Is there and adequate market in Gyor? Are rents adequate to support this development?
Gyor was chosen as the primary project site by ECE after careful consideration, under the assumption that its market was sufficient to support the project. Phillip von Wilmowsky base assumption were that Gyor enjoys strong demographic and economic potential, high accessibility and minimal competition. And more specifically, these were the main rational points underlined by von Wilmowsky assessment: •Hungary’s Macroeconomic Condition † As of the case date, Hungary is in the midst of integration with the EU economy. Hungary enjoyed several years of high GDP growth, high employment rates and an appreciating currency. Hungary has still half the GDP per capita as Germany, but enjoys high purchasing power (labor and good costs are still relatively low). •Area’s Demographics † The site has a projected catchment-area of some half a million inhabitants. Gyor has a higher income per capita and employment rate than the Hungarian Average. •Competition † Gyor has no current competing projects, and most of its retail sector is dispersed in the city center. However, improving economic conditions in the area will probably facilitate entry of competition in next few years. •Accessibility † The site chosen for the project is highly accessible within the city for pedestrians, public and private transport. However, Hungary has a low ratio of car ownership per capita, which inhibits it’s accessibility to potential buyers from the rim of the catchment-area. Review of these points might facilitate von Wilmwosky’s assumption that the site could reach a market demand share of 8%-12%.
ECE has had no experience in operating commercial sites in rural Hungary, so von Wilmowsky had no good comparable data in order to assess the potential rent rates. Von Wilmowsky estimated the retail annual net productivity, based on comparables in Budapest and other locations in Europe to be 2,812 Euro per sqm. This yield is about 30% higher than that is common in the US. The planned rent for inline stores would comprise some 12.3% (including CAM contribution) , in line with ECE’s experience. All in all, it seems that Gyor can support the project rents if von Wilmwosky’s reasonable yet aggressive assumptions are proven to be correct, and pending light competition. I would suggest using a more conservative assessment (30% lower) as to the annual net productivity per sqm. and deriving the 12% rent rate from it.
How would you structure the deal with your equity partner? If you were an investor what would you want?
The object of the deal with a potential equity partner is to mitigate the initial risk involved in the investment in the project and achieve higher yields. The lending bank requires an equity rate of at least 30% of the total needed investment. The initial risk is relatively higher than other similar projects in Europe, due to the planning problems (that might delay the project by several years), the uncertainty related to occupancy and rents (there are no comparable projects in the area) and Macro risks involved in investments in Hungary. Therefore, it is prudent to seek an equity partner. Usually, the deal structure with an equity partner has two main characteristics: •Preferred status † The equity partner will seek to receive for his investment interest-baring preferred stock in the project. In other words, he will have precedence, in case the project does not yield positive returns, to receive his investment (with compounded annual interest) with preference over the other shareholders. •Excess cash flow stake † If the project proves to be successful (it achieves a positive yield), the partner will seek a share of the excess profit, beyond the return of his investment (with preferred terms). The deal terms are a zero sum game † the partner will want to receive maximal preferred status and ECE the opposite.
The partner would...