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Well financed retailers can increase market position

The situation on the retail market continued to deteriorate in the first half of 2009 and Colliers forecasts even tougher times ahead. Retail sales declined by 4.2% year on year in May 2009, the 28th consecutive month of contraction.

It appears certain that this trend will continue well into 2010 with sustained growth unlikely to return before 2011-2012 at the earliest. “Rents have fallen across all product types for the third consecutive quarter. Fortunately new supply has been limited. Stable, well financed retailers can capitalize on the misfortune of weaker competitors to strengthen their market position and pick up excellent locations under favourable terms. Finally, shopping centers are finding that specialization is increasingly the key to success” ­– points out Anita Csörgő, associate director and senior broker of retail divison at the Hungarian office of Colliers International, the most important facts from the latest retail market report based on 2009 mid-year data.

Non-food sales were down 7% in the first five months of the year, with some international family fashion brands reporting declines of as much as 15% over this period. The decline outside Budapest has been even more pronounced than in the capital. In an attempt to maintain profitability many retailers, both local and international, are seeking short-term rent and service charge reductions from shopping centers and are considering closing their least profitable locations. With confidence in the industry at a low, smaller retailers’ access to credit has been extremely curtailed which has impacted their ability purchase stock. Almost without exception, survival is at the top of everyone’s mind followed by a desire to maintain their market position.

Retail take-up during the first six months of 2009 was the lowest recorded in the past five years. New international brands have cancelled or delayed market entry plans and most of the take-up has been by brands already present in the market. Discount family fashion operator KIK has opened 20 stores throughout the country in the past 12 months. H+M signed leases for 4 new stores and new entrant Italian Oviesse has signed for 10stores. The market position of the few expanding firms is stronger than it has ever been, with landlords now offering extended rent-free periods, fit-out contributions and general break options to fill space currently under construction or recently vacated.

Retailers in the Home Electronics, Book and Home Furnishings segments have seen the largest drops in turnover, 14% for Home Electronics, 16% for Home Furnishings and 8% for Books and retailers in these sectors have frozen expansion activities in Hungary almost without exception. Indeed, of major Hungarian Home Electronics retailer, ElektroPont, went bankrupt at the end of 2008 and British ElectroWorld - who had failed to turn a profit since their entry into Hungary in 2002 –sold their 9 stores in Hungary to Romanian EW Electro Retail for 1 EURO in May2009.

Fortunately new supply has been limited. No new shopping centers opened during the first half of 2009 and only ING’s 47,000 sqm GLA Allee will complete during the second half of the year. Outside Budapest, the Gödöllő Stop.Shop opened almost fully leased in Q2 and the ZalaPark strip mall will open in Zalaegerszeg in Q3. Centers are now opening with 10-30% vacancy and the slower take-up times have begun pushing back the opening of centers currently under construction.

Rents have fallen across all product types for the third consecutive quarter. Prime High Street rents are down 21% on a year earlier and shopping center rents have declined by an average of 10%, with more pronounced declines seen in secondary centers and those outside of Budapest. Developers with projects scheduled for completion in 2010-2011 are achieving rents some 30% below their 2008 Estimated Rental Value (ERV). Strip mall rents have decrease to 15-30%, however again the decline is larger in small towns and those places where more than one stripmall project has been completed. Few tenants are now willing to even consider paying key money, although in the very best locations tenants are still able to achieve considerable sums.