The quality shift

The credit crunch may have caused difficulties with the acquisition  of finance in CEE markets, but it has also led to the standards of retail projects being raised. Rafał Twarowski and dr. Knut Volquardsen, who together run the development company ECE Projektmanagement in Poland, are convinced of this

Mladen Petrov, ‘Eurobuild Central & Eastern Europe’: Can we already announce the end of the financial crisis?
dr. Knut Volquardsen, managing director of ECE Projektmanagement: From my point of view the crisis has had three stages. It started in the financial sector, which stopped financing companies and projects. This in turn triggered the second phase of the crisis in which many companies had to lay off employees and cut costs in other fields. Now we are in the third stage of the crisis – consumers have become afraid of the future and have started to save their money. This leads to lower turnovers for many retailers. The good news is that this stage is probably the final phase of the crisis. In Poland we can already see the light at the end of the tunnel. Poland is surely in a much better position than other countries, such as Bulgaria, Romania, Ukraine and Russia, where we still have a long way to go. The Czech Republic and Hungary are somewhere in-between.

What do the development plans of ECE Projektmanagement look like in comparison?
Rafał Twarowski, managing director of ECE Projektmanagement: We are working on a project in Bydgoszcz, where we already own land for the project. It is similar to our Katowice development. We are also preparing for a project in Kraków, which will be unusual for us because it will be an office project sited next to Galeria Krakowska. We are currently considering a number of possibilities, ranging from independent development to cooperation with a partner. We are not excluding the eventual sale of some of these properties. We are currently in negotiations with Kraków city council concerning the issuing of the site development conditions. We hope that we will manage to obtain these conditions by the end of the year and start the final analysis of the enterprise. We are also working on a few other schemes. I mean the acquisitions of prepared retail projects, which would allow us to save time. However, it is certain that we are planning to open Kaskada in Szczecin in autumn next year. Construction work is being completed ahead of schedule and the facility is now 80 pct leased. Additionally, we are seriously considering extending some of the existing shopping centres which we manage.

Why did you only decide to build your first office project in Poland now?
RT: As I mentioned before, we have also been considering the possibility of selling properties, so there is no final decision yet as to whether we take up  independent development.  If we decided to carry out the project, it would mean that we have managed to convince our headquarters in Germany about the necessity of diversifying our portfolio in Poland too. However, offices will never become our main line of business in Poland for sure.

How does the difficult market situation translate into relations with tenants?
KV: Let’s not forget that the crisis arrived on the tenant market only about one year ago, but there had been many very successful years during the boom times before. Any entrepreneur has to prepare himself during good times for difficult phases. This goes for tenants, too. Apart from that you can monitor at the moment very clearly the difference between good shopping centres and problematic ones. Tenants in good shopping centres with a proper location, a professional and flexible concept and strong centre management are in most cases still doing okay, despite the crisis.

Is the financial crisis as least over for the developers of shopping centres?
RT: The crisis affected everyone and put even the biggest market players on hold. When we saw last year the first signs of a thaw emerging and banks started to think once again about lending for projects, we immediately invited twenty banks for negotiations, as we had the optimised project of the Kaskada shopping centre in Szczecin in our portfolio. We were surprised ourselves at the final stage of the process when we saw the banks competing with each other, so we had the opportunity to take advantage of the competition between lenders that was gradually starting to return.

What does the situation on the financial market look like nowadays?
RT: Banks are still approaching the financing of these types of developments with caution; they are examining the smallest details and get deeply involved in project quality assessment. Even a superb location, higher equity or the required levels of leased space are not enough for them as conditions for granting the funds. They want to know what tenants have decided to sign contracts, if they represent all business lines or whether the figure has been artificially inflated by contracts with small traders. They are looking for quality and not just quantity. The size of a shopping centre is assessed. Projects must be well thought-out, and this is where the strength of an experienced developer lies. It might seem to some people that a certain company is moving slightly slower than the competition, but haste does not always make a good adviser in this business. We are able to react in a flexible way to the changing business environment, which can be proven by the fact that a large department has been created in the company to deal with acquisitions. To sum up, banks have increased their requirements, but I think that the situation today is better than a year ago.

Is the Polish retail market a mature one?
RT: There has surely been a lot done within the last decade but there are still a lot fewer square metres of retail space per one inhabitant of Poland than there are in Germany or other countries of the old EU. Of course the purchasing power of Poles is still different from citizens of more developed European countries. Through the rapid development of big projects our market has reached maturity much faster than in the West, where such changes – ‘tin boxes’ to modern shopping centres – took 30-40 years. The direction of further development will be towards higher quality. We can now expect many modernisation projects and extensions to existing shopping centres. We cannot continue to open new facilities indefinitely. Their blending in with the urban fabric takes a long time. It should be remembered that new areas ‘come to life’ in cities, such as the Gdańsk shipyard and the Dalmor shipyard in Gdynia or in railway areas, and they create new possibilities for developers. There is also a shopping centre to be built in Olsztyn next to the planned stadium. This is a PPP project and our company is participating in the tender right now.

How will shopping centres develop?
RT: Retail formats come and go. The more important change is that cities have matured to the fact that retail is not a bad thing. They have started to appreciate the role of developers. For example, in Tarnów we have joined a project started by one of discount chains after the municipality witheld its consent for the construction of a facility of this type in such a prime location. The city wanted to see something more, so we have had to create a project with an added dimension, to combine the interests of the city and the retailer.
KV: Big retail developments in city centres face bigger challenges over land acquisition and legal procedures than green field developments. However, we believe it is worth it, provided you have a long-term orientation. There will definitely be more emphasis on sustainable developments in the future. We believe that the renaissance of city centres has only just begun in many CEE countries and the development and refurbishment  of attractive shopping centres will play an important role  in this.

Experts say that customers are bored with well-known brands...
KV: Retail concepts change every few years. Zara for example used to be a novelty not so long ago. Now we can hardly imagine a shopping centre without it. The good thing about shopping centres is, however, that they are more flexible with regard to the tenant mix than high streets, where every building owner focuses only on the highest rent for himself. Well-managed shopping centres can instead allow for more diversity, since they are not so much focused on a single shop but on the overall attractiveness and profitability of the centre.