SCF Magazine, Retailnet.pl/Katarzyna Łabuz, April 2022
Interview with: Jacek Wesołowski, Managing Director Trei Real Estate Poland
During our last interview, you said that Trei intends to develop seven retail projects per year. Are these plans still on track and what stage are the investments planned for this year at ?
Two years ago we reached a development pace that was and is optimal for us and we plan to maintain this in the near future. That's seven projects put into operation per year. We also want to open a minimum of seven retail parks in 2022. We are only changing our strategy regarding the formats of our schemes. So far we have mostly built small retail parks with an area of about 5,000 sqm, but now we are also focusing on larger centers – power boxes, whose offer will be supplemented with a DIY store. An example of such an investment is Vendo Park in Szczecin with a leasable area of 23,000 sqm, where an Obi DIY store will open. In turn, our investment in Otwock will have a Castorama store and in Gniezno a branch of Leroy Merlin. Currently, we have retail parks under construction in Otwock, and Skarżysko-Kamienna which will be the first to open. This year we are also planning Vendo Parks in Szczecin and Mielec, where we are waiting for the building permit. Other investments are being prepared and will be executed as soon as we receive the relevant permits.
Are we talking about individual construction starts or project commissioning scheduled for this year?
We are talking about the full completion of the investment. In our case, the construction process for a standard retail park averages six months. All the construction that will be started by June will be completed this year. So we still have time to launch the remaining three or maybe even four investments to meet the plan for this year.
Can we already talk about the specific dates for opening the retail parks in Otwock, Skarżysko-Kamienna or Mielec?
Obviously, the contracts with our contractors contain these dates, but because of the difficulties that are occurring in the construction and investment market today, I would not want to go out on a limb and give specific dates.
How much longer do you think this boom in retail parks will last?
We have secured plots of land for about three years, assuming the development of
seven Vendo Parks a year. We want to maintain such a buffer as it will allow us to smoothly move from the design stage, through obtaining building permits, to the implementation of the investment. With the acquisition of more land for future retail projects, we do not see any slowdown in the supply of plots. If current market conditions continue, I think we will see at least five more years of this boom – a high level of investment in the retail park sector.
However, more and more often investors say that there are less and less attractive plots of land. Either they are problematic, for example, because they require extensive infrastructure development, or they do not have any such infrastructure, or they are simply in difficult locations. Do you also see such a challenge?
First of all, ideal plots of land where no difficulties are encountered are now practically non-existent. Those days are well and truly gone, and you have to adjust to such circumstances. We assume that the majority of land-related problems have already occurred somewhere, and therefore it is not something that we would not be able to cope with given the scale of our operations. Trei has been present on the real estate market for many years, we have worked out our own methods and thanks to our experience we probably deal with it better than someone who wants to enter the market now. However, the problem with the availability of attractive lands for investment stems from the profitability of retail parks. If a company borrows money from the bank, it is more expensive. Similarly, it’s not an inexpensive operation if they subcontract the implementation of such a project. Consequently, the situation arises where rents stand still but costs rise. In our case, we self-finance the majority of our projects. Because of the scale we have and our long-standing delivery partners, we are less burdened by cost increases than someone who is implementing their first project or whose scale of operation is small.
Aren't rising construction costs, rising labor costs, subcontractor and employment issues slowing down Trei's investment processes?
Contractors are cautious when approaching any new client. At Trei, we have always focused on long-term relationships and consistency with good contractors. If a given company gets seven or eight facilities, or constructs two retail parks a year for us, there is less concern for both sides. If we see a proven and reliable contractor completing orders for us, we look for an opportunity to continue working together. Stable relations ensure the continuity of our investments and developed standards such as contractor support on the construction site allow us to minimize the risk in cooperation with construction companies. However, what is becoming more and more visible on the market is the fact that the profitability of projects and room for mistakes or additional costs, e.g. infrastructure, is getting smaller. Speaking in construction terms, such a project is becoming harder and harder to put together.
How is Trei's relationship with the tenants? Has the pandemic affected this collaboration?
I would commend the industry as a whole because at a time when we were all caught off guard by COVID and its scale, all parties quickly began working together to find the best solution for this new situation. We signed agreements with tenants to help them survive this difficult period.
This came at the expense of our revenues, but the stability we achieved reduced store closures in retail parks to a statutory minimum. We haven't noticed any significant changes in our cooperation with tenants. There is some market consensus. Tenants are not trying to lower rents; we are not trying to raise them. In turn, what we try to keep an eye on is the so-called brand mix, i.e. the arrangement of tenants in our retail parks. We try to make the team of selected brands as complementary as possible, so that it drives sales up without any unnecessary competition.
A significant part of retail park tenants, however, are discounters.
A discount product alone is not enough. We need diversity. That is why we have introduced such brands as Top Secret, LPP Group brands as well as Smyk, Rossmann, Hebe and Castorama. These are tenants that are not only present in parks, but also in traditional shopping malls. We certainly don't see a trend for retail parks to be limited to discount stores alone although they have also introduced more expensive products and supplement their offers with higher-end items. Furthermore, our experience shows that as the retail park sector develops, an increasing number of brands that were previously only present in downtown malls are now present in retail parks. Some of these brands are even adapting to the needs of such facilities in smaller cities. An example is the smaller model of Castorama, which today opens stores with an area of 2-3 000 sqm. This is a format that favor renting in parks. The situation is similar in the case of furniture chains. We can clearly see that the range of potential tenants is expanding, and we can also talk about slightly longer leases. From this point of view, the market is easier. On the other hand, there is more discussion about fit-outs, which is having a detrimental impact on the economy due to significantly higher material and labor costs. The market is in a balancing act, and everyone is trying to adjust to the changes.
You talked about the market consensus between tenants and landlords, that is, not raising rents. Aren't investors tempted by this situation to take advantage of the retail parks boom?
This needs to be looked at from another angle. Trei is not a developer that builds and immediately sells its projects and multiplies the revenue by the yield and receives a higher selling price for the facility. We want to keep the parks in our portfolio. And it's important for us to see what happens five and ten years down the line. The worst thing you can do is sharply raise rents and then reduce them in five years. We're aiming to make sure that there's no threat to the initial yield, and that the future holds the possibility of receiving higher rental rates. We do not look at our portfolio from the perspective of one or three years. We have facilities that we put into operation a decade ago, such as Chełm or Nysa. In these cities, compared to the competition that has emerged in recent years, we are doing very well. Our footfall is growing. Hence, we also observe high investor interest and demand for retail parks. Trei is approached by funds interested in buying a package of retail parks. This is a big change on the real estate market. Retail parks have become an investment product that attracts big players, for example, if a company has a portfolio of parks worth 50 million euro, it is bound to attract investor interest. I see a very favorable trading environment in the smaller retail format sector, and I think more and more of these products will be realized in the market. We have also acquired a partner for business development in Poland. In the autumn, we established a joint venture with an investor, Patron Capital, with whom we are now successfully completing the first package of 15-20 retail parks, with hopefully more to follow. This shows that there are such capital funds which are not afraid to enter into the development process of such facilities as retail parks.
Trei has been an SCF participant for many years. What projects and ideas are you bringing to this spring’s fair?
The SCF trade show has become even more important due to the pandemic. The number of specific talks we conduct is greater than it used to be. At our stand we prepare visualizations of the planned Vendo Parks and the prospects of each project and, to put it simply, we sell retail space. Hence, this fair is not a promotion of the company for us but attracting business on the projects we are preparing. We have already purchased over 20 plots of land for future investments. Interest in our retail parks is so high that often most of the units are already occupied by the start of construction. For each SCF fair we have prepared a specific offer and a package of projects ready to rent. Thanks to this, the moment a Vendo Park opens, we practically do not have any free space left.