Action stations

Investment & finance
The cooperation between the railway companies and commercial developers has been promising so far. The benefits available to both provide the perfect conditions for such a symbiosis

Even though train stations in Central and Eastern Europe have been in a desperate state for a long time now, the economic and political transformation in this part of the world eventually kickstarted gradual improvements to these facilities. In EU countries the thing that contributed most to this process were the structural funds that encouraged local authorities to take on the task of improving the aesthetics and functioning of their transport infrastructure. However, the cooperation of state-owned companies with the private sector also turned out to be a significant factor. Bringing in the commercial element, more often than not retail has not only added a friendly atmosphere to these stations, but has also given an investment boost to often underfunded state-owned companies. It has also made it possible for greater investment and the development of the railway system itself.

PKP as adeveloper

It is not such an unlikely scenario that the Polish State Railways (PKP) will become one of the leading developers in the country in the future through its development arm – Xcity, which was established at the end of 2014. The subsidiary holds a huge land bank and has been drawing up bold plans for its utilisation. The potential this has is clearly not in terms of transport operations, but lies in development projects – forty of which have so far been selected to be carried out on plots owned by the company. The PKP estimates that their market value will exceed PLN 24 bln after their completion. However, the company claims that this is just for starters. These estimates do not include other huge sites that belong to PKP, such as Odolany in Warsaw’s Wola district (150 ha), which is still waiting for a development concept to be prepared.

As a rule, the PKP does not invest its own money in development activities, but it uses the support of private investors. These have the experience required for such projects. “We do not do this ourselves because we do not have the appropriate expert knowledge. So we look for partners and we usually find them, because these are very attractive properties from their point of view,” explains a well-informed person at PKP. The company always adopts a similar formula for such schemes: it establishes an SPV company with the private partner; and it makes a contribution in kind in the form of land, whereas all the rest (investment funds, management, debt financing, etc) is provided by the other party. “We are always a minority and passive shareholder with a stake of up to around 30 pct in the company, subject to the market value of the land that constitutes our contribution to the company,” explains the representative of PKP.

The contracts signed by the railways also determine the exit path from the project. “The shares in the commercial side of the scheme are sold by us to the partner on the same terms, in order to maintain the transparency of the model and to be fair to one another. Meanwhile, the modernised station goes to PKP as part of the deal. We never assume that the station will become a private property,” says the PKP representative.

The PKP representative does not hide his satisfaction with this model because the two projects completed in this way by PKP so far have found buyers (seven more projects are under construction and negotiations are taking place on three more). In 2014 they sold the Poznań City Center shopping centre, developed in a partnership with TriGranit adjacent to the Poznań Główny station, followed at the end of 2015 by the sale of Galeria Katowicka, which was built on a similar basis in a partnership with Neinver. PKP’s stake in the Poznań project amounted to 23 pct thanks to a contribution in kind in the form of the land estimated as worth over PLN 58 mln. “This made it possible for us to generate a threefold higher profit than if we had simply sold the plot to the developer for the company’s own project to be developed there. The profit would have gone to that company not to us. That’s why we would not like to sell our best properties located near transport centres right away, but to have a share in the developer’s profits,” says a representative of PKP, describing the attractiveness of the formula. However, it is not clear whether PKP’s investment will be altered following recent changes in the company’s management.

Czechs lease or sell

In 2011 the Czech State Railways (České dráhy) officially opened Prague’s refurbished central station. This was the fruit of a contract signed in 2003 by the Czech company and the Italian state railway company Grandi Stazioni, which won the tender for the revitalisation of the station. A 9,900 sqm retail section was created with 64 shops in a building with a total area of 30,000 sqm. Under the contract Grandi Stazioni is to manage the station for 30 years. “The main station in Prague is fully owned by the Czech railways, which has signed a long term lease agreement with Grandi Stazioni. As the station is a crucial strategic part of the infrastructur of the country, it is unlikely that it will ever be sold,” claims Tomáš Soukup, the head of the retail agency at JLL Czech Republic. The Czech and Italian railways agreed similar contracts for stations in two other towns: Mariánské Lázně and Karlove Vary. Grandi Stazioni has earmarked CZK 1.15 bln (app. EUR 47 mln) for a pilot investment programme in the Czech Republic.

In contrast to the Polish railways, its Czech equivalent does not have just the one investment model. Another large project, the Masaryka station in Prague, is to be refurbished in a partnership with MSD, in which the Czech railway has a 34 pct stake, while the remaining stake is held by a company controlled by the Slovak group Penta. A commercial area of 89,000 sqm is to be built together with the station, mostly offices and a small retail section. “We are starting the environmental assessment process and the construction is most likely to start at the end of 2017,” reveals Ivo Mravinac, a spokesperson for Penta Investments. However, precise details for the project have yet to be disclosed, although Penta will be taking over the entire project from the railway at some point. For other projects, the Czech railways is simply selling the land. “In the case of Praha-Smichov, Bubny and Žižkov cargo stations, the unused, former railway plots were sold by České dráhy to private companies who then develop the land independently,” explains Tomáš Soukup.

Good business near small ring road

In Russia large projects combining commercial development with transport hubs are built not only as part of the railway infrastructure but also as extensions of the Moscow underground and the ground-level city rail-line. The latest enterprise, which is expected to involve as many as eleven such projects in Moscow is the construction of the ring rail of Moscow or MKZhD [МКЖД]. The ring rail of the city’s ground-level system is currently beeing expanded to have a length of 54 km. The entity responsible for the project is the state-owned company MKZhD, which was established by the authorities of the city and the railway. According to the plans, commercial properties in excess of 1 mln sqm are to be developed, including offices, shopping centres and hotels. One of the first projects to be offered by the authorities to investors will be the Botanical Garden (Ботанический сад) hub. The design approved by the city officials envisages the construction of 30,000 sqm of retail space, 35,000 sqm of offices and an aparthotel with an area of 45,000 sqm as well as 25,000 sqm of parking space. The entity granted the right to carry out the project is an SPV established by the city and the railway. It is to be sold to a private investor in a tender. Similar hubs are also poised to go under the hammer. “The key projects to be offered to investors include intermodal hubs at Novopeschanaya, with estimated sales price of RUB 10 bln (or EUR 132 mln), Yaroslavskaya (RUB 5.2 bln or EUR 69 mln), Shelepikha (RUB 4.8 bln or EUR 63.5 mln) and Moscow City (RUB 3.1 bln or EUR 41 mln),” states Valentin Gavrilov. In total the sales revenue from the project could amount to RUB 40 bln. MKZhD estimates [given these starting prices] the achievable yield for investors at around 20-23 pct. "However, given the current market situation, these estimates might be too optimistic,” says Valentin Gavrilov. The vacancy rate for ‘A’ class offices in Moscow exceeds 30 pct and in Moscow City, where the supply is huge, it is over 50 pct.

More competitive locations

The high footfall generated by stations is also an obvious advantage from the point of view of retail chains. However, Tomáš Soukup, the head of the retail department at JLL in Prague, points out that the specificity of visitors to such facilities is not necessarily suitable for all kinds of tenants. “We need to bear in mind that passengers are very convenience-orientated. They do not have much time to spend on shopping at these locations and, in addition, different stations attract different types of passengers, which has an influence on the actual tenant mix," he points out. Apart from traditional tenants such as bakeries, cafés, restaurants and food shops, it is internet shops that can benefit most from this footfall. “Passengers can pick up their shopping on the way home and the rest can be done in the city. Good examples are Hevis with its click-and-collect store and Czech online store, which both have stores in Prague's main train stations,” says Tomáš Soukup.

The representative of PKP is convinced that the value of commercial space in transfer hubs will grow. “In London, thanks to the public transport that has been redeveloped, the latest office buildings do not have any parking spaces. So the proximity of transport hubs becomes of key importance,” says PKP's representative. This might be a particularly important factor on the Moscow market, where the competition among developers is strong due to a substantial supply of office space and the current economic downturn. “Due to its location in a transport hub, this commercial real estate will have better accessibility, meaning, other things equal, the presence of a competitive advantage over the competition. Thus, this provides an opportunity to reduce the competitive pressure,” explains Valentin Gavrilov of CBRE.

Malwina Wierczuk, senior consultant, capital markets, CBRE

A bonus but not crucial

Locations in stations might help and in many cases they do help commercial projects. However, we are not getting too many enquirers from investors about premises located near the main transport hubs. So this is not a variable that we start our work from. Investors mainly look at the financial results. If the numbers in a given centre are right, it will be a good project. High footfall can occur not just in the stations but also in other places in the city: for example, in the city centre or in certain residential district. Factors such as a good design, the tenant mix, the positioning of the centre and how competitive the surrounding area is, also have a strong influence on the turnover generated by tenants. When we advised the buyers of Poznań City Centre (Resolution Property and the ECE Fund), these investors were looking for a dominant centre and this one fulfilled that criterion. It was very well commercialised with an annual history of turnover, so the investor was not buying the centre as a shot in the dark. The turnover was included in their estimates.