Echo Polska Properties consolidates retail market

Hadley Dean, CEO of Echo Polska Properties (EPP), talks about the company’s plans to dominate the country’s retail market, and reveals his view of other Warsaw developers as partners in building a better city, not as rivals.

How has the first year at EPP been?

It’s been a very active period for us. We’ve just completed our H1 results: we’ve made 11 acquisitions since listing in 2016, within seven retail locations. We’ve added €500m worth of assets in value, we’ve delivered on our promises and our dividends and it looks like the rest of the year will be the same. We’ve also changed our company strategy and we are going to focus on consolidating the retail market in Poland. We want to own shopping centres in Poland’s dominant catchment areas; this makes them defensible and therefore sustainable. We believe that the strongest growth in Poland is in retail. We’ve looked at a huge amount of data before deciding and, as a result, we’re now selling our office buildings over the next three years, in a gradual phase to help fuel our growth. That doesn’t mean to say that our office buildings aren’t performing well – we have very low vacancy in our projects – but we’re doing it because we can’t keep going back to our investors to raise another €250m in equity.

Why do you have such faith in retail when the sector seems to be under siege, especially in the USA?

That is the million-dollar question. The US retail market is very different than in Europe, mainly because they are three times oversupplied in retail. It’s amazing how much retail was built there in the past. I think there has been a lot of noise in recent years about e-commerce and how fast it’s growing – and clearly it is – but people are making a mistake if they think the two can’t co-exist. Retail has always changed. When you look at what’s working, you can see three things. One, food is the new fashion. People are using shopping centres much more now as community areas. Two, the retailers doing best are luxury brands and fast-fashion like Zara. Third, the other retailers doing well are  discounters like Pepco or TKMaxx. Everyone loves a bargain. Now, in the States, it’s all about creating an amazing experience: more staff and more space.

Haedley Dean, CEO of Echo Polska
Properties (EPP)

How does that translate into revenue?

It’s click and collect. We’re seeing retailers figuring out that e-commerce allows them to really control the brand and observe the customer reactions in the store. No-one has the definitive answer about how things will evolve but all the data that we’re seeing shows that the e-commerce and retail. Something like 50% of those who click and collect will buy something else in store. Shopping centres are usually in convenient places, so retailers are encouraging people to come in and collect by offering discounts. It’s cheaper and typically people like to go to a shopping centre every two weeks or so. The beauty of Poland is that we have time to figure out what’s happening. Poles do not like giving their financial data online, Poland has one of the lowest credit card penetrations in Europe and, in Poland, people underestimate the impact the climate has on shopping habits. A lot of people also underestimate the retail therapy of physically going to place and buying in person. People really enjoy it, especially in Poland, and a lot of analysts just don’t get it.

How is cooperation between EPP, Echo Investment and Griffin Real Estate?

In a sense, we’re very fortunate because all three focus on different areas. We focus on retail, Griffin Real Estate on office and Echo Investment on development. There is around a billion euros of development going on and the reason why we’re here in the same office as Echo Investment is because our futures are absolutely linked.

Everyone is very interested in the Towarowa 22 retail project. How do you see traffic concerns playing out there, with all the new offices being built in the area?

It’s directly connected to the metro, which we’re heavily pushing people to use. Look at London: no one drives to work in the centre anymore, while very few people drive to work in Paris. As Warsaw develops, getting around by car will become increasingly problematic and that’s where the commuter belt will come into play. People will come by train from Podkowa Leśna because you can get into the city in 30 minutes. It’s not just going to be an amazing retail centre – it has to be an urban environment. No one wants to see a dirty gray box – we have 6.5 ha land We’re talking about having skiing events on the roof, we want to have a high street and a big square for major events. It has to be for the city.

Who will be your architect?

We’ve had a local architect on it so far. We want to create a place where people will live, work and be entertained. We want people to come here as part of their visit to Warsaw. This will be the most exciting project in any European capital city in the next five years. It is the jewel in our crown. We want to work closely with the city to make this as fabulous a project as possible. We know what the city wants and they know what we want.

Galeria Młociny, recently acquired by EPP and Echo Investment, is an 81,900 sqm mixed use development in north Warsaw, due to open in 2019.

Do you see projects such as Koneser, EC Powiśle and others as competition?

Absolutely not. This is about giving something back to Warsaw. We’re rebuilding something. Of course all developers want to make money, but this is about making Warsaw into something quite extraordinary. Powiśle and Koneser and Browary Warszawskie – it’s about a city building its own identity again. By 2025, Warsaw will be the highest city in Europe in terms of floors in office buildings – excluding London of course. Frankfurt, for example, only has about eight or nine high towers.

Isn’t there a concern about too much office space?

Yes, but the economy is growing by 4% a year so the organic growth in the city is already at massive levels. Plus, Credit Suisse have come in and created 2,000 new jobs and JP Morgan is coming in and making jobs. Warsaw never used to a destination for back-office jobs but now it’s becoming a real hub for highly-skilled jobs. I don’t know what will happen to the Warsaw office market, but I do know that the city will develop in the next few years and will be unrecognisable in ten years time.

We see retail as having the biggest growth. From a macroeconomic perspective, we have a burgeoning middle class where people have their flat, are paying off the mortgage, are having dinner out once a month and going abroad for their holiday. And now, this middle class is dipping into consumerism. There is a blooming middle class now and it’s so exciting, but people don’t realise this. It’s happening in the big cities and also in the small cities. The reality is that the 500+ benefit programme is the biggest redistribution of wealth in Poland since World War II. And it’s working. The government has done a good job in decoupling the economy from the politics. Poland is like a young Germany – it’s just getting going. We think retail is going to be a big part of this. If we can consolidate the retail market in Poland, then we think we can drop our operating costs significantly. This will be passed on to the retailers, who can pass it on to the customer in turn.

Is the South African perspective on real estate investment different to that of a European or a US perspective?

When you look at big real estate markets in the world – the US, the UK, the Netherlands – there’s one thing they have in common: they understand that you build wealth through property. That’s not the case in Germany, and that’s why the German commercial real estate market is a long way behind the UK. South Africans have the British-Dutch mentality – it’s around the eighth biggest commercial real estate market in the world. They love property, they understand property, and they love Poland because they can relate to a developing economy.

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Written by: Richard Stephens