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edition 7 (222)
July 2017
Retail & leisure

Rocking the retail scene

After spending billions buying malls, Rockcastle is now to invest millions in improving them

Ewa Andrzejewska

Rocking the retail scene
Marek Noetzel, retail director, member of the board, Rockcastle Global Real Estate

Last year Rockcastle’s CeE portfolio became significantly larger, as Bonarka in Kraków, two Focuses in Zielona Góra and Piotrków Trybunalski and Forum Liberec were added to it. The investor’s appetite for further acquisitions has not abated and it is now looking for more opportunities – but it still needs to do some work on its purchases. Marek Noetzel of Rockcastle Global Real Estate tells us all about the company’s redevelopments, as well as its extension and recommercialisation plans

Ewa Andrzejewska, Eurobuild Central & Eastern Europe: It seems that you have a year of investing heavily ahead of you. To what extent have the plans announced in your financial report at the beginning of the year taken shape?

Marek Noetzel, retail director, member of the board, Rockcastle Global Real Estate: The portfolio built up by Rockcastle will be undergoing a fair number of extensions and redevelopments. The portfolio we have purchased can be divided into two kinds of properties. The first type dominate their catchment areas, but have limited extension possibilities and yet can still be improved in order to strengthen their position – if only because of their age (e.g. Pogoria Dąbrowa Górnicza, Focus Piotrków). This can be done through recommercialisation, the introduction of new tenants, optimising the area of the existing tenants, changes to the internal layout, adding new facilities for customers, refreshing and improving the centre’s image, and so on. The change in the grocery operator in Piotrków is one such example – Carrefour is to open a 3,500 sqm store there in the autumn, which will considerably strengthen the position of Focus in our opinion. The other kind includes centres that can be expanded in size. These include Focus Mall in Zielona Góra, Solaris and Karolinka in Opole as well as Platan in Zabrze. The extension of Platan is at the most advanced stage, because we have already obtained the building permit, CFE has been chosen as the general contractor and the work has now started. Our own team is working on the leasing, having already commercialised app. 65 pct of the new section. We will be adding another 11,000 sqm. The centre will now feature a multiplex, a fitness club and some leading fashion brands. Platan is to be transformed from a convenience centre into a city centre project with a significant entertainment section. The entire first floor will be occupied by tenants from this segment and a modern food court will be added. A multi-storey car park is also going to be built and we’ll also be improving the existing car park. Importantly, we are also enhancing the look of the existing section of the shopping centre, the interiors, the toilets and the tiling. We want both parts to be cohesive and attractive.

Who is responsible for the design changes?

The entire design work has been prepared by the Sud Architekci studio in cooperation with Tremend.

What will be the cost of the project?

About EUR 40 mln. We will open the completed centre in Q3 or Q4 2018, subject to the weather and the possibility of carrying out the construction work.

Should tenants also expect to be relocated?

Yes, we will be demolishing the retail park we have purchased and so the majority of its tenants, including Super-Pharm, Pepco and Neonet, will be moving to the shopping centre.

You are dealing with the leasing and the marketing yourselves. Is this also the case with other aspects of the management?

We outsource the property management. We have four partners in Poland, which is a consequence of last year’s acquisition of many properties serviced by a variety of operators.

Lets go back to the projects: which one apart from Platan is at the most advanced stage?

Focus Mall Zielona Góra, where Carrefour is replacing Alma, which has disappeared from the market. It will also be joined by CCC and EObuwie. The centre is now virtually 100 pct leased. It has always been too small for the purchasing power of the residents of this city. It currently has an area of almost 29,000 sqm and we want to extend it by another 13,000–15,000 sqm (depending on whether we will be able to include a restored historic building). I think that a 40,000 sqm mall with a suitable car park, a clear layout and a tenant mix enhanced with new brands will be ideal for the local residents. The demand for space in Zielona Góra, which is the only mall in the town, has been growing dramatically – and as it is located near the German border, it is now huge. We already have the architectural design, provided by Tremend. The city council has recently passed a new local zoning plan having taken into consideration our needs. So we are currently working on the tenant mix. We have already made arrangements with the largest tenants. I hope that we will be granted a building permit this year and I cannot see why we should not be able to start construction after the issuing of the building permit, if the weather conditions permit.

While we are on the subject of Focuses, what about the centre in Piotrków Trybunalski? This mall has the most vacant space about 20 pct.

The vacancy level is indeed the highest on paper, but you need to remember that it includes stores that have are yet to open. We are already introducing a new Tesco concept – an 800 sqm Savia – and a Carrefour with an area of 3,500 sqm, which I have already mentioned. This will mark the return of the brand to the town. We are also focused on optimising the area of the existing stores. A few brands have left the centre, such as KappAhl and Cubus. We are introducing new brands to replace them and extending existing shops, such as Martes Sport, which is to grow by 300 sqm. We are also focusing on adding warmth to the image of the centre, through improvements to the interiors. Our plans also include creating a really good playground, installing escalators, opening rest and relaxation areas and enlarging the food court so that it can feature new concepts to tempt the residents of Piotrków.

Are the expectations of consumers in Piotrków, which has a population of less than 100,000, different from those in the largest cities, such as Kraków?

The main factors are the purchasing power and the specifics of the local market, but these are also the consequences of the location and the history of a town such as Piotrków Trybunalski. Customers currently do not differ in terms of their expectations – the residents of smaller towns expect exactly the same standard and range as that available in large cities. However, coming back to Kraków and Bonarka, which is the leading mall in its region, I have to admit that it had a difficult birth. However, its significance increased together with the growing purchasing power of the citizens of this part of Kraków, one of the richest cities in Poland. Our former capital has been developing impressively due to the BPO/SSC sector among others, and thanks to our location near the B4B complex we can see this and benefit from it. We have been making improvements to the interiors of Bonarka. After all the redevelopment, modernisation and optimisation work is complete, an area of over 4,000 sqm will have been added to the centre. We have already signed a contract with RTV Euro AGD and are introducing Super-Pharm. We also want to improve the vertical transport and enhance the car park – by installing taken/vacant signs, improving the navigation and working on the access control system.

It sounds rather cosmetic...

But it is not. We will align the shop windows, improve the passageways on the first floors, and there will be four new escalators. The changes to Galeria Warmińska will be more cosmetic, because it is a new shopping centre.

So how much will Rockcastle be investing in the improvements to Bonarka?

It is a large-scale undertaking, so it will be about a few million euro. It has actually already started, but we have divided the process into nine phases. It would be ideal if we could be finished by the end of 2018 – but we don’t live in an ideal world, so we will have to see if it works out. The first few changes should be visible this year.

We have not mentioned a completely new centre Galeria Wołomin, which was opened last October.

We are opening a retail park in Wołomin (6,000 sqm) at the end of August. This has been leased by Jysk, Media Expert, Komfort and Maxi Bazar, among others. It will perfectly complement the existing retail range of the mall. A Leroy Merlin is also being developed nearby, but this is not our project.

Your two centres in Opole Solaris, built in 2009, and Karolina, completed in 2008 would seem to have more potential in terms of added value.

In the case of Solaris we are at the final design stage and it looks as though we will be choosing the general contractor soon. We would like to open the new section of Solaris in autumn 2018. We are adding 8,000 sqm and it will be a very complicated enterprise, because it is a PPP project. We will be reconstructing a considerable section of the historic square in front of Solaris and adding outdoor furniture to it. We are also building a car park under the market square, which will have app. 300 spaces and will be connected to the lower storey of the shopping centre. This is a challenge for us because we are adding 8,000 sqm on three levels, which will connect the old and the new sections, and they will be located in the historic quarter of the town. This is more difficult than finding tenants, because there is a great deal of interest in leasing space in the centre. We want to use this opportunity to refresh the old section of Solaris. Currently we are in talks with a neighbouring Helios cinema over connecting the two facilities, while we are also extending the food court, which will be very large, as well as adding a fitness club. We would like to start the construction work this year...

The former area occupied by Alma is still vacant...

That’s right, but it has been leased to Lidl, which is to open in October. Customers and tenants have responded favourably to this change.

You are replacing a delicatessen with a discount store?

We had two other offers, but we opted for Lidl. If you compare their stock and the quality with other grocery operators on the market, Lidl was the best choice. We consulted other tenants over this and the idea for Lidl to take over as the grocery anchor was welcomed. While we are talking about Opole, it also is worth mentioning Karolinka. We are currently involved in edeveloping the Karolinka shopping centre (Karolina II is the retail park). The turnover of the centre has been good, so we want to build an additional area of 15,000 sqm, which will not be easy due to the parking possibilities. But it is worth doing. We also want to add new facilities, such as a cinema, while extending the food court and introducing new brands. It looks promising.

The extension of food courts has become something of a recurring theme of our conversation, as well as the creation of play areas for children and relaxation areas. Are these your own investments, or do you ask others to do this?

As the owner I prefer to focus on what I do well, such as the redevelopment of centres and increasing their value, while preferring to leave facilities such as children’s play areas to professional operators. Some hot concepts have recently hit the market, such as Klockownia. Being the owner I do not want to copy these approaches.

You are introducing cinemas to a few centres, but I was under the impression that multiplexes are dying out...

That might have been the case some time ago, but last year was a good one for this business. The market increased by 17 pct, which means that statistically each Pole went to the cinema once in 2016. In Western Europe the figure is about 2, 3 or even 4. Cinema is the most accessible and popular form of entertainment and we want to provide that in our centres. Karolinka is a weekend location and it lacks a place like this.

There is still Pogoria in Dąbrowa Górnicza and Galeria Tomaszów in Tomaszów Mazowiecki to talk about...

A few leases are expiring at Pogoria, so we are prolonging them and optimising our tenant mix. We are extending the centre by app. 1,000 sqm in order to increase the space occupied by CCC and Deichmann and to introduce Pepco. This is small change, which will take us just a few months in 2018. So far we have been preparing the documentation needed for the building permit. At Tomaszów we have been improving the food court, but apart from that the shopping centre is virtually 100 pct leased.

So lets move on to the Czech Republic, where you have been the owner of Forum Liberec since last year.

Liberec has significant retail space saturation, but the location of Forum is excellent because it is in the city centre and we are determined to invest in its modernisation, including the façade, as well as streamlining the transport in the shopping centre. We believe that certain things could have been done better in the past and that current standards are certainly different. We are also planning to add some new tenants, improve the quality of the food court and make the car parks more modern. This is the project that will undergo the most substantial metamorphosis. The architectural work for these huge changes has been drawn up by the Chapman Taylor and SIA Design studios. We are now waiting to be issued with the building permit. The changes will be introduced in several stages over a period of around two years in order to limit the inconvenience for tenants.

Will any new brands be launched on the Polish or Czech markets through opening in your centres?

Yes, but I cannot say any more than that. We have not signed any leases, but we have agreements with several new brands. All of them are popular and highly anticipated in Poland.

We were talking about entering the Polish market, but there are also brands that have withdrawn from it. Why?

If you start analysing those that are pulling out, it turns out that these are mostly chains that operate on a franchise basis. I am not saying that this is a bad partnership model, but franchisees often find it harder to cope with running a business on a competitive market.

All these changes will result in increasing the value of the portfolio. So what would come next? Selling the assets?

We operate in a similar way to a REIT, that is, we regularly pay dividends to our investors. We do not envisage exiting these projects. Our goal is to build a quality portfolio of retail facilities and to actively manage them in order to guarantee stable profits.

But are you looking at further purchases?

Yes, we are. We want to increase our involvement in Poland. However, we are not in a hurry, we are waiting for suitable opportunities to pop up. We prefer to buy properties that meet our criteria and fit into our strategy. We are currently developing several projects in Poland and the region.

Is Rockcastle interested in building entirely new centres?

We would like to do that very much – and in fact we are already working on one plot. But there are only a few opportunities left in Poland. There are cities where there is still much to be done, such as Warsaw. There are those that are saturating, such as Wrocław; and then there are the oversaturated ones, for example, Poznań.

It seems that in a few years we will have a market that will be dominated by just a handful of owners of retail properties: EPP, ECE, Unibail-Rodamco, Klépierre, Rockcastle

This is not out of the question. It is how things are on the more mature West European markets – there are large institutional investors there with long-term investment horizons rather than private equity or local developers. You need to build scale. More fragmentation will be possible only for smaller retail formats.

Finally, I would like to ask straight: are you afraid of the rise of e-commerce?

Along with everyone else, we have been monitoring this sector closely, but probably nobody knows what form it is going to take in a few years. I think that the market is heading in the direction of multi-channel development and services like ordering online for pick-up in the store. I think that it is important to encourage customers to collect goods personally because it provides the opportunity to offer other services, such as financing the purchase hrough loans, the prolongation of the guarantee and the buying of accessories. There are product types that will move to the net, but others will be resistant to it. It is clear that there is no escape from the march of technology. The question is how far we want to go in terms of exploiting it – and that includes us as the owners of shopping centres and as consumers.

From consultant to player

Marek Noetzel is an executive director of Rockcastle Global Real Estate. Before joining Rockcastle Poland in January 2016, he was a partner and director of the retail space department of Cushman & Wakefield, where over a period of ten years he gained considerable experience in commercial real estate. He is a member of the Royal Institution of Chartered Surveyors.

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