Capital idea

Capital cities were the first to benefit from the boom in modern retail projects in the CEE region. Are they also going to be the first to enjoy the new wave of shopping centres?

In times of turbulence investors stick to the golden rule: "Prime product is king!" Moscow traditionally has been the number one choice for the majority of investors, who prefer to play it safe rather than investing in the regions. But is this also the case in other CEE capitals? A few recent investment deals give some food for thought. At the end of September, Atrium European Real Estate bought the 37,600 sqm Palác Flóra shopping centre in Prague for EUR 191 mln from its two previous owners, AFI Europe and Avestus Capital Partners. At the very end of 2010 Atrium purchased the Promenada shopping centre in Warsaw for almost EUR 170 mln and now has an income-producing portfolio valued at around EUR 2 bln.

Still number one
The retail market is hardly an exception, with investors still opting for the comfort which possessing a prime asset in a capital city gives. Developers across the region seem to be looking for the same. Overall, in 2011 alone nearly 6.8 mln sqm of retail space is to be delivered across Europe, representing a 26 pct increase on the 2010 figures. The pipeline for next year is estimated at 5.8 mln, with Russia and Turkey accounting for as much as 41 pct of the European pipeline by the end of 2012. In Russia alone, as Cushman & Wakefield's data reveals, in this period as much as 3 mln sqm of retail space will be delivered. Moscow this year saw the completion of the 180,000 sqm AFIMall City, with more than 400,000 sqm of retail space currently under construction in the capital. In fact, in H1 2011, with 400,000 sqm of newly completed centres, the Russian capital accounted for 36 pct of the gla added to the market.
After the opening in 2007 of the Złote Tarasy shopping centre in Warsaw, market players seemed to reach an agreement - the city is now closed for major new retail projects. But is it really? By the end of this year Wolf Bracka, a 10,000 sqm department store project by Wolf Immobilien Polen, is to finally open its doors. The sleek Stefan Kuryłowicz-designed building in the centre of Warsaw will host brands such as Gucci and Bottega Veneta. Further on, Plac Unii, another Stefan Kuryłowicz-designed scheme in the centre of the capital, will add 15,500 sqm of retail space in 2013. New modern retail space, as a part of a mixed-use project, is also expected in the capital's Lower Mokotów district. Prior to this, Tesco announced plans for a new project, the Kabaty shopping centre in the Ursynów district. Scheduled for completion in 2013, the mall is to contain 45,000 sqm gla. Meanwhile, Globe Trade Centre has returned to the city's retail market with two mall projects in Warsaw - Galeria Wilanów (60,000 sqm) in cooperation with Polnord, and one in Białołęka. Another, Neinver's 14,000 sqm Factory Annopol outlet should also be ready in 2012. A year later, Galeria Legionowo, a 57,000 sqm project by the Irish Investment Group, should also be opened just outside Warsaw.
The list is not yet full. The Promenada mall is to be significantly extended by 20,000 sqm, with the opening of the extension expected to take place in Q1 2013. Extension and major refurbishment is also the key theme at Wola Park. AEW Europe, the owner of the centre, is adding 20,000 sqm of new retail space, half of which has already been leased, while the existing space is to be refurbished. Once completed by the end of 2013, the centre will be the second largest in Warsaw.

What is really happening?
Are developers being over-optimistic or is this actually what the city needs? Maybe a little bit of both. Currently in Warsaw there is over 1 mln sqm of shopping centre space. Varsovians represent the most affluent group of customers (with a purchasing power estimated at EUR 8,432 per person yearly), and yet the capital city lags behind other major cities in terms of shopping centre density. While Wrocław, Poznań and the TriCity are nearing 500 sqm of retail space per 1,000 inhabitants, in Warsaw the ratio is just over 400 sqm per 1,000 inhabitants. Add to this the fact that for a long time the vacancy rate in Warsaw's malls has been oscillating at around 1 pct and you will understand the reason for this new activity. And on top of that new brands - including the iconic GAP - are also entering the market.
Warsaw is hardly an exception. The retail stock in other CEE capitals is also projected to grow. "If we look at the total amount of existing retail space per capita in Prague and Bratislava, then one could argue that the markets appears to be at or are close to saturation. However, as in much of the CEE region, these markets are dominated by shopping centres and other retail formats due to having under-developed high streets. The situation is almost the opposite in Western Europe, where things are more high street driven. In addition to this, there are some centres or retail projects in both markets that perform very well and there are others that do not. With this in mind, there is room for new projects or extensions of good retail schemes or for the potential repositioning and improvement of those that are not doing so well," comments Kevin Turpin, head of Central and Eastern Europe research at Jones Lang LaSalle.
Similar voices can be heard on other markets too. Budapest, where the current retails stock stands at 876,000 sqm according to the Hungarian Council of Shopping Centres, will see this year the opening of KÖKI Terminal, a project by the R-CO company. The 55,000 sqm project is located in the vicinity of the Liszt Ferenc Airport. "There is still room for retail projects," believes Katalin Csókás, senior consultant of retail leasing at GVA Robertson in Hungary. "Budapest is still not saturated."
The pipeline of projects in Budapest is considerable. Next year will see the opening of the 11,000 sqm Váci1 in central Budapest, a project by Orco Property Group. Located in the centre of the city, this highly anticipated project, whose completion has been postponed four times, represents something of a new concept. The refurbished historic building will have a separate men's and women's level, offering a large variety of upscale brands. Further on, the deliveries of the Hegyvidék shopping centre with a 6,700 sqm leasable area on the Buda side, a project by Wing, and CET, a project by Porto Investment Hungary with 12,000 sqm gla on the Pest bank of the Danube, are expected.The retail map of the Hungarian capital is set to change. It has been announced that TriGranit's WestEnd City Center and Árkád Budapest will be expanded. The WestEnd centre addition, if realised, will also include office space, roughly 100,000 sqm, and two hotels with three-stars and four-stars. The construction work for ECE Projektmanagement's (in cooperation with Deutsche Bank) Árkád II shopping centre has just started. After their completion in 2013, Árkád I and II will together offer 68,000 sqm. And finally, two other projects are expected to take off in Budapest: Echo Investment's Mundo (42,000 sqm) and Etele City Center (44,000 sqm), a project by Futureal.

The return of the tenant
This increased development activity comes hand in hand with increasing tenant activity. Tenants, both local and international, are looking to benefit from the more favourable leasing conditions on offer in shopping centres. In times when the world seems to be heading for a second global recession, it is hard to take for granted any macro-economic forecast, but it is nevertheless fair to say that things are starting to brighten up for CEE economies, with Hungary often being given as an example of where tough government decisions are most probably going to give positive results in the end.
Tenants are gaining in confidence. In the first half of this year, British retailer Debenhams opened its first Hungarian department store in the WestEnd City Center. On the other side of the border, in Romania, H&M has been having a busy first year on the local market. The Swedish retailer is to end this year with ten stores, six of which are located in Bucharest, with plans for at least 15 Romanian outlets. And after much anticipation, H&M has also finally decided to start operations in neighbouring Bulgaria, a country whose retail market remains somewhat challenging. The first H&M store in Bulgaria will be opened in spring 2012, occupying 2,200 sqm of

The Mall shopping centre in Sofia.
The ongoing strong recovery in the development pipeline in these markets can be easily explained by the shortage of stock coupled with the highest average GDP and retail sales growth rates forecasts in Europe over the next five years. "For CEE countries, with average net salaries of EUR 618, the average stock per 1,000 inhabitants is 204 sqm. In Romania, where the average net salary is about 50 pct of that recorded in comparable countries, the level of saturation of modern retail space will be achieved when it reaches a level of 100 sqm per 1,000 inhabitants," points out Bogdan Sergentu, head of valuations and consulting at DTZ Echinox. Currently Romania has a shopping centre stock of 56 sqm per each thousand inhabitants, while the European average of shopping centre stock stands at 238 sqm per thousand, a figure more comparable to the state of the Polish retail market.
The H2 2011 pipeline in Romania is made up of six projects totalling 170,000 sqm. Jones Lang LaSalle expects that in 2012 the retail stock in the capital will be close to 700,000 sqm, up from 570,000 sqm in H1 2011. By the end of the year the capital's stock will increase by a further 73,000 sqm due to the opening of the Colosseum Retail Park (featuring the first Leroy Merlin store in the country) and the extension of Băneasa Shopping City. DTZ's data shows that Bucharest accounts for 21 pct of the new supply in 2011, which if fully-realised will eventually add eight new retail projects to the market.

Who's next in line?
"The eastern part of Bucharest has potential as this area is highly populated and with average income inhabitants. The Promenada Mall announced for the end of 2013 is located in the northern part of Bucharest, currently dominated by Băneasa Shopping City, the largest mall in Romania. Two projects are under development in eastern Bucharest - Mega Mall Bucharest and Parklake Plaza. We expect high interest from retailers for these projects, since all the other centres in the capital will be mature at the moment they open and tenants will look for new space. After all the announced deliveries, we are not expecting more new projects to be announced," declares Razvan Sin, head of the retail department at DTZ Echinox.Back in Prague and Bratislava, the locations that hold the most potential for retail development in these cities are known, but will actual construction work take place soon? "As both markets are recovering and a certain amount or nervousness exists around the eurozone, many retailers are cautious about their expansion plans and some consumers may be concerned about spending," notes JLL's Kevin Turpin.
Significant extension work on Centrum Černý Most by Unibail Rodamco is currently underway and due for completion in 2013, which will add app. 45,000 sqm to the Prague 9 centre. In Prague, there are two equally good locations that are being considered for development. One is close to the Vltavská metro station in Bubny, Prague 7. The second is at the Dejvická Metro station close to the Czech Technical University campus. "The completions of these projects, should they go ahead, are not expected to take place until 2014 at the earliest," claims Mr Turpin.
In Bratislava ECE Projektmanagement is currently building Centrál, a 33,000 sqm retail project due for completion in autumn 2012. Another project to be added to the market in the next few years is Penta's Bory Mall. HB Reavis is also planning a retail development in Mlynské Nivy as part of the Twin City mixed-use project. "At this point, however, there is not much news regarding the Twin City project. The city authorities have been quite reluctant to adopt new zoning and regulation standards. Before this happens, neither us nor any other developer owning plots in the neighbourhood will be able to start the construction of a new project. We do not expect to start the first phase of a shopping centre at all. We might add one later, but not in the coming year for sure. The plan is to develop app. 32,000 sqm gla of retail in the second stage of the project," reveals Roman Karabelli of HB Reavis.
The capital cities' markets are certainly back in the game. So whenever a Bratislava project gets off the ground, the chances are it will be needed.

Mladen Petrov