Hunting time or survival strategy?

New operating conditions mean new problems, but also new opportunities. How are developers of commercial space preparing for the lean years? Are they running scared and bracing themselves for takeovers?

Emil Górecki

The situation on the market may be grave, but developers are trying not to panic – especially those who are working on commercial projects. They are in a relatively good situation, as the amount of free space of any type in most large cities in Central and Eastern Europe is quite low. However, one cannot believe that the situation in the real estate sector will remain as good as it has been so far. The first victims of recession are small residential developers, who were trying to obtain profits by building one or two projects for the money from advance payments from their clients. The next ones in turn are larger companies, also from the residential sector, although they usually have a much better financial background and their problems will probably not lead them to bankruptcy (however, not every market observer agrees on this point). The third type of company suffering from problems are developers of commercial space. As negotiations with banks become tougher, these players will have to sell their less important projects. And this may create an opportunity for those who would be willing to buy such projects – with a hefty discount, of course. So ‘Eurobuild CEE’ has asked developers what has changed in their strategies since the golden age, which is but a fading memory today.

Romanian space

“We are not afraid of the recession, because of the fact that, among other reasons, the properties built by us already have preliminary agreements secured with the Carrefour chain. This company is our security guarantee,” states Andrew Hardy, international development director of developer Red Projects, which operates on the Romanian market. The company does not plan to cancel any projects or to postpone the opening of any of the four properties that are being constructed at the moment. Andrew Hardy is confident that Red Projects still has the financing, but the company has become more cautious recently. “I expect that the market will slow down for the next 2-3 years. However, Romania has great prospects for the future. We still have a lot of space for such projects as we have in our portfolio. The best projects will certainly survive these hard times,” he insists.

Cost-cutting, but not at the expense of employees

Globe Trade Centre froze land acquisitions as early as at the beginning of 2007. As the bosses of the company claim, the resources of the land bank in Hungary, as well as in Poland, Bulgaria, the Czech Republic and Slovakia, are sufficient to continue activities. The company has announced that it will not start any new residential projects, and three of them – in Łódź, Poznań and Bucharest – will be re-designed for office purposes. The company has lowered the total investment budget planned for this year from EUR 1 bln to EUR 600 mln. The decrease is to be achieved by postponing the openings and starts of some projects, as well as from the suspension of land purchases. “We will not dare to start building any projects any more, unless we have secured 100 pct of the financing,” reveals Eli Alroy, president of the board of GTC. The company will also attempt to economize, although this should not have any impact upon employees. “The best savings opportunities come from negotiations with contractors, who can lower their prices by 10-20 pct nowadays,” asserts the GTC president.

Ukrainian slow down

The situation for developer ECE Projektmanagement in its homeland of Germany, in Poland and in other older member states of the European Union ,is still quite good. Representatives of the company believe that it is still possible in such locations to obtain funds and loans for the realization of good, select projects. However, things are harder in Russia and Ukraine. As the investment climate continues to deteriorate, the company has decided to suspend its activities in these countries. This should not mean closing the Kyiv office of its subsidiary TOV ECE Ukraine, but instead a temporary postponement of the projects planned so far. It will, however, entail the laying off of some of the personnel, and not only in Kyiv. Soon 25 people will leave the firm, but the company may have to economize more. “Although we have not backed out of any projects so far,, it will nevertheless be hard to stick to the scheduled dates for opening our Russian malls,” admits Robert Heinemann of the Hamburg office of ECE.

Waiting for opportunities

Ghelamco is also developing a new operational strategy which will allow the company to adapt to the new conditions. However, all the projects located in Warsaw will be carried out according to the previously set schedule. The company is also considering the postponement of its investment plans in one Polish regional city. “Fortunately, we managed to sell the Marynarska Business Park office complex in Warsaw at the end of September, and in July we also sold the Bema Plaza office building in Wroclaw. Thanks to that, we now have funds for the realization of further projects,” says Jeroen van der Toolen, head of Ghelamco Poland. He also gives assurances that, although the company is not about to start any new projects at the moment, there are enough under development to allow them to wait until the worst is over. “We are not being forced to sell our projects. On the contrary, in mid-2009 we expect there to be some interesting opportunities for buying plots at good prices. We want to benefit from these opportunities,” adds the head of Ghelamco Poland, at the same time insisting that the company is not planning any extraordinary cost-cutting in the near future.

Strategy of silence

French shopping centre developer Apsys has adopted a very tight-lipped information policy. Is it going to sell any of its projects? Or maybe the opposite – is it going to purchase them at bargain, recession prices? Does it have problems with obtaining financing? The head of the communication department, Aleksandra Wasilewska, would only reveal that the company is not yet prepared to answer these questions.

Office episode?

LC Corp, controlled by Leszek Czarnecki, is first and foremost a residential developer. However, it does have a mixed residential-office investment in Warsaw – on ul. Przyokopowa – in its portfolio. As late as in the middle of the last year, the residential function was still supposed to be the dominant one in this project. But, as Konrad Dubelski, the (now ex-) president of LC Corp explains, the neighbourhood of this investment is becoming a predominantly office district, so this project, too, had to be transformed into offices, leaving only a small residential section. It is easier to lease offices than to sell apartments today, which was probably also one of the factors influencing the decision of the developer. The complex, designed by the studio of Stefan Kuryłowicz, will contain 39,000 sqm of leasable office space, and many fewer apartments than had been originally envisaged. Additionally, the company is introducing a cost reduction programme, which should lead to a lower risk of loss of financial liquidity. Between September and October, the company lost nearly 50 pct of its value on the Warsaw Stock Exchange.

Far from the