AFI Europe is part of AFI Properties, one of the leading real estate development, management, and investment companies, operating in Central and Eastern Europe since 1997. AFI Europe’s diversified portfolio consists of shopping centers, business parks and large-scale residential and mixed-use developments. The group operates in Romania, Czech Republic, Poland, Germany, Bulgaria, Serbia, Hungary and Latvia.
Doron Klein took over leadership of AFI Europe Romania in June 2018. He also manages the company's business in the Czech Republic.
You are coming out of what sounds like a very successful 2020. Among others, you finalized the largest ever transaction in the Romanian office market, in the midst of a global pandemic which hit the office segment primarily. What made you believe this is still the right way to move forward?
The deal was initially signed in December 2019 and was supposed to be closed at the end of March 2020. Travel was already complicated at that point, we were all stuck in different locations, so closing was simply impossible. To cut a long story short, we managed to negotiate different terms for signing with the seller (NEPI Rockcastle) and closed the deal at the end of August.
This deal was interesting to us from the very beginning - the buildings are well located, well occupied and the yields fitted to our business model. We looked at this investment bearing in mind the long term and considered various scenarios and risk factors.
Of course, a global pandemic was not something we anticipated but I still believe in the office market for the long term, especially for good locations (each and every property in the portfolio we acquired meets this criteria).
2021 will likely continue to be challenging for this segment, but we are taking all necessary steps to ensure that once people are allowed to go back to their offices our premises will be ready to welcome them with as safe environment as possible. This is something we have been working on from the early stages of the pandemic.
Do you expect as many people to come back to their offices?
I am talking to many of our tenants, not just in Romania but in other countries in the region , and what has been confirmed time after time (including through lease extensions) is that people are eager to go back to their offices. A certain percentage of workforce may continue to work remotely, but this percentage will not be significant - tenants are estimating this to range between 10-15%.
What should be noted is that before the pandemic the office efficiency was a key factor with an attempt to achieve 6-7 sqm per person. I believe this will change after the pandemic and we will see more social distancing kept within the office premises. This will therefore offset the fact that certain people will be allowed to work from home.
The way I see it the impact on the office demand will be minor overall.
2020 also marked the opening of the new AFI Mall in Brasov, slightly delayed by the pandemic. How are things going there, are you satisfied with the initial response?
I am very happy and very proud that we managed to open the mall under the current circumstances. Finalizing the construction was difficult generally speaking, and especially during COVID time.
We opened the mall in October 2020 with almost full occupancy (97%) not just by signed contracts , but full operating stores. This is a great sign of confident expressed by the Tenants in the project, in the location and also in the developer. They were ready to invest and open their shops for business even during very difficult times.
Are you at all concerned that this period has increased people's appetite for e-commerce?
It's a trend that has been unfolding for quite some time, COVID accelerated certain aspects but at the end of the day, similar to what I was saying regarding the office market, people crave socialization and experiences. The range of things one can buy online may increase but all things considered they still want the experience of shopping and the extra benefits we make available in our malls.
Offices and retail have been fundamental to your work in Romania but you made the first steps in the residential segment as well. Can you walk us through why this decision has been made? What was the opportunity you spotted?
First of all residential as such is not new to AFI Europe. AFI City was indeed the first residential project we did in Romania, but we drew from our background and previous experience in the region. In the Czech Republic we have been developing and selling residential units since 2001, and we have similar experiences in Serbia, Poland, Latvia and Bulgaria. So it is a business we know very well.
So what happened in Romania, why did the residential segment come into focus so late?
We waited for the right time. We have been exploring ideas about how to use the land in Bucurestii Noi for the last 10 years, applying different business models. Eventually we came to the conclusion that residential is most suitable for this location.
The land is surrounded by excellent infrastructure, which is essential for determining a good residential project. We are very close to a subway station for instance, and have visibility to Bucurestii Noi Blvd. Phase 1 was delivered in 2020 and the plan is to build more over this land once the zoning permits will be in place.
You also head AFI Europe's business in the Czech Republic - how do the two markets compare? What do they have in common and what would be the most striking differences?
The Czech market is smaller, we are talking about a 10 million population and a country that is highly dependent on its neighbors (Germany in particular). Speaking about offices, Romania is different in the sense that the market is more than just the capital, Bucharest - it spreads in other cities as well, like Cluj, Timisoara etc. By contrast, in the Czech Republic, the capital city of Prague is overwhelmingly the source for offices, which limits our ability to grow and expand.
What exciting developments do you have in store for the coming period?
About two years ago we made a strategic decision not to act as a pure developer, that exits after the project is ready. Instead, we want to grow our income generating portfolio be it retail, offices or residential for rent.
So we are not considering at all at the moment selling our properties. On the contrary, we want to keep growing both organically by developing our land bank and by acquiring income generating properties.
For residential in particular, for new projects, we want to focus on residential for rent. We already started this model in other markets but it is a little early to talk about how/ when this could apply Romania.
That is an interesting approach, why are you betting on residential for rent?
It is a complex topic, but I can highlight a few facts. In Poland and the Czech Republic the selling price has increased considerably for residential units over the past 5 years (close to 100%!) while the salaries increased but not as much. For a young couple that decides to settle in Prague it is almost impossible to get the needed equity to buy an apartment. So they are pushed to find an alternative.
If we provide our tenants with a good product, that includes amenities (gym, dry cleaning, coffee shops), maybe even a rent that is guaranteed for a long term, I think that many people will appreciate it. So far we have been getting positive responses from potential occupiers (companies and individuals alike) - it seems like the right timing.
Romanians have a strong sense of property though, it is part of their culture in a sense...
We are all experiencing cultural shifts at this point in time, millennials for instance want to maintain a certain flexibility. They don't want to be tied up to a certain work, nor to a certain property. This attitude is already common in the western world, look at Germany for instance, the market is mostly working on a rental model.
We are dreaming of a Bucharest skyline someday - are you planning any exceptional projects that could make a contribution?
Yes but we cannot disclose too much as yet, as we are too early in the permitting process. What I can say that we are very excited for what's to come in this matter.
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