The next big thing?

In the next few years Bulgaria, Romania and Ukraine will each see the opening of 10 outlet centres, while for the region as a whole there are 140 in the pipeline. clearly a popular concept ? but there is always a ?but?

 

 

 

Mladen Petrov

 

It happens everyday. A few times a day a bus takes a big group of Japanese tourists, who have just landed in New York city. Jet-lag is not an issue. They have more important things to do. Sightseeing in the Big Apple? Not really. Shopping! The bus, however, doesn?t take them to Manhattan, but to an outlet centre outside the city, a place where you can buy USD 120 Burberry bags and other discounted luxury items. Although they can easily afford a 5th Avenue shopping spree, the Japanese, and pretty much everyone visiting the city, prefer the outlet centres.

 

It is not embarrassing at all. Actually, it's called smart shopping and even the image-conscious Italians, don't feel that there is anything wrong with it. In Italy, there are over 700 retail units operating as outlet centres, offering discounted designer clothes.

 

And what about Central and Eastern Europeans? The figures are less than impressive. Ukraine, with a population of over 58 mln, has no outlet centres operating. Poland is doing better with eleven outlet centres either operating, under construction or in the pipeline. Western European countries, however, are also lagging behind ? Germany for example, a country of 82 mln, has only five operating outlets. ?People are asking me if outlets are the next big thing? I don't know. But I know that outlets are definitely big when we look at the pipeline,? says Brendon O?Reilly, director of outlet services at GVA. The company is involved, both as a leasing agent and a property manager, in a few of the upcoming outlet centre projects around the CEE region, such as the Sofia Outlet Center, Fashion House in Bucharest and the Ljubljana Outlet Center. Let the numbers speak for themselves: in the next six years some 140 outlet centres are to be opened in the region, with 10 located each in Bulgaria, Romania and Ukraine.

 

A difficult start in life

 

Retail analysts agree that the number of outlet centres in Bulgaria, Romania and Ukraine will grow, but as for now what is termed an outlet centre is not exactly what Western shoppers are used to. A real outlet offers a wide selection of mass, medium and high-end brands, at a price at least 30 pct lower than in a regular store. Usually the outlet is located outside the city, but still with as big a catchment area as possible within a 90 minute drive, and it contains between 30-50,000 sqm of retail space.

 

?Following this criteria, currently there are no modern outlets in Bulgaria,? claims Pavlina Nikova, head of retail services at the Forton International real estate consultancy firm. ?Before outlets start appearing on a large scale, more shopping centres and retail parks are needed. This is the main pre-condition for this to happen. Now in Bulgaria, more shopping malls are being developed, and a few retail park projects have been announced. Therefore, I would expect more news about outlets in possibly 2 years. Right now we are missing the critical mass of brands to sustain such projects,? she argues. In addition, according to data from Forton, around 70 pct of the brands on the Bulgarian market are represented by franchises, who tend to regard outlet centres as risky locations.

 

Walking down the streets of Sofia and some other big Bulgarian cities one may see lots of stores with signs emblazoned with the word ?outlet?. Here you can generally find items from last season under a variety of brands, some of which are in competition with each other. In the case of Bulgaria, these so-called outlets also prepare the ground for the entry of big brands, before their official debut in the country. One of these is the Spanish brand Zara, which is to have its first official store opening next year in Sofia, an event that will lead to the closing of the outlet chain managed by the Trend Studio Bulgaria company.

 

Things, however, are changing. After two years of renovation work to an old style shopping centre costing EUR 5 mln, the Princess Outlet Center was recently opened in Sofia?s Mladost district. The outlet, with an area of 12,600 sqm, features brands such as Adidas, Playlife, Reply and Rifle. The Turkish owners of the outlet centre, Corecom Princess, are asking for rents of EUR 20-30 per sqm ? comparable to shopping centre rents. The scheme, however, is having difficulties attracting customers, and as our research uncovered, some of the tenants are expressing concern about the lack of visitors, who remain unimpressed by both the brands and the design of the project.

 

One is enough

 

The real test will be the first large-scale outlet centre project in Bulgaria: Sofia Outlet Center, which is scheduled for delivery in 2009. The developer of the scheme is K&K Engineering, the owner of the Technomarket electronic goods chain. The 37,000 sqm project, located on Tsarigradsko Shausse boulevard, is being advised by ECE Projektmanagement, with the financing provided by the Bulgarian branch of Raiffeisenbank.

 

The British-based GVA Grimley Outlet Services is in charge of the leasing and property management, has already signed lease contracts. ?Given the current state of the market, I think Sofia, a city of almost 2 mln inhabitants, can sustain one such professionally carried-out project,? or so GVA Grimley?s Brendon O?Reilly believes. Pavlina Nikova adds that: ?The crucial thing is more brands. The new trend we?ve been observing is customers who prefer to buy cheaper items, but much more often. That?s good news for the outlets. Therefore, the high-end brands are the ones that are vital. They need to have direct contact with the customer in the outlet.?

 

The CEE experience

 

Naturally, there is nothing wrong with high-end brands being on offer in an outlet centre. ?Outlets, at least in theory, should be all about the high-end brands. This is what attracts shoppers. The lack of a substantially large number of high-end retailers that are interested in outlets is a problem throughout the whole CEE region,? complains Małgorzata Trzaskowska, retail director at Colliers International Poland. According to her, investors remain very cautious when it comes to such projects, with their interest focusing on the major cities, a rule that is applied to the whole region. ?On the other hand, in Poland we are also seeing a small amount of tenant interest in leasing retail space in outlets. But for the time being I wouldn?t expect a lot of news from this segment in Poland,? adds Ms Trzaskowska.

 

However, there are some interesting developments. The Austrian-based Premiumred, the real estate subsidiary of the Investkredit bank, part of the Volksbank, is planning to invest in three 25,000 sqm outlet centres in Warsaw, Wrocław and Poznań. The sites are already being secured, with the construction work expected to begin by the summer of 2009. ?For our Village Outlets we are going to attract lots of Italian brands that are not necessarily well-known here, but will help us stand out from the other competitors,? reveals Leopold Deufl, managing director of Premiumred. After this latest announcement, there are now eleven outlets in Poland, both delivered or under construction. And it is mainly the big cities that are on the investors? radar: Warsaw, Wrocław, Kraków, Poznań, Gdańsk and Sosnowiec.

 

The first outlet centre in Poland, Factory in Ursus on the outskirts of Warsaw, was opened five years ago by the Spanish-based developer Neinver, which has just announced its first project in Budapest. Currently, there are three outlets operating in Hungary: GL Outlet Center and Premier Outlet Center outside Budapest and the recently opened M3 Outlet Center in Polgár. In the Czech Republic, things appear to be much the same. There are two projects of major importance on the outskirts of Prague. The first of these is Galeria Moda (30,000 sqm) by the Italian developer B. Consulting, which is to be opened by the end of the year. The second scheme is Fashion Arena by TK Development and LMS Outlets, which has just announced its 2nd phase.
An additional 7,000 sqm is to be added to the centre (now 18,000 sqm), which already features stores such as Factory Mariella Burani, GAS, Lee Wrangler, Levi Strauss & Co., Mango Outlet, Mexx, Pepe Jeans London, Retro, Nike, Puma and Reebok. Another investor, the Devo Group, after attracting a new strategic partner has restarted the construction work on the Exit 66 outlet centre (18,000 sqm), halfway between Brno and Prague.
Doing better in Romania
This month Bucharest is to see the opening of the first modern outlet centre in Romania - the Fashion House Outlet Center, a project from the Fashion House Development company, a joint-venture in which the Flemish company Liebrecht & Wood is a major shareholder. The outlet contains 30,000 sqm of retail space at a cost of EUR 38 mln. "We intend to open other outlet centres in Romania, because the market can absorb at least five more," reveals Patrick Van Den Bossche, managing director of Liebrecht & Wood. As for now, two of the outlets are located in Bucharest. The second Bucharest outlet, on a plot that has already been secured, is to be delivered in 2010. The company is not revealing any further expansion plans. The first Fashion House Outlet Centre is to be developed in two stages, with 90 pct of it already leased.
"The outlet market is now starting to grow in Romania. Studies have proved that for landowners who own huge plots close to big cities it is more profitable to develop outlet centres there than residential schemes, at least in the present market conditions. The financial crisis, in addition, might diminish people's buying power, so they may turn to outlets where prices are lower," thinks the independent Bucharest-based real estate broker Bogdan Cernea.
This year, Awdi Real Estate has announced EUR 150 mln is to be invested in the biggest outlet centre in Romania on a plot close to the Otopeni International Airport, near Bucharest. The total built-up area will be close to 255,000 sqm, with the project scheduled for completion in 2011.
Recently, Mega Company, the developer of the Mega Designer Outlet Centre situated near the Fashion House project, has announced that its opening, which had been scheduled for the end of the year, is now postponed until next spring. The explanation given by the developer is that the main reason for the delay was that it was unable to open in time for the Christmas. Mega Designer Outlet Centre, once opened, will contain around 80 stores (38,600 sqm), at an investment value of EUR 80 mln. Rents have been set at EUR 25 per sqm.
Good to know
The majority of investors across the region remain sceptical about the outlet concept in general, although they might be even twice as cheap to develop than regular shopping centres. "This kind of project should be carried out only by developers experienced in this field. This is crucial for the banks when it comes to financing these developments. In addition to that, they also take a look at the tenants. The rule is simple: the bigger the brands, the better," according to Pavlina Nikova.
For the moment, no more projects have been announced in Bulgaria. In addition to Sofia, the other suitable locations are around Burgas and along the Varna-Dobrich highway - an area with a catchment area of almost 1 mln. "Romania has a limited number of possibilities due to the geographic and demographic landscape, and there is a huge gap between the capital and other large cities. In Romania, it would be difficult to find suitable sites other than around Bucharest," claims Brendon O'Reilly.
Developers are starting to appreciate the potential of the Ukraine, a country with no shortage of aspirational customers. In addition to Kyiv, cities such as Odessa and Dnipropetrovsk are believed to have the potential to sustain outlet projects. The first Fashion House by Fashion House Development is to be opened in Kyiv in the spring of 2010. Plots have been also secured in Moscow and St Petersburg. According to analysts, over the coming years Ukraine and Russia have the potential for a minimum of 30 outlet centres. ?
With Matei Roman contributing from Bucharest