The Słupsk Factor

Although this round table discussion took ?place before the sudden collapse of ?a number of banks and financial companies in different parts of the world, there was still a chill economic feel in the air, and this was reflected in the cautious approach adopted by most participants, while still expressing confidence in the underlying strength of the Polish retail market and in Polish retailers

Around the table:
Paweł Graliński ?President of architectural design, project management & consultancy company Arch Magic Assoc. Architects. He has 25 years' international experience in Bulgaria, Israel, Norway, Spain, Sweden and Ukraine, and 20 years in Poland. He has won an ICSC award for the design of Sadyba Best mall in Warsaw.

Grzegorz Mroczek
Head of the leasing department at Irish investment group and commercial property developer Caelum Development, where he has been for 3 years. Grzegorz has 10 years' experience in the Polish and international retail market.

Marcin Świdnicki
A legal advisor at international law firm Clifford Chance. Marcin previously worked for German international retail giant Metro Group in the shopping centre management division.

Piotr Kaszyński
Partner and head of the retail department at international real estate consultancy Cushman & Wakefield, Piotr has 10 years of experience in the Polish retail market with the company.

Renata Kusznierska
Regional director of DTZ's CE retail agency, Renata has 9 years' experience in retail, 8 of these with DTZ. She is involved with all major DTZ retail transactions on the Polish and CE markets. She has experience in Poland, Ukraine and Romania.

Robert Nowakowski
Managing director of MGS Retail Service, exclusive consultancy for Mayland, part of the Casino Group, since 2005. He started his career in the early 1990s and has worked in Germany and the Czech Republic, as well as Poland.

Kef van Helbergen
Managing director of Real Polska since September 2007, he was previously with Ahold in Poland. He has worked in Indonesia, Thailand and China, before arriving in Poland ?5 years ago.

Agnieszka Kowalewska
Project manager at Gfk Polonia, the Polish branch of international market research company Gfk Group. On behalf of Eurobuild, Agnieszka is carrying out a survey of tenants in shopping centres, offices and warehouses across Poland to find the best projects from their perspective. She was present to observe the discussion.

Richard Stephens, "Eurobuild CEE": So, is the market good for retailers in Poland at the moment?

Piotr Kaszyński, Cushman & Wakefield: It has been, and for the time being, will be. Retailers have taken full advantage of increased disposable income. The availability of retail space in the last two years has enabled them to expand their businesses. I'm convinced they still have good years. However we are seeing signs of concern, of caution, about expenditure and client base due to the financial climate that is coming our way.
Kef van Helbergen, Real: I find this difficult to answer. If I look at Central & Eastern Europe, Poland's a very peculiar case because there has been no other country which has been able to grow traditional trade over the last five years. Everybody was worried that it would retract due to the fact that all the large players were here. On the contrary, they have grown, and I'm mainly talking about the smaller formats. Modern trade represents less than half of the market. The rest is small Polish companies. Why is it increasing? Because retailers with 400 sqm and under are entering the market of traditional trade. If you look at larger retail, which I represent, you see that there's a shake up going on and it's not finished in my opinion. It's getting better, more realistic and more mature in that respect.

Mladen Petrov, Eurobuild CEE: We see shopping centres coming to smaller cities. With the present financial crisis, what percentage of these projects may fail to go ahead?

Renata Kusznierska, DTZ: At the moment it's not easy to say as the whole wheel has already started, and a lot of projects are looking for financing, so the answer will be in the coming months. In the next 2 to 3 months we will see the first signs of some projects stopping, or the project will change owners. Small developers will not get the financing, so it's a chance for the more experienced developers and institutional investors to get a good project for a slightly better price. A lot of land is currently overpriced, as prices were going through the roof, and it will be good when prices stabilize somewhat and become much more realistic.
Grzegorz Mroczek, Caelum ?Development: I would like to come back to what was happening 2 to 3 years ago. Since then the market has changed a lot. Then a site with a building permit was something very precious and unique for the developer because it meant someone had been working on this for the previous 2 years. The market had just started to recognize 100,000-inhabitant cities for shopping centre development. Then a lot of developers and local businesses started to work on sites to change them for big retail. Then a year ago the WOH law came into force [editor's note: Ustawa o Wielkopowierzchniowych Obiektach Handlowych. The law was enacted in an attempt to stop large-scale developments, but was recently annulled by Parliament] which increased the prices of ?ready-to-go' projects. Everybody heard how much somebody made on a site. It was expensive, yes. In the meantime when "WOH" was reigning in the market, which significantly stopped the development of shopping centres, local business developers and cities as well were asking how much they could make transferring the land into big retail and selling it. During this time the whole retail market had a common enemy, which was this law. Now all the new projects are coming to the market again thinking it's the same timing as a year or two ago, but today if you take cities of 100,000, it's not the same if you have one project or if you have 3 or 4 projects at the same time. This is the biggest change, which means that it will be more difficult for some projects to be carried out today, not only because of the financial climate but also because the new competitive environment hasn't been factored in.
Robert Nowakowski, MGS Retail ?Service: I think MAPIC will give us a summary. I still see the market as good for retail. It's a time to downsize, of hesitation but not very significant hesitation, which is in terms only of expansion ultimately. It seems the current situation hasn't hit retail yields yet. There are still a lot of plans, however many plans need to be confirmed, and I think MAPIC will be the hour of truth. CEE retail will be confronted with what's happening in Western Europe. Now emotions are involved that can create tension as well. Development is very stable and low in the West, in contrast to this region, which is still attractive. The consolidated chains know that there's a lot to do and they are still planning their expansion, but carefully.
Paweł Graliński, Arch Magic: It's good that in recent years retail has come to the countryside. Now we stretch to areas where we know the purchasing power and potential catchment area. Lots of developments are popping up even in very small cities. I'm very concerned about what is happening today. No major infrastructure investments are secured by the government in Poland which can provide the necessary economic pull-out for the whole economy. I was in Scandinavia when the crisis hit in the 80s. You sit in a room like this and the next day the tenants are gone.

Richard Stephens: Do the factors then mirror the factors now?

Paweł Graliński: It was simple - the developers stopped getting credit. It's not happening immediately but of course banks are sharpening their criteria. This is a major thing. Here, for some reason, we naively believe the crisis can't reach us.
Robert Nowakowski: We still don't know the scale of what is going on. Looking back over the last 2 years it's ridiculous in terms of expansion. The amount of shopping centre projects was growing out of control. This is a time when such things will be resolved.
Renata Kusznierska: The market is at a point where it's quite difficult to stop everything because there are a number of projects in process. I think that retailers are looking for expansion. They have discovered that small cities are still very interesting for them, so they have to expand, build a chain, and give a new prognosis for the stock exchange, because some of them are already listed there. So they try to occupy a big part of the country. Also newcomers are looking for space in Poland, which is a positive signal. Newcomers have ambitious plans to open several outlets so there is a need for new projects to make that happen. Each time we do new projects they are fully let so they can't enter immediately. There are almost never empty spaces in shopping centres. So the expansion of new shopping centres is encouraging tenants to enter because they are able to expand. They are looking for expansion of five, ten shops per year, and then the operation is effective. Otherwise they are generating huge costs. What I'm afraid of is project financing from banks because I've heard from some clients that they've already got credit from the banks and actually there is no physical money to be paid. That's the problem I see right now. Hopefully it will change, but this is the issue. The tenants are not the problem; it's the money to fund the projects.
Marcin Świdnicki, Clifford Chance: I agree with that. The tenants are not the problem. Last year was mainly influenced by the unreasonable law, because at this time developers could only develop old projects and new projects couldn't be developed in terms of getting the building permit and starting construction. What we see now is that companies with their own means are the only ones which do not have problems with obtaining financing. They made their pre-let promises and they will continue their investments, but those who are focused on fast development and then a sale of the product, might have problems because the banks are sharpening their financing criteria, which influences the prospective owners of commercial buildings. They are more likely to consider whether to spend money or wait and see how the market develops.
Renata Kusznierska: I think that all these years tenants were still signing quite secure rents, so they are not overpriced. The affordability ratio across the country is between 8-10 pct. But in some centres the average affordability ratio is about 5 pct. Tenants can easily pay 10 pct, so it means that if there is a crisis, they can survive because there is no danger that the costs are so high that they can't manage the shop. So I see a kind of signal that rents will increase and this is what we are trying to do, because the costs of construction have grown dramatically in the last two years and there hasn't been a knock-on adjustment in rents yet.

Mladen Petrov: Do you think this will happen, that retailers will pay higher rents? They obviously don't want to.

Renata Kusznierska: It's a kind of psychology that once they agree to pay EUR 50 per sqm everyone knows about it in the market, but the next day you pay EUR 55. There are already projects where tenants pay higher rents, and there can be higher rents also in the smaller cities, especially now the amount of new projects in the "real pipeline" will fall.
Kef van Helbergen: Poland is not a country of averages. In smaller cities the spending power is there but the shopping profile is completely different. As an anchor in a major mall in a large city you have a completely different mix of products, products which finance other products, which you can't afford to have in smaller formats in smaller cities. So if you run, for instance, a 5,000 sqm store, your model is different, your mix of food and non-food. Then you can't finance the rents that you are paying, for instance, in larger cities.
Robert Nowakowski: The cost of everything is rising. Much of the rise in cost was simply blown up because of the speculation on land plots (Grzegorz: Exactly). You had 10 developers going around after land for a shopping centre in one town simultaneously.

Richard Stephens: Is that changing now?

Robert Nowakowski: I hope so.
Renata Kusznierska: The costs of construction over two years have risen by about 30 pct, and now we have the first signs of change the cost will be adjusted.
Paweł Graliński: In our project management we are indeed experiencing huge jumps in costs, not on a year-by-year basis, but from tender to tender. To cut costs we are turning more to the split enterprise model as we no longer want to accept the general contractor's exaggerated mark up. I believe the present shake up will provide a welcome sense of adjustment.
Piotr Kaszyński: We are approaching an expected correction. We have been seeing very intensive growth in the retail sector. The fact that it will slow down will start the stabilization process. We have seen too many speculative retail projects initiated by companies from different business sectors or totally fresh to the market. The retail market has plenty of existing projects started by qualified developers and that will manage fine. The retailers must carry on with the performance that they have had recently; however, they will be more selective where they lease space. If development slows down and supply shrinks as we have seen in the WOH days, then the rents will stabilize further or will go up. Concerning start-ups, I think there will be some acquisitions to be made and some will not manage to secure financing as they will need additional equity to start. Now is a very interesting time for long term players to be involved in various pre-development acquisitions. The future of many developments will be clearly defined with the yields, which at the moment are yet to be set. Construction costs, exit yields, financing and the Polish currency level will determine how fast new projects will get started and what will be the leasing pace for the next 2 years.
Robert Nowakowski: My feeling is that the market was slightly overheating.

Mladen Petrov: But honestly, do you think a city such as Słupsk, with a population below 100,000 people, can really sustain 3 large retail projects?

Robert Nowakowski: The first one will most likely be the winner...

Richard Stephens: Is it necessarily so, that the first one will always be the winner?

Robert Nowakowski: If we assume that the city is not big enough to support all the developments, the first one to deliver the proper development is always going to have the biggest number of the most interesting tenants. Accordingly consumers get used to shopping in this centre and are attracted to changing their shopping destination only if something bigger and more attractive arrives. That's what we do. We are extending Jantar in Słupsk with an additional 24,000 sqm in to keep the customer's attention.
Kef van Helbergen: I have both in Słupsk and Opole a very interesting situation because we opened two stores there. The funny thing is that customer behaviour doesn't change that rapidly. They will look. Openings are always interesting. Then they fall back to their old behaviour if the retailer is doing his job. I see it. The first week you see a dip in sales in your existing store and then it gets back to normal levels.
Renata Kusznierska: I wouldn't agree that the first one will always win out. I think that the one that wins is the one that delivers the quality and the best tenant mix. That's why among these projects there is a big fight to secure the major anchor tenants, which drives the other tenants to lease space in the shopping centre because such a centre will be sustainable.
Marcin Świdnicki: I agree that from the perspective of the local population that the quality and the tenant mix are the most important success factors. Customers will visit a newly opened shopping centre but will not choose it as their shopping destination if the tenant mix and the product quality are not as good as in the existing centres. It is therefore important for each new project to secure attractive anchor tenants with well-known brands.
Grzegorz Mroczek: I think what is happening in Słupsk is quite unique in the market. When the developers open their projects together this will be a real test for the market. Where is the market establishing the critical point? Where is the bottom line? Right now we have examples of tenants testing the market in cities with populations of 100,000, and we had very good numbers from tenants in Gorzow and Focus Park in Zielona Gora, and the profits and market numbers are supporting the development. They are showing that the numbers are good enough and the market is big enough to take 1 or 2 shopping centres in such cities, but 3? There is a question mark. When all developments are delivered in a city like Słupsk we will get the real answer.
Paweł Graliński: From my experience in a developed economy 30,000 to 40,000 inhabitants can sustain quite a sizable shopping centre. It all depends on the purchasing power. When Poland was moving into the modern era, I was very concerned that there wasn't a solution to the social structure of a country where peasantry perhaps makes up 50 pct of the population. For years we've witnessed a lack of any coherent government programme to address this issue, and the actual percentage of people living in the countryside, who today are living on - basically - subsidies from the European Union, is still very high. What will happen with that sector of the population is critical for the answer to the question about Słupsk. Because Slupsk is not only an issue of how many inhabitants live in the city itself, but the purchasing power of the wider population, the extent of the catchment area and the mobility of the customers.
Robert Nowakowski: That is true, but at the end of the day retailers have to show good figures and they will think twice before they go for such a city. I agree that in a stable economy in a developed market many more developments can coexist together without coming to any harm, but we haven't arrived at this point yet in Słupsk.
Paweł Graliński: Today the question is about positioning. It's not the time yet, but if there is a 4th project in 5 years' time, will the market there still be saturated? There will come a natural development of smaller formats like Kef was mentioning. Still, I believe in the future there will be massive over-regional formats as well, meaning overkill.
Renata Kusznierska: I think that 3 centres can survive in such a city, but actually there is one factor. The timing of delivery of those centres to the market. I don't believe that those 3 centres being delivered at once will not have trouble, because the tenants will feel confused about which one to choose. If the shopping centre is delivered in a period when the other ones are already more mature, the new centre has a kind of "wow factor" of being the latest, so people go to see it. Still, the new centre needs time to establish a catchment area and really get amalgamated into the market. So I don't think the pipeline for 3 or 4 shopping centres at once in a city is healthy for the market, for customers or for tenants. I think that the problem is from the first moment when the city authorities saw the money they could get from the land and the offset they could get from road improvement and so on, and they started to think about where else to acquire money and improve other parts of the city, because actually retail is the most profitable part of real estate. If there is no master plan, there is a danger that the city authority can cover the gap in the budget by offering another site for a shopping centre, without thinking if it's healthy for local trade.
Grzegorz Mroczek: The situation is like an upset. You could see several factors on the market, that the city was preparing 3, 4, 5 plots, not taking care about the timing. They have until the next election, they have their budget, they need the offset, they really don't think about customers in terms of when the projects are delivered, tenants get confused, developers are coming and saying: "we will build, they will not build". A retailer asked me: "Which project should I choose?" and I said: "Wait for the building permit." So this is the test again, but this is quite a dangerous one. The amount of money some developers were pumping into the project was quite significant so it's not that easy to slow down or stop the project.
Kef van Helbergen: Coming back to the remark about rents, there will come a boundary where people will say they can't go further because they can't get the credit any more.
Renata Kusznierska: Some anchor tenants are preparing different formats for different cities. They are not expanding with a regular shape of, let's say 2,500 sqm, but they are looking for 1,200 sqm. This shows how flexible the tenants are prepared to be to be present in smaller towns or cities.

Richard Stephens: How have shopping centre tenant expectations changed over the last few years in Poland?

Marcin Świdnicki: First of all the tenants are becoming more and more conscious of their needs and expectations concerning the shopping centres. They would like to have more influence on the management of the centre, more to say in the marketing - not directly, but in having the right to keep and follow their own marketing and sales policies. It's not as simple as it was 5 or 6 years ago when they would simply adjust to the policy of the centre.
Paweł Graliński: What really matters is what the customer expects. The small cities are getting the same quality of design. The customer has become the worldly man and tenants and developers have to follow. Small city people have seen it all and we have to provide them with high quality shopping, world-class entertainment, food courts etc. What I see as an interesting development is globalization, meaning increased variety of offer in the tenant mix, so what we can offer to the customer will be enriched, the scale will be very aggressive and when somebody operates in 2 or 3 markets then the tools are beginning to be feasible. If someone is only in Poland they can struggle but if they are in 3 or 4 countries they become a global player. A lot may come from China and India. Sweden with its H&M has no exclusivity for success any more. The successful development of Polish retailers is proof of this.

Grzegorz Mroczek: One example which is changing from the retailers' point of view, is that we see the delicatessen market is growing right now. Two years ago players like Piotr & Pawel and Bomi had limited expansion to a few cities. Right now they are expanding throughout the country. This is a big change. The Polish customer really appreciates the delicatessen concept today. Tenants want to expand, they are testing smaller cities of 50-60,000 inhabitants. The test results have been good for 100,000s, so we don't see that it's getting difficult for these tenants to develop.
Robert Nowakowski: We all know that there are tenants on the market financing their expansion through the developers. Full fit-outs and financing of the stock and so on. Here behaviour hasn't changed much in recent months. The real change came in 2003/4 when the slowdown in the economy took place and tenants realized the strength of their own brands, and so started to push their requirements. These requirements are still in place.
Kef van Helbergen: What I look for in our expansion is to partner up with a developer, because you are much more able to synchronize your planning, marketing and organization. You're developing together and I think that's going to happen as things reach an equilibrium. The offer is not as big as it used to be, there's a lot less clarity about future development, even though WOH is not a concern any more, but something will come in place of it. People are still doubtful about what's going to happen, so I think it's important as a retailer to find a few developers. In these cases you need to get "mother guarantees", and this is something that's going to be more and more important as there's less cash in the market.
Robert Nowakowski: The situation is always like that. There are people who are more aggressive, expect more, and there are developers and chains which are playing fair, opening books, declaring their turnover, saying: "This is our market expectation, the costs, and I can pay X amount because my affordability ratio is stretching from this percentage to this percentage." I believe this is healthy behaviour. As a developer I would say that in the future I would put this forward. When things come to money, discussions are getting tougher and I just ask for open books. Why do they simply expect? Those who play fair will be the winners.
Renata Kusznierska: There are some chains which have built their critical mass across the country and now they are focusing abroad to build their chain. That is why they are diversifying their risk, because they are now looking at other places to expand, such as Romania, Ukraine, Russia, sometimes Germany. They are new markets. I've already found that they are paying quite high rents, but are looking for the market position and are quite successful. I'm talking about Polish companies.

Mladen Petrov: Can we really talk about differences between the big city customer and the small city customer?

Renata Kusznierska: Actually, when we talk to people in the smaller cities they are always asking about a number of brands that they really want in their centre because they don't want to have to travel 60 minutes to find them. So if the brand is ready to go to that city it's always successful because people are waiting for it. There is a certain type of tenant which really fits well into smaller towns. For example we have a project in Łomża, where there hasn't been a proper shopping centre, previously consumers had to travel to Białystok or Warsaw, spending too much time.

Richard Stephens: Are the same brands wanted all over Poland, or can you see regional preferences?

Kef van Helsbergen: We did a survey of 6,000 people, where we shopped with them, visited their houses, did questionnaires, and it's a very simple business. We've got five different customer types, also within cities, with different values and attitudes, and with completely different expectations.

Richard Stephens: Do tenants get together in terms of rents and coordinate together, or are you so competitive that you keep your distance?

Kef van Helbergen: I'm working for a stock exchange listed company and we're not allowed to have that sort of contact.
Robert Nowakowski: Depends on the branch. I think at the end of the day tenants negotiate differently...

Richard Stephens: Talking about globalization, we see for example Smyk expanding. Will we see Polish brands increasingly moving into Europe?

Robert Nowakowski: Absolutely. I see it when we travel around. You just go to Romania, Ukraine and see who's opening there. There are 20 brands which are interested in moving there. Polish or Polish-based brands.
Grzegorz Mroczek: This is proof of how good the economy has been for them over the last 7 years. The good times really started for them after 2003 and today ?we can see that some tenants are not really focused, as Renata said, on our markets, where they have over 100, 150, 200 shops. They are looking for new opportunities. It highlights how good the market was for us, for retailers who made good business decisions.
Kef van Helbergen: There's one great reason for caution in that expansion gets quite difficult in itself if you work in a different country, because it is all to do with people, and running one company here and doing it somewhere else is completely different.
Paweł Graliński: Regarding the crisis in the 1980s we thought what was developed at that time was the maximum. ?As time has shown, retail developments, even if slowed, were the least affected, and what has developed since has exceeded all expectations.