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Bucking the trend in bricks and mortar retail An expert view of retail in Central and Eastern Europe

Investor's Notebook

The health of bricks and mortar retail, and the resulting impact on retail property owners, have rarely been out of the news in 2018. In many western markets the pace of structural decline in retail has accelerated, and this has brought enormous challenges both for retailers and for the owners of the centres from which they trade.

There is sometimes an assumption that these trends are global, but from our experience, with a portfolio of leading shopping centres across nine Central and Eastern European (CEE) countries, we see a different picture and a continued desire by global retailers to expand their footprint in those markets where modern retail and leisure destinations remain relatively few. The interest in modern shopping centres from consumers in this part of Europe is strong and growing, as we can see from the 370 million people who visited our properties in 2017.

Independent data from respected bodies such as the Economist Intelligence Unit shows that the CEE region, home to a cumulative population of more than 100 million, is set to be one of the key engines of economic growth across the EU in the years to come. To take our home markets of Romania and Poland as examples, GDP growth in 2017 was 7% and 4.6% respectively, as opposed to just over 2% for the EU28.

Private consumption is growing at a significantly faster rate in the CEE region compared to western European countries. Of course, the CEE countries are coming from a lower base which should mean outstanding growth over the years to come, helped by tight labour markets and fiscal stimulus.

For instance, in Serbia, consumption per capita is low at under euros 4,000 per capita per year, but is forecast to almost double over the next decade. Another key indicator is unemployment, which clearly has significant social as well as economic implications, and is predicted to fall in all the main CEE markets over the next five years.

What does this mean for retail?

What does this mean for retail? The potential of these markets certainly has not escaped the notice of major international retailers. Alongside local retailers, who will always be an important part of the mix, some of our top fashion tenants are the Inditex brands such as Zara, the LPP group, owner of Reserved, H&M, C&A and Peek&Cloppenburg, complemented by anchor tenants such as Auchan, Carrefour and Cinema City.

These retailers recognise the potential of these markets and that they have historically been underserved with high quality retail destinations. In the first half of 2018, retailers in our centres delivered sales growth of 7.7%. In some markets – the Czech Republic and Serbia – our properties’ sales growth was closer to 20%.

These are rates of growth which store based retailers in western Europe or the US can only aspire to. We have sought to both develop and acquire prime shopping and leisure locations in major population hubs in the key CEE markets. The names of many of the places concerned would be unfamiliar to international observers but these cities are growing in both population and affluence.

Novi Sad

Take Novi Sad as an example. It may not be a familiar name to many, but that might be about to change. It is the second biggest city in Serbia after Belgrade, with a population of 319,000. The city is a regional university centre with a growing tech scene, is next year’s European Youth Capital, it was named Lonely Planet’s 3rd Best in Travel city 2019 and, in 2021, will be the first non-EU city to be European Capital of Culture.

When the first phase of our shopping centre, totalling almost 50,000 sq metres, opens there this month, it will take the retail offer in this city to a new level: the shopping mall has already attracted upmarket international brands such as Armani Jeans and Calvin Klein, plus no fewer than seven Inditex brands.

The CEE region

That’s not to say that the CEE region is immune to all the retail trends which are reshaping the sector globally. As elsewhere, the key to retail success is having scale in the right locations which are genuine destinations. Successful centres need to be places where consumers want to spend their time, which means they need to have a compelling combination of retail, leisure and entertainment space. And they need to be as good as comparable centres anywhere else in the world.

Investor's Notebook

About Alex Morar

Alex Morar

Alex Morar is Chief Executive Officer, NEPI Rockcastle. He joined NEPI upon its founding in 2007 and as CEO, he contributed to the significant increase in the company’s portfolio as well as further growing its team and asset management platform. Mr. Morar was appointed as joint chief executive officer of NEPI Rockcastle in 2017 and subsequently appointed as sole Chief Executive Officer of NEPI Rockcastle in 2018.

Articles by Alex Morar

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