Recession reshapes meaner mall market

Shopping center developer, manager and owner Sonae Sierra is hoping to begin its Adora Mall project in Craiova this year. It will be the company’s first greenfield project on the local market after it started operations here in 2007 by acquiring River Plaza in Ramnicu Valcea. Ingo Nissen, managing director of Sonae Sierra in Romania, told BR about some of the developer’s plans for the local market.

Simona Bazavan

What were your company’s expectations when you first came to Romania and what are they now?
When we entered Romania in 2007 the market was booming and we planned to have three projects in development and start them very soon. Back then, the expectations were that this market would continue to boom, that it was still an upcoming market. The crisis came and changed the situation everywhere, not only in Romania. Unfortunately it has made it very difficult to get financing. The last year brought more stability and has also cooled down the overheated real estate market. The recovery will happen in a much more sustainable way. The question is, will this recovery happen very soon, this year, or will it take a little bit longer? This is difficult to say but I have no doubt that Romania will come back.
As for present expectations, we will continue our work. We a have stabilized our position in Ramnicu Valcea with River Plaza, improving the center in many ways. We have significantly improved our environmental performance in the shopping center and we are working to better our tenant mix. We are still on the right track to starting the Adora Mall project in Craiova. We have successfully signed several lease contracts and we hope that we can seal the financing very soon.

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How will this year be different from 2010? Where do you see growth?
I think that by the end of 2011, banks will restart financing which is very seriously needed in Romania and not only in real estate. I think there will also be some companies going into insolvency. This is unfortunately something that I expect.
How have you witnessed the local retail market change since you came to Romania?
It has changed a lot. In the beginning one could see here many international brands coming through franchise. What we’re seeing now is that tenants like Inditex and H&M come here directly and run operations themselves. I think the quality of the experience they bring from all over Europe to Romania will also be reflected in the shops. Retailers understand the local demand much better than they did a few years ago. This also means that they are more demanding. For example, there are retailers who ask for the explicit vicinity of other retailers and want to make sure that there will be a certain tenant mix in the shopping center they plan to expand to.

Do you think that there is room for more large-scale shopping malls in Bucharest? What are your plans for the capital?
I have no doubt that we will have some three or four more large-scale shopping centers in Bucharest in the distant future. There are projects, but their development depends on the recovery of demand, and financing is still difficult. But once the situation improves, this will change.
One benefit of the crisis is that the price level for new developments in the capital has come down. We are investigating several locations, not only in Bucharest but also in other towns, but I cannot announce anything yet. Bucharest itself has room for some more shopping centers like for example ParkLake Plaza. In the eastern part of the capital especially there is room for more.
In terms of land acquisition we are looking in Romania to find dominant locations. This is one of our philosophies and maybe one of the lessons of the crisis. One can see that all the shopping centers with a good dominant location, a broad range, a good tenant mix and a good entertainment range are not suffering as much as those that haven’t adapted to the new demand.

Would you say this is a good time for retailers to consider expansion?
Actually, seen from the offer side, the market is ideal for new tenants to come because the rent level is as low as it has ever been here in Romania. I do not believe that we will see much lower rents because that will mean that nobody will invest here anymore. And retail is not different from housing and logistics. We are at a level where the return on any investment is not very attractive. The rents barely cover the cost and the interest so there isn’t much profit. Romania is not actually a very profitable destination. One can go to the emerging markets, like the BRIC countries, for a higher return. International investors have to ask themselves whether they should go to Romania to make a profit of let’s say 5 or 7 percent, or to China or Brazil for a return of 15-20 percent. It’s just risk assessment and all the companies with a sustainable long-term strategy are still here because it is quite obvious that this market will bounce back.

Should shopping center developers consider new concepts or stick to already existing patters?
Well, our experience shows us that shopping centers should permanently change. What we will see in the future is that shopping centers will have a more dominant entertainment dimension. Actually, they should be renamed as shopping and entertainment centers. This is the trend all over Europe.
 

What are Sonae Sierra’s current projects and targets in Romania this year and in the long run?
At Ramnicu Valcea we are coming closer and closer to the ideal tenant mix and we have managed to improve the environmental performance of the shopping center significantly. It was an investment of EUR 120,000 which had a payback time of seven months. We certified the shopping center: River Plaza was the first shopping center to be certified energy efficient in Romania. Overall, last year we saw a 10 percent increase in the number of visitors to River Plaza, to about 2.8 million visitors. We also signed up eight more tenants.
Coming to our second most advanced project, in Craiova, we have the building permit and 35 percent of it leased. We are in very advanced discussions with banks for the necessary loan and when we have this in place and signed we can start construction, hopefully very soon. I can’t yet give an actual date but we hope it will be very soon. Some of the tenants will be Cora, Altex and Cinema City. The tenant mix has a very strong entertainment component and through our concept we will focus very much on this. This will hopefully persuade people to stay longer in the shopping center and to accept it as a leisure destination and not only as a place where one goes shopping.
Our project in Ploiesti is on hold, as unfortunately there isn’t the necessary demand from the tenant side to start that project. We have not given up on it, but there is little hope of beginning the shopping center in 2011.
Our third project is ParkLake Plaza in Bucharest. We are still in discussions with Caelum Development to find a new basis for our partnership and since we have agreed on confidentiality for all our discussions I cannot tell you anything about this now. We still have some money invested in the project so we are not out.

CV Ingo Nissen
February 2008 – managing director of Sonae Sierra in Romania.
2000 – joins Soane Sierra in Germany
1987 – obtains a PhD in Massive Construction from the Technical University of Munich