A forced exchange of tenants

Rents might be falling, but on the other hand the value of the euro is growing, and it’s in this currency that rents are made out. while Developers are not so concerned about bankruptcies of retail chains, as There are still many others in the queue for their premises

Emil Górecki, Gergo Racz

According to Cushman & Wakefield, the demand for retail space was stable in Q1 2009, despite a noticeable light downward trend. Looking at the highest rents, falls were registered in Warsaw (the difference between rates in Q4 2008 and those in Q1 2009 amounted to EUR 5 per month per sqm), in Wrocław, Gdańsk, Gdynia, Sopot, Poznań, (EUR 12 each) and Kraków (EUR 10). The analysts predict the trend to continue downwards in Warsaw, Poznań and Wrocław, while rents in the other cities should remain stable.

The problems and the saviours

A slump in consumption has yet to materialize. Shopping centres are still full and the Central Statistical Office (GUS) has calculated that retail sales in April grew by 1 pct compared to April 2008. But this is next to nothing compared to last year’s growth of 17.6 pct. The result? A tricky situation for some companies, including shopping centre owners. It all started with Sphinx and Chłopskie Jadło. A bankruptcy petition was filed by Monnari after its affiliated company Molton had already disappeared down the pan. Also Redan, the owner of clothing brands such as Top Secret, Troll, Textilmarket and Morgan, faced similar problems. Galeria Centrum, part of the Vistula Group, has also filed for bankruptcy. Skarbiec TFI has taken such action with regard to Reporter. And Kolporter has announced that it is to pull out of shopping centres. “The financial results of these 24 salons were not satisfactory,” explains Grupa Kolporter spokesman Maciej Topolski, adding that “this is exacerbated by the increase of rents resulting from the euro exchange rate surge.”

However, the problems of some companies provide an opportunity for others. Sylwester Cacek, the founder of Dominet and one of Poland’s richest people, has offered a helping hand to Sphinx restaurants. He has now bought a 32.99 pct stake in the restaurant chain for PLN 30.5 mln from Amrest. Soon after the share acquisition was completed, the management of the company withdrew its bankruptcy petition. Redan has also concluded an investment agreement with Cacek. According to the agreement, the latter will issue 6 mln ordinary bearer shares with a nominal value of PLN 1 each, which will be offered to the investor under the terms of a private subscription at an issue price of PLN 2.5 each.

Compassion of the competitor

Despite deteriorating results, the outlets of brands belonging to the LPP group are not going to be closed down. On the contrary, Dariusz Pachla, the vice-chairman of the company, has announced the opening of 150 new outlets with a total area of 40,000 sqm by the end of 2009. The investment will amount to PLN 65 mln, i.e. half as much as a year earlier. “Out of 150 new outlets, 80 will be run by franchisees. But there will be no large stores in smaller towns. One of the chances that the crisis offers to us is to take over such franchised outlets. And yet, bankruptcies among our competitors are not convenient for us. Empty outlets in shopping centres mean less people traffic, and consequently fewer customers,” claims Dariusz Pachla, the vice-chairman of LPP. He goes on to reveal that the vast majority of the new outlets will be opened in Poland, as other countries in the region are considerably less profitable for the company and there is a need to focus on one’s best market in difficult times.

Tough conditions

In the real estate business there has been a lot of talk about the slump in rents in shopping centres. LPP also started talks related to this issue last year. So far they have not abandoned any locations due to a lack of agreement with their lessors. “The talks have been fruitful, we have renegotiated a few contracts, but you would be mistaken if you thought that we have managed to cut the rent by half. The average leasing rate for all our outlets grew by 20 pct between Q1 2008 and Q1 2009 as a result of the increase in the value of the euro,” remarks Dariusz Pachla.

Marek Błędowski, the sales director of Apsys, suggests that as a rule his company does not negotiate rents while the lease contract is in force because both parties take the currency exchange risk. “We have recorded a fall in the lease contract dynamics in the last couple of months. Some leading retail chains have files bankruptcy petitions, which results in the termination of lease contracts and re-commercialization of the premises. However, it is a good time for other companies that had tried to secure new space for development of their retail chains in the past and had failed due to lack of free premises,” he remarks.

LPP are also planning to save money on the furnishing of their outlets. The furnishing of 1 sqm in Reserved stores will be 20 pct cheaper. Besides, nowadays shopping centre owners are contributing to the costs of premises adaptation to a larger extent than only a year ago. However, LPP is not planning to take over the bankrupt outlets.

Tough player strategy

Empik Media & Fashion group opened 14 new outlets in Q1 2009, with a total net retail area of 3,900 sqm. They currently have 651 outlets with a combined sales area of 263,000 sqm. The total investment cost of the new retail outlets, language schools and service outlets amounted to PLN 19.8 mln in the first three months of the year. And the management of Empik is not planning to halt its expansion. The company intends to have opened up to 48 outlets in Poland and several in Russia, Kazakhstan and Ukraine by the end of the year. As company executives admit, these are rough numbers and implementation will depend on what good leasing opportunities crop up. Due to the dynamics of the current market situation, it is impossible to establish the precise numbers for new outlets at this point. The company has already expressed a willingness to take over the premises of Galeria Centrum, among others. “We are following the status of shopping centre tenants and hoping to take advantage of good leases of the vacated premises. We