Streetwise shopping

As the big cities across the CEE region become saturated with shopping centres, customers are starting to miss good old-fashioned high-street shopping. Tenants are hunting for high street locations, waiting for their big come-back. But it’s easier said than done.

Mladen Petrov

The opening of the Złote Tarasy shopping centre in 2007 arguably marks the end of big mall developments in the Polish capital for the next few years. While investors can see no more room for growth in this segment – and not only in the capital, but also in the larger Polish cities – retail chains are looking with optimism at the prospect of the re-emergence of high street shopping.

Reality bites

However, there is one question that needs to be answered first: “Is there anything like a proper high street in any of the largest Polish cities?” In most cases the answer would seem to be “not really”. In Warsaw, there is only pl. Trzech Krzyży that could be described as a high street. The potential of the area, however, was identified and pushed not by city councillors, but by the privately-owned Paradise Group, which gave the area a second lease of life with the opening of flagship Zegna and Burberry stores. The square is now the number one choice for every exclusive brand looking for retail space on Warsaw’s high-streets, but the supply in the area remains extremely scarce. “There are several reasons for this – very often the ownership status of the retail units is not clear. In addition, it can be hard to find a larger retail unit, or the buildings are in a very bad condition and renovation constitutes a major cost,” claims Jan Wasilewski, real estate development director at NFI Empik Media & Fashion Group. One of the other significant problems is the fact that the local authorities have no clear vision about what to do with the prime locations, which often results in a diverse tenant mix. This seems to be the case with ul. Marszałkowska in Warsaw. “This street serves as a great example of the lack of development strategy. Once a high street with great traditions, today the main retail is concentrated only around Domy Towarowe Centrum. As for the rest of the street, whoever gives the most money can rent a unit, which accounts for the large number of bank branches and other service outlets,” explains Agnieszka Michalczewska, head of the retail agency at King Sturge. 

Sopot seems to be one of the rare examples of a town co-ordinating the tenant mix on its main street. The owners of retail units on ul. Monte Casino have to comply with the tenant requirements laid down by the town hall, contributing to the uniformity of the street. The larger Polish cities share Warsaw’s problems. On the other hand, in cities such as Kraków and Poznań, where the majority of retail units belong to single owners, the local authorities are able to create a common development plan for the whole area.

Rising stars

Despite the difficulties in finding the right location, retailers remain patient, believing in the potential success of high street shopping. “In the big cities we are getting to the point where customers are getting tired of shopping malls. I firmly believe that we will see the customer coming back to the street very soon as nothing can replace lunch with friends and a day of shopping outdoors,” says Jolanta Brulińska, general manager of Owl International, the company which represents the Max Mara Fashion Group on the Polish market. Brulińska’s company is only one of the numerous firms constantly looking for a hot new location in the capital. Warsaw’s Nowy Świat still falls way below the status of a real high street despite its superior location. Today, the elegant street is occupied mainly by restaurants and coffee shops, which, together with a ban on car traffic, proves something of a deterrent for upmarket brands.

Due to its proximity to pl. Trzech Krzyży, retailers are pinning their hopes on the elegant ul. Mokotowska. In addition, on ul. Bracka, a few metres away from the Armani flagship store, Wolf Immobilien is planning to develop a department store with around 12,000 sqm of leasable space, which should attract more exclusive brands to the area. Where else? According to Grażyna Melibruda, senior negotiator at King Sturge, ul. Świętokrzyska, currently not considered by the premium brands, also has huge potential. “Looking for quality retail space, retailers are even considering some ‘A’-class office buildings, such as the Metropolitan on pl. Piłsudski, but there are not many buildings like this in Warsaw,” she adds. There are have also been rumours about Louis Vuitton and Gucci opening their first flagship stores in the Polish capital on the ground floor of the Złota 44 residential building. If that in fact happens, ul. Złota, despite it also accommodating the Złote Tarasy shopping mall, is not going to turn into a high street. “Retail traditions are of great importance for exclusive brands too, and this particular location is lacking them,” points out King Sturge’s Grażyna Melibruda.

Pricey locations

According to King Sturge’s European Retail Property 2008 report, the rising trend in the rental levels of the capital’s prime locations in the near future will continue. In 2007, 1 sqm on ul. Nowy Świat cost EUR 1,020 a year, whereas two years ago it was EUR 720. Over the last year the price per sqm for retail units up to 100 sqm was between EUR 80-100 a month. The second most expensive city in Poland is Kraków, where the market square, together with nearby streets, continues to attract retail tenants. In the last year, rents in Kraków ranged between EUR 60-80 per sqm, while in Wrocław (ul. Świdnicka and ul. Oławska) and Gdańsk rents varied from EUR 50-70. “The problem with Gdańsk is that Długi Targ, which appears to be the city’s high street, can barely be described as such,” believes Empik Media & Fashion Group’s Jan Wasilewski. Łódź is another big city in which the main street is experiencing difficulties maintaining an upmarket status. After the opening of the Manufaktura shopping complex in 2006, the street was abandoned by some of its retail tenants and new restaurants were opened instead. In Poznań, on the other hand, the success of the Stary Browar shopping mall, which was significantly extended in 2007, made ul. Półwiejska in the city’s downtown more attractive. Another city, which is to benefit from the revitalization of its downtown area, is Katowice, where the planned revitalization of the Katowice Osobowa railway station should increase the traffic between the station and the city’s market square, ul. Stawowa and ul. 3 Maja. While waiting for the revitalization plans to get off the ground, prime rents have steadily been going up by 10 pct a year, with banks – actively looking to be present in the prime locations – boosting the demand and pushing up the rents.

Balkan rental tango

The Balkans are known for their long retail traditions, going back many centuries, which goes  some way to explaining the huge popularity of high street shopping. The rapid economic changes, however, have brought with them new shopping patterns, which in the long run might affect the leading position of the street as the most preferred place for shopping. 

Bulgaria, for example, has been a promised land for developers looking to invest in shopping centres for couple of years now. In Sofia, with a total of 10 malls both already delivered or under construction, the high streets are coming under some pressure. After the first three modern malls were opened in 2006, the rents on the capital’s high streets – such as the prominent Vitosha Boulevard, Patriarch Evtimii and Graf Ignatiev – underwent a slight fall. In 2005, Vitosha Boulevard, the most preferred location for upmarket brands, was ranked 22 in Cushman & Wakefield’s ‘Main Streets Across the World’ report; whereas, in the latest 2007 edition of the study, the street was down 10 places, with an annual rent per sqm of EUR 1,200.

Does that mean that the high street in Sofia is starting to lose the battle with the malls? Marin Kozhuharov, CEO of the Bulgarian-based luxury retailer Capasca, believes that: “We are simultaneously expanding in the shopping centres and on the upmarket street. However, due to the limited supply, we are planning to open up to three new stores in shopping malls. For exclusive retail, however, Vitosha Boulevard is the only option and I am not expecting a major shift to shopping centres.”

Problematic high street retail

At the beginning of 2007, Vitosha Boulevard was pedestrianised. The decision by the capital’s mayor may have been accepted with relief by most Sofianites, but the tenants of the street, however, braced themselves for a fall in revenues. Almost a year and a half on after the ban, the tenants are still on the street and, according to Marin Kozhuharov, despite the figures in the reports, rents on Vitosha Boulevard are still rising. 

In terms of revenues, the retailers present on the high street seem quite satisfied. According to estimates made by Colliers International Bulgaria, however, the revenues of some of the stores in the prime locations went down by 40 pct. “Another reason for that, apart from the traffic ban, was the big success of the two first malls in Sofia – located in the vicinity of downtown Sofia that offered a similar tenant mix to that available in the most popular locations,” comments David Davidov, director of commercial brokerage services at Colliers International Bulgaria. According to Davidov, tenants are not losing interest in high street locations. “It is not an either/or situation – the brands are eager to be present in the shopping malls, but the street as such remains very attractive,” Davidov explains.

Capasca’s Kozhuharov adds that: “Prior to the opening of the first two shopping centres in Sofia, we were concerned that our revenues from the Vitosha Boulevard location would be lower, which didn’t happen. I believe that to be the case with the rest of the stores – the malls are extremely popular, but Sofianites still love their streets as a place for shopping.”

Let’s go to the mall!

The limited supply of retail space in prime locations is not the only problem that retailers are faced with. Pursuing higher rents, the majority of the owners of shops on Sofia’s main streets are reluctant to unify their properties into bigger retail units. After a four year search for a prominent high street location, Inditex choose instead the Carrefour mall, currently under construction on Tzarigradsko Chaussee Boulevard on the capital’s outskirts, for the debut of its Zara brand in Bulgaria. Some other major retailers such as Reserved, Deichmann, New Yorker, C&A and H&M are also expected to enter the Bulgarian market, opening their first stores in shopping centres.

The Cushman & Wakefield’s study, which also covered major streets in Varna, Plovdiv and Bourgas (cities with a large number of shopping malls in the pipeline), also showed falls in rental levels – for example, according to the 2007 report, rents on the main Kniaz Boris I Boulevard in Varna were down 15.8 pct to EUR 960 per sqm a year. This elegant street is home now to everything from small shops with souvenirs and cheap clothes for foreign tourists, to upmarket retail brands such as Lacoste and United Colors of Benetton; but in the near future it is expected to transform into a real high street. Colliers’ Davidov firmly believes in the potential of these cities: “The main streets in Varna and Plovdiv are the most popular places in the cities, as they have long traditions and are entirely closed from traffic. As more brands are eager to enter these markets they will be looking for locations mainly here, which will affect the rental levels.”

Waiting patiently in Zagreb

Croatia is another hot destination for investors. In 2007, two shopping centres were opened in the capital Zagreb with a few other large-scale projects remaining under construction in the city’s suburbs, which are to add around 280,000 sqm of retail space in the next 2-3 years. The favourable economic conditions, however, are not the only reason for the swift development of the retail market. The market, especially in Zagreb, is lacking high street retail space with an occupancy rate of almost 100 pct, according to a Colliers International Croatia report for the second half of 2007.

Retailers looking to expand experience difficulties in finding a satisfactory location, as only 4 pct of the total number of the stores on Zagreb’s high street (around 500 retail units), such as Ilica and the neighbouring Tkalciceva and Radiceva streets and Jelacic square, offer more than 200 sqm of retail space, with the majority of the stores in the prime locations being only as big as 55 sqm. Nenad Peris, key accounts manager at Colliers International Croatia, explains: “Finding the required location on the high street might take even up to 5 years. The chains, which are eager to be present here, have to be very patient. On the other hand, their flagship stores have to be profitable, so they are not willing to pay any price.”

More space, higher rents

Landlords, however, are aware of the huge demand and are showing some creativity in order to attract high-profile tenants. As the Colliers’ report shows, they are also converting 1st and 2nd floor apartments into large retail units with existing ground level stores. Rents in the prime locations remained unchanged throughout 2007, with prices of EUR 80-120 per month per sqm for units of up to 200 sqm, EUR 40-70 for stores with 300-800 sqm and EUR 15-30 for those over 1,000 sqm.

A stabilization of rents is expected to take place at the earliest by the end of 2009, when the completions are scheduled of a few new shopping centres in the capital, satisfying the current demand for retail space. Stabilization, however, doesn’t necessarily mean a fall in rents. “In the long run, I can’t see a possible drop in the rents – on the high street they are going nowhere except up. But on the other hand, we will see more exclusive brands in these locations, which will substitute those going to the shopping centres,” Colliers’ Nenad Peris forecasts.

Running for Romanian money

The retail sector in Romania is another hot topic for investors these days. In Bucharest, which is currently under-supplied with 0.07 sqm of shopping centre space per inhabitant (app. 20 pct of the Warsaw level), by 2009 the amount of modern stock will be triple its current volume. Development outside the capital is also taking off, with every city above 100,000 inhabitants being targeted by developers. “We have to move fast,” says Tomer Barhom, country manager for Romania of the French-Israeli developer, Euromall. Experts estimate that the total value of investment in the retail sector this year will come to EUR 2 bln. As for the retailers, the main obstacle seems to be the lack of retail space, a problem which will partly be solved in 2008-2009, when a significant number of malls around the country are due to be completed. 

High street mismatch

Luxury brands, which tend to avoid shopping malls, are looking for space in prime locations around the country and especially on Bucharest’s Calea Victoriei street, with the section between Bucuresti Hotel and Muzica Store being the most attractive for tenants. However, due to the limited supply of retail space, retailers are also considering opening stores on Victoria Plaza and Calea Dorobantilor. These locations are also preferred by banks, home furnishing stores, car showrooms and pharmacies, which is off-putting for some retailers, but on the other hand, the Bucharest high street is also seeing the emergence of a new phenomenon. In an attempt to secure the most attractive units the retailers are now willing to pay more and offer to the current tenant some capital as an incentive to leave the space before the contract expires.

According to a study by the consultancy company Atisreal Romania, the majority of high street tenants require medium-sized units (between 100-150 sqm) with a leasing period of five years and an option to renew for another five years. High street rental levels have continued to increase slightly over the last year, and currently range between EUR 100 and EUR 130 per sqm a month. Prices are more likely to see further growth as the number of potential tenants is rising, with some international banks also looking to be present in Romania’s prime locations, such as the business-oriented Bulevardul Magheru, which is shown in reports as the most expensive street in the capital (EUR 1,380 per sqm in 2007 according to Cushman & Wakefield’s ‘Main Streets Across The World’ report), but without any major retailers being present on it.

Nevertheless, it looks like that despite the craze for malls, both tenants and customers across the CEE region still appreciate the benefits of the high street and no modern shopping centre is going to change that. n

Contribution by Matei Roman in Bucharest