Waltz On The Danube

Waltz on the Danube

Executive Summary

The purpose of this case is to establish the viability of the Ђ75 million shopping center project located along the Danube River in the city of Gyor. As the director of Hungarian operations for ECE Projektmanagement Dr. Philipp von Wilmowsky had worked for two years on the 30,300 square meter shopping center. So while Gyor lack significant a shopping center thus creating a site that had great potential there were several major questions that would define the success of the project.

The question that transcends the project is whether equity investors be sufficiently rewarded to justify there financing interests. The answer to this question is dependent

on several factors including the viability of the market and the adequacy of the rents. Also the design selected could financially impact the returns on invested capital. The use of sensitivity analytics could be used to compare and contrast the different options and help differentiate between the levels of risk associated with each. Understanding and avoiding the risks associated with such a massive project in an emerging market will allow Philipp to proceed with the deal and help ensure he can convince the equity investors to back the deal.

In conclusion the recommendation would be to pursue scenario 3. While it is not the most elegant of designs, its beauty is in the practicality and simplicity of the design. This will appease the equity investors without compromising on sales area or floor space. The justification for this plan is presented in a series of exhibits that proves even with less than idea circumstances the equity investors will be ensured their required rate of return.

Analysis

1. Is there an adequate market in Gyor?

Gyor was chosen as an attractive site on the basis of the adequacy of its market. Gyor is a central geographic location within Hungary's burgeoning economy and that has been accentuated as the strength of the labor market has become more consistently reliable as apposed to erratically undependable. Gyor also has some demographic

characteristics that would interpolate a strong market potential for the region. So while Gyor is only fifth largest principal city in Hungary with only 130,000, the city is more modern than other major cities in the country and has the largest catchments area after Budapest.

Central Location

The catchments area is defined as a driving distance of less than 45-minuets includes 490,000 inhabitants. This is a standard distance for regional centers that could lead to the rational expectation of a potential customer base and therefore sales dollars. The traffic pattern in the city is conducive to attracting customers from outside the city and is a nexus of traffic including four national roads. These roads connect some major cities including Budapest, Vienna, Bratislava, Slovakia and Austria. The site is also near a bus station removing the necessity for transportation as a barrier to access to the shopping center. There are also economic and demographic trends that also have a great opportunity to translate into a strong series of beneficial outcomes in and around the predetermined site.

On recent strength of the Hungarian economy the labor market has allowed for more discretionary spending. This translates into a tremendous potential for future growth in retail sales driven by strong demand for customer goods. Forecasts for the time span 2003 to 2007 anticipate accumulative appreciation of private consumption building on continued economic growth. Invariably these sanguine expectations could present a major cause for concern considering the success of the ECE's investments is reliant on these economic variables that they have no control over.

Also due to demographic factors there would tend to be more discretionary income in Gyor relative to Hungry as a whole based on the purchasing power index. The purchasing poser of individuals living in Gyor is 115.9 compared to that of the national index of 100.0. The problem being that the retail purchasing power throughout the region is lower than many other major industrial nations. So while the growth potential facilitates opportunity, the lower income per capital must be recovered through greater reach. Lower levels of development and therefore less competition makes this possible but is a major question mark of whether the market in Gyor will support the development project.

The success of the 2002 opening of a suburban mall near Budapest would be supportive the viability of the potential market in Gyor. Based on the location, the economic factors, and the demographics of the area, Gyor would also be the next logical site for ECE to expand. The development project therefore makes sense in Gyor, providing a strong investment opportunity to add value to the company.

Are rents adequate to support this development?

The tenant structure of the shopping center is an important factor in ensuring rent is adequate to make the project viable. The fact that Philipp conceded the hypermarket could have a negative effect on the overriding success of the project. ECE strategy typically relied on these large self-service retail stores. Hypermarkets are very desirable to customers since the warehouse structure enable the stores to offer a wide variety of products (i.e. fresh food, beverages, home supplies, electronics, clothing, car accessories, garden furniture etc.) at discounted prices. This lack of a hypermarket must be offset by assurance and the allure of the anchor tenants.

Philipp's was able to secure commitments from four major national brands as anchor tenants. The anchors included a supermarket, an electronics store, a sports equipment store and a clothing store. These stores would comprise 14,300mІ of the total 30,300mІ gross rentable area, leaving just 16,000mІ of rentable area to be filled by small retail shops and the food court. If this scenario were to play out the ECE could support this development even without the hypermarket. These anchor stores should be enough to attract shoppers to the center and increase client turnover in the shopping center.

Since all leases would be 10 year contracts the long term visibility of future cash flows would be relatively secure once contracts were filed. The anchors would provide average cash flows of Ђ108 per mІ per year while the inline stores would provide average cash flows of Ђ264 per mІ per