The bigger the better

despite the crisis The volume of retail space continues  to grow, mainly in the form of new projects. However, the number of enlargement projects for existing facilities has also been rising recently. between 2005 and 2008, extensions made up 5 to 8 pct of all projects.  but As the market continues to mature, they now account for over 20 pct of all retail schemes

Emil Górecki

Mayland Real Estate is now extending the Jantar shopping centre in Słupsk. In 2012 the facility will be twice its current size, amounting to nearly 46,000 sqm. Gemini Holdings has recently revealed that it has decided to enlarge the Gemini Park shopping and entertainment centre in Bielsko-Biała, with the launch of the work planned for the second half of the year. The leasable area of the new section of the building will come to 16,500 sqm. Meanwhile, the owner of the Wola Park shopping centre in Warsaw, AEW Europe, is planning to extend the mall by app. 20,000 sqm of leasable space. The investor already has the site development conditions decision for this project and is currently applying for a building permit for the new section, which will be built in the area of the car park located on the eastern side of the building. The extension work will take around half a year. There are also plans to extend another facility owned by the same company, the Klif shopping centre on ul. Okopowa in Warsaw.  The plan involves the expansion of the centre by app. 1,000 sqm of leasable space. This new section will be built according to a new concept targeted at the more affluent customers who shop at Klif. It is not clear when the project will be launched.

Three reasons
These are only a few examples of the increasing trend for extending retail facilities. Jones Lang  LaSalle has calculated that between 2005 and 2008, extensions of existing and operating facilities constituted between 5 and 8 pct of all launched retail projects. The turning point came in 2009, when the percentage grew to 14.5 pct. And last year extensions constituted nearly a quarter of new constructions. "Looking at the market in 2010, 23 pct of launched retail projects were extensions. There are three main reasons for this. The first is the lack of attractive land for new projects. The crisis has led developers to turn to the big cities again and this is where it is hardest to find a good plot of land. I would consider the growing competition between retail facilities as the second reason. For an older centre to be able to attract customers it has to improve its attractiveness, and extend its offer and change it according to the needs of the customers. Otherwise it will lose them to a newer facility located relatively nearby. The greater ease with which the finance can be acquired for an extension rather than the construction of a completely new facility is only the third factor," explains Anna Wysocka, the head of the retail department at Jones Lang LaSalle. The agency's research shows that in  2011 the ratio between extensions and the construction of new centres will not change much. The trend might weaken a little only in 2012, but not in the biggest cities. The barrier here is the low  supply of suitable land.

Through the eye of a banker
It might seem as though developers should abandon new projects and focus on making those that are already open more attractive at a time when it is hard to acquire a bank loan for any kind of project. But none admit to embracing such a strategy. Is two and a half years of economic downturn too short a time to change the course of such big ships? This is a difficult question, since up until now no developers have changed their minds and started extending their retail projects instead of building new ones.
"It's obvious that banks greatly prefer to finance the extension of existing retail projects, rather than new ones. It's just safer," explains  Martin Erbe, Westdeutsche ImmobilienBank's managing director for Continental Europe. Firstly, the existing building and its cash flow can provide good collateral for the loan. Secondly, the recorded results of the shopping centre's operations demonstrate that this particular retail location is accepted within the shopping community. Thirdly, the main performance data, such as turnover, generated income and footfall, help bankers to decide whether it is worth extending the project or not.
As Martin Erbe claims, the financing conditions for substantial extension work do not differ much from those for a new retail scheme. "If a developer wants to double a shopping centre's leasable area, the cost of the loan for this can be slightly lower, by about 25-50 bps. But for this we will require pre-lease agreements for at least 50 pct of the new space as evidence that this particular location is still attractive to tenants." Things are much simpler if we are talking about a 20?30 pct extension. If the existing part of the project has generated decent turnover and footfall, the developer can obtain a loan even more than 50 bps cheaper than pure construction margins, without the need to have a high pre-lease in place.

Proof of the pudding
Echo Investment is extending one shopping and entertainment centre: Galeria Echo in the home town of the company, Kielce. The construction work is to finish soon and the facility should be open for customers in Q3 2011, when its total leasable area will amount to 71,000 sqm. The decision to go ahead with the extension project was made during the market fever of 2007. Currently there are two more enlargements under preparation: the Echo shopping centre in Jelenia Góra is to grow by a leasable area of 13,000 sqm and Pasaż Grunwaldzki in Wrocław is to be expanded by 12,500 sqm, with the latter project possibly to be launched this year. Krzysztof Giemza, the director of the retail project department at Echo Investment, insists that the projects are not being carried out instead of starting new constructions. "It is making use of the possibilities which the two shopping centres have provided us with. We extend the offer for the customers and improve the functionality and aesthetics of the entire facility at the same time. From the point of view of leasing there is only one difference between a new section of an older facility and a completely new project: if we commercialise a new part of a centre, we can present the potential tenants with the results of the older section as proof of the success of the whole project," explains Krzysztof Giemza.

Safer but not cheaper
His colleague, Grzegorz Iwański, Echo  Investment's financial director, admits that he has not noticed that banks are favouring extensions over new projects. "There has been a noticeable diversification between financing finished projects and those at the construction stage.  Of course an extended project is more attractive by definition due to it having an 'established' location, both for customers and tenants. It is important for the banks to know that the turnover of the open section is high enough during its extension to cover the loan interest and that the loan can be secured on the facility itself,"  he explains.
Anna Wysocka confirms that there is no difference in price for potential tenants between a new part of an existing facility and space in a completely new project. This does not mean that it makes no difference for retail chains, which open outlets where they identify good locations. But if they want to open their outlets in extended sections, they will not have to wait so long for the completion of that area. In addition they will have hard data on the turnover of a given shopping centre, its footfall and the customer profile. "In this respect a decision to rent space in an extended section of a shopping centre seems safer and is faster," says Anna Wysocka.
In 2011 Echo is planning to launch not only the extension of Pasaż Grunwaldzki but also five new shopping centres and shopping and entertainment centres. None of the company's new projects has been replaced with the extension of an existing one. "At the moment a number of banks are interested in financing new projects. We are currently holding negotiations regarding a few of our projects planned to be launched in 2011," claims the financial director of Echo Investment.