Eastern And Central Europe See Restaurants And Retail Moving In
Czech Republic, Hungary and Poland are becoming more attractive to the savvy retailer, restaurateur and developer.
Richard L. Lackey and Jaana Luik

As the retail property market in the United States has cooled down somewhat, retailers, restaurateurs and developers are looking to other parts of the world for expansion opportunities. 

Although the giants of Asia, China and India are uppermost in the thoughts of many of those seeking foreign expansion, Central and Eastern Europe (CEE) are fast becoming a consideration as a part of their international expansion program or as an alternative area, altogether.

China and India have the populations (1.3 and 1.1 billion, respectively) and the GDP growth (10.7 percent and 9.1 percent for 2006) that make them attractive to retailers. Even when combining the population of all of Europe (including the European part of the Russian Federation and Turkey), it would consist of 41 countries and a population 804 million, considerably less than either China or India alone.

However, there are distinct advantages to the consideration of CEE and in particular the larger, more established markets of the Czech Republic, Poland and Hungary. There are the advantages in consideration of the emerging markets in general. The area has lower wages, which mean more attractive yields to the institutional investors than in Western Europe or the United States. For the most part, the area is under-retailed. In most of the CEE markets there is also a strong potential for rental growth. CEE governments are working hard to solicit foreign investment and the consuming public has an increasing income potential. In addition, compared to the potential for investment in Asia, these countries (Czech Republic, Poland and Hungary) are all emerging democracies, while China is Communist. Though liberalized, the language barriers are usually less. Most professionals speak English and it is not as difficult to do business as in Asia. CEE countries have shed layers of bureaucracy, simplified their tax systems, invested in education and overhauled their infrastructure.

In no other place in Europe are the entrepreneurs and consumers as optimistic as in Poland. The World Bank recently upgraded the “emerging” Czech Republic into a “developed” nation.

Dun & Bradstreet recently ranked Hungary among the top economies of all the countries in transition. Andreas Polkowski of the Hamburg Institute of International Economics (HWWA) said, “In the next 10 years, the gap between per capita income in the old and new EU member states will progressively close.” 

Many of the major U.S., U.K., and European international real estate brokerage firms, commercial developers and financial institutions are already in CEE markets with their offices and/or investments or are eyeing closely these markets. ING Real Estate, Jones Lang LaSalle, CB Richard Ellis, Colliers International, Cushman & Wakefield-Healey & Baker, Simon Property Group, General Growth Properties, GE Real Estate, Urban Retail Properties and Heitman are just a few.

Although the development of hypermarket-anchored centers is most popular at this time, other centers, of every category (mixed-use, fashion malls and convenience centers) are underway or in the planning stages. Even though many Europeans are used to shopping in downtown city centers, a number of shopping center developers feel there are untapped markets throughout the CEE secondary cities. Some CEE countries have become very attractive for investors given the small number of sizable modern retail spaces and quickly improving living standards. In Poland, approximately 130 commercial projects are underway. Hungary and Czech Republic are also experiencing a significant number of new projects either under construction or in the planning stages. “The investments are much cheaper there [in CEE] but the average expenses by the consumers are very similar,” says Serge Brunschwig, the president of Prinault-Printemp Redoute, a French financial conglomerate.

Czech Republic

Of the emerging democracies in CEE, the Czech Republic has one of the most developed industrialized economies. With a population of approximately 11 million, it is one of the most prosperous and stable of the post-Communist states of CEE. Its population is well educated and the country has a well developed infrastructure. Its GDP growth rate for 2006 was 6.1 percent, compared to the 2006 GDP growth of the U.S. of approximately 3 percent. There are more than 30 major shopping centers up and running currently and by the end of 2007 another 13 shopping centers are scheduled to open across the country (adding another 4.2 million square feet of new retail). Czech Republic’s largest shopping center (approximately 2.7 million square-feet), Letnany Obchondni Centrum, opened its final phase last year and features 200 shops and 19 cafes, bars and restaurants, with a multi-swimming pool and ice hockey stadium.

Poland

With a population of more than 38 million, it is the largest new EU member. It is both an affordable production site and contains a market full of hungry consumers. The GDP growth was 5.3 percent and the economic growth was 5.8 percent in 2006. The 2.4 million-square-foot mixed-use development in downtown Warsaw (Zlote Tarasy), which opened in 2006, is said to be the beginning of the next generation of retail development in CEE. It features an eight-screen theater plus 220 stores, including The Body Shop, Marks & Spencer, Zara, H&M and Hard Rock Café. Poland’s largest shopping center, at 1.1 million square feet, is Arkadia and is 35 percent owned by Simon Property Group.

Hungary

Despite an earlier overheated economy, which resulted in excessive budget deficits, important measures have already been taken by the government to secure additional revenues and cut expenditures. Although this country of approximately 10 million has seen its GDP drop from 3.9 percent in 2006 to an estimated 3.0 percent for 2007, those monitoring Hungarian economic development feel it will soon be back again on a path of sustained growth and wealth creation and on the radar of those seeking retail development. Interestingly, most of Hungary’s major retail players are foreign-based. Considered Central Europe’s largest shopping center, the 2 million square-foot, WestEnd City Center in Budapest, was opened in 1999. It features 400 shops, offices, 30 restaurants and cafes and a 230-room Hilton Hotel. Amongst its tenants are: Valentino, Diesel, Adidas and Nike.

If your decision is to consider going international, it is prudent to anticipate that you will encounter different cultures, customs, laws (protection of intellectual property rights may be difficult, for example) and ways of doing business. Caution should be your guiding principle. In making the decision to enter a certain foreign market, the selection of a partner(s) is definitely a most critical factor. Whether one is a developer, retailer or restaurateur, seeking a partner that has extensive local market knowledge, experience and the financial and infrastructural abilities to properly assist with your development and/or roll out your brand is vital. SCB

Richard L. Lackey is chairman of Lackey Cos. LLC, chairman of the Council of International Restaurant Real Estate Brokers, Ltd (CIRB). Jaana Luik is executive vice president of Lackey Cos. LLC, an international restaurant real estate brokerage and consulting firm with offices in Palm Beach, Florida and London, England.