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The Warsaw Voice » Real Estate » March 5, 2008
The Real Estate Voice
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RETAIL PROPERTIES: Investment Falls but More Retail Space Completed
March 5, 2008   
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Investor activity on the commercial real estate market decreased last year in comparison with 2006, but 40 percent more modern shopping space was completed. Some 30,000 transactions were concluded for 740,000 sq m of retail space worth 1.6 billion euros.

The volume of transactions decreased due to a low number of large-portfolio deals and the impact of the credit crunch linked to the U.S. subprime mortgage crisis, which restricted the availability of financing and pushed up costs. Investors became more cautious and many are waiting for a market reaction this year. However, the basic indices for the real estate market, such as strong tenant demand, high GDP growth and increasing rents, remain good, and even higher activity is expected this year. The present capitalization rates in the best locations are 5.6 percent, although there were no sales in these locations in 2007. If such properties go on sale this year, slightly lower capitalization rates can be expected.

As a result of the credit crunch, investors who use a large amount of external financing are encountering greater difficulties in obtaining profits, given the higher financing costs, and are sometimes unable to obtain loans due to higher bank fees and lower loan-to-value ratios. As a result, the main players on the market are buyers with a bigger share of their own capital. In 2007, the most active investors in the commercial real estate sector included those from Britain (Pradera, Catalyst, First Property and Dawnay Day), France (Klepierre and AEW), Germany (Deka and Credit Suisse), Austria (Akron and Meinl), and Ireland (AIB Polonia, Caelum Development). Funds from outside the European Union also had an influence on the market, mainly due to Australian company Macquarie CountryWide Trust's purchase of five shopping centers from Simon Ivanhoe for 232 million euros.

The 1.6 billion euros invested in retail properties in 2007 was 59 percent of the 2006 figure and 82 percent of that in 2005. Portfolio transactions accounted for 48 percent of total investment volume in 2007. In the biggest single transaction, French fund AEW bought Warsaw's Wola Park shopping center from Ivanhoe Cambridge for 146 million euros. Prospects for this year look promising due to the strong demand observed in January and February and a significant number of transactions that are still in the negotiation phase.

Nearly 800,000 sq m of modern retail space was completed last year in Poland. Higher developer activity was particularly visible in the shopping center sector, which accounted for 80 percent of the completed modern space. The largest facilities completed last year include Magnolia Park and Pasaż Grunwaldzki in Wrocław, Złote Tarasy in Warsaw, Auchan Rumia near Gdynia, Forum Gliwice near Katowice, and Galeria Bałtycka in Gdańsk. It should be noted that last year, 38 percent of modern retail space was completed in medium-sized cities.

At the end of 2007 there was more than 7.5 million sq m of modern retail space in Poland (197 sq m per 1,000 residents), of which two thirds was in the eight main conurbations (Warsaw, Cracow, ŁódĽ, Wrocław, Poznań, Upper Silesia, Gdańsk-Sopot-Gdynia and Szczecin). In the Warsaw metropolitan area, there was more than 1.5 million sq m of modern retail space at the end of 2007. In 2008-2009, the supply of modern commercial space is expected to grow in Poland, both in large conurbations and in medium-sized and small cities. It is estimated that over the next two years, more than 3 million sq m of new space will be completed, and only 43 percent of that will be in the biggest cities. The launch of some facilities may be postponed until 2009 due to the complex administrative procedures surrounding the construction of large retail facilities in Poland.

Demand for modern retail space is growing, particularly in medium-sized cities (population over 100,000), where shopping centers are being built in central districts. Smaller cities (population 50,000-100,000) are also enjoying growing interest from retail chains, but the number of these chains is limited. Due to strong demand, vacancy rates remain at a low level of 0-3 percent in most locations, but in the more competitive markets it can be difficult to rent out space in facilities in peripheral locations.

Rents are directly linked with a given market's buying capacity. Due to significant differences between the buying capacities in big conurbations and regional cities, the rents are greatly varied, ranging from 20 to 95 euros per sq m per month.

Developers are increasingly interested in the main shopping streets in the biggest Polish cities, and the first investment projects are already visible. Projects to renovate and extend old shopping centers such as Renoma Wrocław, and to modernize and adapt downtown tenement houses for retail, are beginning to move ahead. There are also plans to build new luxury department stores like DT Braci Jabłkowskich in Warsaw. The first facilities should be completed in late 2009 or early 2010, and Półwiejska Street in Poznań may become an example of a highly attractive shopping street.

The prospects of new investment in this market segment are attracting the interest of luxury shopping chains seeking new locations. Luxury retail areas are appearing, such as Trzech Krzyży Square in Warsaw, which boasts Hugo Boss, Max & Co., Ermenegildo Zegna, Burberry, Escada, Max Mara and Emporio Armani stores. Rents on the main shopping streets remain stable, at an average of 50-55 euros per sq m per month and 90-95 euros in most big cities.

Poland has nearly 300 shopping centers with a total area of 5.5 million sq m, as of the end of 2007. Over 1.9 million sq m of this is located in medium-sized cities, with the other 3.6 million sq m in the eight biggest conurbations. Projects completed in late 2007 include Galeria Askana in Gorzów Wielkopolski, Galeria Biała in Białystok and many smaller facilities in regional cities, such as Galeria Dębica in southeastern Poland.

At the end of last year, some 860,000 sq m of shopping center space was under construction, with 69 percent of that outside the biggest cities, signaling a significant shift of developer activity to regional cities. The biggest projects under construction include Galeria Malta and Galeria Pestka in Poznań, Focus Park Bydgoszcz, Karolinka Opole and Auchan Szczecin. Smaller facilities are also being built, such as Galeria Wisła Płock and Alfa Białystok. In addition, over the next two years, developers plan to build shopping centers of a total of 2.1 million sq m, mainly in medium-sized and small cities such as Jelenia Góra, Łomża, Przemy¶l, Ostrów Wielkopolski, Piła, Nowy S±cz and Słupsk.

Demand for space in shopping centers is created mainly by food and clothing chain stores planning expansion into new markets in regional cities. Their strategy involves reaching those consumer groups who so far have traveled to the neighboring big cities to do their shopping, are familiar with trademarks and are enthusiastic about having a new shopping center nearby. Shopping centers with a solid position on the market in big cities enjoy stable demand, due to the relatively high purchasing capacity of local consumers. Due to the shift of developer interest to medium-sized cities, a significant diversification of rents in shopping centers can be expected. The market still sees record rent transactions with 60-65 euros per sq m in big cities, while in medium-sized cities the highest rents reach 35-37 euros. This process will continue along with the commercialization of facilities in smaller regional cities.

The process of consolidation of the food sector in Poland continues, involving smaller market players. Last year, Portuguese company Jeronimo Martins bought a portfolio of 210 Plus discount stores in Poland. At present, there are nearly 200 hypermarkets in the Polish market, most of them located in shopping centers, as well as several thousand food supermarkets and discount stores in freestanding buildings in large residential districts and small towns. Carrefour and Tesco were the most active hypermarket chains on the market last year, with Real and Auchan developing at a slower rate. The most active food supermarkets and discount stores include Biedronka, Kaufland, Lidl, Tesco and Carrefour. In the specialty food store sector, Polish chains Alma, Bomi and Piotr i Paweł are creating demand for space in downtown shopping centers and new residential districts. They also build their own facilities. Rents for hypermarket space remain stable at 6.5-7.5 euros per sq m per month. Rents for supermarket space are growing due to high demand, reaching 7.5-13 euros.

The non-food sector
Large-area non-food stores have developed in Poland since the late 1990s, mainly in freestanding facilities. Most are DIY stores, with Castorama as the leader, followed by Leroy Merlin, OBI and Praktiker. These chains are now developing in medium-sized cities, adjusting the store size and product range to the local markets. In smaller markets, Bricomarche and Nomi are competing with the leaders. Also, the process of grouping large stores to create suburban shopping parks in the biggest cities continues. IKEA is systematically extending its facilities (for example, IKEA Bulwary Poznańskie) and planning a new project, IKEA Port ŁódĽ. Auchan is also active on the shopping park market. It is extending its existing shopping centers in phases, adding large-space non-food stores and creating large suburban shopping complexes.

At the end of 2007, Poland had 1.4 million sq m of large non-food stores, of which 26 percent were shopping parks. A further 520,000 sq m was scheduled for completion by 2009. The group of developers active in this market segment was joined by Neinver company.

Demand for space in shopping parks remains at a medium level due to the limited number of chains and delays in the modernization of the road and transport infrastructure in Poland, which makes access more difficult. Rents for large non-food stores are at around 6-7.5 euros per sq m per month.

Last year brought about a further development of factory outlet centers in Poland. Factory Luboń near Poznań was completed, and the construction of Factory House Sosnowiec began. Neinver plans more investment in Cracow and Warsaw and an extension of existing facilities. At the end of 2007, Poland had six factory outlet centers with a total area of 70,000 sq m, with a further 6,000 sq m under construction, and 77,000 sq m at an advanced design stage. Limited demand for this type of space encourages developers to build facilities in stages. Monthly rents for such space are around 18-23 euros per sq m, reaching 27 euros in the best locations.
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