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edition 4 (219)
April 2017
Investment & finance

Twenty-twenty vision

It has been 20 years since ECE came to Poland – the first market the company entered outside Germany

Rafał Ostrowski

Twenty-twenty vision
Alexander Otto, the CEO of ECE

ECE – the pan-European real estate giant run by the Otto family – manages an impressive portfolio of 200 shopping centres across Europe. We asked Alexander Otto, the CEO of ECE, about the direction the company is taking to sustain its positive development in the next twenty years

Rafał Ostrowski, Eurobuild CEE: Let me start with a personal question. You have been heading ECE since 2000. What would you consider to be ECEs greatest achievement of the last two decades?

I think the key achievement was that we have come all the way from being a company that was active only in Germany to spreading our business across 14 countries – the internationalisation of ECE has been a very successful process for us. We opened Galeria Dominikańska in 2001 – this was the first international centre we developed. ECE has grown tremendously well over this time. We have had very good financial development, but most of all we have built up an extremely good management team that is open to constant change and development, that has never stopped learning and that is set up very well for another successful twenty years.

How has your perception of Poland changed since you entered this market?

Initially, it was quite entrepreneurial to start off in a country where there was no fixed retail structure and it also meant some cultural changes to us as a company. When we started, there was a lot of development in the market and a lot of new ground to break at that time. In the beginning, it was challenging for us to judge which were the best retail formats – and those that Polish consumers also enjoy making their purchases in. The market has since developed tremendously and has become highly professional. Some retailers have really turned out to be winners and also a strong network of Polish retailers has developed and grown over time, such as the LPP group, for example. So now it is an extremely professional and transparent market, and we can see that many international investors are showing great interest in investing in Poland, such as our ECE Funds, for example.

It is rumoured that some German investors have decided to suspend further investment in Poland. Since you work with German funds, could you tell us what the state of play actually is?

I certainly cannot comment on behalf of others. But we can see that quite a few German institutional clients have been interested in buying assets in Poland and have been active already in the past few years. So at the moment the truth is quite the opposite – there really is a very positive view of Poland and there was a significant growth in sales figures last year for existing Polish assets. There is strong interest in expanding and investing in Poland, but there are not many opportunities available on the market and few very good prime assets – not just in Poland but across Europe in 2016. So I also guess that the right opportunities will just have to arise.

What is the scale of investment that ECE or the ECE Funds are planning for Poland in the next couple of years?

It is difficult to specify. There is another EUR 1 bln available to be invested in Europe through the ECE Funds and other vehicles. Of course, in the end this will all depend on where interesting opportunities arise. So it is extremely difficult to comment on any specific transactions.

Where will you invest in the main cities or in smaller ones?

At the moment we are happy with our focus on the top ten cities in Poland and in general we will not spread the focus and divert much from this strategy. But of course we will look at every opportunity individually and so I wouldn’t rule out looking at the top twenty cities in Poland as well.

You mentioned prime assets, but what about distressed assets? Do you also have a strategy for acquiring properties that are maybe not 100 pct leased?

We have done this in the past. In Germany we bought a virtually empty centre with almost no tenants left. This was Marstall in Ludwigsburg in the south of Germany. After a complete refurbishment it turned out to be very successful. But this actually depends on the individual locations where we can really change some key aspects of the centres to make them successful. There has to be real potential for adding value to the assets. We would definitely not acquire some distressed asset in a completely oversaturated market just because it was really cheap but without any value-add potential.

Are you now planning to act only through your investment funds and acquire new developments as a fund manager, or is ECE going to act as an investor and owner?

We are very active in many different ways. We continue to be active as a classic developer. Secondly, the ECE Funds follow the strategy of buying centres with value-add potential. Usually the types of centres that are stabilised and absolutely prime tend to be too expensive. And then we work with publicly listed companies, and very closely with Deutsche Euroshop – a company that is particularly interested in buying stabilised prime centres and in which my family is the largest shareholder. And we also work in joint-ventures together with other institutional investors. So we do have the option of a number of different models.

But the preferred model would be what?

Preferably, we work with our partners while we ourselves have a minority share as well. It shows that we are committed, that we have invested ourselves in these assets because we believe in them, and that they have the right quality. We think management and ownership predominantly goes hand-in-hand and we believe that is how we can deliver the best results for our clients.

Sometimes you are the majority owner, but more often you are a minority owner. Which model will you follow in the future?

Given the investment sums and how capital intense our business is, and that we have more than EUR 30 bln of assets under management, we usually are a minority owner – in Poland this share is normally in the range of 10 pct to 25 pct. However, there might be cases similar to the new asset we have in Verona, which opens at the end of March. We are the 100 pct owner and in the long term we also want to remain the majority owner. So the model is very much dependent on the availability of capital and also where we see the most growth possibilities in the future.

And do you expect to grow through mergers or by buying other companies?

This is possible in general and we have done so in the past, so I will not rule it out completely, but generally our best experience has been with organic growth.

In 2014 you sold Galeria Dominikańska in Wrocław. Will you be selling more centres?

We also cannot rule this out, but it is not our prime focus. In principle our goal is actually to own large and dominant shopping centres that ideally have the number one or number two positions in their respective markets. Now Dominikańska, while being an excellent asset in a very good location, is a little bit smaller and didn’t really fit into our strategy.

Do you think you will develop a shopping centre in Poland again?

(laughing) If the right opportunity arises, why not? Generally, we would be interested, but it would have to make sense. It is a saturated market, so we would have to find the right location and a special niche.

Apart from the CEE market, which countries will you mostly be focusing on in the next few years?

We will be focusing on every country where we are currently present. To provide one example of this: we still own a very interesting plot in Budapest, which we could not actually develop in the last couple of years, but now the market is coming back very strongly. So in terms of a new development Budapest is most likely to be first, but in terms of acquisitions and investments we are really looking at all the CEE markets we are currently present in.

Since you now have so many properties under management, are you planning to continue to grow more or to maintain what you already have?

We are always interested in growing the value of assets under management that we have. So our focus is not on growing the number of assets, but actually on making sure we increase the overall value we manage. This means, growth can also be achieved by refurbishments and by the extension of existing centres. After all, we want to manage the best centres.

Are you also considering entering other market sectors? For example, in Poland you are not really present in the logistics or office markets. Will you be doing this in Poland as well?

Probably not. Our main focus remains on retail because we don’t have the special competences in every field for every market. For instance, office development really requires highly specific local market knowledge and very specific competencies. However, in other markets, especially in Germany, it is a big growth area for us to develop office buildings, logistics centres and hotels – we have gained much experience in this field and we are very close to the market there. Residential development, on the other hand, is a regionally clustered market: Within Germany, in Hamburg, for example, we are very strong in this field, but in Munich not so much. It is hard to be really good at everything in every country and that is why in every country we have very specific targets.

Are you also aiming to move into some new countries where you are not yet present?

At the moment there is no definitive plan, but again I would not rule this out.

Is the fact that you have so many centres under management helping you to grow even more or not?

It is a huge advantage. If you are a single mall owner you cannot afford to invest millions in digital systems, for instance, and to work with your tenants on this. The tenants would not have the time to work so closely on something like this with a single owner. However, if you can just roll it out across a big portfolio there is usually much more interest in it. In a large portfolio, such a project can be piloted in one centre successfully and then can be rolled out more easily to other centres. But this is just one example. Also, in many other areas, such as marketing or data analysis, there are tremendous benefits from having a large portfolio.

What sort of role does new technology play in ECEs shopping centres?

It is absolutely crucial. We are at the beginning of a technological revolution and we have seen online retail capitalise on the latest technology. But we are increasingly seeing that the bricks-and-mortar sector is also benefiting from these technological developments. We are carrying out some key projects in this area. One prime example is the pilot project that we have implemented at our Alstertal Einkaufszentrum centre in Hamburg: the Digital Mall, where you are able to do a product search in a number of stores. In the future, the shopping centre will probably have a double function – not only that of an attractive, classical shopping centre, but also as a logistics platform. This could be one of our big advantages in the future, because shopping centres would be able to go the ‘extra mile’ to the customer. The last mile of the delivery is generally the most difficult and expensive to do for online retailers, but if we can do this from our centres I think we can resolve such logistical issues easily.

Son of the founder

Alexander Otto, the son of ECE’s founder Werner Otto, is the CEO of the company. He is a member of the supervisory boards of Otto Group, DES Deutsche EuroShop AG, Sonae Sierra Brasil in Brazil and DDR Corp in the US. He also sits on the advisory board of Peek & Cloppenburg KG Düsseldorf. He is the initiator and chairman of the board of trustees of the Lebendige Stadt Foundation, which promotes the revitalisation of European inner cities. Since 2009 he has been also the largest single shareholder of US shopping centre company DDR Corp. In 2014, Alexander Otto expanded his business activities to South America and acquired a stake in shopping centre company Sonae Sierra Brasil. After graduating from Harvard University and Harvard Business School, he joined ECE in 1994.

Over half a century in business

ECE Projektmanagement is a German real estate company founded in 1965 by Werner Otto. It specialises in the development, leasing and management of inner-city shopping centres, but also develops office buildings, logistics properties, hotels and transport hubs. Out of the 199 shopping centres ECE manages in Europe, 51 are located outside Germany. The total value of the assets that the company manages is app. EUR 33.5 bln.

Its Luxembourg-based sister company ECE Real Estate Partners, an institutional investment management company, manages two investment funds (ECE European Prime Shopping Centre Funds), which administer equity commitments of EUR 1.6 bln raised from institutional investors. ECE’s Polish branch, ECE Projektmanagement Polska, was established in 1997. It manages nine shopping centres across the country, including its own developments such as Galeria Dominikańska in Wroclaw (2001), Galeria Łódzka in Łódź (2002), Galeria Krakowska in Kraków (2006), Galeria Bałtycka in Gdańsk (2007), Galeria Kaskada in Szczecin (2011) and Zielone Arkady in Bydgoszcz (2015). In 2013 the company took over the management of Silesia City Center in Katowice and Avenida (formerly Poznań City Center) in Poznań in 2014. In the CEE region the company also manages six shopping centres in Russia, five in Hungary, three in the Czech Republic, one in Slovakia, one in Bulgaria and one in Lithuania. Other countries where ECE is active include Turkey (13 centres), Austria (6), Spain (4) and Italy (3).

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