Retail Faces Major Challenges

Allee shopping center

The shopping center markets in Budapest and other Central European capitals are seen as consolidated in terms of total stock, with center owners and investors instead concentrating on upgrading and extending their products to meet the changing market requirements.

From a demand perspective, the Hungarian retail market had been recording positive retail indicators as retail sales increased steadily in the post-economic crisis era. The top tier of Budapest shopping centers all had waiting lists for new spaces and there have been no significant deliveries for several years, with a number center owners planning to undertake reconstructions.

Analysts had long argued that a new shopping center project that freshens up the Budapest retail offering would be welcome. International retail developers such as ECE Development and Echo Investment had planned shopping center developments for the capital, but they have been abandoned in recent years.

“Footfall in prime shopping center schemes is around 50% of pre-COVID and Hungary is a long way behind the rest of Europe in terms of online retail share, but the growth is expected to be much quicker,” comments Cushman & Wakefield on the first half of 2020.

The consultancy puts retail stock in Budapest at 770,000 sqm with pipeline represented by one major shopping center development, the first in several years and subject to a number of postponements. JLL put total modern shopping center stock in Budapest at 720,000 sqm, which is low by European standards and represents a total shopping center density of 440 sqm per 1,000 inhabitants.

Rescheduled Handover

The 55,000 sqm Etele Plaza by the Hungarian developer Futureal has a rescheduled handover of Q4 2021 or Q1 2022, when potentially the market could improve.

The complex, designed by the Hungarian Paulinyi and Partners and the Budapest studio of the international Dyer Group, will include around 180 retail outlets located at a transport hub at the Kelenföld railway station, metro line 4 and the approach section of the M1-M7 motorways. In addition to the retail and service elements, the overall project will include the phased, 65,000 sqm Budapest One Business Park.

According to Futureal, the site, located in the west of Budapest, has 236,000 people within a 10-minute traveling distance; a further 165,000 passengers are estimated to travel through the transport hub on a daily basis.

“Amid the challenges raised by the pandemic, the development of Futureal’s EUR 300 million Etele Plaza is still in progress with full capacity and expected to open by autumn next year. Meanwhile, to date, more than three quarter of the rentable area has been leased to high-profile tenants including some of the largest fashion retailers,” says comments Futureal.

“Spanish fashion giant Inditex Group’s international brands available in Hungary including Zara, Zara Home, Stradivarius, Pull&Bear, Bershka, Oysho and Massimo Dutti have joined Etele Plaza as anchor tenants,” the developer adds.

Analysts generally have a positive view of the development from the perspective of location, tenant mix, potential footfall, sustainability and exterior and interior design.

“Due to its excellent location as well as the unique digital, sustainability, health and safety features there is a huge demand among retailers for the unique business opportunity and experience Etele Plaza can offer to them,” says Tibor Tatár, CEO of Futureal.

“As a result, we have already successfully leased most of the rentable space and we are in negotiation with many promising partners. The complex was scheduled to open earlier had not it not been for the pandemic and subsequent lockdown,” he adds

Etele Plaza, designed by Paulinyi-Reith & Partners.

No new Entrant

The first half year was the first time in the past 10 years without a new entrant in the retail market according to CBRE. A combination of availability and 10-20% falls in prime rents could be seen as an opportunity for retailers to enter the market in 2021.

“Leasing demand remained fairly positive over the first half of the year, vacancies provide more options for brands looking to expand, relocate to better locations or entry into the market, which can easily lead to an organic refreshment of tenant-mixes across the country,” says CBRE.

Having been the dominant investment destination along with office, investors are now reluctant to invest in the retail sector, initial due to concerns over the growing popularity and use of ecommerce and subsequently because of the COVID-19 virus.

These issues have substantially reduced investment activity in the sector. Due to the current economic and business uncertainty, most investors prefer a wait and see approach. Banks have been unwilling to provide finance for retail projects.

Even while developers and shopping center operators are devising new retail concepts and designs to meet the perceived threat from e-commerce and changing consumer and retailer demands, they are also now adapting centers to meet the challenges of the coronavirus pandemic.

Thus NEPI Rockcastle, the South African investor and developer with assets across the CEE region, is set to modernize and expand its Budapest purchases, Aréna Plaza (since renamed Arena Mall) and Mammut, in response to the current market needs.

“The buildings are frequently ventilated with 100% fresh air and additional cleaning and surface disinfection protocols are performed regularly. Frequently used furniture and equipment are disinfected hourly. Furniture in common areas is limitedly available for visitors to decrease the possibility of getting close,” comments Erna Balla, operations asset manager at NEPI Rockcastle in Hungary.

“Besides the above, the owner has placed hand sanitizing dispensers at numerous busy points in the properties. Shoe sanitizing mats are laid at all entrances of Mammut and mobile germicide lamps are disinfecting the air at the restrooms while in Arena Mall this is done by ozone ionic machines,” Balla explains.

“Social distancing rules are enforced through sticker markings in seating areas, corridors, elevators, and escalators. Operational staff, management staff, sales staff and all visitors are obliged to wear face masks and apply all other precautionary measures when entering. Both for Arena Mall and Mammut, it is extremely important that visitors feel safe and secure, so we are implementing the highest hygienic measures in our buildings,” she adds.

Major Trend

Complexes that mix commercial, service, leisure and residential elements or with direct access to residential could be seen as the major retail development trend.

“New developments are going to be mainly mixed-use urban projects combining retail, leisure, offices, residential and hotel use. Also, there is still a potential for extra-large destination shopping centers including all elements of a small city center including entertainment,” comments Jan Kotrbáček, head of CEE retail at Cushman & Wakefield.

Another trend is that retail parks have been doing relatively well in the crisis.

“Our Stop Shop portfolio is completely stable, it can be said that the general retail turnover returned to the pre-crisis level, and even exceeded in some segments,” says Viktor Nagy, country manager for operations at Immofinanz Hungary.

“Our tenants benefit greatly from the generally low rental and operating costs of Immofinanz’s cost-effective retail concepts, which include Stop Shop retail parks. We see that a good tenant mix and affordable comfort products have been playing an important role in a successful return,” he continues.

“In our view, customer habits have changed somewhat; the basket value has increased, meaning that during a single purchase, customers visit more stores and buy slightly larger quantities at once. During and after COVID, shoppers were more likely to turn to ‘open space’ shopping parks than to the regular ‘closed’ malls,” Nagy explains.

Although there has been a step change in the number of customers shopping online, and the market share of ecommerce across Europe is expected to reach 15% according to Savills, penetration in the Hungarian retail market is lower, indicating that Hungarians still like to shop in a physical store, despite concerns over the pandemic.

Euromonitor estimates the ecommerce penetration figure for Hungary to be 7.3% for 2021 and 7.7% for 2022, while it will be 10.9% and 11.7% respectively for the CE-5 (Poland, Czech, Slovakia, Hungary and Romania).

Regarding the threat of ecommerce to the retail sector, Gábor Borbély, business development and research director at CBRE Hungary, sees shopping center owners as needing to redevelop in order to survive in the post pandemic period. Malls will, for example, require pick up points and larger storage facilities, he says.

Etele Plaza