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The Warsaw Voice » Real Estate » September 16, 2009
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Ready for a Revival
September 16, 2009   
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"We are pressing ahead with new projects because when the crisis is over the market will need new office buildings and modern shopping malls," Mariusz Kozłowski, director for investor relations and member of the management board at Globe Trade Centre, a developer active across Central and Eastern Europe, tells the Voice's Magdalena Fabijańczuk.

Is the Galeria Jurajska shopping mall, scheduled for opening in October, tailored to the requirements and capabilities of today's tenants?
First of all, Galeria Jurajska shows that a good project will always be successful, even in difficult times. Galeria Jurajska is the first shopping center of this kind to be opened in Częstochowa and it will be many years before a larger or better mall is built in the city. I have to admit that the project was quite a challenge to us because most of the process of renting the property out took place during the crisis. Tenants had their problems as their business costs increased due to a weakening of the zloty. No one had a clue of what lay ahead for us and how the market would be changing. This is why shopping chains also found it more difficult to decide to rent new space. Now, almost 100 percent of the space in our shopping mall has been rented out. We have managed to attract all the best brands we wanted to have in the mall.

The crisis works to the advantage of cheaper brands because consumers have started to save. How pronounced is this trend judging by your talks with prospective tenants?
The assumption that cheaper products will be selling better may not pass the test of time. Thinking in these terms may become out of date as early as next year if a revival begins. This is why at the shopping center in Częstochowa we have a mix of tenants representing high-end and cheaper brands because local residents need both.

Poland is on a long-term growth path. We are trying to catch up with the 15 "old" EU countries in terms of living standards. It is only natural that consumers are choosing cheaper brands because of the crisis. But in the long run there is room in Poland for shopping centers offering products for more demanding clients, those with more refined tastes and deeper pockets.

Globe Trade Centre develops office buildings and shopping malls. Which of these markets would you say is more resistant to crisis?
The chances of a tenant going bankrupt are smaller on the office property market. It is true that for many months we have seen tenants leasing space to subtenants but this does not concern us as the owner of the office buildings. We have signed long-term contracts with our tenants and this ensures us stable revenue. We have reliable tenants: large international corporations and well-known Polish companies. We have not had any bankruptcy, apart from one small company that has suspended its business operations.

In contrast, spectacular bankruptcies among shopping chains have been quite frequent recently. As a result, we have witnessed more movement on this market. Of course, much depends on the property-at the Galeria Mokotów and Arkadia shopping malls in Warsaw there is always a line of prospective tenants eager to rent space. Shopping centers in small cities where the investors have overestimated the size of consumer demand are having the greatest problems. [The northern city of] Słupsk is one example. At one moment, developers planned to build four large shopping centers in this small city with a relatively small purchasing power.

Has Globe Trade Centre been affected by the crisis?
Before the crisis started we had collected quite a lot of cash. We had conducted two bond issues worth around 300 million euros in total and sold two properties in 2007. As a result, when the crisis came and banks were reluctant to provide funding for new investment projects, we had some 200 million euros in cash and were able to start new projects. Later, after securing a sufficient number of tenants for the new properties, we also received funding from banks. Luckily, our presence on the housing market had not been strong so we did not enter the crisis with a large number of unsold apartments. We had not bought land at peak prices so we were not forced to suspend construction work. We only needed to adapt the pace of completing successive project stages to market demand and the pace of renting out new space.

Which cities are the most promising for developers of modern shopping space and what locations have you chosen for your new projects?
Around 18 months ago, many developers started to invest in shopping centers in cities with populations below 50,000. In connection with the crisis, this expansion will slow and investors will return to larger cities so as to expand existing premises and build new ones. Poland's entry to the European Union [in May 2004] resulted in increased migration from rural to urban areas. As Polish cities grow so do opportunities for developers. Even Warsaw is still not saturated with modern shopping space. The greatest shortages are in the districts of Wilanów, Białołęka and Bielany.

The fact that the development of shopping centers is concentrated in large cities is also due to strategies pursued by tenants. Large brands, such as Zara, for example, have special thresholds for city size and purchasing power and do not open stores in cities below these thresholds. As a result, for the time being no Zara store can be seen in a city with a population of 50,000.

It seems to me there is room for a large modern shopping center in Gdynia, and ŁódĽ will also need a new mall in a few years, although the Manufaktura center opened there recently.

What are you focusing on at the moment and what are your plans for the future?
The role of the housing sector will certainly decrease in our portfolio. The rise in Globe Trade Centre's business on this market in recent years was due to the huge residential boom of 2006-2007 when developers were able to sell homes that were still under construction, and their gross margins ranged from 25 and 40 percent. I believe that the residential market will bounce back but the boom of 2006-2007 will not repeat itself. Moreover, the residential sector will now be consolidating. Economies of scale are more important here than on other markets. Nowadays, residential building requires large outlays and the involvement of the developer's own capital. It is difficult to operate on a large scale in the commercial and residential sector at the same time. We are focusing on office buildings and shopping malls. At present, we are building 15 shopping malls in eight countries in Central and Eastern Europe. Our goal is to build a chain of around 20 modern malls under the brand name "Galeria," which is already well known. I think we will achieve this goal in three to five years.

Does this mean that Globe Trade Centre expects the crisis on the property market to be over soon?
There is still some uncertainty and pessimism at the moment. But next year shopping chains will start looking for new locations for their stores. Companies will have problems renting new offices because few new projects have been started over the past 12 months, and this means we will have a major shortage of supply two years from now.

However, at some point during the crisis one needs to take a deep breath and assume that the market will soon rebound because a construction project takes some 14-18 months to complete. When the market revives other developers will also start their projects and then it will become more difficult to rent out properties.

Have you already taken a deep breath?
We are pressing ahead with new projects. Next year, we are going to complete three new office buildings: Platinum Business Park in Warsaw, University Business Park in ŁódĽ, and Francuska Business Center in Katowice.

I am sure this fall we will see much activity among tenants, especially as many companies have postponed their decisions since October last year. All economic indicators show that a revival is coming. As a result, it will now be easier for companies to make decisions to expand.
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