Not just for the connoisseurs

E-commerce is a phenomenon that has been having a huge impact on traditional retail models. It may not yet be as common here as in Western Europe or the US, but the changes it is forcing on the Polish retail sector have been dampening the enthusiasm of some investors. If the gradual ban on Sunday trading and rapidly changing consumer habits are also factored in, a fuller picture of the scale of the challenges faced by this sector emerges. The retail sector, which has shone out for years among the most popular real estate segments in terms of investment, has now moved slightly into the background, as buyers’ attentions turn instead to offices and logistics. Of course, it’s not the case that no one is interested in shopping centres at all, but a certain hesitancy has become evident. It’s now the connoisseurs who are making the purchases. “The retail sector is basically now the domain of specialised investors. Centres are managed on many levels, which goes far beyond simply administering lease contracts and the building maintenance. We are currently seeing the greatest interest in prime buildings as well as convenience centres and retail parks,” comments Agata Sekuła, the director of the retail real estate capital markets department for Central and Eastern Europe at JLL.



Agata Sekuła, the director of the retail real estate capital markets department for Central and Eastern Europe at JLL

A product for the wised-up

The cooling of the climate around retail is clear in the H1 investment results. While investors have spent around EUR 1.7 bln in buying offices, only EUR 430 mln has been invested in retail. Although the summer and the beginning of autumn was a busy time, according to JLL Polish shopping centres with a total value of around EUR 880 mln had changed hands this year by the middle of October. The numbers speak for themselves: since 2015, the average annual turnover for shopping centres in Poland has been around EUR 2 bln to EUR 2.5 bln. Several major deals have been carried out this year. The centres under new ownership include: the M1 centres in Bytom, Częstochowa, Radom and Poznań, which were sold to EPP for EUR 224 mln; King Cross Jubilerska in Warsaw (sold for EUR 43 mln to Atrium European Real Estate); Silesia Outlet in Gliwice (acquired by Neinver and Nuveen Real Estate for EUR 31.5 mln); and Galeria Leszno, sold by Blackstone. However, the largest deal of 2019 so far has been the purchase of Atrium Felicity in Lublin and Atrium Koszalin by the ECE European Prime Shopping Centre Fund II for EUR 298 mln. Liad Barzilai, the CEO of the seller, Atrium Group, said on the occasion of the deal that the sale of the properties forms part of the company’s strategy for repositioning its portfolio. The company now wants to focus on large, prestigious shopping centres with a dominant position in the best metropolitan locations and in the capital city – and so is selling its assets in smaller towns. It is difficult, however, to regard such an experienced player as ECE as a newcomer buying a pig in a poke. There is also a consistent strategy behind the purchase. “We believe in the future of centres that provide their customers with the advantages of a convenient location, a comprehensive tenant mix and the constant attention of their owners and managers on the quality of the tenant mix. Our consistent policy of selecting only the best locations gives us the opportunity to focus on the operational side of the centres’ activities: testing and introducing new systems, using the available space innovatively – revising the structure, the aesthetics, the mix in the food courts, and introducing innovations in combining brick-and-mortar with online retail,” insists Joanna Fisher, the managing director of centre management at ECE Projektmanagement. “ECE is taking a step into the future by connecting online and offline shopping: In the light of the progressing digitalization of the retail sector and extensively changing customer needs, shopping centres require a comprehensive digital strategy. The Digital Mall – an online product search – allows customers to search the availability of a product from participating retailers on the website and the app of the centre, reserve it and pick it up on site later. We are thus responding to the changed purchasing habits and the increasing demand for convenience as many customers prepare their purchases at home and want to be able to check the availability of a product in brick-and-mortar stores online beforehand,” adds Joanna Fisher. Her company has devised a programme for modernising the centres and adapting them to modern requirements. “At Your Service is an improvement programme focused on the convenience of using centres, involving a number of enhancements ranging from the car park, through the building of the centre, the lighting, the acoustic atmosphere, the spatial elements, changing the logo and external identifiers, to the toilets. Examples include Galeria Łódzka in Łódź and Silesia City Centre in Katowice, which have changed their character while a contemporary finish has been given to their common areas in line with contemporary aesthetics and customers’ expectations. Comprehensive changes will also be made to the recently purchased centres in Lublin and Koszalin,” reveals Joanna Fisher.



Atrium Felicity

However, she is not without reservations when it comes to the retail sector, pointing out the problems that can afflict many centres. “Despite the unprecedented favourable demand, there are issues with centres that have been developed on the bassis of over-optimistic assumptions about the location or the parameters of the building itself. In several spectacular cases, the city’s inconsistent zoning policy has left its mark, as over the years they have permitted the construction of rival centres almost side-by-side. The range of smaller, local and suburban convenience formats, which naturally complement the landscape of destination centres with a regional range, is also filling up. Here we also believe in the quality of the location and matching the scale of the centre to the needs of the micro-market as a condition for its success,” says the representative of ECE.



Grzegorz Mroczek, a deputy CEO of Cream

The owners of retail centres, if they are going to keep them afloat, must take into account the expenditure needed for them. Tenants, but above all customers, require active work to be carried out on the property. “The most important work on a shopping centre has to be done at the planning stage so that it can meet the needs of customers in its catchment area as well as being within their purchasing power. In order to function well, each shopping centre has to grow with the development of the market, provide an attractive tenant mix and respond effectively to the changing needs of customers and tenants. Furthermore, marketing is extremely important for each centre,” emphasises Agata Sekuła. “The creative development potential has to be assessed for each centre individually by examining the target customer, the competitive environment, tenants’ interests, as well as its technical and legal possibilities. When you look at the actual centres on the market, it’s clear that many that are playing in different leagues are undergoing transformations,” stresses JLL’s expert.

Niche ready for development

Not every shopping centre has been lucky to find its place and so some are now having a hard time. There are types of centre, in inferior locations, that are older or not very well managed, which are being bypassed by foreign investors. “The market for smaller projects in smaller towns is very shallow today. This is down to several factors. Firstly, the notion that traditional retail is on its last legs has recently come into vogue. Although we would rather say that it’s undergoing a transformation rather than dying, the fact that shopping centres are regarded as assets on an unpromising market by large international funds, which are not, as a rule, familiar with the ins and outs of the local retail market, represents something of a barrier,” believes Grzegorz Mroczek, a deputy CEO of Cream. However, it is possible to actually earn a great deal from such an investment. “It is a niche and a significant opportunity for investors opting to invest in this sector. There is a huge price gap: dominant centres in large cities fetch very high prices, with yields of around 5–6 pct. Meanwhile, those that are regarded as secondary centres can be bought at 9 pct or even cheaper. I would like to point out that both kinds of projects need investment outlays because they are both getting older. For the second type, however, you need to take a more considered approach, accurately evaluate the risks draw up the necessary investment plan for the centre’s modernisation and redevelopment and introduce new brands while undertaking a number of other measures, such as reducing the common space or giving the centre a facelift, and so on,” suggests Grzegorz Mroczek, who estimates that there might be scores of such properties in Poland as well as other bargains to be found in the Czech Republic and Slovakia.



Forum Koszalin

Variety is the spice of shopping

There are as many purchasing strategies as there are investors. And that’s basically the point. “Investors’ perception of asset attractiveness depends largely on the nature of the investor, the yield expectations and how they see the investment period. So the attractiveness of a centre is seen through the eyes of the investor. To give as an extreme example: the best located, most dominant shopping centre in the capital of the country could be attractive to a particular investor, despite the fact that they will have to pay top-dollar for it; whereas another investor might choose a rundown centre with good potential to be renovated but available for a fraction of a prime centre’s price. In order for the market to remain liquid, it’s necessary to have investors who have the whole spectrum of expectations. It needs to be remembered that the shopping centre market is very diverse and many investors find their own niches within individual market segments other than large shopping centres, in particular in the compact convenience centre, retail park or stand-alone store sectors,” believes Agata Sekuła.

Not everyone sees their future as staying in the retail market. However, the players that are active in retail, who may have no doubts of the efficacy of their own adopted strategies, are nevertheless alsotaking on a broader perspective. “We are open to mixed-use, hotel and residential projects and are ready to invest in non-retail assets in the strongest cities in the country, as well as to seek out the potential within and around shopping centres, including non-retail functions. Currently we are working on alternative land use around Galeria Baltycka. Such activities are being undertaken in virtually every country we are present in. In Germany we are already among the leading hotel and logistics developers,” declares Joanna Fisher of ECE, before adding that the company still believers that shopping centres will remain an important asset class on investment markets: “The temporary negative sentiment among some investors won’t change that. This attitude is often not the fault of the local market but instead stems from strong trends on dominant markets, especially the US. The Polish market, with its strong positive trends in retail sales, the continuing growth in the spending power of society and the healthy situation on the labour market, does not give credible evidence for such apocalyptic predictions as the end of traditional retail,” she insists.

The problem is, however, that other investors need to be of a similar opinion. Then Polish retail could finally return to the investment spotlight once again.