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The Warsaw Voice » Real Estate » February 23, 2010
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Return of the Tenants
February 23, 2010   
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There will be no spectacular new mall openings in 2010, rents on the retail market will stabilize by the end of the year and retail chains will return to expansion plans that were frozen amid the crisis, analysts predict.

Last year, though a time of crisis, was a busy one on the shopping mall market. According to Jones Lang LaSalle real estate services company, the total supply of new retail space in 2009 was 656,000 sq m. The malls opened last year were the result of decisions made earlier, in 2004-2005, the years of plenty. In comparison, 562,000 sq m of modern retail space was opened in 2008, while just 429,000 sq m is planned this year.

Giants of 2009
The biggest projects of 2009 were Bonarka in Cracow (91,000 sq m), Galeria Malta in Poznań (52,000 sq m), Galeria Jurajska in Częstochowa (48,000 sq m) and the first part of IKEA Port ŁódĽ (33,000 sq m). Finding tenants was harder than a year or so earlier. Retail chains started revising their development plans in a big way from the start of 2009. A few bankruptcies were declared, some tenants moved out of their rented premises at existing malls. Agents had to work twice as hard to finalize leases. Negotiations still take much longer, because tenants take a lot of time checking out projects and studying the fine print in their contracts. Often, they suggest extra clauses as well.

This is unsurprising, since decreasing demand has affected retail chain sales, making companies react immediately by restricting their development plans. It becomes a vicious circle: no tenants, no new malls. Developers have put many projects on hold, though Anna Bartoszewicz-Wnuk, director for research at Jones Lang LaSalle, says, "The construction of malls that were halted by the crisis will have to start before the end of this year."

The past year has also changed Polish consumers' shopping habits. "Poles have switched to cheaper brands," says Małgorzata Trzaskowska, retail director at Colliers International real estate services company. "There is a group of people who buy even their clothes at stores like Tesco. Outlet and second-hand stores are very popular, as places where you can find brand-name clothing but for a better price. All this means lower sales figures for expensive brands, which have reported decreases over the past year or so."

Bartoszewicz-Wnuk shares this view, saying, "There is still a trend of consumer interest in cheaper brands, thanks to which supermarkets are developing more quickly than delicatessens. Tenants from the leisure sector (movie theaters, bowling alleys etc.), home improvement and electronics are also more careful and join a project only if the price is very good."

However, Bartoszewicz-Wnuk adds that "tenants are clearly regaining their confidence and this is a very good sign. Previously, they halted their expansion, today they are drawing up new development plans. There is a growing interest in Poland from retail chains, also those that have yet to enter our market."

Big Three for 2010
The largest upcoming project, due to open this spring, is the second part of IKEA Port ŁódĽ. The first part of this project, an IKEA store, opened in the fall of 2009. The total space for rent will be 100,000 sq m. IKEA Port ŁódĽ is located on the outskirts of ŁódĽ, on Pabianicka Street. It will be home to about 200 stores, including a Leroy Merlin home improvement store, clothing and footwear stores Zara, Bershka, Pull&Bear, H&M, C&A, Kappahl, Reserved, CroppTown, House, Mohito, Cubus, Benetton, Solar, Bytom and Ryłko; electronics and appliance stores: Sony Centre, Saturn, RTV Euro AGD; and sports stores EXIsport and Sizeer. The complex will include a parking lot above ground and an underground garage, with free parking spaces for a total of 4,500 cars. At the heart of the center there will be a leisure/retail space with a play area, a stage and a garden with trees, occupying 10,000 sq m.

Another big opening is scheduled for the summer. Galeria Victoria (43,000 sq m) will be the first modern shopping and entertainment complex in the southwestern city of Wałbrzych and the region, with accompanying hotel and residential facilities. It will also be the city's first shopping center with a multiple-screen movie theater (Cinema City). Galeria Victoria will stand on a 10-hectare plot at the intersection of 1 Maja and Skarżyska streets in the center of Wałbrzych, on national highway No. 367 leading to the border crossing with the Czech Republic in Golińsk. The two-level mall will include a 4,800-sq-m Carrefour hypermarket. A unique element in this project will be a public amphitheater to be used for outdoor concerts in the summer and as a skating rink in the winter. The developer of Galeria Victoria is Keen Property Partners Retail.

The last of the big three for 2010 is Turawa Park, a project by Helical Poland, a company specializing in the construction of large stores and shopping centers. It will open in the fourth quarter of the year on a 15-hectare plot in the northeastern part of Opole. The complex's 41,000 sq m will be home to over 70 stores. The project is worth an estimated 75 million euros. The general contractor is Skanska. The main tenants of Turawa Park are Carrefour and Praktiker.

Real estate analysts say that 2011 will see even fewer new projects opened than this year. "Today everything depends on financing," says Trzaskowska of Colliers International.

"Banks are very cautious about lending money for commercial projects. Just a few years ago the retail segment was among the most attractive real estate for banks. Today they demand a pre-lease figure of 50-60 percent. In addition, the contracts have to safeguard the investor, and therefore the bank, on very good terms, preferably with high rent and for 5-10 years, without the option of an earlier termination of the contract."

Signs of new transactions
From the viewpoint of the retail investment market, 2009 was a time of waiting on the part of buyers and vendors alike. The financial crisis and the economic slowdown made funding less easily available and reduced willingness to take risks. Analysts predict that 2010 will bring a revival on the retail investment market. Bartoszewicz-Wnuk expects a larger number of transactions in the second half of the year, as they will take several months to conclude.

One sign of improvement is a January transaction involving the sale, by the Mayland shopping center developer, of the Karolinka mall in Opole and the Pogoria mall in D±browa Górnicza to the MGPA Europe Fund III, together with an option on a third mall in northern Poland. This transaction was worth 236 million euros. In 2008 alone, Mayland opened three shopping centers in Poland as well as starting work on three new projects, in Słupsk, Cracow and Szczecin. The malls from the latest transaction are 98 percent leased out. Last year 6.5 million people visited Karolinka and 4.8 million visited Pogoria.

A month later, the news came that French-Dutch developer Unibail-Rodamco had reached an agreement with U.S.-based Simon Property Group and Canadian-based Ivanhoe Cambridge on the acquisition of seven shopping centers in Poland and France. These include Warsaw malls Arkadia (over 103,000 sq m) and Warszawa-Wileńska (35,400 sq m). The total price for all seven malls is 715 million euros.

Analysts point out that final buyers of projects are also cautious and want to make sure they minimize their risk. "Investors are interested in the best existing projects that are already well rented out and generate income," says Bartoszewicz-Wnuk. "It is safe products that are selling now."

Potential in need of investment
Most leading developers finalized their projects last year. Today they are looking for new land to develop and conducting conceptual and preparatory work. "Developers follow different strategies," says Bartoszewicz-Wnuk. "Some focus on large cities with populations exceeding 170,000. The main market for them is Warsaw, but they are also interested in Szczecin, Lublin, Rzeszów and the Tricity [of Gdańsk, Sopot and Gdynia]. Some investors are considering building several small, community shopping malls, 7,000-10,000 sq m for local residents. Others plan to expand existing malls."

According to Jones Lang LaSalle, the highest saturation with modern retail space is in the conurbations of Poznań (601 sq m per 1,000 residents), Wrocław (557 sq m) and Warsaw (496 sq m). Bartoszewicz-Wnuk highlights the special situation of Warsaw: if you also counted all the people living here but not registered as residents, the saturation of Poland's capital with retail space would be much lower.

This means Warsaw has great potential in terms of building new shopping malls. Since the opening of Złote Tarasy in early 2007, Warsaw has not seen any major mall opening. Meanwhile, the city includes districts where huge residential estates have sprung up over the past few years, with thousands of people moving into the new housing. The leader here is Białołęka. The needs are also substantial in Wilanów, and residents of Ursynów lack a big mall as well, driving to Galeria Mokotów to do any bigger shopping. Trzaskowska also points to Wawer and Rembertów, expanding districts on the east bank of the Vistula river.

"In recent years the cost of plots and numerous protests against new projects in Warsaw have effectively scared off developers, who have turned to regional cities instead," is how Trzaskowska explains the lack of new projects in Warsaw, adding that there is great potential in smaller towns. "The crisis interrupted investors' expansion in this direction, but I am sure they will return to small towns, where there is demand and no competition. Many former provincial capitals, like Krosno or Tarnobrzeg, lack a proper shopping mall, while people no longer want to lose time driving for dozens of kilometers to shop in the next town. Local governments also understand that a shopping mall can be the pride of a town and increase its importance. Besides, when building a mall, developers often agree to build a new roundabout or renovate a local road. That's why I believe that, maybe not at once, but in time, developers will return to smaller towns with their projects."

In Warsaw, Polnord is getting ready to build a shopping center in the residential estate of Miasteczko Wilanów. The project is being designed by the M±ka Sojka Architekci studio. The exact surface area of the mall is as yet unknown, but the investor has said it will be no more than 60,000 sq m. Polnord hopes to have obtained all the necessary permits by the end of this year.

Rents: stabilization, then upward trend
Due to the high supply and dropping demand for retail space, rents showed a downward trend last year, with the greatest decreases reported in the last quarter. Cushman & Wakefield predict that this downward trend will reverse in mid-2010 on most European markets, but a steady rise in rents for retail space probably cannot be expected sooner than 2011.

The highest rents at shopping malls in 2009 were as follows: in Warsaw, at about 80 euros per sq m, Cracow - 44-46 euros, Poznań and the Tricity area- 40-43 euros, Wrocław and ŁódĽ - 40-42 euros per sq m (data from Colliers International).

"The most popular malls, like Złote Tarasy and Arkadia, have suffered the least from dropping rents," says Trzaskowska. "Even if a tenant moved out of such a mall, a new one was found quickly, prepared to pay the same rent for the space." She adds that rents should stabilize by the end of the year. "Due to the small supply of new projects, they could even go up slightly, because tenants will show determination in vying for the best space."
Magdalena Fabijańczuk

Value-for-Money Brand Names
Bożena Gierszewska, shopping center management director at Neinver:
In the current market situation, outlet centers are becoming an attractive option for customers who don't want to stop shopping for brand-name goods. The number of people visiting Outlet Factory stores has increased compared to the previous year. In 2009 we reported month-on-month growth of up to 30 percent in the number of shoppers. We are also seeing a continuous increase in sales at all our centers.

Customers are attached to brand-name products and appreciate the fact that outlets - despite the crisis - offer them such products at good prices. Our marketing highlights the value for money in terms of the quality of products offered at our centers and the prices. Awareness of the Factory brand has been rising consistently, and therefore also awareness that this is where you can find products at prices reduced by 30-70 percent all year round.

Looking at the results of individual segments, the biggest increase in sales has been at stores offering footwear. At the Factory Ursus center, the children's segment reported the greatest increase in sales (as much as 30 percent), chiefly as a result of expanding the center's range in this product segment.

As for the Factory center in Wrocław, we are seeing a growing number of customers faithful to specific brands, that is, the number of visits to stores has been similar to the year before, but sales are growing steadily.

As a result of outlet centers' positive results, we have seen new brands becoming more interested in the centers.
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