Bustling Bucharest Old Town facing fashion foray?

Both overall potential and investor interest are growing in direct proportion with the traffic of foreign and local visitors on the narrow, cobbled streets of Bucharest’s Old Town. Will fashion retailers be the next big thing in this unique part of the city?

Andreea Ceasar

While the current tenant mix in the area is drawn mainly from the leisure segment, with bars and restaurants pulling in the crowds and representing 54 percent of the commercial area, in the near future the number of fashion retailers and other businesses may increase, as the street repairs are due to be finished by the end of next year.

Today, just 19 percent of Old Town outlets are fashion retailers, mostly old family businesses and companies dating back to communist times. “The lack of diversity in the tenant mix makes the Old Town a place for leisure activity and not a commercial point of reference,” states a study on the high street retail market in Bucharest’s Old Town carried out by More Real Estate Services. It found that of 360 existing commercial spaces, 289 are rented, leaving 19.7 percent empty. This suggests sufficient space to rent for future fashion retail growth.

“What appeals most to foreign tourists about Old Town is the fact that there is such a large selection of places to eat and drink in a small space,” says Craig Turp, editor-in-chief of city guide publisher In Your Pocket. For years Bucharest has had a good number of places to eat and drink, but they were dispersed around the city, and the distance from one place to another could often be quite big. With Old Town half rehabilitated, that problem is solved. You can find hundreds of places on just a few streets. But the area is small compared to the old towns of the most popular tourist destinations, Prague and Krakow for example. At times it can feel very crowded, too crowded in fact, especially in summer. But neither visitors nor retailers seem to be complaining.

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“While I do not think that it would harm Old Town Center for there to be a commercial side to it, I do think that it has become known very much as an entertainment district, and as people are used to that, it will be best served by continuing to develop in an entertainment, and not commercial direction. There are already a few souvenir shops, antique shops and such like, enough I think to serve the needs of foreign visitors. Whether locals want it to be a more commercial area is another question…” adds Turp.

Retail costs remain high

“The main reasons why international fashion retailers and other such firms haven’t yet entered this market are well known. The various owners of commercial spaces wanted to increase the rent from one year to another and this is why they didn’t want to sign contracts for longer than two years,” says Ilan Laufer, general manager of Retail Group, a company focused on the retail market. As any international retailer needs a minimum ten-year contract to invest in such a location, these companies postponed or cancelled any investment in this area.

In addition, the degraded state of local infrastructure and buildings made fashion retailers think twice before coming here. Local buildings are small for the needs of retailers and require huge investments in getting them up to scratch. An average surface to let is about 100 sqm, but they vary from 70 to 150 sqm or more. This is why the 28 percent increase in the average rent to EUR 45/sqm in the first half of the year (against the same period of 2010) is based on the increased traffic in the Old City, not the facilities offered.

Adidas was the first new retailer, opening an impressive shop in the Old City of Bucharest three months ago. Of the EUR 720,000 investment, more than half went on improving the structure.

“From 2012 some of the biggest fashion retail companies, which have already signed contracts, will open shops in the area. I believe 2012 will be the first year of fashion retail in the Old Town,” predicts Laufer, stressing that the district will discover the most important changes of the last 20 years and that new retailers will be upper and mid-market concerns.

The existence of interested brands is confirmed by Ilias Papageorgiadis, CEO of More Real Estate Services. “We have another six well-known brands that are searching for a space in the area, but I doubt that they will find what they are looking for. Commerce requires affordable rents and the current rents in the area do not allow many fashion retailers to enter. So either the owners must accept lower prices, or these brands will continue to avoid the location,” says Papageorgiadis.

Moreover, if investors want to upgrade their own buildings, the area is among the top five locations in Bucharest for purchasing prices. “Taking into consideration that interest in this area remains strong, the transaction price could even reach the levels seen on Calea Victoriei and Calea Mosilor,” says Papageorgiadis, using ground floor prices, though he underlines that major reductions are available for other levels. Most of the properties in the Old City have two or more floors, while on the commercial boulevards the majority have just one.

Bucharest’s mayor, Sorin Oprescu, stated four months ago that the municipality would start looking for private partners to renovate the Old City’s buildings through public-private partnerships that include a temporary concession of the commercial spaces in the buildings. “Luciano Benetton [chairman of the fashion group of the same name, e.n.] showed interest in the Old City, as he saw it had great cultural, touristic and, not least, commercial potential,” he added.

High risk investment?

This month two prominent locations, Crama Domneasca and La Bon Bonche – the latter enjoying the favor of the IMF team and Jeffrey Franks – suffered fire damage, highlighting the fragility of investments and posing tough questions of the area. Investors have put money only in improving the ground floors of the buildings. Investors have neglected the upper levels due to their upstairs co-tenants – many of them itinerant or destitute – or a lack of interest. As a consequence, the upper floors pose risks not only to investors but also to their clients, as there is always the threat of falling plaster, masonry, fire and so on. Also, the narrow streets of the area and substandard infrastructure impede firefighter access. This makes insurance companies reluctant to insure some of the buildings.

“Crama Domneasca burned down because of a fire in an un-renovated part of the building above the restaurant, caused by people living illegally in the building. For the good of Old Town and to encourage more investment, the people living in buildings illegally need to be moved on,” says Turp. “It is clear that potential investors would have seen these incidents and begun to think twice about investing. This issue is probably the biggest threat now to the area’s continued development.”

This might have been a real signal to investors. A huge number of visitors and customers doesn’t mean an instantly perfect business opportunity. Operating in the Old Center requires investments in upgrading and consolidating buildings, assuming high fire and earthquake risks and ongoing street works for at least another year.

“I agree that the insurance problem is critical, which is why we advise our clients to avoid investing in properties that cannot be insured (or to invest only if they intend to include the cost of consolidation as well, to make the property insurable). We say ‘yes’ to investing in the Old City, but with careful moves and a clear business plan, avoiding unsustainable costs,” says Papageorgiadis.

An Allianz-Tiriac spokesperson told Business Review that the company has sold insurance policies for Old Town, where its set of underwriting guidelines were respected. These guidelines included the type of structure, building materials used, date of building, as well as the seismic risk class. “Clearly no building ranked in seismic risk class 1 can be insured, but this rule applies to any such buildings, not only to those in the Old City area,” says Marius Onofrei, communication and public affairs director of Allianz-Tiriac. According to him, insurance policies do not differ because of co-tenants, as this would be both discriminatory and illegal.

The list of buildings considered to be most vulnerable in the event of an earthquake, republished at the end of 2010, includes at least 12 with surfaces of 212 sqm to 3,450 sqm on Lipscani Street, while Blanari Street has five such edifices and Franceza Street nine. Many of them were built in the 1880s and could be badly damaged by an earthquake, so they cannot be insured.

And there are further challenges for investors, as competition is high and sometimes unfair, while costs have increased to the level that precludes further investment from amateurs. “If you don’t know your business very well, you will end up losing money, even if your income is substantial. As the first phase of development is about to be over, the greatest challenge for an investor is to prepare a project which will be in accordance with the new phase of the development of the Old City,” concludes Papageorgiadis.