BRICKS & MORTAR: Mall rats desert sinking ships

By bne IntelliNews March 2, 2009

Nicholas Watson -

One of the most visible victims of the deepening economic crisis engulfing Central and Eastern Europe is that monument to the consumer society - the shopping mall. After years of rapid growth as the newly affluent citizens of the region flocked to these modern shopping outlets to fritter away their salaries, retail malls are now struggling to find tenants and customers; unfinished developments are being scaled back, put on hold or sold off; and those projects still on the drawing board are being scrapped for lack of money.

The fall has been all the harder because the rise of such retailing in the region was so precipitous. According to a February report by the real estate specialists Jones Lang LaSalle, emerging Europe dominated the ranking of most popular locations for international retailers over the past two years, accounting for the top-five destinations. Turkey accounted for 11.3% of global cross-border movements of retailers in 2007 and 2008, with over 1m square metres (sqm) of shopping space opening up in the period. The other four top-ranked countries were Russia, Poland, Romania and the Czech Republic.

However, with this part of the world suffering the most from the collapse of property markets and subsequent credit crunch, the end to the retail boom has been abrupt and painful. "In a situation where on the one hand consumers are afraid to spend money because they are concerned about losing their jobs, and on the other hand developers are having to postpone or even cancel projects because of problems in securing bank financing, the picture does not look rosy," sighs Petr Valenta of the real estate adviser DTZ in Prague.

No longer Russian in

In Moscow, whose transformation from drab communism to gaudy consumerism epitomised the boom of the last decade, less than half the shopping malls slated for completion last year were actually opened. According to Colliers International, developers had planned to build 20 shopping centres with a total area of more than 1.5m square meters (sqm) last year, but because of the crisis only 33% were opened (seven malls with a total area of 500,000 sqm), and most of those were just the smaller ones. Among the most prominent projects not completed on time are the 205,000-sqm Metropolis on Leningradskoye Shosse and a 202,000-sqm mall on Ulitsa Vavilova.

In the Czech Republic, which has seen the amount of modern shopping space double in little more than four years, only 60% of the originally planned amount was actually built in 2008, with nine shopping centres with a total area of about 150,000 sqm completed versus the planned 14 centres with an area of 250,000 sqm. New shopping centres that opened their doors just as the economy went into a dive included Galerie Butovice in Prague, which hasn't met the expectations of either the investors or the retailers, resulting in a repositioning of some of the sales space. The swanky new shopping centre Palladium in the centre of Prague, which opened in late 2007 after about five years in the making, is pitifully quiet on the weekends.

"With only 110,000 sqm of new shopping centre space to be delivered in 2009, it is expected to be the year with the lowest supply since 2003," reckons Paulina Husova, head of research at CB Richard Ellis. "The pipeline for 2010 is considerably higher, 250,000 sqm. However, many of these projects are in the planning stages and we believe that due to problems with financing, some may be postponed."

European Union newcomer Bulgaria, which was gearing up for a huge explosion in malls to match that seen in Central Europe after the countries there joined the bloc, is also seeing a sharp slowdown in growth. With the opening of Park Mall in Stara Zagora in October and two smaller projects in Pleven, the total inventory of shopping mall space in Bulgaria reached 170,000 sqm, which is still a relatively small amount. However, Colliers International says the financial crisis has stiffened the requirements for bank financing of new. While banks previously were satisfied with letters of intent from tenants, now signed lease agreements are required. And certain levels of occupancy are also required in order to secure bank financing. "As a result, fewer projects have been announced, and it is expected that some of the larger shopping mall projects in Sofia, Varna, Plovdiv, Rousse and Stara Zagora will be put on hold or cancelled," Colliers says in a report.

In Almaty, the commercial capital of Kazakhstan, another country that's become a poster-child for the past decade's boom and bust, city authorities confirmed in early February that the planned 500,000-sqm shopping mall to be built under Republic Square - which has resulted in Almaty's central square being hidden behind aluminium hoardings for more than a year - won't be built after all. Instead, developer Bazis-A will convert the space into an underground car park.

With retail tenants being squeezed by plummeting sales - retail sales in Hungary actually fell on an annual basis in January by 3.9%, which doesn't bode well for other countries like the Czech Republic whose retail sales growth has slowed to a crawl as their economies follow Hungary into recession - they are now looking to developers to slash their rents. Estimates put the drop in rental prices for mall space in Moscow at anywhere from 20% to 50%; in Almaty, there have even been incidents of shopping centre managers offering free space for a while - at the less popular centres - just to avoid empty space. As late as the autumn of 2008, after the second wave of the crisis broke, landlords were not making concessions, says Charles Raether, head of Jones Lang LaSalle's Kazakhstan office. "There is an increased interest from tenants in discussing, renegotiating or relocating now, [so] landlords have lowered their rates significantly. Some are even taking the pre-emptive move of going to their tenants and offering them better terms. It's a tenant's market," Raether says.

However, while only partially occupied shopping malls and falling rents appear on the one hand to be symptomatic of the gloom enveloping the retail trade in the region, on the other hand they will form part of the recovery. Jones Lang LaSalle says as new mall openings help to curb rising rents, Central and Eastern Europe, particularly Russia and Turkey, will remain the destination of choice for international retailers plotting counter-cyclical expansion drives this year. "2009 is set to be a year of opportunity. Deals are likely to be very favourable for tenants even in prime locations, with the best lease terms available for the best brands with strong covenants," says James Dolphin, head of pan-European Retail Agency at Jones Lang LaSalle. "Financially strong brands such as Abercrombie & Fitch, Inditex and Nike are undoubtedly in the best position to take advantage."

Jiri Kominek and Clare Nuttall contributed to this article

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