Wild days are over

Recently you have bought two Polish retail projects together with Rockcastle: Galeria Tomaszów in Tomaszów Mazowiecki and Fabryka Wołomin in Wołomin, so now you co-own a total of five projects in the country. Why is the Polish retail market attractive to you?

Arne Bongenaar, the managing director of Acteeum Group: For us the Polish retail market is very interesting. There are still some areas where supply of modern retail space stands below international standards and there is a need for modern retail space. But it is a limited market today. Unlike in the past years, these days you cannot simply build shopping centers everywhere you are able to. You need to be much more selective, do much more research and try to establish the exact specifications in sqm for different units across different market segments as well as remain more aware of the consolidation among retailers and the online retailing power. This makes operating on the market tougher than in the past. For the greenfield developments all you previously needed to do was to buy an agricultural land plot, rezone it and put a shopping center there, the opportunities are drying up. You can still find maybe 10 of such potential opportunities in Poland, and that is it.

But you still carry out greenfield projects jointly with your business partners…

Our first greenfield development in Poland was Galeria Solna in Inowrocław. It has been open for two years now and we can certainly call it a success. The project is 99.5 pct leased and we welcome more than 300,000 visitors to the centre every month. Its OCR (occupancy cost ratio) is around 11.5 pct, a very healthy result for this dominant center in a limited catchment ara. It is an example of taking an opportunity in the right time. There is no competition on the local market and the centre is attractively located. If these conditions are met, you can build a shopping centre on agreenfield location even today. Our next projects include Vivo! Stalowa Wola and VIVO! Krosno. Both centres, which are being developed jointly with Immofinanz, are being created close to where the people actually live. However, the pipeline for these kinds of schemes is set to dry up in five years times. By that time we need to be well established in other segments of the property market.

What exactly do you have in mind?

We are experimenting with some brownfield projects. We buy old factories in order to redevelop them. I think these kinds of projects have a future. For instance, our Tomaszów Mazowiecki project, Galeria Tomaszów, is situated in the perfect location – in the middle of the town. Tomaszów Mazowiecki is not a big city, but it has no modern retail facility. Therefore we took the opportunity to build something needed on the site formerly taken by a textile factory. Construction is scheduled to start in two months, and the one-level scheme, which will be only 17,000 sqm big (downsized from a pre-crisis three layer old plan of over 35,000 sqm GLA), is enjoying tremendous tenants’ interest, reflecting our belief that brownfield developments can still be quite successful. Another direction for us is to redevelop existing shopping centers. The two projects that we did with CBRE Global Investors, Sarni Stok Bielsko-Biała and Ogrody in Elbląg, show how we approach redevelopments. The 3,000 sqm extension of Sarni Stok was a relatively small project. But in the Ogrody case, we transformed the 17,000 sqm GLA one level scheme in a completely new five-level 40,000 sqm shopping centre experience.. We act in this case as the project’s fee-based development manager, without equity at stake, which is something we tend to do as well in case the development partner prefers full ownership. In Poland there are over 100 shopping centers that should be refurbished, redeveloped, extended or remodeled. This is all a very labor-intensive process. You must choose the right model individually for every single property and the local market. The hardest thing is to convince the owners that they need to change something in order to stay in line with the changing market offer and standards. And when an investor understands the need but doesn’t want to pour extra money into the project our job is also to bring money to the project. Convincing the city, the community and the immediate neighbors to support a redevelopment is another time consuming, sensitive process, for which we are very well positioned.

Can we expect to see you settling any new transactions in the near future?

We are working on a number of new acquisitions. We always try to work with reputable international and domestic investors like Dariusz Miłek and his Libra Project, CBRE Global Investors, Immofinanz and Rockcastle. Our role is to find new joint venture opportunities for these kind of partners. Our share in a project typically varies between 10-20 pct. When we find a potential development, we do market research, analyze its environment and prepare a feasibility, talk to tenants, City authorities, etc. . We sometimes decide to drop a project after a few months of thorough analysis. This is an enormous part of our work, obviously largely remaining unexposed. Two, maybe three, out of the ten projects we examine see some continuation. The market is now in that sense more mature and disciplined. The wild days on the Polish retail market are over. Developers start to listen to the tenants and rely on market research, which is all a very healthy sign. Unprofessional parties fade away, to the benefit of all.

Why did you drop the projects in Biała Podlaska and Białystok?

We concluded an initial purchase agreement for a plot in Biała Podlaska, which was set to serve an Agata Meble store and a retail scheme. We believe the city is ready for such a large scheme, but much to our regret we could not convince our investors to incorporate the large demand from Belarussian customers in the future turnover assumptions. In Bialystok the competition between retail schemes is quite intensive and the plot we analyzed, close the central station, is much better positioned for a mixed scheme, with limited supporting retail. Such schemes are not our main focus.

What locations are you most interested in?

We always operate in cities and towns with 50,000 to 100,000 residents. The catchment area should amount to between 200,000 and 350,000 people. This leaves us with mid-scale assets. Currently there are app. ten project opportunities in Poland left in this segment. And we hope to develop two or three out of them. The entire retail development industry realizes that in a couple of years from now we won’t be developing any new projects, but concentrate on redevelopments instead.

How much money have you invested in Poland so far?

Well, we are a private company and we don’t disclose such details. Jointly with our partners we have however published our stakes in Galeria Solna, Vivo! Stalowa Wola, Vivo! Krosno, Galeria Tomaszów, Galeria Wołomin investment projects, of 10 to 20 percent in each of them. The investment volumes for each asset reach app. EUR 40 mln on average, with banks financing taking ca. two thirds of the investments. We see our returns when we exit the projects, but we haven’t sold off any of them so far.

Maybe in the future?

It seems to be a good time for considering the sale of a shopping center. The investment appetite for the areas where we operate is growing. We expect to sell our first Polish shopping center, in Inowrocław, within the next twelve months. It will of course depend on the offers we are currently analyzing and our partners’ stance.

You only develop joint projects. Why do work this way?

It is rooted in our background and history. We all come from big companies like Ahold Real Estate, Multi Development, TK Development, and we used to developed big schemes of 20,000 sqm to 100,000 sqm. When we started our own company we wanted to keep carrying out projects of similar size, but we didn't have enough equity. Therefore we tried to identify partners interested in the joint venture approach. We now cooperate with market leaders which are not only capital strong but also have vast experience in retail and we are proud they have selected us as their partner.

Any new projects in the pipeline?

Apart from the two we talked about - in Tomaszów and Wołomin - we are in an acquisition process that will take another three months. Our retail focus will subsequently shift towards redvelopments. We furthermore have a new idea involving the Warsaw residential market. It is not about houses for sale, but about blocks of flats for the rental market. This segment may also grow in the future, even though the owner-occupier segment is the strongest, going forward.. We started to work with new investors from Holland and they asked us to have a closer look at the Polish residential market. In the next six months we will continue to search for investment opportunities and by mid next year we should make our ultimate decision on whether to invest in that market or not.

What about other CEE countries?

We have been examining investment opportunities in Belarus for some time. Although the local political situation oftentimes scares away investors in the country, we continue our market research. We are now discussing potential business models with Belarusian entities. The biggest problem in Belarus today is that the lack of retailers. Also, the existing projects are too large and show substantial vacancies. The concept of designing flexible schemes, which can be properly phased once the market matures does not really exist yet. But the situation will hopefully improve at some point.

Where do you see your company in the next ten years?

It is a good question. Now we work with a two to five year long time span in mind as the market changes quite dynamically. We will definitely lean towards the residential market and the asset management services. In the future I would like us to co-own the majority of our assets even if as a developer we normally should sell them. Maybe we will redevelop some of our schemes. Our asset management team is active in Galeria Solna and we would like to expand the services to other projects. There are some new investors on the market who don’t have their platform here and look for people to represent them locally in the long term. This sort of activities creates a lower income, but it gives more stability. The combination of selective (re-)development with asset management with some sort of parallel diversification towards residential for instance is on our mind and we will have to strike the balance between them.