinities.

Small towns rule
The majority of small retail facilities are to be built in smaller towns, which generally lack modern retail space. Experts claim that towns with populations of less than 100,000 continue to be attractive potential markets. However, they caution against treating this class of town as a single entity. “You must not forget that this is a heterogeneous and highly varied market. After the relatively prosperous towns there are also the poorer ones. For example, the purchasing power of Lublin citizens is nearly twice that of Hrubieszów’s residents. The towns also differ in terms of the saturation of retail space. For Nowy Sącz or Słupsk the supply of modern retail space compared to the number of inhabitants is twice as much as the average for towns of this size. You also need to view such towns as potential locations for retail projects from the angle of their proximity to large urban centres, and the rich and varied offer which potentially attracts customers from the towns outside them. The shopping habits and preferences of residents are also of key importance,” claims Agnieszka Kowalewska, a project manager in the customer analytics and sales strategies department of GfK Polonia. This is one reason why we should view the market cautiously, approach each location individually, and take into consideration each aspect of the preparations for the construction of the retail project. “Small towns possess development potential. There are app. 870 towns with up to 100,000 inhabitants in Poland, the largest category of which are towns with up to 10,000 inhabitants – and there are app. 500 of these. The smallest towns make up about 6 pct of the entire urban population of Poland. Out of the towns with populations of up to 100,000, those with 10,000–50,000 inhabitants make up the largest percentage of the country’s urban population (18 pct). It is worth emphasising that the purchasing power per sqm of retail space in these towns is the highest in the country. This results, naturally, from the smaller supply of retail space in smaller towns, but it primarily reflects the large variation in terms of the potential of these locations. The market is a promising field for the development of modern retail space, which there is a lack of in many towns. Still, each location needs to be thoroughly analysed before making a decision on whether to start a project. It is not only important ‘whether’ to build but also ‘what’ to build – what size, what format and what mix of offer and tenants will suit the consumption demands of the town’s residents, even in the case of small retail facilities,” points out Agnieszka Kowalewska. Thus the profitability of a project is to a large extent based on the choice of a suitable location and the adjustment of a given project to the financial possibilities and the expectations of residents. This view is shared by Ewa Bobkowska, the president of the board of P.A. Nova, who also points out another factor that is important for developers – the facility’s occupancy level. “The development potential of retail parks in towns with 10,000 inhabitants is still substantial. Although there is one condition for this: if there is a suitable location, you need to have your tenants secured and then start the construction process,” stresses the head of P.A. Nova – a company that has built three such facilities so far and has three more are in the pipeline. “The turnover of our small retail facilities has been satisfactory. These are very profitable projects, which is why we will continue with the development of such facilities,” adds Ewa Bobkowska.

Suitable format
Retail parks are the most popular format for small facilities. These are quite simple structures with access to the shops directly from the car park. The construction of a retail park eats up less money and time compared to a typical shopping mall. It is a convenient concept for the customer, and is designed for quick shopping. Who are the most eager to move into such facilities? “For retail parks a mix of tenants including footwear, clothing, chemist shop, pharmacy, household appliances and audio/video equipment retailers combined with a supermarket is the most ideal,” claims Ewa Bobkowska. This segment of the market not only offers a chance for developers to do business, but tenants have seen this too. “The small town market has always been within Media Expert’s area of interest. We have managed to become the leader in this market segment, but we can see intensified activity from other companies in this sector in small and medium-sized towns, thus confirming their potential,” says Marcin Żakowski, the director of Media Expert’s real estate department. The company’s expansion plans involve opening 80 new stores this year and remodelling 50 existing locations. “We are focusing on recognisable projects with the potential to become leaders on the micro market. It is not so important whether it is a retail park or a traditional shopping centre. What counts is the quality of the project, its tenant mix and its value for the local market,” emphasises Marcin Żakowski. Other chains that often feature on tenant lists include: Biedronka, Lidl, Pepco, KiK, TextilMarket, Jysk, RTV Euro AGD, Centrum Chińskie, Rossmann, CCC, Deichmann, Martes Sport, mobile operators and local service providers.

Filling the market
A few new companies focused on the development of retail in smaller formats have recently made their debuts on the market. These have been set up to build smaller facilities or have added such operations to their core activities, including Katharsis Development, Budner Investment and Real2B. Several mini shopping centres are in these developers’ pipelines or under construction. In the case of Grupa Budner, one of the fruits of their activities will be revealed this year with the opening of the Shopin retail park in Łódź. Katharsis already has a HopStop in Radom, which was opened in November 2013. Some investors turn to the services of agencies for the business concept of their projects, such as: Retail Concept (employed by Boza Inwestycje), Origo Group (providing services for private local investors, e.g. PHPU Fabel, Athletic Management. Nieruchomości 3 SKA) and Mallson. The latter company carries out projects for MarcPol, McKinlay Development (the owner of the Multishop chain), the investor behind Era Park Wieluń, ZRB Kampka (the owner of Park Handlowy Żory), and Budrem (the owner of the Multibox chain in Świecie, Siedlce and Łask). RetPro is another firm active in this field. Its clients include the owners of Pasaż Targowa in Garwolin, Galeria NDM in Nowy Dwór Mazowiecki (Domex) and Galeria Bem in Zambrów. Dekada Realty has been present on the market since the very beginning of the development of smaller modern centres. Now it can boast eight up-and-running facilities, with five more under preparation. Another veteran is RECE Group, which has opened eleven Skwer Handlowy centres. However, it has now put its development plans on hold. Meanwhile, Czerwona Torebka is the record holder in this field, with 69 shopping arcades operating under that name. These are often facilities smaller than 2,000 sqm but featuring shops that satisfy the most basic consumer needs: bakers, butchers and greengrocers. The latter two companies have also opened facilities in large cities: Warsaw, Szczecin, Gdańsk, Bydgoszcz and Toruń. Their expansion in large urban centres proves that small formats can also work in such locations as a supplement to traditional malls. “The Czerwona Torebka shopping arcade format works perfectly in small and medium-sized towns, as well as in large cities. We have shopping arcades in Warsaw, Piaseczno, Wrocław, Szczecin, Łódź and Gdańsk. Customers have less and less time to spend walking down aisles and waiting in the long queues to the cashiers, particularly during the week, which is a typical scenario in large retail formats. People mostly go shopping in these places at weekends. Our retail facilities are opened in locations that are attractive in terms of retail potential. These are places with extensive car and pedestrian traffic, such as large residential estates, major traffic routes, important retail and service areas, and access roads to the so-called ‘‘dormitory’ districts of cities. Shopping arcades are convenient centres offering a specialist range of the most essential products, which you can buy on your way to work or back home without the need for going to a supermarket or hypermarket. Furthermore, small retail formats help to develop local businesses that do not have the financial capabilities to rent outlets in malls or shopping centres,” explains Tomasz Jurga, a board member of Czerwona Torebka.

Andrzej Wilk
mayor, Żyrardów

Revitalising the heart of towns
The dynamic development of retail chains has not passed Żyrardów by. Over the last few years our town has gained facilities owned by Kaufland, Lidl, Carrefour and Biedronka, among others. Apart from traditional discount shops in Żyrardów, there is also the Dekada shopping centre, the Stara Przędzalnia and Stara Garbarnia shopping centres, and Elbfonds Development is planning a project in the town, too. Actually, all the retail facilities I’ve mentioned were built on plots that do not belong to the town, which is why it would be difficult to credit the location of such facilities with the local government. Nevertheless, when a new investor enters Żyrardów, including those from the retail sector, we start cooperating with them through the town hall’s investor service centre. Our help includes advice in terms of contacts with the institutions that issue the necessary permits or with companies that supply the necessary utilities. When it comes to large projects that generate many jobs, we can offer our support in terms of improving the investment attractiveness of the area a potential investor is interested in, for example, by improving access to transport facilities and the quality of road infrastructure as well as tidying up the area near the location of a project. However, we do not provide tax relief. Żyrardów is a unique town, which is historic in its character in many ways. Thus we are very favourably inclined towards enterprises that choose to become part of the revitalisation process of the historic quarter of the town. An excellent example of this is the Stara Przędzalnia shopping centre. Private investors undertook to revitalise the post-industrial premises, providing the buildings with new attractive functions and adapting the old buildings for retail, services and apartments (so-called lofts), which has resulted in creating an excellent offer for tenants and the residents of Żyrardów. The refurbished buildings are a place of interest for tourists and industrial heritage enthusiasts. In addition to this, the Dekada shopping centre complemented the urban setting perfectly, complementing its architecture and the ‘red brick’ image that typifies Żyrardów. When it comes to locating large-format retail facilities in Żyrardów, with sales areas in excess of 2,000 sqm, such issues are regulated by the town’s spatial conditions study. The study permits such facilities to be located in two places – in the very centre of Żyrardów (in the extremely attractive area of the historic factories), and on the southern outskirts of the town. It is not out of the question that mall type facilities will be built there soon. Malls always include new retail areas that can be used by local businesses that are only just starting up their operations or, for example, want to extend them into new retail outlets. Operating within a mall allows smaller, local businesses to exploit the positive effects of the extensive advertising campaigns regularly carried out by facility owners and the chain stores located in such malls.

Piotr Wasilewski
owner, Origo Group

Image building
The market for small retail facilities is quite varied, subject to the location. In the case of shopping centres in smaller towns with populations of less than 20,000, the location of a project is still a very significant parameter, but potential tenants are less restrictive with regard to transport issues; while the analysis of the credibility of an investor and deadlines are planned more thoroughly. The ‘first come, first served’ principle has proved to be true here because the first retail facility is most often the only one in a given town. It should be remembered that it is mainly local entrepreneurs who decide to carry out projects in smaller towns: they know the market inside-out, but they do not always apply the appropriate procedures when it comes to the preparation and conduct of the commercialisation of the facility in all its aspects – from planning a tenant list to negotiating contracts. The advisor’s task here is to translate the investor’s intentions into actions that will give them a positive and credible image. The list of serious chain tenants who would be interested in smaller towns is rather limited, allowing them to call the shots. The element of synergy is important for them at the same time, thus the key to successful commercialisation is convincing two or three strong tenants to become involved in the project – the others are unlikely to choose a competitive location and will be eager to join it. The situation for smaller retail facilities is slightly different in larger towns. They have to comply with strict location selection criteria, taking into consideration all the aspects of urban traffic. There is no room for error here, which would doom a given project to a futile battle with much larger competition. Small centres in large cities have to possess the easiest accessibility possible for the customer. Their tenant mix should be devised for convenient shopping and to satisfy residents’ basic needs. In practice this translates into giving up on the premium offer as the customer can find a broader selection of such products in shopping malls anyway. When drawing up the tenant mix for such centres you need to take into account both the purchasing specificity in the vicinity and the offer of the competition. To sum up, tenants’ demands are high and grow as the market saturates. However, we are nowhere near full saturation and this is why there are still some prospects for well-thought out small retail projects.

Maciej Ostrowski
mayor, Myślenice town and district

Expanding shopping districts
The opening of small retail facilities benefits not only the inhabitants of Myślenice but also those of the neighbouring towns and villages. The comfort of shopping in one place is certainly a great advantage. Smaller entrepreneurs use the increased traffic of the various customers to start new enterprises, which extends the offer for consumers. The retail zone in Myślenice has also been extended. Before the Dekada shopping centre, which is integrated with the bus station, was opened in 2011, the retail area of the town was the market square and its immediate vicinity. Now the flow of customers has spread out to these two locations. This has also resulted in increased car traffic in the town and a shortage of parking spaces, therefore we will soon be introducing the necessary paid parking zones in Myślenice as in other larger towns and cities. New investors are not included in any incentive programmes in Myślenice. Only entrepreneurs who locate their companies or factories in the Katowice Special Economic Zone within Myślenice can count on such benefits being available.

Rafał Trusiewicz
president of the board, Katharsis Development

Developed west and under-estimated east
The first HopStop facility has been opened in Radom and several more are to be launched in Warsaw, Siedlce, Ostrów Wielkopolski and Zamość. We are planning to open seven new projects by 2015. These will be located in central and eastern Poland. The region looks particularly attractive in terms of the saturation of retail space. The west of Poland is already developed, whereas the east is under-estimated. Perhaps there are not too many investment opportunities on the eastern side of Poland when it comes to large or very large centres, but medium-sized centres can win in this market. We have some serious plans concerning those. Apart from the projects mentioned earlier, we have land for ten more, which will be located in towns with populations of 50,000 or more in central and eastern Poland. Two are located in Warsaw – one on the eastern side and one in the western part of the city.

Mateusz Siejka
managing director, Palmer Capital Poland

Identifying a niche
The small shopping centre and retail park market in Poland is still in a phase of intensive development. As large cities become saturated with retail, developers’ attention is being focused on smaller and smaller towns. Recently they have been making bold decisions to invest in towns with considerably fewer than 100,000 inhabitants. A few years ago such locations were not taken into consideration at all. Smaller markets require substantially less retail space and adjustments to the size of the local population, its purchasing power, etc. It would seem that there is a bright future ahead for smaller shopping centres and retail parks with areas ranging from a few to a dozen or so thousand square metres. At Palmer Capital we are planning to invest in such centres through the Central European Retail Fund, which has just been established. I believe that the segment has not been developed institutionally by investors yet. Large foreign investment funds are not eager to look at centres with values of less than EUR 30–40 mln, while local individual investors are still unable to bid so high. We can see a niche for Palmer Capital here and we want to take advantage of that situation.

Michał Stanisławski
capital markets senior consultant, CBRE

Investors focusing on prime centres
The main trends among the most active investors on the real estate market remain unchanged. Investors are focusing on the prime facilities that dominate on their markets. Large shopping centres are enjoying the most interest, both among the main investors and the so-called ‘value-add’ ones. Smaller retail projects can also be of interest to the main investors on condition that they are centres with high quality commercialisation and strong trading results. A risk that has to be taken into consideration by investors is the development of local markets and the sensitivity of smaller properties to the retail facilities that could be built in a centre’s catchment area in the future. Due to the relatively small volumes of such shopping centres, investors can approach purchasing such facilities for their portfolios more positively as a means to optimise their management structures. In the case of older retail facilities in very good locations, an attractive thing to do is to implement asset management by extending the current centre if possible.

Łukasz Lorencki
capital markets consultant, Cushman & Wakefield

In the shadow of large transactions
The small retail centre investment market is characterised by stability but very much in the shadow of large transactions. Around 7–10 such transactions have been concluded in each of the last few years. However, their value, which fluctuates at around 5–8 pct of the total transaction volume in the retail sector, is marginal. It is worth emphasising that the small retail centre market is marked by considerably lower transparency in terms of price disclosure than the market for the largest centres. The reason for this is the different profile of investors active in this segment because they are not public funds that are obliged to publish details of their acquisitions, but smaller businesses characterised by high flexibility and speed of operations, and which invest their own funds or the funds of their individual clients. The Portico fund has taken a liking to this niche and bought a dozen or so properties with areas ranging from app. 1,000 sqm to 3,000 sqm, but the facilities were always leased by strong grocery tenants. Considering the high supply of retail centres with areas of less than 15,000 sqm in Poland, it needs to be said, however, that the number of transactions concluded is small in terms of the scale of the market, while the liquidity of the market is still much weaker than the market for the best retail properties.

Krzysztof Mucha
development manager, Biuro Inwestycji Kapitałowych

Adapting to local conditions
The demand for small retail parks with leasable areas of 3,000–6,000 sqm in smaller and medium-sized towns is rather high at this time. As an investor we can see the potential of small towns and local communities, and we adapt our modern retail parks to the requirements of these markets. Facilities like this should be close to the consumers, they should meet their expectations and satisfy their everyday needs. Both Retail Park Bielsko and Galeria Dzierżoniów mainly offer grocery products, cosmetics, clothing, footwear, children’s goods and sports accessories, and they provide an opportunity to use some basic services. While preparing the projects in Bielsko and Dzierżoniów, we surveyed the towns with regard to their populations and spending power. Retail Park Bielsko is just entering the construction phase. We are finalising the selection of the general contractor and will start the construction work this spring. The commercialisation process is very advanced: tenants representing the household appliances and audio/video equipment, clothing, footwear, sports, gastronomy and service industries have confirmed their interest in the project. In the retail park in Bielsko we are also planning to open a medical centre and a chemist store. In the case of Dzierżoniów, the town’s development directions were an important element of the analysis. We chose this location because it is very central, near the historic old town quarter, offering convenient access to public transport and the bus and railway stations. It will be the first such modern retail facility in the town. We are convinced that the choice of the location will be justified by the future turnover.

Jarosław Dębowiak
managing director, Retailcenter Management, which has introduced the My Box network to Poland

Close to the customers
Observing our tenants’ expansion plans in My Box retail parks, we can see that there is still some demand for new retail facilities, particularly in smaller towns. The large shopping mall market is already very saturated in a lot of cities and towns. Creating a well-functioning retail location requires a thorough analysis of many factors, regardless of whether you are dealing with a boom or a slowdown. It should be emphasised that we select potential locations in Poland very carefully. First of all we take into consideration the micro-economic factors – the location, catchment area, competition in a given town, as well as the macro-economic factors, such as the unemployment rate and real purchasing power of local consumers. When making a decision about the implementation of a project we try to adjust it to the given location. Generally speaking, retail trade needs to be as close to the consumer as possible, within their very reach. Retail parks are developed with the reduction of shared costs in mind, thus they offer more beneficial conditions when leasing the retail area to tenants. At the moment investors are struggling with the financing and commercialisation of projects. Based on our firm’s experience, we can say that there have not been any problems in terms of obtaining loans for our projects. However, the level of project advancement now required by the banks has changed significantly, but this is a change for the better that motivates you to prepare and commercialise a project as well as possible.