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The Warsaw Voice » Real Estate » November 12, 2008
COMMENTARY
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Market Development in Central and Eastern Europe and Poland
November 12, 2008   
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The Central and Eastern European market-with 127 million potential customers-is one of the most attractive areas to invest in commercial property.

Poland, with a market share of 53 percent, is the unquestioned leader in terms of the supply of modern retail space in the region. The shopping center market in Poland is developing dynamically, as evidenced both by the figures and by a qualitative analysis of evolutionary trends in this sector. Poland currently has 8 million sq m of retail space, including over 73 percent in shopping centers and more than 19 percent in standalone hyper- and supermarkets and DIY stores. Retail parks have an increasing share in our market, now accounting for less than 8 percent of modern retail space. Outlet centers provide less than one percent of this kind of space. A total of 825,000 sq m of space came online in 2007, up by 44 percent on the year before. Another 1.4 million sq m is under construction, and the supply of retail space in 2009-2010 is expected to stand at 1-1.7 million sq m.

The Polish shopping center market is evolving both in geographical terms and in terms of quality. Since mid-2006 developers and investors have been focusing on new retail locations, that is, medium-sized and small towns with population of around 100,000 and below. The reason behind this trend is that attractive investment areas in such locations are relatively easier to find, competition in the segment of modern shopping centers is not too strong and the potential of these towns and the spending power of their residents show a steady upward trend. The next few years will see new completions in such towns as: Lublin, Zamość, Przemyśl, Rzeszów, and also Włocławek, Zielona Góra, Kalisz or Jelenia Góra, Lubin, Kłodzko and Świdnica. A number of centers planned for 2009-2010, like Bonarka in Cracow, Felicity in Lublin, Port Łódź, and Gdańsk Shipyard Center, will have 70,000-100,000 sq m of letting space and 200-250 tenants each. Commercializing facilities of this kind in Poland is a major challenge as you have to attract almost all retail chains operating in the marketplace.

New developments primarily include mixed-use and ambitious retail schemes. Many of the new projects are incorporated in plans for regeneration of post-industrial urban areas or inner cities. Fourth-generation centers already offer a range of functions, from retail and service, entertainment, culture, to hotel and office spaces. Centers belonging to Irish Development Group in Toruń, with 35,000 sq m of space, or in Białystok-50,000 sq m, provide good examples. What is also important is that every new mixed-use center involves an investment of the order of zl.20 million in municipal infrastructure (roads, transport, sewerage systems, and so on.) Without such schemes local budgets will not receive financial injections they so badly need.

Average rents for a retail outlet with a floor space of 100-150 sq m in a shopping center located in one of Poland's major cities range from 45 to 55 euros per sq m per month. Higher rents are charged in the capital, where one square meter of space costs the tenant 80-90 euros per month, DTZ data shows. The highest monthly rates for one square meter of leased space are those for retail facilities located on prestigious streets.

The past few years have shown that high quality mixed-use centers are a driving force for Poland's economy. They boost the development of modern retailing, consumer services and foreign expansion of Polish retailers, especially in the fashion sector. The demand for new retail space in Poland continuously shows an upward trend. Polish consumers like shopping and their spending power has been growing by around 20 percent annually over the last two to three years. Development of mixed-use infrastructure, including retail, will undoubtedly be an important element in Polish preparations for hosting the Euro 2012 soccer championships.

Globally, the entire Central and Eastern Europe region still remains a very important area to invest in the commercial property sector. The markets of all countries in the region are developing at an increasingly fast pace, with some of them are already catching up with Western European levels. In terms of rates of return this is also true of Poland. Even so, this country's attractiveness for investment is not declining because centers expand into smaller towns and Polish society still holds considerable potential for the shopping center sector. What can be observed, though, is that different locations are being chosen for new centers and that new types of centers are appearing. With high levels of market saturation in big cities, new formats are being developed, such as outlet or convenience-type centers.

What is characteristic of Central and Eastern Europe is that new retail facilities in the region represent very high quality. Progressive market saturation reveals the importance of strong profiling. Investors try to equip their centers with unique elements to set them apart from competition. Hungary and the Czech Republic are important and attractive markets, while Romania and Bulgaria still provide fewer market opportunities, although the situation is changing at a dynamic pace. Ukraine is one of the most interesting new and upcoming markets in the region. With a population of nearly 50 million, it is becoming increasingly attractive to investors because of the growing spending power of its residents and low levels of competition on the retail space market.

The economic situation of the region and of the individual countries always has an impact on investment security. With a certain development level and stability, the shopping center market develops independently from temporary financial swings. The supply-demand ratio is what matters most, while the economy on a global level has a lesser impact on local strategies of development companies. Under a risk diversification strategy, they often draw funding from various sources located in various parts of the world. This is why, for the time being, no major dangers lie ahead for the development of the shopping center market in Central and Eastern Europe.

Renata Kusznierska, Central Europe Director for DTZ
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