HIGH FIVE–Interview: The Future of Shopping Center in CEE

NEPI Rockcastle is the dominant shopping center owner and operator in CEE. What are the current biggest challenges and where are the future opportunities of this asset class?

Rüdiger Dany: The world economy is confronted with an inflationary loop prompted by the post-Covid consequences, the energy crisis, and the effects of the Ukrainian conflict, which were felt more acutely in the CEE region. Currently, many forecasts increasingly point to a sharp slowdown in the economic growth after two years of post-pandemic recovery.

In what concerns the shopping centers sector, the main immediate challenge remains the increase of utility costs, specifically if the war in Ukraine will lengthen.

Nevertheless, I do not believe in a deep recession in the commercial real estate market in CEE, as the inflation diminished in the first half of 2023 and many large retailers from Western Europe are interested to enter or to further consolidate their position here. The CEE markets are increasingly attractive to international retailers due to the region’s fairly stronger economic growth compared to Western countries and the higher margins achievable on account of lower occupancy and labor costs. We can still see growth potential for the CEE’s shopping centers market expansion and the possibility of good business profitability.

You are present with your shopping centers in 9 CEE countries. Why this focus and where are the main differences to western European country markets?

Rüdiger Dany: We have always believed in the huge development prospects of the CEE. There is still room for new shopping centers, and also a great consumer need in that direction, unlike in the Western part of the continent, where this market segment is oversaturated.

There are many particularities that distinguish the Western European market from CEE. Among them is the resilience of CEE consumers and their willingness to spend, on average, greater amounts per visit coming out of the pandemic. This trait stems from the fact that the people in this region are more accustomed to long periods of economic adversity than their Western European counterparts. As a result, they tend to be more optimistic about inflation, as the possible future depreciation of their purchasing power does not affect current spending habits so much.

The shopping center sector plays a central role in the economic and community development of cities in CEE, because the retail ‘High Street’ didn’t evolve in the post-war socialist period as it did in the West.

Offline retail and the shopping journey and leisure experience remain highly sought after in CEE, even if online retail surged during the pandemic. The consumers on these markets were much more willing to come back to bricks-and-mortar stores as soon as the restrictions were lifted, in comparison with those in Western Europe.

End of the last year (2022) NEPI Rockcastle was among the first to do bigger transactions for shopping centers after a pandemic driven restrained market situation. What are your factors of success in this context?

Rüdiger Dany: Indeed, at the end of 2022, we have acquired Forum Gdańsk Shopping Centre. This represented one of the largest single asset shopping center transactions by value in Europe and the largest in CEE last year. Another major deal has been the purchase of Copernicus Shopping Center, also located in Poland, in the city of Toruń.

Our development strategy is focused on searching for investment opportunities aimed at enhancing the quality of our asset portfolio and strengthening our leading position in the 9 markets where we are active. These acquisitions of two prominent assets on the Polish market are based on NEPI Rockcastle’s strong belief in the CEE retail real estate market and its positive outlook, despite a rather agitated macroeconomic climate.

In this context, we took into consideration aspects such as the fact that Poland is the second largest market for the Group’s operations after Romania and has had a GDP growth rate that has been consistently, year by year, outpacing the EU average over the last decade.

Retail real estate ever has been in change. Is now the time for more revitalization projects and though more value-add opportunities?

Rüdiger Dany: For us, 2022 was the year our business not only recovered completely, but we achieved record financial results and a tenant turnover higher than the benchmark year of 2019. I believe that now is the perfect moment to accelerate progress in directions such as digital transformation, technological evolution, or portfolio enhancement.

On the other hand, the people have returned to the malls in high numbers, but their necessities and expectations have changed. They need better and more complex services, larger spaces, and a more complex and well-integrated leisure experience.

I believe in the revitalization and periodic upgrade of the portfolio and having that in mind, we have started construction works throughout our portfolio. In Bulgaria, we plan the development of Promenada Plovdiv, by the end of 2024, and we have many other extensive works in our pipeline.

In Romania, we have begun the extension works of Promenada Mall in Bucharest and the greenfield development of Promenada Craiova, that will be inaugurated in October 2023, with an investment of more than 125 million euro. This is our largest project in Romania, outside the capital city of Bucharest, and it is also the largest project delivered on the local market since 2016.

This project will create over 1,500 jobs and will include more than 150 stores, out of which over 13 will be local exclusive brands, on the Craiova market, but also in the region. Lefties, one of Promenada Craiova's tenants, enters Southeast Europe for the first time. This is one of the world's leading chains of affordable and sustainable fashion stores and part of the Inditex Group, the world's largest multinational fashion retailer.

Complex projects such as Promenada Craiova have the great advantage of bringing regional cities back to the attention of large international retailers.

Another important change is the focus on sustainability. More companies understand that you can no longer disconnect sustainability and profitability. At the moment, we are developing projects that enable us to meet our ESG goals and generate a positive bottom-line impact. For example, during 2022, we have implemented the BREEAM sustainability certification program for our properties. As a result, the Group achieved a 13% reduction in its operational carbon footprint in 2022 compared to 2021

Furthermore, we are investing to achieve the targets set in our sustainability strategy and are installing photovoltaic panels across 30 properties in Romania, with a total investment of 37 million euro. This project will be finalized by the end of 2023.

The tenant mix in shopping centers is adapting. Which are the dominant footfall anchors and which role can food retail play?

Rüdiger Dany: Our strategy is to continually improve the services and experience we offer in our shopping centers. The tenant mix is tailored to our customers’ changing necessities. People want as many facilities as possible concentrated in one place. They have become more demanding and attentive to details, and eager for a more diverse mix of stores, for exclusive brands, more generous spaces, and modern design.

The mall has become a community space, a place for shopping, for retail therapy, for relaxation, dining out or hanging out. Also, in the last years, the role of the food court has become more important. Whereas before people stopped for a quick bite to eat during a shopping session, now the food court has evolved into a destination in itself.

Hypermarkets also have a prominent position in a shopping center’s ecosystem. They function as an anchor and contribute massively to providing our clients with a complete, complex, and highly efficient shopping centre experience. Surely, hypermarkets have a big contribution in attracting new customers, and increasing the frequency of visits to a shopping centre.

NEPI Rockcastle is the largest listed owner, developer, and manager of shopping centers in Central and Eastern Europe, with a retail portfolio of over 2,000,000 sqm in nine Central and Eastern European countries: Romania, Poland, Slovakia, Bulgaria, Hungary, Croatia, Czech Republic, Serbia, and Lithuania. The Group owns a unique portfolio of over 50 shopping centers, created over the last 15 years.