Hold or fold

Delayed, frozen, abandoned. No matter which words you choose to describe the retail projects hit by the crisis there are no doubts that after a few years of constant growth, the retail market in the region has ground to a halt. But is this really such a bad thing?

Mladen Petrov

And it was all looking so promising. In 2008, Romania and Bulgaria ranked first in Europe in terms of the amount of new retail space being delivered to the market, respectively enjoying a record 63 pct and 76 pct increase in retail space stock. Making the most of their fifteen minutes of fame after joining the EU in 2007, the two countries could not have been any happier: investors had arrived and they wanted to build everything – everywhere. This is how the Bulgarian town of Kazanlak, with a population of 80,000, ended up with two shopping centre projects. Across the Danube river, in Romania, developers and investors were on fire too, launching a large number of projects in cities such as Arad (population of 172,000 with a record 7 projects announced, but only one completed) and Ploieşti (population of 232,000 with 6 projects, none of which has been carried out thus far). All in all, back in the happy days of constant growth the pipeline of upcoming retail projects across Romania totalled around 100 projects.

Getting real

The credit crunch, however, has changed everything. In the summer of 2008, when serious questions about the impact of the financial crisis on Europe were already being raised, Cushman & Wakefield predicted that in Europe as a whole more than 14 mln sqm of retail space would be delivered in 2009. This number, naturally, has since then been subject to a number of corrections – downward. This year the amount of shopping centre space to be delivered on the continent is now only expected to reach around 10 mln sqm. In 2010, around 7 mln sqm of retail space is expected to come online in the European market, the lowest supply in five years. According to Cushman & Wakefield’s estimates, another 7 mln sqm of retail projects have been either put on hold or cancelled for good across Europe, with Russia, Ukraine and Turkey being among the most heavily affected. These three markets now account for 22 pct of the pipeline of projects – down from a peak of 58 pct.

Among the main reasons for these significant shifts is the decline in consumer spending power, difficulties securing financing and – last, but not least – investors’ general sense of insecurity in the current turbulent times. Nevertheless, these reasons do not only apply to emerging markets. More mature markets are also being pinched by the crunch. For 2009, developers and investors had been planning to deliver 1 mln sqm of leasable retail space in Poland. However, after the onset of the crisis, the pipeline was slashed down to 740,000 sqm for the year, according to Colliers International. As for the pipeline for 2010, analysts’ expectations are for 420,000 sqm of retail space being completed. Cushman & Wakefield estimates that 870,000 sqm of space is now under construction, with work on an additional 190,000 sqm on hold. For the next two years, market analysts expect a significant drop in activity across Poland, where an estimated 35 pct of all planned developments have already being frozen, mainly due to lack of financing.

Change of plans

Atrium European Real Estate has postponed the construction of the Felicity shopping centre in Lublin, while Bogdan Pawłowski and Ryszard Podkulski, the investors behind the 140,000 sqm mixed-use Millenium project in Rzeszów, have also temporarily left the construction site. So what went wrong? Officially, the Rzeszów project is
being delayed due to an unresolved problem with the ownership of a nearby site, which is to be
encorporated into the project. Talking to
‘Eurobuild CEE’ in October Bogdan Pawłowski assured us that the problem is to be solved in a few weeks. However, no time-frame for the project, scheduled initially for completion at the end of 2007, was disclosed with the construction site still standing empty.

There is currently no construction work in Lublin either. Dominique Beghin, chief development officer of Atrium European Real Estate, which changed its name from Meinl European Land following the introduction of a new management team and company restructuring, insists that work on Felicity will continue. “After assessing the project we took over from the previous management team, we looked at Felicity and realized that it was over the top, at least for a city the size of Lublin. A redesign of the concept was obviously needed so that it can better serve the realities of the market in that city.”

Accordingly, AERE is planning a new design for Felicity, most likely with a reduced area 30,000-38,000 sqm GLA mall, as well as a 30,000-35,000 sqm retail park. “Negotiations with potential anchor tenants, which will include an international supermarket or hypermarket, are now underway. Under the new market conditions we have inevitably lost some smaller tenants, but I believe they will come back as the economy keeps improving and we continue to make progress with the scheme,” Mr Beghin comments. The company is expecting to obtain the planning and building permits in the first half of 2010, with the construction work likely to start in H2 2010. The project is expected tpo open in 2012, three years later than initially expected. The company is not revealing the cost of the smaller project, but insists that it has enough equity to complete the job.

On the waiting list

Since the beginning of the year, only two new retail projects – smaller schemes in Dobrich and Sliven – have been announced in Bulgaria, while the number of planned projects just keeps melting away. According to data by consultancy GVA Solliers Solutions, a number of large-scale projects have been on hold, such as: Evropa Park (ECE Projektmanagement), Sofiiski Akropolis, a EUR 500 mln project by Lithuanian-based AB Vilniaus Akropolis (part of the Maxima Group), Tzarigradski Mall, GLS Mall and Riofisa’s Civis Center (all in Sofia), as well as the Grand Galleria project in Burgas, and yes, the two shopping centre projects in the town of Kazanlak.

Speculative retail projects which rely on securing a resourceful joint venture partner are now very much a thing of the past. “Before the crisis, the owners of development sites across the country would often announce that they had become developers and were planning a retail project. In fact, they were hoping that partner would be found who could finance the whole project, with the plot being their only asset. At the moment we cannot detect any interest from investors in these ridiculously overpriced plots,” claims Elena Undzhieva, key accounts manager of GVA Sollers Solutions.

By the end of 2009, a total of 207,000 sqm of retail space should have been opened on the Bulgarian market in seven cities and towns, bringing the shopping centre density ratio up to 58 sqm per 1,000 inhabitants from 28 sqm per 1,000 at the end of last year. In 2010, twelve new projects are to be completed, the smallest being Sun City Center in Burgas (11,000 sqm) and the largest being Serdika Centar (53,000 sqm by ECE Projektmanagement and Sparkassen Immobilien) in Sofia. 2009 will be the year of the city of Ruse (175,000 inhabitants), where three large-scale projects with a combined area of 110,000 sqm are due for delivery. This year, the 17,000 sqm Dunav Mall is to be opened, while the 37,000 sqm Galleria Russe mall is to enter the market in 2011. Analysts agree that a city the size of Ruse certainly does not need five malls, but this particular city got “lucky”. It is only due to the fact that the construction of a large number of upcoming projects was started before the crisis hit the region that these malls are still being built.

But is this good news, given the current market conditions? Not necessarily, as there are completed projects that have started operating with less than 60 pct of their areas leased. “These shopping centres have had serious problems from the very first day they opened their doors.” As Elena Undzhieva explains: “The crisis, when combined with the reduced expansion plans of the large retailers and the steadily increasing supply of retail space, will certainly lead to an increasing vacancy rate in shopping centres. Upcoming projects are facing serious difficulties attracting tenants, as no one is willing to engage with a project that is too far from the delivery stage. That naturally accounts for low pre-leasing levels, which leaves the banks in no position to finance such projects. It’s a vicious circle.” All the developers spoken to by ‘Eurobuild CEE’ for this story expressed complete agreement with this opinion.

Cold shower

Another way of looking at the credit crunch is as a long-needed cold shower for investors, forcing them to finally get a grip on reality. “The cleaning process on the Romanian market has already started,” asserts Aura Voiculescu, head of retail department at DTZ Echinox in Bucharest. “Long gone are the days when sites were bought without even visiting the site, or even without any feasibility studies. Developers are finally starting to put their feet on the ground.” RED Projects group, one of the main players on the Romanian retail property market, was the first company to get real and take a second look at its whole pipeline. This summer the company closed down the EUR 45 mln Armonia shopping centre in Braila, only nine months after it opened. The mall was closed after retailers’ sales turned out to be way below expectations, with the number of visitors reaching at only 2,000 on some days. The company’s representatives admit: “We had certainly not sufficiently researched the Braila market. The project is not drawing enough people, and the level of retailers’ prices is above the purchasing power of the local citizens.”  

What is now going to happen to the Braila scheme? “We are continuing to develop our projects, but in some cases will be readjusting the offer to comprise value retail and cash & carry. In line with market conditions, we will be launching our projects as the economy improves. Romania continues to be significantly under-shopped. We are now re-aligning the Braila scheme for a different market segment as a regional value retail and cash & carry mall. It is likely to re-open at the end of 2010,” says Andrew Stear, managing director of Red Management Capital. He continues: “In Constanta we are pressing on full-steam ahead with a major mixed-use project (World Trade Center Constanta, 36,000 sqm of retail space)  and already have a number of substantial pre-lets in place including Carrefour. We are also shortly to sign up a major international hotel operator.  We have moved back the completion date of this project in line with market conditions and it should be finished in the last quarter of 2011.”

The company’s project in Satu Mare has also yet to get going. “We are re-thinking the format of this scheme and as it is in an edge-of-town location it will probably be more along the lines of value retail and cash & carry. In Baia Mare we have planning permission for a shopping centre. However, as there is a rival project in the city centre, we will probably go for a revised planning permit to focus more on the value retail side. We envisage starting on site sometime during 2010.”

A project in Giurgiu is also being reconsidered. “It is likely that it will comprise more ‘classic’ high street retail with residential development above,” Mr Stear reveals, adding that: “We are continuing to develop our Cadran brand of neighbourhood centres of 5,000 to 10,000 sqm which are anchored with a supermarket. Our scheme in Husi is going ahead and will open in the spring of 2010, and we will follow this up with the Cadran centre in Marghita by the end of 2010. We are great believers in community shopping in small to medium-sized towns throughout Romania.”

Small is beautiful

What else is keeping developers busy during these turbulent times for retail?  Fine tuning projects is what the smart guys are doing. David Sharkey, CEO of the Caelum Developmen, is busier than ever these days. He is relishing this “down-time” and taking the opportunity provided by the slowness of the markets to add value and efficiency to projects which were undoubtedly more rushed in 2006, 2007 and 2008. In a joint venture with the Portugal-based Sonae Sierra, this Polish developer is very much on track to 
complete the ParkLake Plaza shopping centre in 
Bucharest. In the late summer of 2008, when executives of both companies were interviewed by ‘Eurobuild CEE’, they believed that the 
Romanian capital was then ready for their 110,000 sqm project, valued at EUR 600 mln.  Soon 
afterwards, in October 2008, the developers 
announced that they were going to take more time out to enter a re-design phase, after 
having already invested EUR 100 mln in the scheme. “We both looked at the project together and decided that it was no longer suitable for the new market conditions and was obviously designed for different times,” reveals David Sharkey. And what will become of it now? “We know that the location is still the best remaining shopping centre location in Bucharest in terms of catchment area and purchasing power. The scheme has been totally re-designed to accommodate the new level of demand from tenants, and for this process we have adopted more efficient, sustainable and environmentally-friendly ingredients. For the new project, an 80,000 sqm GLA ParkLake Plaza will now be developed at a total cost of around EUR 260 mln.”

With the design stage of the new project now completed, the leasing process is already underway (Cinema City, Cora and a number of international anchors have  been secured as tenants). “We are already negotiating the financing for the project, a process which is expected to take several months.  We expect to make an official announcement shortly in terms of starting the construction phase and the estimated completion dates,” Mr Sharkey says.  He believes that 2010 will see a new banking attitude, stricter in general, but more favourable to the stronger projects with obviously less risk. For the Bucharest project the partners are aiming to secure a bank loan for 50 pct of the financing. “I am delighted that we reacted with mature foresight to such a drastically changing horizon, and now 2011 is indeed looking likely to be the year for a stable market recovery and a return to more sustainable levels of growth in the retail market in Bucharest,” David Sharkey concludes.

Enough drama

Analysts in Bulgaria and Romania agree, at the end of the day the delay is not quite the drama it is made out to be by all the newspaper stories. “The retail segment is not doing well at all,” DTZ’s Aura Voiculescu comments. “According to our figures, in July 2009 the turnover was down by 30 pct y-o-y. Fashion retailers are dealing with a 30-50 pct decline in sales, while the white goods chains are reporting a 70 pct slump. Tenants are afraid to expand and banks are not eager to finance their expansion to shopping centres.” The situation in Bulgaria is similar, as Elena Undzhieva of GVA Sollers Solutions relates: “Some developers do have the financial muscle, but yet they prefer to wait. Others are almost ready, but still reluctant to open.” GTC has postponed the opening of its projects in Ruse and Burgas for six months, while the company’s project in Varna is to be opened four months later than expected. Retail Park Burgas, which was originally scheduled for completion this year, will be opened in the autumn of 2010. “If there is a lack of vision, putting the project on hold is a smart step. In Bulgaria, concepts are being reconsidered. A richer tenant-mix is needed as well as more targeted projects.“

Rumours regarding the cancellation of the 
Shumen Plaza shopping centre project in the city of Shumen have been circulating on the market. Initially, Plaza Centers, the developer of the project, was to have the scheme completed this year, but construction work has yet to get underway. 
Daniel Belhasen, Plaza Centers’ managing 
director in Bulgaria, explained to the Bulgarian media that under the new conditions the company is benefiting from the lower prices of construction companies. Plaza Centers is now planning to finish the 20,000 sqm scheme, which has an estimated cost of EUR 38 mln, in 2011 – but construction work on the project will not go ahead without bank financing. “We were looking to sell it a year after it was delivered, but we are also ready to retain it for the next 3-4 years until the situation on the market finally improves,” Mr Belhasen reveals. For cities the size of Shumen (around 100,000 inhabitants), Elena Undzhieva believes the delay to actually be a good thing. “Gradually the spending power of the people in such cities will increase to the point where a mall will be perceived as something 
normal, not something expensive and exclusive. There is no need to rush,” she comments.

Well, good things take time. ν