The well known secret no Mall owner wants to disclose
The "trend" for Malls in Romania was initiated by the success of the first 3 projects, created by two companies. Anchor Group developed two projects in Bucharest, with one of them ("Bucuresti Mall") still being a "cash cow" for the company and the second one ("Plaza Romania") being very profitable until the opening of "AFI Palace Cotroceni". Iulian Dascalu developed "Iulius Mall" chain of Malls in Iasi and then Timisoara, Cluj and Suceava. Their success opened the market for all the rest that followed…
One more example of wrong market reports…
As it happened with the residential segment (and more or less by the same people) there were published many reports which "proved" the need of many new Malls, retail parks and commercial centers all around the country. This is why the pipeline of new projects in Bucharest reached the… mythical figure of 12 (twelve) projects, while tens of new developments were planned around the country. 7 companies announced that they wanted
to develop in Arad (!) and in the beginning of 2008 all cities appeared to be fully covered.
The crisis revealed the problems…
Like in every other domain of the Real Estate market, this incredible fast development was not well planned. This is why it stopped very soon. Too many projects were abandoned, while the completed ones had to adjust all their figures to the reality. They realized that they paid too much for the land; the design and construction, for everything (except the launching campaign, surprisingly). And the rents soon started falling, when the tenants did not evacuate their space.
Some bankrupted, some others restructured…
The first Mall which bankrupted was one in Bucharest. The second development, a retail park, was in Braila (for different reasons though). Oradea and other cities followed. Some developers simply cancelled the projects. Other Malls or retail developments had to be changed too much, forgetting all about the glorious prospects and hopes of the past. People based their projects on the scenario that Romanian economy would continue growing forever and the consumption power of citizens would increase even more. It proved to be wrong, but it was not the only problem…
The big problems that the Malls have today
1. The Romanian economy continues contracting. When this happens over the last 2 years, it is normal for the whole market to be under stress, influencing all sectors. Malls feel every change in the economic segment, good or bad one.
2. The banks dramatically cut lending for consuming loans. Big part of the consumption was artificial and based on the consuming loans that the banks were providing. Despite the fact that many Mall developers expect these loans to return, reaching the international levels, this will not happen any time soon.
3. The available income for consumption has been seriously shrunk. Hundreds of thousands were fired. Millions of people saw their salaries being decreased. The State's employees lost 25% of their income recently. Goods have become more expensive, life too. So the available income can not support all the investments and retail projects. (= all business plans should be revised, downwards)
4. There are not too many serious local businessmen – retailers. Too many people made money just because the market was rising and they happened to be there, selling goods to consumers eager to spend on almost everything. Once the crisis came, we found out that too many retailers or businessmen did not know what exactly they were doing. They had no plans, did not know their real costs and their expansion strategy was based on "the owner's dream" (but not "vision" unfortunately). When this "dream" became "nightmare", we realized that we still need hundreds of local businessmen to learn business and to develop more sustainable retail projects. So, the Malls can not count on a critical basis of a "local business elite".
5. Too many foreign retailers overestimated Romania. Too much money spent on market reports (which described a… different country). Also enormous amounts spent on "country managers", "sales directors" and "the whole structure of a serious company" (salaries, homes, cars etc). All kinds of investments for infrastructure. Expensive rents and constructions of shops. High expectations… Too many small and medium sized foreign retailers did not succeed in Romania (some big ones too). With plenty of them leaving the country or simply restructuring, the Malls ended up having many new "holes to fill".
6. 40 – 80% of their tenants do not reach "break even point" during 2010. Let us look at Romania as one market. I let you choose the 10 most successful Malls and retail parks around the country. More or less, about 40% of their tenants do not reach "break even point". This means that they lose money every month. Then let us choose all the other Malls in Romania. 60 – 80% of their tenants also do not reach "break even point". Does this sound like an "easy to handle" problem?
7. Thus the rents continue declining… Almost all Mall owners (with few significant exceptions) have to choose between lowering the rents of their tenants or losing them. But lowering the rents means that their income will be reduced as well. And how will they pay their bank's instalment? (which meanwhile has increased a lot, as the interest rates are much higher than 2008)
And the well known secret that they still don't admit officially…
All the above are important and vital, causing many headaches to the Mall owners, but their biggest problem is different. It is called "the first floor of the Mall". Exceptions around the country are counted by the fingers of one hand. All the rest have major problems to keep their first floors busy, full of tenants who actually pay rent each month. There are many Malls whose upper levels become deserted, as people tend to remain on the ground floor levels (this is an international trend).
Every week of every month I hear about (serious) companies leaving their commercial spaces in Malls (even the top ones). Most of these spaces are located at the upper floors of the projects. You will also notice that in some other cases shops from the first floor are moved to the ground level, in order for the retailer to attempt a "last try" to save his business there.
This trend will be increased during 2011 and unfortunately the only vital solution for some Malls will be to rent these surfaces to major retailers for very low price, in order not to close them down completely. Ofcourse officially no one will tell you this. But it is good for you to know, especially in case you think about investing in retail and you discuss with Malls…