Tenant risk may add to mall developers' troubles in CEE

Tenant demands form a growing risk for retail developers in Central and Eastern Europe, claims Rachel Lavine, CEO of Atrium European Real Estate (formerly Meinl European Land). 'We haven't seen this trend yet in Poland or the Czech Republic, but it wouldn't surprise me if we started seeing tenants demanding discounts there in the future.'

The potential size of tenant risk in the retail sector is an unknown factor, Lavine claims. 'The development risk, getting planning approval and finding the right design, is one thing. But the tenant risk is new for this part of Europe. I have been active in Central and Eastern Europe since 1997 and during this
period I have only seen yield compression.'

Retailers are normally required to pay three or four months rent upfront for new shopping centre developments, but this is, in reality, little more than an option for them to take the space. 'If a retailer were to rein in its expansion plans, forfeiting the pre-leasing payment would be a relatively inexpensive and simple way for them to achieve this,' Lavine notes.

'We have not yet seen this - and I hope we don't - but if a big chain were to forfeit on a pre-leasing agreement, that would send shock waves through the industry. And as a developer, there is really not all that much that you can do about it.' Hypothetical situations like these are making it more difficult to price
risks at present, Lavine continues. 'What yield should we be demanding to cover both the development and tenant risk? We're seeing yields move out for the first time in Central and Eastern Europe. At the same time, rents are no longer rising and there is no certainty that they will stabilise; they may well fall.'

Turkey accounts for a sizeable part of Atrium's current development portfolio. With eight projects in the pipeline, it ranks third after Russia (17) and Poland (12). The Vienna-listed company currently has 155 operational assets, of which 99 are based in the Czech Republic and 25 in Hungary. Another 15 are located in Poland while Russia accounts for 7 assets. Lavine concedes that Atium’s Russian development pipeline is substantial, but says the company is now focusing on its investment properties. 'We are seen as a developer,' she says, pointing to the company's share price which has been decimated in the past year. 'But that is the wrong perception. We are first and foremost an operator and owner. For now, we're doing as little as possible on development
and only have €426 mln of costs to complete the projects under construction.'