I’m a believer

Alexander Otto, the CEO of ECE Projektmanagement, has an excellent view from his office on the fifth floor at the company’s headquarters in Hamburg. And what does he get to see every day? Opportunities for growth, that’s what. In times when there is nothing more natural than being pessimistic, Alexander Otto explains 
to ‘Eurobuild CEE’ why he still believes
in the potential of the region

Mladen Petrov, ‘Eurobuild CEE’: A simple question to start with. Or it may not be that simple. What do you think is going on right now in the world market? It seems to me that we are running out of ways to describe the global crisis…

Alexander Otto, CEO of ECE Projektmanagement: I am sure you’ve heard this before from other players in the European market. The most stable place is probably our home market in Germany, where financing is still available. Interestingly enough, we still haven’t observed any impact of the crisis on retail sales in Germany so far. We have a healthy pipeline of new shopping centre projects in the country – and this January we started a new project with an investment volume of EUR 115 mln. Undoubtedly the earlier hype has gone and prices are getting more realistic, and when looking further east the situation is definitely getting more complicated.

For the last few months we’ve seen an historical drop in the value of the major Central & Eastern Europe currencies, with the Polish złoty being the leader in this fall. How scared should we be?

Well, I am not going to sugar-coat it for you, of course everyone should be concerned – this is a major crisis we are dealing with. In fact, it is the biggest crisis we have had since World War II. The financial system, crucial for economic growth, is some way off from stabilizing, and one important question is “How fast can we get out of this crisis?” For the moment, I am still quite confident when it comes to Poland and the Czech Republic. These markets are managing to stay reasonably stable, with financing still being available. Retail sales are satisfying for us, which actually applies to the whole region. The biggest problem with financing is found in the Ukraine and Russia – two currently very difficult markets. Some projects in Russia have been put on hold, but only to a limited extent.

Going back to Germany for a moment, we keep hearing about the recession there, which might turn out to be a lot deeper than was predicted just couple of months ago.

As unemployment figures rise, I am sure we are going to see a drop in retail sales. But in my opinion it is crucial to remember one thing: Germany is a stable country and the economy saw reasonable growth during the boom period, without getting overheated. As there wasn’t such spectacular growth similar to other European countries, there won’t be such a dramatic fall either. Some of the Eastern European countries, especially the investment-driven ones, won’t be that lucky.

How is the deeper recession going to influence the other markets you 
operate in?

Our projects in the CEE region are not dependent on the situation in Germany. The existing centres have a very stable setup with a long-term approach and an ECE ownership position in many of them. We have financing secured until 2014-2016. Thus, at the moment we are not concerned with finance expirations. However, we are cautious when it comes to new developments. We do work on new projects, we advance them and obtain building permits, but before the actual construction work begins we want to have financing secured. We don’t want to put equity in each of the projects, as there are lots of other opportunities to be explored. In the current climate, in some cases it is even better to buy than to start developing.

So, ECE is on the market to buy?

Yes, we are. In February my family decided to expand our activities in the US, increasing our investment in Developers Diversified Realty. Thus, we will be involved with a company which operates 710 properties with over 14 mln sqm of retail space in 45 states of the US, in Puerto Rico, Brazil and Canada. We will continue to keep an eye on the global market, looking for interesting opportunities, but we will maintain our focus in Europe.

Congratulations on the American deal, but the numbers of falling sales for the last two to three years are anything but optimistic…

And yet, I am an optimist when it comes to the US. This is a country that has always managed to rise again quickly after a downturn. America is good at reinventing itself, and the last recession didn’t last very long. We should also keep in mind the great demographic potential of the country, which is an opportunity for us as a developer and shopping centre operator. This year, though, is going to be a hard one for all of us. However, in the long term, I think the US will recover faster than Europe.

And what about Europe?

In Europe we should make some distinctions. Romania and Bulgaria, for example, are two markets we think have great potential but will probably need four to five years until they recover and see investment capital returning. I do, however, firmly believe in these countries – now that they are part of the EU it is a lot easier to do business there. Until recently, the overheated Romanian market offered quite unrealistic prices that have now started to decrease. In Bulgaria we have already secured some very interesting plots and our first project – Serdika Center – is now under construction, scheduled for opening next year.

Romania, Bulgaria… is Serbia the next country in the region that ECE is going to move into?

Serbia is definitely a very interesting market. We have just secured a management deal for the Ušće Shopping Center in Belgrade, which opened on March 31st.

When one talks about growth, one inevitably thinks of the Ukraine and Russia. These countries are all about the potential for growth, but there is always a but…

I am very cautious regarding Ukraine and not just because of the current economic situation. The heavy dependence on Russia seems to be an issue as well as the political instability and the numerous legal obstacles deterring business. For a western company it is very challenging to do business in Ukraine under such conditions, to put it mildly. Additionally, despite the substantial interest of foreign real estate developers and investors, the government has missed an opportunity to truly promote the country and make it more transparent for us to operate there. As for Russia, I am positive it will rebound. It may take a couple of years, but having started work on two local projects we are going to stay there.

Therefore, what is the major challenge for you when operating in Europe?

Financing for new projects to start with. The weakening of the local currencies against the euro is also a major concern, as it drives up rents and it also makes the procurement of stock more expensive.

The Polish government has been advising us to tighten our belts while it is also counting every penny. Western governments, on the other hand, are doing all they can to stimulate consumption and encourage citizens to splurge. I wonder which approach is better?

Each government has its way of fighting the crisis… I would rather agree with the