Hello, and a very warm welcome to all of you at NEPI Rockcastle's Capital Markets Day. It is a fantastic day to see you in this very beautiful city, in this amazing hotel. It's a little bit dull outside, or it has been this morning, but I can tell you that you will have anything but a dull morning ahead of you. We have a very, very exciting lineup indeed. My name's Tanya Beckett. I'm a BBC broadcaster, so my job is to help the flow of the event, but also to ask some difficult questions and make sure that you get out of the day what it is that you're looking for. My first duty is to welcome our online audience and wave to them. Thank you very much indeed for joining us, and we hope you enjoy our journey this morning.
I just want to go through some of the agenda with you, just to give you a picture. If you look on the back of your passes, you will find that you have the agenda. Just to talk you through some of our thinking. We start off with a bit of macro in this rather turbulent geopolitical and economic environment we find ourselves in. We drill into that and get a handle on what the big picture looks like. We'll also then talk about the changing trends of consumers and what they've been doing and how they've been thinking over the past few years, and more importantly, how they're going to be thinking over the next 5 - 10 years. We will hear, of course, from the NEPI Rockcastle team as well, and we'll be drilling also into the investment environment.
What does it mean to invest in this field at the moment, and what are some of the parameters and the benchmarks that people are using at the moment? I hope that that's all clear. As I've said, you've got it on the back of your passes, so if you need to orientate yourself at any point in the morning, then please feel free to do so. I've told you that we have our web audience. We will also be recording the event. That means that we will be filming it. So there's a GDPR consent here. Shall I just leave you a moment to look at that so you're not rushed through it? But it is an important point. So if you don't want to be photographed or recorded, then please feel free to tell us.
Right now, you seem to be sitting in the dark, so I don't think there's going to be too much of an issue with it. Great. But we will, of course, be asking questions. How are we going to do that? We use a technology called Slido, with which I'm very familiar indeed. If you scan this onto your phone, you don't have to download the app, but you can put questions in relating to the speakers. For example, if we have Jens talking about geopolitics and economics, if you would like to ask a question during the time he's talking, just put it into Slido. However, we will also have microphones in the audience, so if you want to vocalize, if you feel compelled to do that, you are also welcome to ask questions in those two ways.
Now today, of course, is about consuming a picture of what we are looking at here. I just wanted to go through, if I can, a few of the details of NEPI Rockcastle. As I thought I would do that, what I thought it would be better to do is show you a video that outlines it more perfectly than I can.
Today, you are in Warsaw, a city with one of the most remarkable stories in Europe, and you are at NEPI Rockcastle's Capital Markets Day, a company with a remarkable story of its own. Two stories of transformation and resilience, both driven by ambition. In 1945, Warsaw lay in ruins so badly destroyed that there was serious talk of moving the capital elsewhere. Its people refused. Under the slogan, "The whole nation builds its capital," they cleared the rubble, often by hand, and rebuilt their city, determined to recover what had been taken from them. For over 40 years, Poland suffocated and stagnated under communism.
You could see it in every shop. Shelves stood empty. People queued for hours for meat, for bread, for shoes, never sure there would be anything left when they reached the front. The real transformation began in 1989, and it played out on every street. People could breathe again. For the first time in their lives, they had choices. The decaying national stadium was turned into a huge open-air market, the Stadium Bazaar, where a generation of Varsovians got their first taste of free trade. By the mid-2000s, that same drive was turning Warsaw into one of Europe's most dynamic capitals.
Old factories and power stations built for production were transformed into places people chose to spend their leisure time. Norblin Factory in Wola, Elektrownia Powiśle by the river, the Koneser Complex on the eastern side of the city. Just as Warsaw was gathering pace, another story of ambition was beginning not far away. In 2007, NEPI was set up in Romania, a modest start, a first portfolio worth EUR 22 million. The company was aiming high from day one. A year later came its first major acquisition, Brăila Mall in Eastern Romania.
Then it moved fast. Slovakia, Serbia, Croatia, the Czech Republic. By 2016, the portfolio had grown to EUR 2.5 billion across 37 properties, more than 100 times what it started with. Meanwhile, another company had seen the same opportunity. Rockcastle, which began by investing in listed property around the world, turned its focus to Central Europe. Above all, to Poland, a country that had queued for bread a generation earlier and was now one of Europe's fastest-growing economies, with shoppers who wanted more. In March 2015, Rockcastle bought its first Polish shopping center, Solaris in Opole. Within two years, run by a team based here in Warsaw, it bought seven more. From Platan in Zabrze to Bonarka in Kraków. It built two new centers from the ground up in Wołomin and Tomaszów Mazowiecki and added Forum Liberec in the Czech Republic.
By the end of 2016, Rockcastle owned 12 retail properties, 10 of them in Poland, worth around EUR 1.2 billion. Then in 2017, the two stories came together. NEPI merged with Rockcastle. A bold move that created the largest retail real estate group in Central and Eastern Europe. Eight countries, EUR 5 billion, a different league. What followed was a run of smart, strategic, and innovative moves. The group sold its office portfolio, a deliberate decision to focus purely on retail.
It built new centers from the ground up in Romania and Serbia, issued its first green bond in 2020, and added solar installations across the region. It added landmark properties, Arena Mall and Mammut in Budapest, and in Poland, Forum Gdańsk, Kopernik in Toruń, and in 2024, Magnolia Park in Wrocław and Silesia City Center in Katowice. The portfolio hasn't just grown, it's held up. Occupancy today stands at 98.2%.
Tenant sales keep rising, and this summer, S&P raised the company's credit rating again to BBB+. Today, NEPI Rockcastle is the third-largest listed retail real estate company in Europe by portfolio value. EUR 8.4 billion of properties, drawing more than 350 million visits a year. From a challenger in emerging markets to the leading retail real estate platform in Central and Eastern Europe. This year came the boldest step yet. For the first time, NEPI Rockcastle went beyond the CEE region into Western Europe with its first acquisition in Spain, MegaPark Barakaldo in Bilbao, the largest shopping and leisure destination in Northern Spain.
There's more to come. Over EUR 820 million of development already under construction or in permitting. The ambition goes further still, with a strong pipeline of new acquisition opportunities. The next chapter starts here and now, and you are part of it. In 2024, Warsaw built a new pedestrian and cycle bridge across the Vistula River, close to the National Stadium, which was built on the site of the old Stadium Bazaar. A bridge is built to take you somewhere new. For NEPI Rockcastle, that crossing has already begun. A gateway to what's next. Connect, invest, grow.
It has been an extraordinary story, and that extraordinary story is being led in this particular chapter and into the future by Marek Noetzel, who is the CEO. Please welcome him.
Good morning. Can you all hear me well?
Yes. Thank you.
Well, first of all, thank you all for coming. It is amazing for me to see you all in my beloved Warsaw, Poland, in the Capital Markets Day of NEPI Rockcastle. Before I go into my opening speech, I thought, why don't I share with you a bit on a personal note, having seen the movie for so many times now. I was watching this clip with the National Stadium, which used to be a huge bazaar, and those of you who lived in Warsaw at that time would remember. I guess this was my first experience with modern retail, which was shopping at the bazaar. I was buying movies and PC games, not necessarily that they were entirely legal, but it all started there.
I would have never thought that in 25 years from then, I would be standing here in front of you in this beautiful hotel to tell you the amazing story of NEPI Rockcastle. Again, thank you for coming. We are thrilled to have you here. We are very, very happy to have so many of you. There is 100 of us here in the room and another 100 people registered, which is amazing. So thank you for coming. I am very happy to welcome our dear investors, the representatives of banks, our dear board members. Most of the board members and non-executive and executives are here with us today. Amazing. There are a lot of NEPI Rockcastle employees, or like I like to call us, NEPI Rockers. Welcome to all of you. I hope you will have a good day today.
Some of you have been following NEPI for many years, but for some, the name of NEPI Rockcastle is new, but I hope long to be continued, the story of following. Whatever the case is, we have one mission for today, and that is to leave you at the end of the conference, having answered one big question: Where is NEPI going from where it stands today? What is the future of NEPI? Or put differently, why are we here? How could you be part of the journey that we want to picture for you today? In order to do that properly, there is a lot of things we will do today. We will speak about numbers, where my dear team, Anca, Eliza, Marius, will tell you how super well they manage their respective business areas. There is reason for that.
We have been building this company for 19 years to develop almost EUR 8.5 billion worth of assets. But we always say the biggest asset of the company are its people. We are here today to show you what we have been doing historically, how have we built this asset, not tangible, but our employees that can take this company to a new chapter, and that is what the conference is today. But we will hear as well from futurists, from geopolitical specialists about what is actually going on and how the business model of NEPI fits in this so volatile world, and why we believe we are well-fit, well-prepared to whatever the challenge may be in the future. So that would lay the foundation for what would be the cream on the cake, which is strategy for NEPI. What is our appetite? Where do we want to go?
Why, and why we do believe we have all the necessary competencies to get where we believe NEPI should be in three to five years from today. I hope a lot of you will decide after the day that you want to be part of this journey. Please, as well, do use us. I mean, you are exposed to the C-team, obviously, but there are a lot of NEPI Rockcastle employees that are board members. Please do ask them questions. Please do take time with them. We are there here for you all day. I hope you will use the time to your best benefit because we can speak every day. We all know each other, but I think it's very useful that you can speak to people who are actually responsible to making sure that every day NEPI Rockcastle improves its performance.
I hope you will do so. Thank you. I will be back on the stage a few times, introduced by Tanya, I'm sure. With that being said, I would like to invite to the stage Chairman of the Board, George. The stage is yours. Thank you so much.
Good morning, everybody. I tend to have a loud voice. I guess you can hear me. I hope so. Welcome to NEPI's Capital Markets Day. I kept saying over and over again when I was rehearsing because I used to work in Prague for a long time. I realized, nope, that's not what I should say. Thank you for your time. As Marek said, we know it's an investment. You're taking a full day to be with us. We really, really appreciate that. We hope it's going to be an enlightening day with a lot of participation. You saw a video, Marek talked about it, but maybe again, why Poland? A major part of our portfolio is here in Poland, so it makes sense, right?
As you've also been following the company, you realize that a lot of our recent history has been written here in Poland. It's a very important market for us. As Marek said, and I think I've got the numbers right, Marek, you started, what, 10 years ago, the office in Poland? Kind of as you talked about, it's a coming home for us as a company, and it's really, really great. Having been a finance director in the past, I know kind of what you need to do to prepare for these things and what you're looking to get from them. I was thinking about it, there are really three things, and Marek touched on them before. Strategy. What is the strategy? What is the financial strength behind the strategy in the company? Who are the people that are actually delivering that?
And let me touch a little bit on that from the board's perspective. Strategy. We are not reinventing the strategy here. It is really a consistent approach. We are going into some new areas which we are very excited about, but the fundamentals are the same. Quality assets, financial prudence, and really investment in people, investment in sustainability. These are all pillars of our strategy, something the board reviews actively with management in our board meetings, and we stand very much behind that.
Financial strength, and I look over at Eliza. Amazing what is happening with our credit rating. Prudent leverage, strong liquidity, all of these things. I kind of say liquidity is agility in these markets where we are actually able to take advantage of opportunities when they come our way. That is something that is incredibly important, and you have seen us do that already, and you will see us do that in the future.
And then last, people. It has been quite a transitional and transformational year this year for us. I would like to start first, before I say anything else, thanking again, Rüdiger Dany, for everything that Rudy did for this company during his time here. Very important transformation in leadership. Rudy also did something together with the board that was incredibly important, helping us develop our internal leadership.
I am looking at two people here, Marek and Marius, both of whom were chosen for their roles not by accident. I mean, we worked very, very hard on developing our team. We are incredibly proud of them. I think the results are obviously going to pay off. I will keep my words brief. One final challenge, though. Use this day to its fullest. The team has been prepping. They are ready. They are ready for your questions. They get a lot of them from us, so I know they are able to answer them. So use the day wisely. Thank you very much for your time and enjoy the day. Thank you.
George, thank you so much. I promised you the macro picture at the beginning. We know that we live in a very challenging geopolitical environment, and of course, that has its challenges economically as well. The two are very closely rerated. So let us talk geopolitics and macroeconomics. Please welcome Jens Larsen.
Thank you very much. Thank you very much for the opportunity to speak to you today. I have been given the opportunity to give you an extensive briefing on the geopolitical environment, and that tends to be a pretty depressing affair. I will try to, as an important message for you, dampen some of that pessimism that invariably comes out when you discuss politics with a bit of macroeconomics and market optimism. My job as head of geoeconomics at Eurasia Group is to try to connect all those political calls that are really the core of our research at Eurasia Group with the macro and market outlook. Hopefully making the geopolitics and the politics relevant to you, and relevant to understanding the environment in which NEPI is operating. There is obviously a lot going on. Unfortunately, it matters. Operational excellence is not enough.
You need a sense of the broader environment, not just local politics, which I am sure you are all familiar with. Many of you will be much better at Polish, Romanian, and maybe indeed Spanish politics than I am. I want to try to contextualize that with some global views. It will affect strategy. It will affect the way businesses are organized, supply chains and so on. Of course, the consumer cares, particularly when it manifests itself in higher prices. I am going to start at a very high level with the geopolitical environment and talk about our broad concepts.
Over the course of the next 40 minutes or so, drill into how that matters and end up on an outlook that is closer to you in terms of the macro outlook, in terms of the market outlook, with some comments on what is happening in the key markets in which these firms operate. The lens throughout is going to be what is relevant for Europe and for this company. It is very much a global context. Please do submit your questions.
I think that is the most fun part of the session, and I hope that at the end of it, we will have enough time to look at that. I will certainly make sure that we make up for some of the time we have already spent. It is very tempting when you talk geopolitics to start with the conflict, start in the Middle East, start with the war. I think the conflicts are symptomatic of a GZERO world. This is very much our organizing framework. It is the end of a world where the U.S. is the sole leading power, and importantly, no one else is able to step up and fill that vacuum. There is no collective, there are no individual countries that can do that.
The multilateral organizations are weaker. They struggle with legitimacy. Coordination is harder than it has been in the past. The U.S.-China strategic conflict remains much the central feature. There is a vacuum of global leadership, a vacuum of coordination. Importantly, the U.S., which used to be the anchor and the source of stability, is now a source of volatility and of geoeconomic risk unlike what it was in the past. The U.S. is more unpredictable.
It is seen by its partners as less reliable, and importantly, it is unwilling to unwind the global economic and financial order that it created. It wants to remain at the center. Dollar dominance is very much part of the story. But there is a stronger focus on the U.S., on America first, and on a different strategy. Is it all about Trump? No, GZERO wasn't created by Trump. It won't disappear with Trump. Some of it is specific to Trump and his behavior, but much of it is structural. What I want to emphasize and what I think is important for investors when you're thinking about the longer-term context, is that this is a new global and economic financial environment with more frequent crises and supply shocks of the kind that we've been experiencing this year. Those are the ones that push up costs.
We have persistent cost pressures. They push up inflation, so consumers are struggling with affordability. They potentially disrupt growth. Governments now using economic policy for strategic and security purposes. Gone are the days of thinking about efficiency, level playing field, competition, and free trade. There is a focus on national resilience, on defense, on tech strategy, on energy independence. That creates new spending and investment needs and indeed it creates opportunities. It creates growth. It is a politically challenging reallocation of resources, and consumers are feeling that if you need to invest more in your defense, in your AI strategies, then those resources are going to come from somewhere, putting even more pressure on consumers that are already struggling with high prices. That happens in an environment where the demand for capital from outside for AI spending, and more broadly, is rising sharply. Companies are also focusing on that resilience.
They are increasing their spending on technology, but they are also, in their strategies, increasingly reflecting this new economic environment. They are willing to incur costs in order to demonstrate their resilience, in order to show that they can cope with those big shocks. All in all, it is a more volatile world, higher real and nominal interest rates reflecting the volatility, but also the strong demand for resources. It is more higher on average, I think, and more volatile inflation, not 1970s, but volatile inflation and continued pressures for more government spending, a feature that is very relevant to the markets that you are operating in. As I said, much of this is structural. This is not just about Trump.
The willingness of the U.S. to coerce and put pressure on its allies through tariffs, through the threats to sovereignty like we saw in Greenland, through the pressures on security and the need for others, including the EU, to step up on defense spending, is really the novelty. Mark Carney captured the zeitgeist in his Davos speech back in January when he said, "We are in the midst of a rupture, not a transition," capturing the idea that this is not a temporary but a lasting phenomenon. A broad loss of confidence in the U.S. as a reliable ally. This is what this chart on the right shows, is how strikingly with my own country, Denmark, at the top, showing how that confidence in the U.S. as a trusted ally has shrunk. It shifted somewhat towards being a partner.
But the striking thing, as I said, is seeing more survivorship bias as an ally. That really matters because it drives strategy. I should say, by the way, Poland, as you well know, is a strong exception. You still see a much stronger orientation, a much stronger support or much stronger perception of the U.S. as an ally in Poland than you do elsewhere. Carney's idea very much is one of diversification, because diversification would reduce U.S. leverage, would give Canada better opportunities. That is applied not just in that context, but more broadly, the idea that you want to reduce your exposure to any individual country and to reduce their leverage in a negotiation, whether it is over tariffs or whether it is over security. From a European perspective, that applies to the U.S., but also more broadly. Will this outlast Trump?
I think a Democratic administration after the next presidential election would have other priorities, certainly on energy transition, on AI transition. But it might be far less hostile to Europe and to its ally, more open to collaboration. But I think the key here is it would keep a strong domestic focus and continue to use industrial policy tools. On China, the Democrats might be even stricter. So don't think of this as going away when Trump disappears or changes behavior. Certainly with Democrats, it might be different. With a new Republican administration, I think you might find that they would take an even tougher stance on Europe. The roots, the understanding, the views on Europe are strongly held when you look at the speeches and works of Vance and Rubio, potential contenders in the election. So don't think of this as going away.
Think of this as, frankly, a source of volatility in the relationship, but also a challenge. So, the idea that pushback is a good strategy, I think has become more prevalent. In the beginning of this Trump administration, the sense was that we were being rolled over. But when you are thinking of the global environment now, I think the strategy of standing up and pushing back has proven to be more successful. That is reigning in Trump in the foreign policy space and behind the view that we are probably past peak Trump, if you want, in terms of leverage in the foreign policy space. Notice I have popped a question mark at the end. I think the last few weeks may lead us to question that.
The idea is that in the key issue and the key conflicts and the key tensions that we have seen in the global economy over the last year, we may be past peak Trump. I come back to each conflict because each of them matter in more detail in a second, but emphasizing the idea in the Iran conflict, the idea that Iranian resilience, the fact that Iran could spread the conflict, could step up, withstand U.S. and Israeli pressure has emphasized to the U.S. and to the world that this was a strategic mistake and has given Iran leverage that it is very willing to use. That means that there is no easy exit. It means that escalation risk is rising, as I will come to in a second. On Ukraine, we have had the U.S. blowing hot and cold on Ukraine.
You will remember the incident with President Zelenskyy back in the spring of last year, and obviously also the pressure right now. Europe has picked up the financial tab that the U.S. has dropped, supplies more of the intelligence and weapons, but Ukraine remains critically dependent on the U.S. So what the U.S. decides in that space is important. The context I wanted to emphasize with this slide is that one way of reading the Ukrainian strategy is that standing up and being clear about your demands, about your position, your role might be a better strategy, and that's how we read the reaction. Trump, of course, might have restrained U.S. support. We think it's likely that Ukraine will still have sufficient capacity over the winter from Europe and from the U.S., but it's certainly a struggle.
Standing up has worked, we think, and will probably work, but it's a very challenging issue. On trade, I think this is perhaps the strongest indication of how the response of China's leverage, particularly China's leverage in rare earths and critical minerals, have given them leverage over U.S. that has been used very effectively. That leverage has basically that leverage that came from China, but also from a market reaction, has pushed back on Trump's approach to tariffs, has led him to back off. There's also, of course, a domestic constraint that has come from the courts striking down his use of tariff tools. But the critical bit for this conversation is that China has used its leverage and is willing to continue to do that and is tying the U.S. into a truce. We think on foreign policy, broadly speaking, we are past peak Trump.
That doesn't mean that things have settled. Trump still has very considerable leverage, but we think his influence is waning. On the domestic front, we have an upcoming midterm election. That doesn't constrain, we think, Trump much in the foreign policy space after the midterm elections, but are critical to the short-term outcomes. I'll discuss that in a second. We think the Democrats are almost certain to win the House. We put 90% probability on that, and are now favorites for the Senate. That means, on balance, we are more likely to have a Democratic sweep, certainly more than a Republican sweep, but with a very strong chance of a split House. Does Trump care? We think he does to an extent, but mostly because it can weaken his grip on the MAGA base.
For him and his approach, it's been very important to retain that control of the Republican Party. A loss threatens his political legacy. It reduces his capacity to choose the next leader of the Republican Party, and it puts him and his family and his business connections at greater risk. But we don't think it constrains him that much in the political space. Yes, the legislative agenda in the U.S. will be harder, but he's done much of what he wants. It does mean that fiscal policy in the U.S. might be a bit more expansionary. But for what Trump really cares about, I think the main issue is that there will be more investigations. There will be attempts at impeachment, maybe not of Trump, but of other administration members. If the Senate flips, which is a tight call, if it flips, nominations get much harder.
Constraints there, but not so much constraints in the foreign policy space. The U.S. elections are really important. It is an important event for Trump because it threatens his grip on the Republican Party. It does not, in and of itself, change his approach to trade or to foreign policy. I am going to look at each of these conflicts in a little more detail now because they have important implications for the macro outlook in a way that affects your markets very directly. These are our Middle East scenarios. We love probabilities at Eurasia Group, so you will see probabilities dotted throughout this presentation. Escalation after the midterms, we think is now a base case. It is not a major escalation. It is not the U.S. entering into a land war, but it is an escalation that could lead to higher oil prices, at least temporarily.
A limited deal, like the one we had in the spring, is a lower probability. I have unfortunately flipped the two around, so the limited deal should be 20%, but still an unlikely outcome at this stage. We think we need to go much further through the conflict before we get to the case where the U.S. and Iran settles. Iran has got this leverage that I talked about earlier. They want to preserve that. The U.S., we think, in order to settle this, will have to make more uncomfortable compromises that potentially leaves Iran with some leverage. That is not a desired political outcome for the U.S. They are not willing to make that concession now. If they can get the traffic out, if they can move commodities out of the Strait of Hormuz without that agreement, they would rather do that.
They have been successful, somewhat successful, but Iran has continued to assert its influence. We think first there will be an escalation, then we are back in standoff before potentially we end with a limited deal. The point is this disruption continues through next year. That matters a lot for oil prices, and it matters for commodities more broadly. The conflict with the Houthis, which is currently a conflict between the Saudis and the Houthis, matter for that. It can affect oil export capacity. It can affect the capacity to move commodities out of the Strait of Hormuz and export through alternative routes. We think that is likely to escalate. We put the probability for major escalation at 60%. When I look at that, arguably, we are already in the major escalation scenario. That could amplify that impact on oil and commodity prices.
That matters a lot for inflation, for the affordability agenda in the U.S., critically, but also here. Diesel is the current focus point, particularly in the U.S. I will come to that in a second. When I talk to you about Ukraine, it is very important there. One of Trump's key motivations. It is not just a political tool, of course. Diesel, petrol prices, energy prices matter critically for the consumer. In the short term, it pushes energy costs up. I think you should expect this to be a reminder to everyone that relying on Middle Eastern energy is a risky approach and that you would be better off finding alternative sources. I think over time, this creates further incentives for the greening of the economy. I know Trump is obviously not in favor of green energy. The U.S. has chosen a very particular approach to that.
When you are looking at it from a European perspective, the green energy transition remains important, not just for the sake of reducing emissions, but also for the sake of having greater energy independence. The Russia-Ukraine war also feeds into this energy and commodity price issue, including on food commodities, because both Russia and Ukraine are such critical food commodity exporters. Ukraine is now much better able to hit Russia's energy and export infrastructure. We expect that despite the pressure they are currently being put under by the U.S., they will continue to do that. We see from the Russian side a strong incentive to escalate, if anything, somewhat encouraged by Trump's alignment with Russia in the last few weeks, with the pressure that Trump is putting on Zelenskyy. So we expect an escalation of that conflict through the winter. We do not expect this to settle anytime soon.
Trump announced an energy truce. It did not have any traction. We do not think that such a truce is coming anytime soon. For the main macro scenarios, really the idea of this creeping mobilization from the side of the Russians is important. I think it is also important to think of what we call hybrid warfare. The fact that Russia considers this a conflict with Western Europe as a whole and is willing to continue with those attacks on energy, on not just energy, on infrastructure in Europe, including digital infrastructure. This is a continued feature that, of course, you here in Poland and Eastern Europe face more strongly than others. As I said, from our perspective, this intensifies before it settles. Even when it settles, we do not mean that we will have a final settlement by the spring of next year.
We mean that by the spring of next year, we think that a general exhaustion will set in. Russia will step up, but also find that the enormous loss of manpower, the enormous fiscal costs that come with this war will be pushing them towards a peace. The elite in Russia are getting more concerned about that. Putin has shown an extraordinary resistance to the idea, but we think that eventually, he will feel that too. The balance in Ukraine is now very fine. A month or two ago, with U.S., European support, it looked like a better basis for an escalation, like a better basis for negotiation. That is less clear now. Our call at this point is that despite the shift in U.S. positions, we think that Ukraine will continue on the current path, but it is going to be a very delicate situation.
Longer term, and for the broader European perspective, the security pressure from Russia clearly continues. It is a rising Russian threat, not so much of strikes on NATO territory or indeed tactical nuclear use. We put that at 5%, which is kind of the lowest number we use. Even from my taste, that is a very high number. The point is that the conflict with Russia is real, and it is real in the minds of European and U.S. policymakers.
Europeans have understood not only that threat, but also that the U.S. wants Europe to play a bigger role in its own defense. I am working my way down the conflicts coming to trade, which is fortunately a less gruesome affair than the conflicts we have talked about thus far. Trump erected a tariff wall. It used a tool which was called the International Economic Powers Act to impose these tariffs.
The Supreme Court struck them down. We started off after those at 15.5%. They were struck down, but the Trump administration has used other tariff tools for sectors and tariff tools for nations that they perceive to be trading unfairly, in an unfair manner with the U.S. Have re-imposed that and are likely to bring back further tariffs that reflect what they say are countries that have overcapacity. So basically re-erecting that tariff wall that was crushed by the IEEPA ruling. For me, the most important thing is not whether it's 14.2%, and actually it might be a little bit lower than 14.2%. The critical point is that that tariff wall has been erected. We do not think Trump is for the turning by the courts or indeed by conviction. I do not think that Democrats are going to look at trade very differently.
When you have erected a tariff wall, it is very hard to get rid of it again. So I think this is a semi-permanent feature. You should think of it as that, as something that is a lasting change in the environment. I promised you some good news, so here's a little bit of good news. I thought that there was a real risk that when the U.S. had launched that new approach to trade and tariff, that that would unravel the global trade order. By and large, that has not happened. The U.S. has erected tariff walls. You have seen responses, but you have also seen deals with the U.S. Globally, the situation is one of more trade deals rather than fewer.
One of my fears of a much broader fragmentation have actually been replaced by this notion of diversification, where countries are looking to work together in a different way. The U.S. is not replaceable for Europe. The U.S. and a trade deal with the U.S. is critical. The U.S. as an anchor for the global financial and economic system is absolutely critical. I think it's important not to think of the current policy environment as one in which that is totally abandoned. That's false. I think we should think of Europe as diversifying, finding other trade partners, making sure it's got other means of channeling its investments and savings is not the end of the global order in that sense, but it is a change in the environment in which you are operating. That was trade.
China, before looking at the U.S., China, and more important for you, the European relationship with China, let's just remind ourselves of the Chinese economic policy approach and why that is such a problem. China has this focus on output in key strategic sectors, tech, green tech, critical sectors, autos, very important, green energy, as I said, both in tech but also in terms of energy production. We think China is going to stick to that approach. The problem with that is it produces enormous capacity in these critical sectors. That, in turn, creates enormous global oversupply in those sectors, and that has very direct impact on the U.S. and on Europe. The other side, domestic demand, receives relatively less support.
We think China will do enough in terms of domestic stimulus, in terms of addressing domestic balance sheet issues to keep the show on the road, but never enough to turn China back into that source of final demand that made it such an important export destination for Europe. Think of it as not enough demand support, not enough balance sheet adjustment, not enough domestic reform, but a lot of pressure on export sectors. Ever rising trade surpluses, that is what the chart on the left shows, that China's trade surplus keeps rising. It was $365 billion with Europe last year, $1 billion a day, an amazing number. Obviously putting pressure on Europe as a trade partner. European industry faces this subsidized supply, this excess supply, but it is also, I think, critically, increasingly excellent supply. Chinese cars are great.
They are not just cheap, they are also great and using the latest technology. What used to be a competition on labor cost is now a much broader competitiveness issue for Europe, where technology investment is absolutely critical. Europe is divided on how to respond. German industry have historically emphasized market access, technology sharing, so a friendlier approach with China that is now shifting, and Berlin is converging on a harder line with what we are seeing elsewhere in Europe, strikingly in France.
That is the background for these calls that we have on the strategic relationship between China and the U.S. and the EU and China. For now, this year, the incentives in relationship between China and the U.S. is one of a truce. The idea being that the U.S. doesn't want further economic disruption. Had the experience last year with the trade war and didn't enjoy that very much. China, for its part, wants to continue its economic policy strategy, so it doesn't want to see that disrupted, certainly not have political disruption into the next year's re-election of Xi.
At the moment, the incentives are for a truce in the relationship between China and the U.S., and we won't see that being a source of global volatility in the way that it was last year. But when you are looking over the longer term, this managed decoupling remains the base case. This is the strategic competition between the two continues. The U.S. does not like China's increasing strength and importance. China, on this side, wants strategic independence. That creates a tension, and we think over time, that will manifest itself again, certainly if you have a change in administration. What about the EU?
As I said, have been a bit slow on changing approach, has seen China as much as an opportunity as a threat. But now with the pressure that you are seeing from Chinese technology and Chinese exports, the accepted case and our base case is one where you have a, what we call that managed confrontation. Not a trade war, not going to be a massive market event. But it is basically an environment in which you will see increasing frictions on trade between the EU and China and investments, in particular, integration of supply chains and so on. This month's deal on hybrid cars is sort of an indication. It is a deal that eases immediate tensions, addresses some of the problems. It is a trade friction. It does reduce the imports of Chinese cars. Over time, we will see that kind of safeguard becoming more prevalent.
We will see restrictions on Chinese investment from Europe, but we will also see China being increasingly restrictive with EU. Responding in kind, a measured escalation where you see the trade relationship gradually deteriorate. That matters a lot for Europe. It matters a lot, in particular for Germany, the engine of European growth. That is all the crisis. Now for the optimism. AI surely will rescue us all with productivity gains. If you are looking at the macro outlook, to which I am going to turn now, you will see that if you could just have much stronger productivity growth, you would get higher income growth. You would get stronger revenue growth for governments, and all would be good. But I think the fear rightly is wasted resources, a speculative boom, increasing social and human costs, and the risk of the end of the world.
There is a wide range of issues coming out of AI, and the boom in AI, and the hopes for AI. A lot hangs on this. From a policy perspective, the perspective I think we have most to offer in, the challenges are really huge. How do you manage risks from a policy perspective, whether it is financial or indeed existential risks? There is no common regulatory agenda. The U.S. and China are vying for dominance, and everyone else is engaged in this national competition, making sure that they are at the frontier. If not of development of models, then at least in the application of AI.
We do not see that changing. Is it a bubble? Views will differ hugely on that. I have tried to demonstrate that, give you a sense of that by putting other. Well, I think most of them are bubbles, or at least extraordinary valuations. And on that metric, it does not look so bad. But I do think that the massive investments we have seen have been critical for global growth and for global trade. That is a risk. We do not think it is a risk at this point in time.
But over time, and that over time could be over the next coming years, you could see a sharp moderation in that investment spending, which has been so critical. A realization perhaps that profits may not grow quite as quickly as thought or a political backlash. You are certainly seeing that in the U.S. currently. We do not think it is restricting AI growth now, but it could do that over the coming years. I think more broadly, the issue of disruption and the K- shape, the idea that some gain a lot and a lot gain very little, is a very powerful concept.
Even if you are looking at statistics and seeing real incomes are actually improving, the perception, and that is true in the U.S., but also strikingly in Europe, the perception that the middle and lower middle class are not benefiting from AI growth. That this is yet another factor that is turning the screw on the middle class, is a very, very powerful one. And I think that could lead to a political backlash. That is important if you are investing in AI, but it is also important if you are exposed to consumers whose sentiment depends critically on income growth and on their sense of making progress. So look at it from a macro perspective. This is an investment surge in developed markets, which is welcome. Of course, mostly at this point, an investment surge in the U.S., but it is spreading.
More technology surely is good for growth, but because of the nature of this growth, it does trigger a lot of political issues, and issues, I think, for the sectors that you care about in today's context. One of the factors of this investment boom, of course, is that it increases resource pressures, and that is one of the factors combined with others, including the inflationary impact of the shocks from the Middle East, including the policy response, the monetary policy response to those inflation shocks that have lifted interest rates. This has been going on for five years, arguably. But it's certainly been intensifying over the course of this year with the Middle East crisis being critical. High-interest rates means a higher fiscal burden, and that's what I try to illustrate with interest rate expenditures rising on the left. Europe actually looks okay.
I think, obviously, Poland and Romania have very particular challenges within Europe on the fiscal front. I'll return to those in a second. The U.S. is the country that sticks out. Even if you didn't care about the U.S., the fact that the interest spending rises so much means that more pressures on resources increase interest rate risk. If you look at that chart, it says more fiscal risk, and I think it says that that'll be a continued source of pressure on interest rates in the U.S. and globally. In Europe, markets are watching France testing their political coherence and the ability to manage fiscal resources. Elsewhere in Europe, including Poland and Romania, deficits are large, and indeed, fiscal consolidation isn't immediately forthcoming. The strategic priorities I talked about earlier will make that tension even more prevalent. That brings me to Europe.
I described a bunch of external threats, crises, China and the U.S., China and Europe. The energy transition and climate change, competitiveness pressures in this brave new world, and indeed higher interest rates. That has led to a reappraisal of European policy, European economic policy, whether it's on security, on energy independence, on tech, on defense. The commission's competitiveness agenda is really a response to those pressures, shaped materially by the Draghi report that really helped shape, I think, a new consensus around policy objectives in Europe. That doesn't mean that it's a perfect transition. That doesn't mean implementation is strong. Europe doesn't have the strategic capacity that the U.S. and China have. But there is, I think, when you focus on this competitiveness angle that is driving a gradual reallocation of resources. We try to monitor that.
We look at the European Commission's strategies and papers and initiatives in a number of areas, many of which I've touched on today, and try to assess what kind of progress is being made on that front. And we see sort of a glass half full. So some progress is being made. The pace, as I said, is clearly not as high as it is elsewhere in the world, but there is some progress. That relies critically on a shared understanding of priorities. The biggest threat to that shared understanding of priorities is a sweep of populist governments. The joint action on defense, on strategy, on energy transition would be much harder to read if you had a President Le Pen, or outside the EU, a Prime Minister Farage. The chart on the left is a very crude summary of the current pressures.
Strikingly, France is the issue, and of course, we are facing elections in France next year, and in a number of European governments over the next 12 months. In France, it is still early days to call that election. Our base case is just about that Édouard Philippe of the center will win in the runoff on May 2nd . We attach 40% probability to that. Le Pen, who is leading in the polls, who clearly has momentum, is right behind. Our probability is 35%, and I think if you're looking at betting markets, her probability is way higher than that. Polls are going her way. The riots we've seen in the last few weeks are strengthening her hand, if anything.
I think it is a great question, how a President Le Pen would fare given the domestic pressures she would face, given the external pressures she would face. On the domestic economic policy front, she hasn't got a very coherent strategy. She's proposed some spending that no one really believes. But we think that over time, particularly if the polls swing even further her way so that she looks like she's going to win, she will start clarifying her approach more and try to avoid having a financial crisis right on the doorstep if she were to take over.
She will respond, we think, in very broad terms, and at this stage, it has to be very broad terms, with a framework that would be compliant with achieving debt sustainability, with meeting the criteria of the European Commission, opening up for support, some acknowledgment of effort from the European side, but importantly, support from the ECB if there is a sense of a market crisis. I would call that the most benign possible outcome. That's still a hugely uncertain outcome, and I think even if you're not in the French market, you have to think of that in the context of Europe. The consequences for Europe, even if the financial market risks are contained, are significant. She is very anti-EU. She would deliberately work to undermine the EU institutions. She would be much less willing to spend on supporting Ukraine.
If she has tailwinds from other European governments, perhaps including from a shift in government here, then I think that would put Ukraine in a much more precarious situation, but arguably undermine the case for this EU agenda. For now, as I said, policy is shifting in the right direction, but longer term, less obvious. Let me finish with the three economies that matter most directly here. I'm not an expert on Poland, Romania, and Spain, but I think when you're looking at the economic trends globally and in Europe, we can draw a lot of inference. Germany is the largest export market for Poland and Romania, a critical one for Spain, and German industry is woven into the fabric of Central European supply chains. The news here is mixed.
The good news is that the German government, despite its weakness, despite the fact that Merz looks politically very exposed, continues to stick to its commitment to investment spending EUR 500 billion over 10 years, and to its commitment on defense spending. So investment spending and defense spending underpin German growth. Not strong, but not terrible either. Challenging politics means that overall, Germany is, if it's anything, it's a modest tailwind or maybe an anchor. Germany is not going to be proactive. They're not going to be proposing a new NextGenerationEU program anytime soon, and certainly not if you have a shift in France. That, I think, makes the relative picture even more striking. I thought I would just have a look at the growth experience the video told about that, looking back.
When you're looking forward, you can see that Poland and Romania, in the yellow and blue, in the consensus, in this case, in the IMF forecast, pardon me, are going to perform stronger than Eastern European peers. Spain has long outperformed Euro area peers, and we think, the IMF thinks it's going to continue to do that. In Poland, we talk about the example of European growth success. It is striking how growth has remained resilient, how unemployment has remained low. Of course, EU funds are important for that. Defense spending is important for that. And these things are going to continue, but the constraint, the fiscal constraint, with a deficit around 7% of GDP, is real. And I think, with consolidation likely not to happen till after the general election of this year, at that point, the quest for consolidation will be stronger.
Rising interest rates, very high deficits, even if debt levels are low, will mean that fiscal pressure will materialize. At the moment, with the cohabitation, and a government and president with different priorities, the progress has been slower. We think, as I said, that next year's election is the point at which the fiscal picture will be reassessed. We don't think there will be much tightening before that. Our base case, this far out, is that Civic Coalition remains the largest party. But what is happening on the right wing is very clearly decisive. Whoever governs Poland will remain committed to NATO, to being a major defense spender, firmly anchored in the EU. So I don't think in that sense, it fundamentally questions the investment case, but certainly the fiscal outlook will be key. That is also true in Romania.
You will see that the growth story in Romania this year hasn't been so great. That reflects the need for a fiscal adjustment in a country that runs a very large deficit. Again, debt levels are not the issue, but sustained large deficits and the demonstrated inability to deal with them are critical. And I think from an investor perspective, you can't ignore the prospect for a further downgrade that would make the investment case harder. So the political developments there, and the fact that Romania got a government yesterday, is obviously critical. And over time, to find a solution for the fiscal challenges is critical. Spain has been a Euro area standout performer. If you look at the politics, it looks slightly confrontational, and Pedro Sánchez, the prime minister, has not been able to put in place a budget. But he has been able to fiscally consolidate.
Spain has seen strong growth. You have seen immigration as a key driver of that, but you have also seen real income growth. If you look at the current election campaign, you would have thought Spain was in a right economic mess, but that is not true overall. It is true when you are looking at affordability around housing. Critical issues there. Spain votes, we see a 70% probability that the People's Party will lead the next government, so you would have a center-right government. That is three economies that are outperforming their peers. All three are in flux. All three exposed to those geopolitical forces, the oil price shock that I talked about. But also, I think, critically facing the fiscal challenges that come on the back of that and that come with very high interest rates. Let me conclude.
Despite all the risks that I have just filled you up with, the growth outlook has been robust. I think on balance, that continues because I do not think the pullback in AI is coming. It is partly because companies are adapting to this much more volatile environment, investing in resilience, if you want. That is costly, but it is also investment, and it also creates opportunities. Economies have proven more resilient, underpinning GDP growth, underpinning global trade growth, underpinning a benign market outcome. But it is a high inflation, it is a high interest rate environment. I do not see downside risks to interest rates at this point. I do not think that is going to ease anytime soon. Monetary tightening is driving administered rates up. Fiscal issues, persistent investment is putting upward pressure.
A sharp cyclical slowdown of the kind that investors certainly wouldn't fancy could be the answer that would drive interest rates down, but I do not think we are at that point yet. Longer term, as I said, it is a very challenging environment. But it is also one of resource reallocation, one in which countries that are agile, are able to respond to circumstances will fare well. And that applies critically, too, at the corporate level. If you can design strategies that take advantage of the reallocation of resources, if you can find pockets, countries, sectors of strong growth, then this is a very interesting environment. Of course, interest rates are high, but that is also a reflection of higher investment and higher growth. I will stop here and we should see if there are questions.
We do have some time for questions, and I would encourage you please to put your hands up if you have a question, and I will come to you. My first one is this: There are many things happening at the moment on the political scene and, of course, the economic scene, and some very vivid characters at the center of that, Le Pen and Trump being two of them. What is interesting always about business is that it has its own dynamic, that it is able to thrive sometimes and see opportunity in difficult circumstances. Out of all of the risks that you have highlighted, what are the leading indicators? What is, we would say, are the canaries in the coal mine that tell us that something is about to change? Are there things that leap out to you?
I want to start with the positive. Things that leap out to me is that-
Which is surprising because you have lived in the U.K. for a long time.
Yes.
It is very rarely starts positive.
If you look at-
It is the Danish bit that is still hanging on.
If you look at politics, we spend most of our time doing that. It is very challenging. When you get a chance to talk to leadership of companies, and we are fortunate to do that. I spend part of my time talking to investors, but also a good chunk of my time talking to boards, risk committees, and so on. They are acknowledging this more difficult reality, the macroeconomic reality. They are dealing with the political risks. They are creating opportunities. It is, for me, the underappreciated fact is that that resilience is becoming embedded. It is very hard to demonstrate in data, but when you are talking to boards, you see that much more prevalently. All the shocks I talk about have had impact.
When you are looking back over the last few years, the trade war last year was a big deal, but it turned out to not have as big an impact on growth as we thought. The Middle East crisis, we thought it would have a massive impact on growth in emerging markets and in Europe, and so far it has not. Fingers crossed. It may, and I am outlining the reason why to be worried. I think that the near term biggest risk is that you get another knock on supply chains and commodity markets from the combined conflicts. But the economy has turned out to be much more resilient.
Some of that is AI spending, but I think a lot of that is the fact that companies, the corporate sector, has responded to this new environment and are much more resilient than we would have seen to the same sorts of shocks, say, 10 years ago.
That's my experience, too, when I talk to boards, is their ability to rewire and rethink and have that as part of their mentality is really quite extraordinary. Am I seeing any hands going up? Because if I'm not, there are a couple of questions that have come in via Slido. Now, the first one is, what is the most likely evolution for the current sovereign debt turbulence? You talk there about bond differentials between, for example, France and the U.S. and so on. How large a role is that going to play, do you think, this cost of debt and the fact that we see the yields going up?
I think that interest rates are likely to remain high. If I have to identify risks to interest rates, I see them on the upside at this point rather than the downside on this.
Meaning what, exactly?
As in that long-term interest rates could go up further.
I see.
Rather than go down. I think fiscal, I think AI spend, investment spending are critical drivers, but also, of course, in the last six months, say, the inflationary impulse and the associated monetary policy response is that upside risk. The sovereign matters. The sovereign risk matters. But I think sovereign risk first and foremost differentiates the weakest. When you have an environment in which rates are rising, then you will start to see the cracks appearing, and then you can end up, like you do now, with the politically and fiscally most exposed responding strikingly. Romania and Poland haven't actually seen markets react as strongly as you have in France, and I think that's to do with the dysfunctional French politics, the fact that markets, and I, cannot really identify a political answer to the issues.
You end up with this pressure, and you see the cracks. I think the question is then, when do the cracks become the drivers? Most of these incidents will be sufficiently small. If it's a small emerging market, it doesn't matter that much. But France is clearly not the case. France is clearly systemic. France is clearly big. France matters to the EU, to markets, and that's one I'm going to be watching.
Okay. There is a question here about property values. With respect, I am going to ask that of a later guest.
Why don't you?
Rather than. Okay. If Trump is voted out, the gist of the question is this: If Mr. Trump is voted out and we get a different leader, let's assume that it is a Democrat, I think that is the basis of the question, could that change things fundamentally? Would that fundamentally change your outlook?
I think it is certainly one of the factors that would change political priorities very strongly. As I have hinted in the presentation, I don't think we should over-index on the Democrats returning things to, if you want, pre-Trump normal. Trump is special for sure, but U.S. policy has been drifting in this direction. The protectionism was started, arguably, under Obama, and certainly Biden did more of it. Industrial policy was amplified under Biden. Trump started it, but Biden made it a much bigger feature. I think you should think of many of those features of U.S. policy as being the same.
I think where it is different, likely different, is that at least as I read, as we read, current Republican thinking on Europe is much more hostile to Europe, is looking to weaken rather than strengthen Europe as an entity. Certainly have individual allies and will want to deal with individual countries, but much less focused on strengthening Europe. The Democrats, I think, will take a different perspective on that. I think that from the perspective of this conversation, is very important. But again, I don't think we should over-index on things returning to some form of, some sort of-
Click back to where they were before, yes.
click back to globalization heaven. No, this is a continued challenging geopolitical environment.
Okay. There is also a question of the impact of inflation on consumers. Again, with respect, I'm going to ask that at a later date.
Actually, I wouldn't. I think that's a very important point. We can measure inflation, and inflation impact has not been nearly as big as I feared it might have been, in part because commodity prices have not risen as much as I thought they would. It's also because central banks have managed to anchor inflation expectations. But anchoring inflation expectations, what that means is essentially asking workers and firms to take the shift in terms of trade, the commodity price shocks on the chin, so either reduce profits or reduce wages.
I see that as the bigger story from the consumer perspective of that pressure on consumers that are intensifying. The key election issue in Spain is housing and housing affordability. I can look at inflation and say, it could have been worse, but for the average voter, that really, really matters. I think it matters in the way they express themselves politically. It could also matter in the way they are expressing themselves in terms of consumption choices. So far, again, resilience, great. Consumption demand has been quite strong. But the combination of very messy politics, commodity price shocks, and of course, higher interest rates, I think are a dampener and certainly a risk I would be looking out for when I'm thinking about the consumption outlook.
Okay, and we'll look at consumer trends a bit later on. There's a final question, and then I must let you go to a break, and that is the impact of climate change. You didn't really talk about resilience to climate change, but is that going to be a fundamental part of economic response?
I think so, and you are right to pick me up on it. I also did not say very much about AI. There is just a lot going on. I think climate change is a huge deal. I think it has been deprioritized, certainly in the U.S., but also in Europe, because the concern has been about energy security, not climate change.
Yeah.
It has been about lowering consumer costs rather than achieving the best outcome. I think over time, the issue of climate change and the response to climate change will reassert itself. So when you are making investment decisions now, when you are making construction decisions now, you obviously have to condition not just on the fact that climate change is real and it is getting even more real if you want the impact, the physical impact on your locations is going to be bigger. The impact on markets is going to be bigger, but also that the regulatory agenda, the transition agenda will come back in force simply reflecting the fact that climate change is there and that the importance will increase.
Jens Larsen, thank you very much indeed.
Thank you.
Right. My job now is to ask you to indulge in a comfort break. If you'd like to move outside, we're going to run some technical rehearsals, so it might be a bit loud or lots of flashing lights in here. I would ask you to leave the room and enjoy conversations and a bit of networking outside, and return, if you wouldn't mind, please, in 10 minutes, and I will herd you back in. Thank you very much indeed. See you soon. Bye. Hello again. We've rounded up some of the geopolitical and the macroeconomic challenges, but also established that really business has its own dynamic, as does the consumer. Now we're going to talk a little bit more about shoppers. Please welcome Doug Stephens.
Thank you very much, Tanya, and thank you, Marek and Cristina, for having me. It's wonderful to be with you. My first time in Poland, so thank you very much for graciously hosting me. Yeah, we're going to talk about the future of physical retail with particular attention to the shopping center. First, let me just tell you a little bit about me. For about the last 20 years, my company, Retail Prophet, has sat at the intersection of retail, technology, demographics, economics, media, and more recently, the political landscape out of necessity, because it's having an impact on how we consume, how we spend, how we shop.
I have to share something with you, because a lot of what I talk about is the future, and a lot of what I do is I try and synthesize trends at that intersection and take those insights to corporations, brands, institutions, so that they can anticipate the future and build strategy to meet it. It's a really hard job, and I'll tell you why. As a futurist, oftentimes you're projecting, say, 10 or 20 years into the future, and you're saying things very often that people think are crazy. That you're just out of your mind. That's the first problem. The second problem is, if in 10 or 20 years you were right, nobody remembers. You lose both ways. Along the way, I've tried to document in books my hits and misses.
Whether I'm right or whether I'm wrong, at least there's a living memory. When Marek and his team called and asked me to be here, I checked out their business, and that word, "forward," really stood out to me. Building forward. Because it implies to me that this is an organization that is open to the future and maybe even open to hearing crazy things about the future. Let's talk about the reality for shopping centers first and foremost. Through the front part of this presentation, and first I'm going to say, right up front, I'm not the expert in this region. The experts in this region are sitting in the room. I'm using Poland here as a proxy for some of the things that are happening in the region, just so we're aware of that.
But as I was looking over some research, this really stood out to me, this quote. What was impressive to me about this is that I could have read that in North America in the 1980s or 1990s, and it would have made perfect sense in that era, because there was a compression going on. What we were finding at that time was that there were really two kinds of retail centers that were really prospering at that time. One was kind of the super-regional mall. Malls like the Mall of America, which is just this enormous complex that is very entertainment-based, very leisure-based, very prone to tourist visits. So that was the one extreme. Then at the other end, you had the power center, as we called it, which was kind of a retail park.
Which was much more mission-driven, where consumers were going on a mission to find specific things and very much shopping-driven. It seems to me that that, in a very short period of time, is where this market has accelerated to, where we have these enormous super-regional centers that are delivering premium experiences. On the other hand, we have a lot of growth in the retail park sector. Across the entire region, we are seeing a lot of growth in retail parks. What is being squeezed is the legacy malls. A lot of the sort of traditional legacy malls are being squeezed out of the market by these two other kinds of properties. Something else is happening in this market that I find really interesting, too.
In the North American market, we had about 30 years on the ground with concepts like this to build out, to create massive amounts of GLA in the market before e-commerce really took root. When it did, it was Amazon primarily, right? Amazon was the real e-commerce engine at the time, and Amazon, even at the beginning, was not all that impressive. But in this market, we have seen sort of a parabolic jump in e-commerce in a very, very short period of time. So what is happening in the CEE is that we are building out physical space while at the same time, e-commerce and digital commerce is growing exponentially. The two have to kind of marry themselves together. Where we in the West are just now starting to build micro-fulfillment centers in stores and in retail parks, it is already happening in this region.
But there is another difference, too, and that is that e-commerce is not just sort of an indexed website of products anymore, the way it was in the early 2000s with Amazon, where you would just sort of search for a product and find the product listing and buy it. It has now crossed into entertainment. Right across all these platforms now, products and shopping are built right into the entertainment experience. Let us be honest, there is really nothing now that you cannot buy online. Things that only a decade ago, if somebody told you that you were going to buy a EUR 50,000 Rolex from an individual on the other side of the planet who you had never met, you would have thought they were out of their mind. But today, we are buying luxury items, EUR 76 billion in luxury items transacted online in 2025 alone.
Anything you want now, you can buy online. Do not take my word for it. Here, I want you to do something for me this evening when you get back to your room or you get back to your home. Go to the Google Search bar and type into the Google Search bar the craziest thing that you can think of, and I promise you there is a product out there that will match that description. Shipped to your door, next day delivery, no problem.
The way I think of the world that we live in today, and the way I think it is instructive to think about the world we live in today, is that today, media, in all of its forms, whether it is a video clip, whether it is a digital ad, whether it is a product placement in a movie, all of those things now constitute a store.
In three-quarters of all cases in this region, when a consumer has an idea to buy something, their first stop is to go online, and maybe they will find a store and visit that store, or maybe they will make the purchase right away. Media is becoming the store, and that opens up a question, and that is, what is the new role of the store in a world where everything becomes a store? We will talk about that in a minute. Let us talk about the reality for consumers. Certainly, I sat through the economic presentation earlier, which was fantastic, and I do not want to portend to add a tremendous amount to that. My observation, for what it is worth, is this.
You are so lucky because you have a middle class in this region, a growing middle class, which is astonishing coming from the West, where we saw over the last 45 years, our middle class evaporate. We started in the 1960s and 1970s with a very, very strong, prosperous middle class that drove the growth of brands like Walmart and Costco and Target and other brands. The same thing across Europe and the U.K., Western Europe. In this region, you have a growing middle class, and all I can say is hang on to it. Fight for that, because that prosperity is what ultimately is going to drive the health of all businesses in the region. If we look at the Polish consumer for a moment, all the indicators are very good, right? Wage growth is good. Debt reduction is good.
The fundamental health of the consumer is very good, and yet sentiment is low. Sentiment is a - 10. You wonder why is that the case, right? It seems like their financial lives are pretty good. The backdrop, of course, which our previous speaker went into phenomenal detail about, is that the world is in chaos right now. We have just a constant drumbeat every day of uncertainty, whether it is the war in Ukraine, whether it is the war in Iran. I am a Canadian, so we have what is a developing authoritarian state to the south of us. In many respects, we are a population of 46 million people. We basically are the North American Ukraine. Trump has even made threats about invading Canada. Canadian consumers are really tight with their resources right now as well.
We are not going out and living the high life because we are trying to also reserve our resources. The two takeaways are, for me anyway, protect and lobby politically to support your middle class, because it is the engine of growth, certainly for shopping centers in the region and for brands. Secondly, I do not think that this uncertainty is going to go away next year. I do not think it is going to go away with one election. I think that Trump and Putin and Xi are meeting for a reason that is, in theory, about spheres of influence. It is about dividing up the world. Hopefully, the good people of the world will stand up in resistance against that. Now let us talk about the reality for brands and retailers, because they have their own reality here as well.
In Poland, for example, there were EUR 11 billion spent in 2025 on digital media. EUR 11 billion. That is a huge jump, right? We are seeing dollars flowing out of traditional media into digital media. About 60% now of all ad spend is digital media, and that takes various forms. It may be search engine marketing, it might be retail media networks, which we are hearing more and more about now, whether it is sites like Allegro or Amazon that are charging out media placement on their sites. It may be, of course, social media that they are spending that money on. The cost of that, and this is important to the future of the shopping center, the cost of that media has become exponentially greater year-over-year. Every year, the cost of that media is rising.
Every year, brands are having to spend more to reach and connect with consumers and to garner some sort of a meaningful relationship with consumers. Here is the catch. Here is the dirty secret the advertising industry does not want brands and retailers to know about, and that is that about 64% of every single dollar that is spent on digital media, programmatic media in particular, so media that hunts for consumers, never reaches a consumer. Almost $0.65 on every dollar is basically thrown in the garbage. It never reaches the consumer. A lot of that is spent on placement fees. A lot of it gets eaten up by exchanges. A lot of it is just bad targeting. It just hits the wrong person, or it is a bad adjacency.
Your ad shows up with something that is completely counterintuitive to what should be adjacent to your message, your brand. It is ineffective. About 30% of European brands now report that reaching customers is becoming increasingly hard online, so they are having to reach for different kinds of media. We are seeing more video media, more influencer marketing, right? Going and hiring influencers to channel your product to consumers for you. The truth of the matter is, brands are finding it really hard to break from this old, traditional world where you had to advertise in order to reach a consumer. It is going to be particularly difficult for brands because this is the world we are moving into, a world where consumers increasingly are going to be using shopping agents, AI agents, or AI search to find products.
I believe within five years, we will all have our own subscription agent that manages our finances, manages our consumption, plans our vacations, rents that car for us when we're in Spain. Whatever the case may be, it will be our agent, and we will trust them because they will know us implicitly. They will find products and present them to us and say, "Here, this will be perfect for you," and we will simply go ahead and buy them. I lied to the AV team. I told them I had no sound. I do have sound. You're not going to hear this video, but I'll explain it to you, okay? We'll do it the old school way.
This is Visa CEO, Ryan McInerney, and what he is explaining, and if you read lips, anyone in the audience, maybe you can interpret, but what he is explaining to this host is that Visa is rolling out an agentic AI credit card that will actually buy things for you. You will simply give it permission. You will say, "I want to go to the Taylor Swift concert on June 22nd. Find tickets and go ahead and buy them." Your credit card, with your permission, will go ahead and make that purchase. It may go out and find products for you and simply buy them for you within parameters of permission. Agentic AI credit cards. The impact on brands, when you think about the old marketing funnel, how many of you attended a business school at some point? Marketing school? Right.
We all learned about the funnel, right? There were these steps, these decided steps that a consumer went through from awareness all the way through to the purchase. In between, you spent an awful lot on media to get them to buy your product. But when you think forward to a world of agentic AI simply going and finding you something that it knows is perfect for you based on your preferences, your needs, your budget, presenting it to you, and you trust your agent so implicitly, you just pull the trigger on the purchase, we circumvent the entire funnel. We go from awareness to purchase in a heartbeat. If you're a marketer, all of a sudden, you're seeing the effectiveness of your advertising plummet.
We're expecting to see drops as much as 47% in the effectiveness of reaching consumers, and we're already starting to see this now. About 50% of all search involves AI. Even if you go to Google today and you search for something, you're getting an AI summary whether you ask for it or not, right? Oftentimes within that AI summary, there's a link directly to a product. But this sets up a different dynamic as well, and this is important to understand. Everything is freemium, right? You can subscribe to YouTube, but if you don't want to get ads, then you buy a premium account, right? You pay a certain amount each month, you see no ads. The same is going to apply to AI. You will be able to subscribe to an agent, and for a monthly cost, you'll get no advertising at all.
But that sets up a situation then where advertising is going to be divided along economic lines. In other words, the wealthy will get great information that informs their purchase, that helps them become more responsible and informed consumers, and the poor will get all the ads. What does that mean if you are a marketer? It means that your advertising now is going to the consumer with the least intent or the least capability in some cases of buying your product. Let us talk about the shopping center response to these problems, and we will look at it from a few different angles. First of all, I think it is informative to understand how the North American market, because they are confronted with all these issues as well, all the same conditions. Let us look at how the North American market addressed this.
As is the case most often in the U.S., the U.S. is a market where they think they can kill every problem with capital. Just give me more capital, I can build something bigger, and if I build something enormous, consumers will come. Here was one of the things they built. It is called the American Dream. It is in East Rutherford, New Jersey. It cost $5 billion to build this center. It is enormous. It is a graveyard. Nobody goes. There are $46 million in past due on their interest payments on their debt. There is actually, I think one of their loans is coming due, I think it is this week, and they may not make the call on that loan. So novelty gets old really fast. Building an amusement park of a mall, and we have seen this happen in other places too.
The West Edmonton Mall in Canada is another example of sort of an amusement novelty mall, but it wears off, and if you do not have super high tourism, which the U.S. is not getting right now, then that kind of a project is not worth it. They built another thing in New York called Hudson Yards. Has anyone been to Hudson Yards? What was it like when you were there? Was it vibrant? Was it packed with people? You probably could have shot off a cannon, right, and not hit anyone with it. Yeah, they built this at huge cost, right? This mega project, and they had to wind up selling 400,000 sq ft of the center to Wells Fargo just to get it off the books because they could not fill the space.
They wanted to anchor it with a Neiman Marcus store, high-end luxury brand, and that did not work out. Neiman Marcus went bankrupt, and so the whole plan fell apart from there. In the U.S., about 25% or more right now of all malls are in distress. That compression that I was talking about, the super-regional at one end and parks at the other end, and then AI, agentic AI, and e-commerce in the middle is putting the squeeze on that middle percentage of malls, and they are in trouble. In Canada, it sort of followed more along the same division that we find along income and wealth. We have a growing degree of income and wealth polarization in Canada, so retail has simply chased it with off-price malls at one end and high, high-end luxury at the other end.
But the problem is, on the luxury end, you can only ever hit about 10% to 20% of consumers, right? That's the high-net-worth consumers, about 10% to 20% of the population, and your market can only support so many off-price malls as well, so it's inherently rate limited. Looking at the U.K. and across Western Europe, we find more of a focus on facility, right? Trying to figure out what do we do with these spaces? What can we do to make them feel renewed, right? So we're finding that they're maybe reviving their sense of place-making. Let's make the place look nicer, make it look more distinct. They're tapping into media revenue now, more digital signage, more placement, more things they can charge brands for in the space. They're looking at mixed-use developments, right?
This is a theme that we see across the industry right now, where they're taking what is basically a decaying shopping center asset and saying, "But if we just build housing around it, that will raise the value." Right? That will raise the market value, but it doesn't address the core problem of the center itself. Then in some cases, they're changing out the anchor tenant, right? So where it might have been a department store and now department stores are failing, they're saying, "Okay, maybe it's a bowling alley. Maybe it's a kids' play zone or a gym or a grocery store." So they're not addressing the core problem. They're trying to dress the core problem up in Western Europe and the U.K. By the way, in the U.K. right now, e-commerce is 28% of total retail. 28%.
I remember arguing with people 10 or 15 years ago when e-commerce was about 2%, and I was saying it was going to go to 10%, and people thought I was out of my mind. Now it's almost 0.3% of every dollar spent. Now let's talk about the Chinese experience, because the Chinese experience was more about function. The Chinese had sort of an interesting problem. Between 2009 and 2024, they built an enormous amount of shopping complexes, just a huge amount of gross leasable space built in China over that period of time. But the same sort of thing happened as is happening in this region, and that is that e-commerce was growing right alongside it. So they found themselves, at a certain point, with way too much retail square footage. About 40 malls, I think, closed in China in 2024 alone.
The Chinese solution was, well, what we'll do is we'll just make everything in the space connected, right? We'll connect everything to technology, and essentially the physical space will just become a showroom, right? The store will become just a physical showroom for things that people will buy online. Every store is basically an excuse to pull out your smartphone or use another screen in the mall. In the West, we were regaling that. We were saying, "Oh my God, that's amazing. The Chinese have figured it out. They figured out the future of the shopping center." But they didn't, because what they were really contributing to was a digital overdose that was already happening in the Chinese market. Chinese Gen Z spend six hours a day on social media as it is, right?
And we were giving them, in the market, more reasons to be on screens in a physical shopping space. It is a complete paradox, and it was contributing to a terrible mental health crisis in China. Loneliness, anxiety, depression, to the point where the government, between 2021 and 2023, actually took action on it and started limiting by law the amount of time that young people could spend on their screens. Are you feeling inspired yet? Have I made you feel good about the future? Well, you should. You should. Because I think, and Marek is probably sitting there thinking, "What is he saying?" "Hey, get him off." But honestly, I think what I have laid out here are the keys. These are the keys. These are the gaps and the mistakes that have been made around the world that I think can be solved in this region.
I humbly offer what I think are potentially six keys to the future of what the shopping center could look like. Not today, not tomorrow, but I do believe at some point on the horizon, this is going to become necessary. First of all, let us talk about the makeup of the tenancies in those centers. My advocacy is do not chase trends. Serve needs, serve human needs. There is a tendency in the market, that I have noticed anyway, in the shopping center market, where it is all about let us find the next hot tenant, right? Whether that is some fashion retailer that is really hot or some food hall concept that is really, really popular. But those things are just ephemeral sort of expressions of the need. They are not the need itself, and we need to start identifying the need.
The first thing we have to admit is that at some point, and because this happens in every market, the consumer is not going to need the shopping center to broker the relationship anymore between themselves and the brand. They will, and they are able to form that relationship and transact themselves. That does not mean that the shopping center still will not be vital. It is just not going to be vital for that purpose alone. But there are a whole host of new needs. For brands are looking for meaningful consumer engagements, not a report from Facebook that says they got half a million impressions when there was no uptick in their sales at all. They are looking for measurable impressions. Warm bodies crossing the threshold into their spaces and interacting with their people and their products. They are especially looking for exposure to young consumers, right?
They want to make those vital connections for the future consumer. They are looking for consumer intelligence and insights so that they can better plan their inventories, better plan their product development, and they are certainly looking for lower customer acquisition costs than they are paying online. For the consumer, the consumer has a whole new host of needs as well, and I would argue one of the most prominent and profound needs that we have today is the need for social connection. I think we all feel less socially connected than we did even five years ago, even before the pandemic. We feel this sense that we have just lost something in our lives. So I think we are looking for community. We need entertainment as a distraction from, my God, the news cycle every day. We just need fun and joy in our lives. We still need expertise.
We've got all the product information online that we want. We've got it all here in the palm of our hand. But that isn't expertise. That's just facts and figures. If I'm buying outdoor gear, I want to talk to somebody who goes climbing or cycling. I want to talk to someone who's used the product. I think we're looking for disconnection from technology. I think we're looking for reasons to put our phones away and just have a meaningful, visceral experience, whether it's with food or whether it's with products, or whether it's with some form of entertainment. I think we're also missing the fear of missing out. We don't have a fear of missing out on anything anymore. If we miss the Academy Awards, whatever, we'll look at the highlights on YouTube tomorrow.
If we miss the debut of the next Drake album or something, whatever, we'll download it from Spotify a week from now. We don't fear missing out on anything. I think the mall can be the center of things that are here, and then they're gone. If you miss it, you missed it. That's good. We want that back in our lives, that sense of, "No, I want to go. I want to see it. I want to be there when it happens." I think we're looking for both time well spent, and I think we're looking for time well saved. How many of you feel like you have less time now than you did before the pandemic? How many of you feel more rushed in your day? What are the rest of you doing? Just slacking off at home? What's going on?
Why is it only me? No, I think we want to use our time efficiently, right? We want to spend our time efficiently. The point I'm getting at is this. We need to think in the shopping center industry in two completely different realms. It's not to say that they can't intersect or overlap, but the consumer has sort of two compartmentalized constellations of needs, right? On the one hand, we have super high utility needs. That's cognitive defaults. That's very much a brain thing, not a heart thing. I think about, "Oh, I need something, and I don't want to spend a lot of money. I want to save money on that thing." In my world, that would be Walmart. I'd say, "Okay, well, I'm just going to go to Walmart and see if they have it," because I know it'll be cheap.
In this world, maybe it's Biedronka, right? Maybe that's the top-of-mind alternative to save money on something, right? The discount house. The other one is I want to save time. In my world, that's Amazon. If I need it and I want it tomorrow, I'm going to go to Amazon. In this market, perhaps that's Allegro. The last one is I just don't want to think about it too much. I don't want to have to go out and shop and think and decide. So in my world, that might be, say, an H&M or someone like that, just a fast-fashion retailer. In this market, maybe it's a Pepco. Just top of mind. That's the brand that pops to mind. That is a very valuable constellation of needs for the consumer. So we have to address those needs with shopping.
We have to give them these high-utility centers where they know they can save time, save money, and not have to think about it too much. But the other constellation of needs is all about the super high fidelity, the emotional defaults in our lives, right? Where it is about culture and community, belonging, inclusion, where we want to feel part of something. By going and shopping with a particular brand, we feel like we are part of that brand community, and that aligns with our values and maybe gives us a sense of inspiration. There is also the idea of just distraction and fun. We want to go and shop at this store instead of that store because this one is more fun. They have turned it into a fun experience, and it brings me joy to go into that store.
And that is particularly important in this market because the same thing is happening here. Kids are spending an awful lot of time online, and that is creating that same sense of loneliness and disconnection from their networks, from their friends, from society. And I believe the shopping center can be the antidote to that problem, and that is a worthy cause on humanity's part. And it is not just speculation, because we have already seen it work in China. Young Chinese kids are flocking back to centers that are saying, "Forget about the screens, guys. Put away your phones. This is about social, physical, visceral, real. Come back to the mall." And they are. They are taking malls that were in distress, and they are actually lifting their sales because the focus is now on social. And maybe it is just about expertise.
I want that experience of going and talking to someone who shares my passion for this sport or this product category, and I just want to go and talk to someone who lives and breathes it just like I do and get that sense of knowledge and insight. And that feeds my sense of self-esteem. And sometimes it is just about beauty. It is just about design. I just want to go, and I want to peruse beautiful things. Pieces of art that are products. And so when you start to put this into the vernacular of brands, Patagonia is a cultural brand that identifies its consumers by shared values. Decathlon, great example of a brand that plays on the idea of play, that allows you to come in and try things, do things. It is a fun environment. Mo61. Has anyone heard of Mo61? Yeah.
A brand that allows you to come in and play with fragrances, play with cosmetics, formulate your own with their help, with their guidance and expertise. And then finally, someone like Dyson, going to either a blowout studio or one of their beautiful gallery stores. So getting back to what I said before, where I said media is the store. The reciprocal of that or the corollary to that is that the store is media. The store is probably the most powerful form of media that there is in the market. Compare what is happening in that Culture Kings store in Australia to a Facebook ad. There is no comparison. That is not only the most powerful form of media, I would argue it is the most measurable and manageable. So we have to think in terms of these two realms. That is the first key.
The second key is that the competition in the shopping center market is no longer just where people spend money. It is wherever they spend time. Here is a shocking statistic. The average Gen Z in the Central and Eastern European zone is spending 1,186 hours per year on social media. That equates to 49 full days, 24-hour days, on social media. It is a terribly addictive mousetrap, is what Mark Zuckerberg and his colleagues have built. The thing about it is Facebook is an incredibly asset-light product, but it garners enormous amounts of data, and that is why brands are initially attracted to it. Facebook collects 52,000 different data points about every person that uses Facebook, 52,000 different attributes. On the other hand, shopping centers are very asset-heavy, but they tend to be very data light. There is lots going on in there.
There is a lot of interaction, but very little of it really gets measured in a meaningful way, apart from just sort of anonymized data and aggregate sort of navigation data where people are going. The second key is that up till now, what we have done in the commercial real estate industry is we have built, monetized, and maintained space. Going forward, my belief is that what we have to do is build, monetize, and measure audiences. That is a different sort of muscle that we have to start flexing. Number three, that brings us to the revenue model for the shopping center. We have to admit to ourselves that the revenue model for the shopping center was built in a pre-internet world. The idea that you build the asset, you divide the asset, you rent the asset, and maintain it. The model looks something like this.
Base rent, percent rent, specialty leasing, add in some CAM costs, and that is your asset valuation, basically, your income and your asset valuation. Might look like this. These are just theoretical figures. Do not hold me to them or anything, just for the purposes of example. But that is the way a shopping center might play out. What if all of a sudden we started thinking about the shopping center not just as a monolithic building that collects rent, what if we started to think of it as a media, data, entertainment, and hospitality company? Totally different perspective. Now, what if all of a sudden the shopping center was a media network, right? If I said brands are media, stores are media, the shopping center is the media network, right?
It is the one that is bringing all of these brands together, and that could be programmatic advertising now that is sold within the center. It could be brand activations that are sponsored, and all of the data that can be collected around them, we will talk more about the data in a moment. What if we were now in the business of live, ticketed, paid experiences? Shopping centers have traditionally said everything needs to be free, right? Come for a free picture with Santa. Come for a free Easter egg hunt. But what if we got into the business of building incredible experiences that people were willing to pay for, and it actually became a revenue stream? What if we started selling memberships to the mall?
Not just a free loyalty program that you get just for showing up, but a membership program or a subscription program where you actually get perks and rewards and gifts and special access. What if we became a content business where the whole center was a studio where every day there was content being produced and pumped outside the walls? What if we created studios in the center where influencers could come in and promote brands within the center and put that content up on YouTube? What if we became community halls, where we were offering classes, we were offering education to people in the community, where they could come in and maybe even have conferences in the mall? We could become that facility. What if there was a digital twin of the mall and it was a full e-com platform?
Now, that sounds crazy, but some shopping centers have gotten close to doing it already. Having an e-commerce platform where people 20 mi away can be shopping on the mall and come in and collect their goods. It is just a matter of bringing retailers together to make that happen. What about place-based services, health, spas, last-mile delivery, and logistics? The list goes on and on and on. Plus rent, right? You still get your rent, but now you have potentially all these other channels of revenue. When you add it all up, it might look something like that. Maybe I am being optimistic. Maybe I am trying to sell you too hard. I do not know. But I think that could be the future. But it is not just about the lift in revenue, it is about the lift in relevance.
It is about all these services now that keep the mall vibrant and relevant for a new era of consumers. Do we have rats or something? What is going on here? Number four, the center is the anchor. Forget about who is the anchor tenant. It is not grocery, it is not fitness, it is not the department store. The center is the anchor. In 2017, I met this fella, his name is Mark Toro, he is the principal at Toro Property Company in Alpharetta, Georgia, and he built a complex called Avalon, incredibly successful complex.
When I met Mark, I said, "How long have you been in the commercial real estate industry?" And he said, "I am not in the commercial real estate business." I said, "But you are a mall developer." And he said, "No, I am in the entertainment business." When I started talking to Mark more, I thought, first of all, this guy is kind of wacky, but when I started talking to him more, I realized what he was talking about. He does 260 events a year at Avalon. 260 events a year. Some of them are bringing audiences, as many as 20,000 people may show up for a specific event. He is building these enormous, paid, in many cases, ticketed, in many cases, events that are paying for themselves. Maybe sporting events, social events, you name it.
I believe the future of the center looks more like this, where community is what drives commerce, where sponsored experiences are driving expenditures, where interaction is generating consumer information and data. Data that can inform the brands that sit under our roof. Talk about time well spent and money well spent. That, to me, is what that future looks like. Again, there are already signs that this is working in China. The experience is the product. Kids are flocking to these malls that are offering these kinds of experiences. Again, there's no reason that in the slow hours within the center, that they couldn't be turned into studios where you're building content that then gets a life outside the center, and people are then able to shop live video directly from the center. Number five, hospitality is what powers the data flywheel.
We get a lot of people going through centers, right? But as I said, we don't know, in many cases, an awful lot about them. If we're lucky, we're maybe getting a MAC address from their device. Maybe we're picking up an email here and there. We're getting a license plate pulling into the parking lot, but we don't really know much about that consumer. I was in South Korea recently, and I was doing some work with the Lotte Corporation. There are basically three huge corporations in South Korea that build and own everything. Lotte is one of them, Hyundai is another, and there's another one. Samsung, I think, is the other one. But Lotte, they build shopping centers, and they focus on member packages. You can become a member of the mall. You get private entry, valet parking.
You get your own lounges that look like incredible Emirates sort of lounges for shoppers. And the amount of data they get is unbelievable, right? The consumer is willing all of a sudden. When you belong somewhere, when you belong to the club, even if it's just $20 a month or something that you're paying, like what you might pay for Netflix, you're willing now to give up way more data. Finally, number six, I believe that we will know when we've gotten to the future of the shopping center, when we stop calling it a shopping center. When we drop the word shopping, we will know we're there. Here's a quote for you. This is from another European. He said, "I am often called the father of the shopping mall but would like to take this opportunity to disclaim paternity once and for all.
I refuse to pay alimony to those bastard developments. They destroyed our cities." Does anyone know who said that? That was Victor Gruen. And Victor Gruen was an immigrant to the U.S. He fled Vienna in the midst of the war and fled to the U.S., and he built a lot of the stores on Fifth Avenue. He designed and built a lot of the existing stores on Fifth Avenue. And in 1956, he built the Southdale Center. It was the first enclosed, climate-controlled mall in the U.S. It was in Edina, Minnesota, of all places. This guy from Vienna in Edina, Minnesota. If you've never been to Edina, Minnesota, don't go. Don't. It's just cold.
He was disappointed because his vision was not that it was just going to become a commercial outlet, but that it would be like a city square where people would go, and they'd commune, and they'd gather, and they'd see art exhibits and watch shows. It would kind of become sort of the piazza in the middle of the U.S. suburbs, and it just didn't play out that way. My belief is we have a choice. We have a choice in the future. We can build this, and this will work. This will work. For the foreseeable future, this setup will work. But I believe that the future looks more like this.
I believe that the future of the center is that it becomes not just the center of commerce, not just the center of community, not just the center of entertainment, it becomes the center of life. When we get to that point, we will know that we're home. Now, I just want to say one last thing in the 49 seconds that I have remaining, and that is this. A lot of people ask me about this notion of futurism, and I think a lot of people think that it's just sort of about making educated guesses about what comes next, right? Sometimes you're wrong, sometimes you're right. But I don't think it's that at all. I don't think that futurism is about predicting the future you get.
I really believe it's about understanding what's happening now, being really honest with yourself about that current state, and then from that, it's about deciding about what future you want to engineer. It's about engineering the future that you want. Your future, ladies and gentlemen, begins right now. Thank you very much for your time. I appreciate it. Thank you. Thank you.
Doug, that was fantastic. Absolutely fantastic.
Thank you.
Thank you so much. I can't see terribly well into the audience, so if you have questions, there's a question immediately there. Yes, please.
Hi. I'm Valerie Jacob from Bernstein. Thank you very much for the presentation. I think a lot of the trends you describe are very much in line with Unibail-Westfield strategy. This is what they've been doing for the past few years, and this now accounts for a meaningful part of their income. My question is: do you think this is a coincidence that they have the big malls that are very well-suited to the future of retail that you describe? Or do you think that this is going to expand to smaller malls, more local? If not, what do you think the future is for malls that cannot sort of evolve into this future you're describing?
Okay, so is it for all malls everywhere?
Right.
Is the question.
I think you are going to see two things happen in conjunction. I do not think anyone ever thought. Very few people thought that we would have a U.K. market where there is 28%, nearly 30% e-commerce, right? So that in itself, I think at some point, if you have a center that is not really viable as becoming some huge experiential stage, it may more and more become a logistics hub for e-commerce purchasing, right? It is local, it is convenient, and I think along the way, we are going to be.
For example, Walmart right now is actually adding third-party marketplace vendors to its backroom assortment, its logistics hubs within its stores. So it is expanding beyond the inventory that sits on the shelves within the stores, and it is starting to add third-party marketplace vendors with top-selling items in that area. So we are already starting to see that transition. So I do not necessarily think every center is going to be necessarily converted into an experiential center. But I think the ones that do are going to really have to push the envelope in terms of what they are delivering.
What struck me as well when you were saying about the experiences that people are looking for sensory experiences, they are looking to touch. You were talking about perfume.
Yeah.
That they want to touch things, they want to smell things.
Taste, yeah.
Yeah, and taste things, and that's what, of course, the physical environment can offer, which the online environment absolutely cannot.
Exactly. Yeah.
Yes.
They want to do those things together, right?
Yes.
I was telling somebody the other day, there is a really beautiful garden center near where we live. It is an enormous garden center, and they offer workshops. It was just come in and make a fall urn of flowers and plants and that sort of thing, and one of my wife's friends canceled, and she said, "Can you come with us? It was me, one other guy, and about 50 women at this garden center making these urns. But honestly, these groups of women came together, and they were having a blast doing this. I thought to myself, "Why couldn't this be in a shopping center?
Yeah. The garden centers have become very popular in the U.K. now.
Oh, huge, yeah.
Not just for older people like me.
Yeah.
Any other questions, please? Yes. Please forgive, but you do feel free to shout because it is not always easy for me to see them. Yes, please.
Hi, thanks. Pieter Runneboom from Lanschot Kempen. Do you believe there is like an end number or final number to the percentage of the market that e-commerce can capture?
Right. Is it close to peaking out, the percent? I think your question is online retail, when will it start to level out?
Yeah.
At what level? Yes. I wondered that too.
I think in certain categories, we are close already. I think in certain categories that are more difficult online purchases, just by virtue of the product, we are probably bumping the ceiling already. But in other categories, it could be infinite. It really could. There are certain things that you think, "Why am I even going to the store to buy this?" Right? "I can make the decision online." Give you a good example. I am sort of a wristwatch enthusiast. I do not know if anyone else in the audience-
Wristwatches.
Wristwatches. Yeah. And that market, the online market for wristwatches, has just exploded.
Gosh.
Because you get incredibly good information about the piece. You get a guarantee from eBay that it's authentic, it's been checked out, that sort of thing. So we can buy with confidence in those categories. So I see, what do I get when I go to a jewelry store? Half the time, I get somebody who doesn't really know much about the product.
I think in certain categories, it could be 50%, 60%, 70%, in other categories, it might stay 15%.
One of the things, there's a shop in the U.K., called B&Q. I think it's called DIY now. But anyway, you go there, and it used to be really confusing for somebody like me because I didn't know what I was trying to buy, and I'd wander up and down, and nobody could help. They've hired a load of older people who are retired, who do up their homes themselves.
Right.
And they love to chat, and they know everything about everything, and it's a wonderful experience, and it's turned it into being something quite joyful for me now.
Yes.
Going there and talking to all of these older people saying, "Well, I didn't like that, and I did like this." It's very nice. That's how in need I am of socialization. Anyway, that's another story. Any other questions, please? Yes.
Special question, yes.
Yes, please.
Good morning. I'm [Arabu Kotien]. I have a quick question about the transition from the traditional shopping center to this new digital network. How do you see the financing of all this investment required to collect the data and become this-
Where's the money coming from to launch that?
Who's going to pay?
Who is going to pay? Tenants or the owners?
Not me. I am not going to pay for it. No, I think it is legitimate to start small, right? I do not think that you set out and say, "Okay, here is our slate of 200 events that we are going to run this year." I think you have to sort of make the transition from saying, rather than having a free Christmas ornament decorating thing for kids, what if we tried having a world-famous artist come in and really make it an enormous thing and see if people are willing to pay for that. I think you have to test the waters and see what the consumer's sensibility is for ticketed events, first and foremost. I think you have to test out the waters with membership, right?
Everybody is welcome to the mall, but if you were willing to pay $15 a month, $20 a month, what could that give you in return? What kind of data would a consumer be willing to share or opt into if they felt it was going to improve their experience materially within the mall? I think it is a question of testing, iteration. Markets are different, centers are different, regions are different, but you have to test it out and make that transition slowly.
Yes. A final question. I think I have two minutes left. Is there another hand out there that I should be paying attention to?
I think everybody.
I think everybody.
Everybody's thirsty for a beer or something.
Everybody's thirsty, probably not a beer. Doug, I want to thank you very much indeed-
Thank you.
for coming to talk to us.
Thank you, and thank you.
There will be more of Doug. After the break, we are going to talk about parameters, expert advice on parameters for investing, and also what to invest in. Please have a 10-minute break, and we will see Doug again later on our discussion panel. Thank you. Hello again. Now, I promised earlier on that we would start talking about investments a bit later in the morning, and that is where we have got to in the agenda right now. To talk about where to invest, strategic investing, and of course, as part of that, we are going to hear from the NEPI Rockcastle crew. Please welcome to the stage the CEO, Marek Noetzel, the COO, Marius Barbu, CIO, Anca Nacu, and the CFO, Eliza Predoiu.
Okay. Thank you. I hope you had inspiring morning. Yes, in fact, thank you for getting the presentations. It is very difficult, it's not impossible to be more entertaining, but let us try. Especially as listening to both of you, I learned and realized how much of actually what you have been describing from your point of view is actually embedded in NEPI . I am sure Eliza and Marius will prove case that what you gentlemen have been describing is actually happening at NEPI .
I think this is actually very important that we are connected, not disconnected to what's going on outside. I am super happy that we have set the stage in a way, put a context around and let's see how NEPI fits in that and what it is that we believe makes NEPI a good choice to allocate capital, let's put it this way.
Let me maybe start with a bit bigger picture of what NEPI is today and unpack a bit why we want to move outside. NEPI started 19 years ago. Yes, we will be 20 years young next year, we will celebrate properly. But the company was built on the fundamental assumption that CEE has a growth story and that CEE will be growing faster than the rest of Europe. If you compound every 2% higher growth over 20-40 years, that puts you in a different position on a relative manner if you take the starting point, the same for the geographies, and that has proven to be the case. We managed to build EUR 8.4 billion worth of assets, and we have become the biggest retail investor in CEE and the third largest in continental Europe.
That is amazing achievement, but those of you who have been following NEPI know that we have higher appetite that we can eat at a time. For me, as a CEO, all that you see, this is a bit historical. I mean, 2027, we will know what we will do eventually. That's kind of in our numbers for years to come. But I am more interested what happens in 2028, 2029, up to 2030, whatever, because this is where my thoughts should go. We have been working hard in 2026 to deliver 2027 number, but in 2027 we will work to deliver 2028, 2029 and onwards, and that keeps us busy. This is why we are here, because we want you to understand what we do and be part of it.
There is probably no reason to say how CEE was a great place to put your money 20 years ago. I mean, that is obvious. Look at the growth. Okay, Romania moving a bit backwards. It was explained, but for all the good reasons, this was and still is amazing place to be. But as a board, we have asked ourselves question, okay, so what's next? How much Magnolias of the world can we add to our portfolio? Well, there are a few. I would say a couple of billions of them waiting in CEE to be bought. But you need two for tango. Unfortunately, the owners of all those properties very rightfully, I would say, are not that willing to sell yet.
We could either sit with our feet in the sand and have good time and continue working in our comfort zone, or we get out of our comfort zone. If you know NEPI, we would prefer the other way. So we said, either we do other asset classes where we are because we have 7,000 people, we can manage other asset classes, but do we want those other classes? Is the relative growth prospects for other classes where we operate competitive to what we can do with retail, but outside of our geography? We concluded very quickly that we better play the game we like and we are good at like we used to, but we may need to change the geography. It took us some time to hover around Europe to realize what are the main economical fundamental drivers and future for various regions.
Without saying why we do not invest, let me focus why we decided to invest in Iberia. We have been a couple of times. Sometimes when I consider new acquisition, the first thing I do traveling to new city is sitting outside looking at people and asking myself, is this a place where you want to live? So is Spain for sure, and so is Bilbao, et cetera. I think if you look at Spain today from macro perspective, which is for last few years growing faster than rest of Europe and for the foreseeable future that will be the case. If you think about the factors that actually made Spain grow that fast, which is not only tourism, it is other means of business.
If you think about demographics, if you think about how Spain has transformed themselves at the same time being able to keep the deficit under the regime, then you think you need to consider the country. Then put on top of that pricing of the prime assets on relative basis to the likes in France, for example. You will realize that return versus the risk that you undertake is becoming quite an interesting investment story. So it started for us with Bilbao, and that is just the first of many steps. There are direct financial reasons to enter a new market, which is growth, which is bigger NAV, higher earnings, expanding our footprint, et cetera. But there are some reasons that you may not see at the first glance. But Spain is much higher rated than rest of the portfolio where we operate. That means cheaper funding for us.
Spain has very strong demographics. It is not the case for each of the countries we operated or micro regions we operated. That is very important and long-term factor. You add all of those together and that is became, for all those reasons, a new platform for expansion of NEPI. Having said that, we will not, of course, not consider LCE. We have the list of the assets we very much like, we call it wishful list, and the transactions will happen, but I do not expect that we will be as successful as we were over the last four years, and I will tell you in details what happened since 2022 in the future to come. If we want to grow, we need to look beyond our comfort zone. That is totally fine. That is how companies grow. Just at a glance, who is NEPI?
You think about EUR 8.4 billion worth of assets, but one needs to put it into perspective, the third largest in continental Europe and the biggest in CEE. I think this needs to continue. We have ambition to go way beyond EUR 10 billion, but not for the sake of the growing company, but size does matter for financial markets, then you have this snowball effect. The more you can do and you prove to be successful, the easier it is to grow in the future. NEPI should be and will be, in a few years, a global player competing for capital, not, as it may be considered, less global today. This is why we are here for EUR 336 million of NOI increasing year-on-year for last few years.
This year is set to be the best in the history of the company, and we want to make each year that is to come to be even better. But it's not only about size and NOI, but it's about growth. It's about us managing the company in such a way that we can return to our investors for the trust they have placed in the management. You can see it was 23% of the EPS growth is 2022 to 2026. While LTV is at 33%. I think one needs to look at those two numbers together, because the two together are the exact definition of value creation, which is growing your DPS but not taking too much risk. 33% is the best class in the industry, and we want to keep it that way.
I like to say, NEPI likes to take a little bit of risk, but every year. Not too much risk one year and then do nothing the other years. That has proven to be the good strategy for the last 19 years. So why would that not be the strategy for us going to the future? When you speak about our market, 60 properties, eight countries, and now adding Spain or Iberia, let's say, to the portfolio. But those all are numbers. I like these numbers. I'm a number person, and they all matter, but they are function of something which is much more important, and that is 700 employees of NEPI Rockcastle that make this actually possible. When I say 700 employees, I mean by that all value creation functions in the company are fully internalized.
There is no other company in continental Europe that would have internalized asset management, property leasing, marketing, investment, development, finance, plus energy. I mean, who else is doing so much energy? What I wanted to say by that, in NEPI, we are proud of keeping the know-how in-house, and this is our biggest asset. We have been building that for 19 years, and I'm sure we can capitalize on that going further. So that is something you may see under our numbers, but what I see under our numbers, you may not see, is just as important, if not more important for me. Because without teams, we wouldn't be able to do that. Eliza, Marius, and Anca will be bragging about what they did, and there's so much that they should be proud of. Now, speaking about the growth, let's look at relative basis.
I hate comparing to competitors, but at the end of the day, it is a relative matter, right? I am super proud to say how much we have been growing. Numbers speak for themselves. Growth coupled with low LTV, of course, 2022, it was function of low base of 2021 with COVID. But even then, on comparable level, NEPI has proven to figure their way to outgrow the market without, again, taking too much risk. We have been talking about how difficult market is macro and this and that. But at the end of the day, each crisis for any corporate starts with wrong or bad or poor debt management. Whatever you do, if you have too much debt at wrong time, if market goes against you, there is nothing you can do about it.
This is why 33%, 34% LTV, this is what you will continue to see when NEPI manages its investment portfolio. Okay. Very well. This is very interesting. The numbers are interesting, but even more interesting if you put them in the context. So we have managed to improve our GLA by 11%. You would have thought 11% more GLA, 11% more NOI. No, but it is gone up by 57%. What it tells you is it is not only that we buy properties, but active asset management is driving the value, and Marius will tell you more about it. If you couple that with portfolio value, +27%, a lot of that value is not by adding new properties, it is actually valuing up the properties that we manage every day.
I think when we showcase those, you will learn that NEPI is good at seeing what others may not see and unlocking the value which is locked. Because we are long-term player, a bit easier to us than to short-term horizon investors, but this is how NEPI operates. This is what I believe we have learned over 19 years, and we can take this expertise going to Spain to be just as successful. Just to put what I have just said about growth in last four years and three quarters, look how busy we were. Think about 2022. This is just after COVID, Russian-Ukraine crisis, but we stayed focused. Being true believer, we said retail will have future, retail is there to stay. We need to be sometimes blind and not think about external noise, because there is noise and there will be more noise.
Fundamentally, if the economy is right and the fundamentals are right, if you buy the right property, then it will pay off. In 2022, we bought Forum Gdańsk and Copernicus, combined value almost EUR 400 million. Anca, remind me, we closed the deal on the same day. So think about it. Anca was sitting at lawyer's office. In one room, there was team for Forum, the other, there was Copernicus, and Anca closed two deals same day. That was late December. Right after Anca did it, she handed the keys to Marius, and over the Christmas and New Year's Eve, the team has taken over two properties to plug them into NEPI system so that we can operate ourselves as much as we can, as fast as we can. That is extraordinary. This has happened late December. Then we opened at the same time.
We bought actually 50% of Ploiești to have full control. We do not like minorities. We like to do ourselves. We like to control everything. We want all decision-making to be within NEPI. That was only 2022. Think about 2023. We opened Craiova. Amazing asset, hometown of CFO. We had to do well, and we did. Amazing. It adds so much value now, so much earnings, and it has reestablished, again, NEPI's presence in Romania. We started our PV, our energy project, which has now become quite a big contributor to earnings. We will speak about it later, but we were busy in 2023 as well, as you can see. In 2024, Anca and the team within a month or six weeks closed two transactions, Silesia and Magnolia, combined value of EUR 760 million.
Not only legal work, not only all the DD were difficult, but think about Eliza, who was kindly asked to find EUR 760 million so we can fund our dreams. And we did it. We have our partners. Some of you are here. We use our RCFs, and we just managed to fund the acquisitions, refinance, get LTV back where it should be, and the effect of those acquisition in terms of operations and value add are just amazing, and we will speak about it. At the same time, we have sold out of Novi Sad. There were many reasons for that, and we have explained a lot. That was as well timed so that we could manage our outflows for acquisition almost perfectly because money came in and out, and we did not have too much sleepless nights over those acquisitions. I am super happy we have them.
In 2025, we continue with our energy rollout. We started as, I like to say, in kindergarten, just putting photovoltaics on rooftops. I did that in my home, easy. But it is much more difficult if you want to put it into the field, the solar plant. Different setup, different know-how. Andrey and his team did amazing job hiring very smart people to manage that business, which we did manage to scale up, so that in 2025, we could say that NEPI was the biggest energy producer of non-energy companies.
That is amazing. And we do it for various reasons. I will speak about energy, but 2025 was a busy year for NEPI. And 2026, and we are not done yet. It is only October. We entered Spain. Again, Anca and her team, it took you two and a half months to close the deal, and that includes month of August.
For those of you who go to Spain in August, know that business is closed, but not for Anca and her team. We did manage to buy. We closed the deal a couple of weeks ago, and we are happy owners, and we want more. At the same time, we are talking to dispose of others. Multiple reasons why we did it. I am sure there will be questions. I am happy to take them. We should close any day now, others, and then roll out of the country. That tells you, before you know it, four years or almost five passed, and it kept us busy. And we like it. We want to be kept busy in the future. I am here to tell you more about it. The story is not stopping here, obviously.
We want to do more, and we have our pillars of growth, of which I will speak when we come to strategy point. What I wanted to say is to prove that this organization is fit to do as much as we did over last four years, despite market not being very easy for us. Think about war in Ukraine. Think about raising interest rates in 2022, where mathematically, we should have been buying back ourselves probably at that time.
But we said, "Okay, but if there is growth in Forum Gdańsk, we should buy Forum Gdańsk." Forum Gdańsk is valued as of today, EUR 350 million. That's EUR 100 million top up. Add to that NOI we collected, that is very nice total shareholder return on that one acquisition. There are more things to brag about. With that, I would like to invite to the stage Marius. He can take you a bit more into the kitchen of what we do when we close those conferences and what keeps us busy every day. Thank you. Marius, over to you.
Thank you, Marek. Thank you all for being with us here in Warsaw. Hope you enjoyed. I enjoyed until now. Thank you, Doug, for the trends. Very inspiring, actually. I must say this, without bragging much about it, together with my colleagues, we decided, we actually realized that we actually put something in some of these trends already in our shopping centers now. So I will show you a bit later what we are doing in our shopping centers. First, let's start with the assets. So I will tell you a bit what's behind the growth and how our portfolio assets are managing to deliver this growth. First, how is our portfolio looking? You've heard about the eight countries and the 60 assets, but very important is to understand what's behind those numbers. We have 60 assets across CEE and Spain now.
Each of them has relevant size, so our average size is more than 45,000 sq m. For the people who are in tech, they know that this is a sizable asset. It's not a corner shop, it's a destination. They are all young, modern. Our average age of the shopping center is almost 14.5 years. But the most important is not the age is just a number, it's how we keep them updated. So 61% of our assets have gone through a refurbishment, an extension, or significant asset management initiatives in the past ten years. 61%. Not by value, by number. If we put by value, this goes almost to 80%. We are present in seven countries in CEE and Spain. This gives us access to a tremendous opportunity. 141 million people combined population.
Out of which, we attracted in the last 12 months, 354 million visits. 354 million visits is a huge number. Basically, a million visits per day in our 60 shopping centers. These visits are not coming from everywhere. We are covering 22.5% of the urban population in our countries, except Spain. 23% of urban population, this is where the money is. So we have a good coverage of our market. This is how we built the portfolio until now. Size, relevance, good location. The right assets at the right places. How we did it and what will drive us to do it in the future? I will go forward. Hope it works. Yeah. And show you the main three priorities that feed how we think about and how we develop further our portfolio. One, most important, we focus on the flagship assets.
Flagship assets are the dominant, relevant ones in their catchments, and we continuously improve them and our asset base. To prove that, we end the 2006 with 51% of our incomes being brought by 14 flagship assets. These are the assets where we can implement what Doug was suggesting, experience more offerings, and uniqueness. We invested constantly over the past five years, almost half a billion in maintaining, improving, and refurbishing our assets. We don't take them, leave them there, and just take rent. We invest in them. Very important for us. The second priority for us is how we allocate our GLA. What we are doing with the leasing, what type of attractions, what type of tenants, what type of retailers we bring in our shopping centers. What we like to call it's a consumer-driven leasing strategy.
What it tells us is it helps us and helps the team to bring the growth and the relevance and keep the shopping center relevant for the target. We managed in the last five years to renew and bring and relet 62% of our GLA. I will share a bit later more data, but this in a nutshell, is 1.4 million sq m of GLA. That, together with our additions of the new shopping centers, brought the turnover increase for our tenants to 57% since 2022. Huge number. The third priority is how you run all this. Marek mentioned something about it, but this, related to the asset, is one team, one system, one platform, run specifically in asset management, leasing, marketing by 400 people. Another way to optimize operations is the new energy that we produce for our shopping centers.
This helps us to control and to turn a bit of a cost in a bit of an income, and control a bit our sources of energy. So these are the three things that I'm going to talk about, and this is how we are planning to develop our portfolio going forward. Related to the flagships. Why flagships? It's simple in a way. The base assets in a market bring us the scale and the footprint. We need to be relevant, we need to be present, and so on. They bring us a good growth, a solid growth. But the flagships move up a notch. They bring us stronger growth, they bring us dominance, and they bring us relevance in the market. They work in a mix.
You need the base to cover the footprint in the market to have the presence for the retailers to expand, but you need the dominance and the relevance to have the flagship assets where you can actually offer more things for people to come, the experience. This helps us to grow our NOI 57%, our organic growth, and our acquisition brought the NOI up with 57%. The trade density, so how much a tenant sells per square meter per year, they increased to 25% over five years. Amazing numbers. I double, triple-checked them when I saw them because you don't always look at five years backwards. As I said, the flagships are growing faster. You have there, they are growing 20% faster than our base. This is the compound annual rate of growth of both of them.
What we do if we don't have the scale and the relevance in the market, as Marek said, we roll out. We did this in Serbia with Novi Sad, and we are doing it now with Lithuania. Once we enter in a country, we need to build up the relevance, the scale, so we'll be dominant and get the proper mix of tenants and interest from the customers for our shopping centers. Another secret ingredient, I would say, and I mentioned it before, is the constant investment. The constant investment both in our flagships and our base. However, the two of them, they return differently. We try to focus more of our efforts towards the flagships, as I said, and keep the asset base relevant while getting the extra speed from the flagships.
I will show you further on some showcases of examples of assets that went through this transformation in the past five years, and what we have obtained with it, just to convince you that we are on the right track. Here are two assets, which I love them all, but those were two assets that we bought in 2016 and 2017 in two capital cities. When we bought them, they were not the leader of the market. What we did in the past 10 years, we moved them from a good asset in a capital city to the dominant assets in both capital cities of Sofia and Zagreb. In Paradise, we managed to grow the NOI with 55% and the trade density to 40%. It's not magic. No, we just started. It's hard work. It's expertise, I would say. We started from the minus one floor, redesign it.
We upgrade the fashion tenant mix. We refurbish the food court and extend it. We keep going with it. The latest opening of the food court, I think it's in November now. Still after 10 years, we push efforts, and we upgrade our shopping centers. Arena Centar, Zagreb. We expanded the GLA, we expanded the shopping center in some areas that we could. We upgrade the fashion mix. We relocated the food court. For people that are industry, it's super hard to relocate the food court. It's very complex. We managed to do that. We built even a retail park, a DH into our shopping center to complement the offerings. To attack the economical or the convenience segment. All in all, we obtained 36% of our NOI growth in the last five years and 44% increase in trade densities. Moving on.
Two refurbishment redevelopments that have been two other examples, where we pushed two good assets to become the leading fashion destination in the catchment. Bonarka, you have seen some pictures earlier in Kraków, and Arena Mall in Budapest. In Bonarka, we have run a EUR 79 million redevelop plan over seven years, maybe a bit more with COVID. Seven years, and it is going to be complete Q1 2027, but most of it, 90% of it has been already done.
We touched everything. If you enter in Bonarka seven years ago, and you enter now, you think on a different asset. We improved the common areas, we improved the layout, we improved the tenant mix. We right-sized the main anchors. We give more leisure and more food court areas to the customers. That is seen in the numbers, 43% NOI growth in the last five years and 36% trade density. Arena Mall, Budapest.
That is one of the leading shopping center in a capital city in Hungary, Budapest. What we want to do there, and what we started four years ago is a complete refurbishment of the tenant mix and the common areas. We finished the tenant mix. We got an uplift in NOI of 4%, but we got much higher trade density of 27%. It is a bit of a gap, but closing this gap will give us the growth in the next years. Bringing up the rents to the level of performance. Not only assets that are with us for a long time have been delivering, but also acquisitions. In 2022 and 2024, we acquired, among others, two big assets. We acquired Forum Gdańsk and Silesia City Center, both of them well-performing schemes.
What we have done in Forum Gdańsk, we integrate in our operations, we leverage our knowledge, we put the tenants that we thought they should be in Gdańsk, we optimize operations, and we managed to push up the NOI with 46% and the trade density 38%. We have a plan when we are making acquisitions, and really we deliver it. The same thing happened in Silesia we bought only 18 months ago. It is a 96%, 85%, sorry, thousand GLA asset. Big one. We are preparing already a redevelopment plan to push this asset forward. But already through the optimizations and tenant mix improvements, we achieved 8% NOI growth, from 2024 to 2026. Good. What you are seeing is how we couple the assets with the redevelopments.
I focused on some flagships because these are the assets or the engines that drive the change, and you can see them with your own eyes. You do not need to trust me. You can travel to those countries, you can travel to those assets, and you can ask people around, and they will see that they really transformed. Moving on. The second priority. How do we keep our shopping centers relevant? How do we improve our tenant mix and offering? We had managed to release, I repeat, because to me it is a big and incredible number, 62% of our GLA. Some of you might think, shopping centers are something fixed. You buy an asset, you put it there, you manage it, and you take the rent. No. Every shopping center is an opportunity for change. It is an opportunity to adapt.
Every shopping center is, every center, to take out the shopping, as I just learned, is a mirror of a community. It needs to mirror how communities interact and their needs. We have taken this 1.4 million sq m that we renewed, which by the way, turns to 20 assets, big assets, that were completely renewed and released in five years. Huge amount of GLA. We brought in new tenants or new concepts, or we right-sized the tenants and so on. What it got us, it got an improvement in traffic. We managed to improve the traffic 20%. Together with the turnovers increase, we managed to increase the spend per each visit with 31%. This is a real striking number, 31% in over five years, that we managed to improve our visitors' spending. We did not just improve the footfall.
We did not just draw in cohorts of new people. We draw in value, people buying. This allowed us to increase the base rents at least between 2.5% and 5% above indexation, while maintaining a best-in-class occupancy. It is 98.5% now. It always has been between 97% and 98%. We still need a bit of 1%, so do not expect to be 100% because we still need to move tenants around. When the movement happens, you have a bit of a vacancy. Cool. How we did this and how we achieved by replacing GLA these results. As Doug was mentioning, I will refer to him a lot because he gave me some inspiration. We adapt to market trends. I will give you some example. These are our main three retail categories, health and beauty, fashion, and food and leisure. How we did it. We looked how they are performing.
Health and beauty was amazing. Performing amazing. We noticed that the trade density increased, and we moved GLA from other categories, DIY, electronics, to this category, because this is where the value of the GLA was higher. This is the mechanism through which we can improve our performance of our assets in an active way. We move GLA from one category to another. We allocate based on what the needs of the customer are and what concepts are available on the market. Here, what we did, we brought new tenants. You might notice Rituals being more and more prevalent in our markets. Notino, it is an online retailer that opened first with us, and we expand new concepts of Douglas, Sephora, and Rossmann. These are the drivers behind this change.
We noticed that the big anchors like Zara, like Peek & Cloppenburg, like New Yorker, they work better in the latest concepts. We went back to them, they are our partners, and then we negotiate, and we manage to have Agreement that most of our anchor tenants, they are present to the customers in their best shape, in their best, greatest concepts. This brought up a tradensity of 16% and an extent of GLA of 21%. The same thinking for the leisure. You heard before, people want to spend more time together. We want to spend more time together. We want to be more entertained. We want to go out and meet not screens, but people. On this trend, we enlarge and improved our food courts.
You don't feel any more like in a bus stop, you feel in a place that cares about you, and we extend our offering of food. This helped us to increase the trade density of food anchors with 17% and extend the GLA from five years ago to now with 39%. More GLA allocated to this. These are our key segments or key trading categories and how they change over time. Moving on, we are not only focused on the big areas. We try to add more things to that, to the portfolio. One, and I would say even innovative things. One that's dear to me is we managed to bring the Gen Z inside the shopping center through a video game competition. So we are organizing as a platform in three countries, a video game competition.
People are coming, they are flooding our shopping centers, they are buying, we make it together with our retailers. And to take Doug's example, and here, thank you again, sorry to mention your name so often, we finance it through the partners. It's not our money there. We bring partners. Orange is one of them, and others. We give people more entertaining concepts and offerings. We even have, in a shopping center that would leave our portfolio soon, the first swimming club. Not a gym, a swimming club where kids and families are spending time together and they learn how to swim. We have an event center in one of the shopping centers. Then using our platform, we have brought first-market entries. Marek mentioned, but I'll mention also later on, we are the place to go for the tenant that want to expand and see.
This allows NEPI exclusive access to, or first in the market access to those concepts or those brands that want to expand in CEE and now hopefully in Spain. Just to name some of them, you may heard about Normal. Normal is a Danish retailer, very successful. Their first shop in CEE was in Mega Mall in Bucharest, opening a couple of weeks ago. This is a picture from that opening. It was a queue that blocked one floor of the shopping center. Then we had other concepts there that we brought first time. Victoria's Secret was a good success, and I think two days ago, and it's just fresh, we opened Søstrene Grene in Poland, a new market entry that comes through the NEPI platform. Last but not least, we explore new trends and the new combinations between digital and physical.
And one good example for us is this Influcenter, where we have a retail unit that's managed by some influencers. Digital, you know this new job of being an influencer? Okay. They are managing this retail outlet, and they put the brands that they promote online, their own creations, and we basically don't know what's happening there, but it attracts a lot of people. We don't control. They don't have a fixed lineup. They don't have a fixed product line. They bring what's hot. And this for us, is a huge benefit. Another thing that we did, and I will end up, is we partner up, for example, another innovative idea. We partner up with the largest music festival in Romania, Electric Castle. And together, we design a facility by which people are bringing their old clothes and we recycle up.
We have tailors and designers that make new clothes out of the old clothes, and they resell it. Works amazing. Through these examples, I want to show you how we adapt to customer needs and trends. Not only that, the third thing that we do in leasing is that we strengthen the partnership with our key retailers. Our key retailers, our key partners. I exemplified 10 of them here. They are leading brands, leading retailers in Europe. They are from LPP to Inditex, to Auchan, New Yorker, and so on. I want to say that our top 50 retailers make 51% of our sales. These 10 retailers are the ones that fit with this slide. We really have a partnership with these top 50. They bring the growth, they bring the new concepts.
To link back to Spain and why we went to Spain, I wanted to also brag a bit about, it's not a leap of faith. We didn't venture into complete unknown. Almost half of our top 50 brands, retail groups, are already present in Spain. What we did, we just followed the track. Where they sell better in Spain, okay, let's go there. So we use this partnership, or we leverage this partnership to gain ground or to hit the ground running in Spain. We are not discovering a market, we are just leveraging our partnerships. Cool. What brought this to the leasing and the focusing on flagship? A top-line growth, so increase the trade density 25%, we increased the portfolio 20%. What delivered us, it allows us to increase the rents between 2.5% and 5% year-on-year on top of indexation.
This is results that you see in our DEPS, in our financial results, but also it helps us to recover the OpEx cost. This is one of the highest rates of operational cost recovery in the market between our peers and us. This allows us to have smaller leakage and less drag in a way, okay? This, we did it while keeping a sustainable OCR. OCR means the occupancy cost rate of our tenants, so how much they have to pay to us together with the rent, and the OpEx, and the service charge, and so on. This is a very sustainable level. So maintain a sustainable level while keeping the occupancy up. Good. I think we need to go to the third one, which is how, based on which, with whom we deliver all this.
We deliver all this with a one team, one platform that focuses on asset management, leasing, marketing, technical, and center management. All these functions are well connected together, and they work to deliver the things that you've just seen. I relate back to what you have seen earlier. It's very easy to discuss about implementing in a shopping center some special marketing activity. To do it consistently across 60 assets or at least 50, 20 flagships, it's a totally different ballgame. You need local expertise. You need people that have autonomy, that can decide locally what are the communities they want to attack, sorry, they want to attract and attack, to bring to the shopping centers. They need to understand the local partners and who can they partner with to bring those events to the shopping centers.
You cannot do it from Amsterdam or so differs for the portfolio. This is the team that we have on the ground. We managed to give them quite a bit of autonomy and decision power so that they can adapt to the market and drive further the growth of the portfolio for next years. This allows us to have the scale, so we have one process across the team. We have synergies. We do not need to reinvent the wheel every time. We just use the same things, and the knowledge transfer. If something works well in Bonarka, probably we will test it in Mega Mall or in other place or vice versa. We easily can transfer knowledge because we are one team. This keeps us, and that is one of our pillars, lean and agile. We are not a big structure. I am ending now.
With our energy, we managed to capture a bit of the value of our main cost driver, which is the energy consumption. This, you heard from Marek also that we have 150 MW installed, but for me, it is important, and it cover 31% of our energy needs. At the moment, and we plan to explain it a bit further. In the end, four things for you to keep in mind. We build our portfolio to be dominant. We build our relationships with our tenants to be the preferred partner. We have one platform to run our assets, and we focus on optimizing our cost structure by producing some part of our energy. Good. Without further ado, and thank you for the attention, I would like to invite my dear colleague, Anca, that will discuss a bit how we sell and how we buy assets. Please, Anca.
Thank you, Marek and Marius. Ladies and gentlemen, thank you for joining us. NEPI Rockcastle, it is a success growth story. A strong engine of this growth has always been acquisitions and development. I want to make a point before we start that we never did growth for the sake of becoming bigger. We did growth always by looking at how to improve the portfolio, looking at how to go towards those flagship assets that Marius was mentioning earlier. We managed to do that amazingly, ending up with a stronger balance sheet and safer balance sheet that we started with. I do not think that there are many companies that can have this kind of success story like we did. Sorry. I joined the company 13 years ago, lucky number 13.
I must say that during that period, we managed to expand toward the region into nine key countries, and more recently, more towards east, towards Spain. We managed to acquire 38 assets, to add 38 assets to our portfolio, and in the same time to deliver 28, 29, sorry, development projects. These are numbers that really show the level of expertise and the volumes that we can deliver. What is though important to mention is what happened with this acquisition and this development during this time. Not only that we managed to grow the company, but the value that we deliver to our shareholders was significant. 25% value uplift in terms of acquisitions and almost doubling the value of development projects, 70% valuation uplift. How is this obtained?
Obviously, by choosing the right products, by focusing on the assets that we believe we can work with that have the long-term potential, and by choosing the right locations for the developments. From a strategic perspective, you will see on the map that we have strengthened the focus on the countries that can deliver more and where we see more potential. We have slowly cashed in and stepped out of the countries that have already reached, from our perspective, the value that we can extract of, namely Lithuania and Serbia, where we bought, we grew the asset, and we disposed of them by cashing in significant values above what we invested. I will show a bit later how those disposals went. Another thing to mention is that from the 29 development projects, we have a lot of greenfields. Close to half of those are greenfield developments.
This is not little because we have a strong development team led by Andrei, our Development Director, and they have managed to build more than half of million of GLA, which was leased also from scratch from our asset management team. That has been integrated in the portfolio, has been financed, and has delivered then NOI growth and value uplift in the following years. I will showcase some of the most recent acquisition and developments that we have done. Forum Gdańsk, this has already been mentioned by Marek and by Marius. We have acquired this asset in 2022. We were one of the few players that were active in the market. Since then, as Marius was mentioning, the NOI has grown by close to 70% and the valuation uplift close to 50%, 42% value uplift.
This has been achieved by a combination of asset management initiatives, leasing improvements, and of course, choosing the right product to buy. In the same time, one year later, we have opened Promenada Craiova, which is a greenfield development done from scratch, 99% leased on opening day. This is an amazing achievement and shows actually the very strong relationship that we have with our retailers and the trust they place in us, and in the same time, our capacity to judge the best options to put on the map another shopping center. Going forward towards more recent moves, this is a strategic move that has been touched by Marek, but I think that it's a very good showcase of how we think about the assets and how we think about recycling capital and putting capital at work.
Within a six-month interval, we have recycled capital from one of the countries that was no longer a focus for us, a non-core country where we could no longer grow, into two core assets in Poland, which is one of our most important markets. Not only assets that are in an important market, but assets that are within those category of flagships, and they have already delivered additional value. Within the autumn of 2024, we closed Magnolia, we closed Silesia, and in the same time disposed Promenada Novi Sad. A thing to mention about Promenada Novi Sad, this is a beautiful project that was actually developed by our team and that we disposed of and exited the country with 35% premium versus what we have put into the asset. The timing, it's also amazing. The capital was recycled very fast.
And what is also to mention is that this has been done, again, without putting strength on the balance sheet, because this has been timed together with an equity raise of EUR 300 million that was done in October, and that sustained this move. So in one move, we moved the capital from one non-core country to two strong assets, in the same time keeping a very strong balance sheet. This is the kind of thinking that we have behind our strategy and behind our intention on how to invest and how to look at capital and new opportunities. A similar move was done this year to lower scale, let's say, in term of total volume of capital, but of a bigger importance in terms of strategy.
In an interval of one month, we recycled again capital from one of the country where we have only one asset, namely Lithuania, and where we saw no longer opportunities for further growth, and opened the door to a new country, Spain, for all the reasons that Marek and Marius mentioned before. This was done, 70% of the proceeds for the Spanish assets were financed through Ozas. Again, Ozas Shopping Center is an example of how we managed to grow the asset, to buy the asset, to work with it, and to dispose and cash in the value. By the asset management team that put there the nice swimming pool that Marius was mentioning, by strengthening the asset into a nice entertainment center, they managed to increase the value in such a way that the disposal premium on 61% when sold.
This is a perfect showcase of what NEPI can do with the asset to acquire, to integrate in our platform, to deploy the initiatives that we have in mind when we acquire them, and at the end of the day, to cash in and put the capital into a different place, where again, can be put to work to derive further value. So what makes us successful in these acquisitions and developments? Obviously, the great team and the great ideas that were mentioned before, but also a lot of other factors that we have gained through time and experience. We are now the first call for sellers in CEE. We are the well-known company, and our track record in terms of deals speaks for itself. We know all the assets, we have our wish list, so we are very well positioned to act when an opportunity is available.
We offer speed of certainty of execution. Again, the experience of the team, the fact that we managed to deliver so many deals, the fact that we present reliability and can do transactions in a very short period of time, and for that matter, develop and build assets very quickly, it's again on our business card, and it's a very good recommendation for us. We have one in-house team, and this is very important because not only then we can underwrite an asset, but we also work very closely with our asset management team that has the ideas, sees the potential of the asset, knows what to do with it after we buy it. We also have our development team that knows the potential of extensions, for example, and how to cost them, how to do them.
We are one-stop shop, let's say, that can acquire the asset, can grow it, and can sell it with a higher value at the end of the day. We integrate and we extract value, and I think that the two cases that we've shown, Novi Sad and Ozas, are perfect example, both for assets that we acquire and both for the assets that we developed. Partners of choice for retailers in development. This is very important, and Craiova development shows that we are a trusted partner. What Marius has shown earlier proves that the fact that we have the important network with all the key retailers, the fact that they know we have the platform, the fact that they know we have the capabilities to offer them good products, makes them want to be in our shopping center and makes them trust when we put forward developments.
At the end of the day, we do have the firepower to act while maintaining stability, and this is very important, and this gives us, again, trust with our partners that we can deliver, that if we are to embark into an investment, we do have the resources and the reliability to deliver on what we promise. Just to leave you with two, three conclusions, we do have a significant track record of expertise. We do have an in-house and integrated team and the region's track record, and we rely on a very strong balance sheet, and I will invite the gatekeeper to this balance sheet to explain us how she manages to fund all our endeavors and all our current and future ambitions.
Thank you, Anca, and no pressure, obviously, for the future. Good afternoon, everybody. Dear colleagues, dear guests. I am very honored to be here today, and thank you for making this event possible. I hope that I said hi to most of you, and if I didn't say it, I will do it over the lunch. As I was watching the introductory movie, and I was listening to my colleagues presenting the company before me, congratulations by the way, I must admit that I felt once again, very grateful and proud when looking at the journey of NEPI Rockcastle and how many things we achieved. Because now we are looking at NEPI Rockcastle, a company in eight markets, EUR 8.4 billion in assets, but I think that we can see much more than that. It is much more than a successful story.
I think that we can see years of ambition, years of determination, of resilience, and more than that, there are years of consistent delivery. I am the CFO of this company for the last five years, and there are finance team representatives here in the rooms, and there are more at home in our offices. We work here to turn the ambition into reality. We work here to provide the necessary means to grow, to protect the stability of this company, and to anticipate its needs. I think that we did a pretty good job. We also had, let's say, an anchor thing, which is our finance strategy, a flexible one, agile one, and prudent one.
Over the next 5- 10 minutes, I will take you through the funding, the funding in the last five years, the scale and the diversified access to capital that we had, how we approached the debt maturities, how we managed to stay prudent and to still grow with the necessary liquidity in place. Very important, I will also talk a bit about the strong partnership that we built. Thank you for attending the event here live and also for the ones that are attending the event online. Let me start with the foundation of what we are doing. If this is working. Okay. I think that one of the most important choices that we made with NEPI Rockcastle is to stay financially conservative even in times of accelerated growth.
If we are looking now at the balance sheet, we can see that two-thirds of it is financed via equity. It's only one-third that comes from debt that we need to refinance regularly, and this caters to the LTV of 33.1%, still some room to the upper limit of the strategic level that we self-imposed, which is 35%. I think that these numbers are telling the story of financial discipline, but it also tells a story of some freedom or some flexibility. Some flexibility into buying when some others still needs to wait, and some flexibility in navigating uncertainty, when some others cannot do it. EUR 3.6 billion. This was the amount that we raised over the last five years. I'm telling you that this is a pretty impressive number, considering the economic context that we are navigating. We navigated inflation, interest rates rising, geopolitical uncertainty.
We have also AI. We have a lot of challenges, and they are somehow repeating. Still, what we did in these times was that we financed acquisitions, as Anca mentioned. We completed developments, and we strengthened our liquidity. We accessed eurobonds, we accessed bilateral loans, we accessed equity, scrip, all type of financing so that will make the business grow. We also took care of our debt maturities, and this is how we managed to stay prudent and optimized. Without being futurist, one of the things that we also try to do in finance is to be one step ahead. One step ahead debt maturities, one step ahead funding needs, and this is, let's say, what proved us to be right.
If you are looking at the average cost of debt, maybe it was this anticipatory principle that helped us to keep an average cost of debt of 3.8% in context in which the interest rates are rising. One of the promises that we will continue to apply this principle going forward, because we have strong ambitions. Now, one of the principles that I learned when I joined NEPI Rockcastle is that fortune favors a prepared mind. When preparation meets opportunity, then we are going to bring great outcomes. For that, I have two examples. One of them is what Anca mentioned earlier, the EUR 760 million investment in Poland two years ago in 2024. To make these transactions possible, you need preparation, you need stability, access to capital, and confidence in executing them.
This is how we managed to secure those two assets in our portfolio, by raising EUR 300 million in equity and EUR 500 million six times oversubscribed in terms of bond raising. At the end of this exercise, we came back with the financial indicators at the same level that they were at the beginning, EUR 1.2 billion in liquidity and 32.1% LTV, like nothing happened. It is only the balance sheet that became stronger. The next one, which I think is beyond EUR 252 million transaction, is the beginning of a new chapter. We are going beyond CEE in Spain, and this found us in a very good financial position. We secured this transaction after ensuring almost EUR 550 million funds. This came from bilateral loans, this came from a secured top-up, and also from a loan that we concluded with an international financial institution, EBRD.
At the end of June, we reverted back to the financial strength that we have, EUR 1.2 billion in liquidity, 33% LTV. So it seems that we are quite sticking to that. One important thing that we are managing here is the maturity. We have well-spread debt maturities, and we are quite proud of securing the necessary liquidity. We all learn in our corporate finance classes that the liquidity is the lifeblood of a company, and I am telling you that this applies to the reality, because with the right liquidity, we have choices. I think that liquidity is much more than cash on the balance sheet. Liquidity is the one that provides a state of calmness when the markets are very volatile and help us to make the right decision for the business without the pressure of the short-term needs. This is something that we are doing.
We have a EUR 250 million maturity now in October. We used out of the RCF, and we have absolutely no pressure to raise any bonds in the current volatile market. We are going to do it when the time is going to be right. Obviously, the financial strength is not the reason for which we are here. We have our assets. We operate them. Marius is extracting the best of value. Then we deduct our expenses out of the NOI that we generated, and we distribute funds to our shareholders, because one of the reasons for which we are here is to create value for our stakeholders and shareholders in particular. Over these five years, we generated EUR 1.8 billion in cash derived from operations, and this was equaling the number of the distributable earnings that we return to our shareholders.
We did so with a 90% payout, which is the largest in Europe. We deliver that consistently. For me, as a finance person, consistency is a very important principle, is the one that is going to earn trust. I think that trust is something that brought us here, for us as company and for us in this environment at the second Capital Markets Day. I am very proud to have this partnership with both equity holders, debt holders, rating agencies, financial analysts, and I hope that I did not forget anybody. If I did so, I apologize. I think that we cannot speak about this billion of euro, about funding strategy, about gearing ratios, without having these strong relationships and without having earned trust with our partners. Maybe it is a buzzword, this trust, but it is something that you cannot take it for granted.
It's not something that you can, let's say, buy, and it's not something that it comes overnight. It comes always through consistent delivery. We are now triple B+ rated by both of the agencies, but the story is very interesting. Fitch, and hello, Pavel, being here, upgraded us back in 2023 in the middle of navigating an increasing interest rates environment. S&P upgraded us in 2026 in the middle of an energy crisis and an inflation that we are navigating. Despite, let's say, a challenging market environment, we managed to protect the business. We managed not to leave the market uncertainties to affect in any way the business certainties. I think that we need to take particular pride in that. I think that Doug mentioned about sustainability and climate change.
We are also keeping an eye on our ESG agenda, and we have a few partners that are looking at us, are scrutinizing us, and are giving some good marks because we have sustainability as our agenda. Maybe it's not number one priority, but it's among our top five priorities. I think that I'm getting closer to my presentation because I will need to let Marek come here and tell you about our future ambitions. I would like to highlight a few things. One of them is that NEPI managed to grow without compromising in any way our balance sheet. We managed to deliver attractive returns to our shareholders while keeping the necessary resources in-house to grow or making sure that despite financial challenges, we still keep access to capital.
If I started my presentation telling you that I am proud about what we managed so far, I would like to finish it by telling you that I am very excited about what lies ahead. Because we still have ambitions, and Marek is going to tell you more about that. Together with you, I'm sure that we will secure the necessary financial capacity to turn these ambitions into reality once more. Thank you. Marek, over to you.
All right. Thank you so much. I'm very well aware that, like very usual, we are very short on time. I have two minutes, so I'll try to maybe focus out of the three slides I have left. I'll focus on that one because this is actually the essence of why we are here. Let me just wrap up what we have heard so far. First of all, we heard from Jens that, the world is a volatile, if not to say a bit crazy world, but the boards adapt, decision-makers adapt. I read it as there is place to be successful. That's number one. Sitting and doing nothing is the worst decision you can make, and I think we all agree to that. That's number one. From Doug, we learned that clients in retail are forever changing. I totally agree.
I remember 20 years ago, what was driving footfall is different to what it is today, and it will be different in five years' time. I think our presentations of my team have proven to you that what we do on, let's say, asset management level, that's exactly what we are doing. We are riding this wave, and what I like most about it is not always we are successful. Of course, we show you our successes, but we make mistakes. We learn from those mistakes, and we don't punish for mistakes. We punish if you do twice the same mistake. What I wanted to say, if you don't make mistakes, and you don't assume that mistakes happen and they cost you a bit of money, then you never move ahead.
That I wanted to stress, listening to Doug, that we will be making mistakes, of course. I promise you we won't repeat them, and I promise you we'll learn from them. Then from my team, I think we have showcased and proven to you that the quality and the know-how that we possess, which is totally in-house, is actually why the company is so successful. I think that we have all the reasons to believe that we can continue this amazing growth, and that we can do it beyond the borders that we operate today. So whatever decision we do, whenever we come to the market for whatever sources of capital, there are four main pillars of growth, and that won't change. Each decision we do would lie under one of those. That is asset management, first of all.
We always take very good care of the babies we have in our kindergarten, so to say, or maybe university. There's a lot of CapEx going back into the business because Marius has shown you that if you take good care of the assets, they will grow faster than the market. They will pay back, and they will pay back well. This is what we'll continue to do. 60% properties have been refurbished. I mean, I don't think anyone ever did it before. For that, we will need, of course, sources. M&A, Anca can transact fast, but she can transact when the time is right, and we are well equipped with ammunition to shoot from the hip when we have to shoot. It may be that we don't transact, and there's nothing wrong with that.
Some of the best transactions are those that you let others to conclude. There's nothing wrong if we don't transact. Looking just at the pipeline of what market is offering us, and we have a lot of new Spanish friends by now, having invested in Bilbao. I can assure you that we have ideas, and of course, we can only tell you as much as we can, but we are booking a lot of flights there and back to Spain. We are sure that this company, in three to five years' time, should be, have GAV of EUR 12 billion-EUR 14 billion, maybe billion euros of assets. I said already once why. I'm true believer that NEPI is set to be number one choice for any property investor interested in investing in property in Europe.
I say it, I mean it, because when I compare NEPI to competitors, the way we are set, the way the balances is managed, we are so lucky we don't have the problems some of the REIT companies have in Europe with too much leverage, not enough of growth. Some of those companies, those mid to small caps companies, they do nothing else but serving the debt holders. This is not NEPI. When we come for capital, this is for growth. This is not for recapitalizing the balance sheet. I think this is a big differentiator. So we will be coming to the market to fund the ambitions of the growth by second engine, which is M&As. Developments, we have a lot on the plate. Inevitably, that source of growth will have to dry out.
I mean, there is only as much as new greenfield developments as you can do. We love them, but obviously, the market will get to its saturation point, and we never want to oversupply the market because that is counterintuitive. So regretfully, that will go lower. Energy, I mean, we are busy, but we already will be, by the end of the year, we will have capacity of 30% of what we consume. We will produce. That's amazing number. By end of next year, I'm looking under no pressure, but that number goes to 41% with another Berges, with another photovoltaic farm of 50 MW that we can install in Romania. By the way, this is high yielding. We are talking about combined CapEx until end of the year of EUR 190 million, which with the IRR of around 17%-18%. That's amazing.
Not only is that green initiative, but it's turning what Marius called very rightfully cost into very nice income stream for the company. We have ambition to continue, but just think about, we consume 550 GW a year, of which 40 will be internally produced. We control it from the production until delivery, including invoicing for that. That's super good thing to do. I'm here to make sure that each of those pillars of growth is properly founded. So I hope you will join the journey in which in five years we see us being EUR 13 billion worth JV company, where 20% income comes from higher graded market like Iberia, but why not further? The NOI aspiration, EUR 800 million is just around the corner. To that, I would like to raise the glass at the lunch. I will finish here.
I have two more slides, but they are function of what I have just said, but I'm mindful I'm four minutes late. So this was probably the most important message I wanted to pass. Thank you so much for that part. We are not over now.
Marek, thank you. I'm not going to let you escape. Please take a seat. I'd like to also invite Doug to the stage, also Valerie Jacob and Steve Brown. Valerie is from Bernstein, so she's going to give us a little bit of the retail analysis side, and also Steven Brown, the CEO of Fortress, who's going to talk to us a little bit about investment. I have with me Slido. If you would like to submit your question, I think it's more fun if you put up your hands, don't you think? I would like, first of all, to ask you, Steve, and also come to Valerie as well, about how has the investment climate, the investment environment, investors' attitudes changed with some of the developments that we've seen happening over the last few years described to us in part by Doug?
Yeah, thanks. We've been hearing a lot, and thanks so much, Doug. I wish you'd stopped your presentation halfway about the death of retail, and it's kind of over, and shopping centers, and what will they be. I think we've gone through COVID, and we've gone through a lot of interest rate cycles. The one thing that keeps coming back, and you did touch on it, is that people need a place to socialize.
Yeah.
They need a place to engage with the products. I don't know if you've bought a Rolex watch without actually seeing and touching a Rolex watch just yet, but you need that. I think people's perception to retail has waxed and waned. What really NEPI keeps proving is that people need this physical space to go and interact with the brands, to purchase things, to nip in and out. I think that's really been one of the things that we've seen through many, many cycles that's been a bit of a constant. In CEE in particular, I guess we probably have seen a huge resurgence in this area of the world. When we first came here, I've been coming here for a while now.
I'm disappointed that we've got so many Western Europeans here because what we really saw is this, a little bit of Western Europe looking at Eastern Europe as though it was a very risky destination. I think we came from a country with capital in South Africa that was a little bit further south of Zimbabwe. Maybe our risk perception was a bit different, and we saw the growth and the opportunity and also the, I guess the grit and determination of the people to make things really work. Everybody else was running around buying offices in London and Paris, and that didn't work out too well. We were here buying retail assets in Central and Eastern Europe. As Marek and everybody showed, it really worked out fantastically well for the capital providers.
I think it is just that slow and steady that NEPI keeps delivering. It is the dividend yield of circa 8% that we really, really enjoy.
Valerie, can I pose the same question to you? How have you seen the investment climate and attitudes develop during these last few years?
Yes. I think from a listed point of view, I am going to mirror a lot of things that has been said. During COVID, if you look at the share prices of retail company, they were completely battered. They have recovered strongly, seeing that as, I think investor got convinced that people were returning to shop, I think a lot stronger. I think the return was a lot stronger than many of us thought, especially from the Gen Z consumer, that they were basically born with a phone in their hands, everyone thought that they will buy everything online. It has proven not to be the case. I think as we showed retail companies showing very strong operating metrics, share price basically rerated.
Another thing that is quite interesting is that if you look at the sort of listed real estate space, you do the correlation with bond yield, because we have been living through a few years of increasing bond yields, retail is the category that is the least correlated to this increase. There are many explanations, one of it is this post-COVID rebound. I think also shopping centers and retail offer also a lot of income, which I think is very valuable in this current environment.
Doug, just thinking about the past few years, and I'm looking for some hands out there, by the way. My takeaways a little bit, I think, were that, first of all, that discussion about retail physical has been won. That's almost been had, and we've now got the answer to that question. The second thing is that the space that you were describing, I was very taken with the sort of amusement park in retail space, and I was thinking, "Hmm." So how would I express what that was? I think what you were saying is you want a flexible space that can move with the times and with fashions and isn't a sort of one-stop excitement, and that's it. That's the interest. I think that's what you're trying to say, is it?
Yeah. I mean, rather than me trying to put it in my words, I'll refer back to the gentleman that I mentioned in the presentation, Mark Toro, who said to me one time, and it kind of struck me, he said, "It's the business of human energy." That's the business that we're really in, where we are manipulators of human energy within space. And I think that what I've been in a lot of airports this week, and as I pass the retail in a lot of those environments, I see no energy. And I think that that is really the art of what you do, of what we do in this industry, is we have the ability through crafting experiences and crafting spaces to generate that energy and to make people want to contribute their energy to that environment.
And you just feel that. When you walk into, whether it's a store or a shopping center, you can just immediately feel that. And by the same token, you can walk into a multi-billion dollar complex and feel nothing. The best way I can describe it, you know, is that we are in the business of generating, capturing, manipulating, and capitalizing on, ultimately, human energy, and in the process, giving people something to be joyful about.
Marek, if I can come to you've described very much the investment as methodical and consistent. It's not you invest a huge amount one year and nothing the next. It's not lumpy in that way. What else can you tell us about how you make those decisions?
Yeah. I think it's quite complex, and I could speak a long, so I try to be concise. I think it has all to start with the very basic in this very noisy world of us being bombarded with so much data and points to make decision on. At the end of the day, the fundamental reasoning in properties which long time not heard, but location, location, which today we translate into dominance. It all starts with that. We want to be number one in the catchment we enter, and we want to be in the catchments like I described it before. I ask myself question: Would I want to live in that city? I think the answers are yes, then you can go deeper into your discussion. Of course, we are very much growth driven. So I put it this way.
If I were offered, even let's say, primary asset, but in secondary city with less growth, but yield of, say, 9% versus super dominant, great agglomeration, much lower yield, let's say, of 6%, but there is much more growth to be unlocked, I am more keen to buy into more expensive but dominant long growth story asset, which is kind of ring-fenced from external factors that may impact the operations versus what, like you said, is in between convenience and dominance because those products will be under pressure. There are reasons why they trade at those levels. Because I could tell you easily, you could buy EUR 1 billion worth of assets higher yielding, but there is reason for that.
I think it's, in a way, ability to capture this polarization and put your money where the growth is, and then plug into your system and execute from day one, unlocking on all the opportunities that investment asset gives you. I know it was longer than I hoped but
Steven, what's very interesting as well, looking at the figures that you've shown us, is the consistency of performance, not just on the balance sheet, but also on the profit and loss account. That's very marked. Steven, in terms of the factors, the markers, you know, however you describe it, that you look at, what are the ones that you would look at today, do you think, when you're looking at finances or the performance of a real estate company in this way?
Yeah. I think I will answer that as a representative of the largest shareholder in NEPI. What do we look at? Why do we like it? Why do we hold our shares?
Yeah.
You have to have a market that you can trust. In other words, the tenure of the land, you have to be able to trust that. I think we are in an area of the world which did have a difficult past in terms of not being able to actually own your own land. I think that is important. So you need that sort of rule of law and that certainty on the land ownership just to invest in any real estate globally. That, in this area and the markets that NEPI plays in, is of paramount importance. Then you do need economic growth. That is really the panacea for real estate.
If you have got those two sort of stabilizing factors, then you can go into more of the micro locations as Marek and Anca and the team do so well, which is the location of the asset and the performance of that asset. I think what we have seen the team do so well, and as Doug alluded to earlier, is that you need that energy in the retail centers, and that does come from the location, and it comes from sweating those assets. The team does that so well, and they manage to generate revenue for the tenants. If I look at real estate and you look at the markets and you look at the macros and where is the growth, and you dig a little deeper and you say, "Well, what type of real estate are we going to buy?
Are we going to do residential in Zurich or are we going to do offices in Paris?" The one thing that always stands out about retail is that you are directly linked in a very close marriage with your tenant's revenue. The data that the team gets here in terms of every tenant in the NEPI centers will report their revenue monthly to the team. That is incredibly powerful. You do not compete with your tenants for the space. We at Fortress do a lot of logistics warehouse developments. You do compete with the tenants. They can go and build that warehouse themselves. Inditex are not going to go and buy Warnaco Mall and let it to their competition.
I think it has the sustainability and the link on the revenue side, which is probably more important, and you can raise the rentals more than, for example, if you are renting out offices and you are just really dealing with a cost line on your tenant. You are linked in with their revenue. If you can add a mix and add CapEx and change dead parts of the mall where you can actually increase a tenant's revenue, wow, you can really start to increase the rental and the value of that store for the tenant.
I will come back to your Rolex example. I think there is a Rolex store in Silesia. Maybe they do not sell any watches there. But you have a very wealthy part of the country where you can go into that mall, you can go into that store, and you can touch and feel the product.
Yeah.
Maybe you are buying 100%. Maybe it is 100% online sales for Rolex in Kraków. I do not know. But without that store, how are they going to engage with the tenant? I think that really gives me a lot of confidence in retail real estate, and especially in markets like this with the burgeoning middle class.
Right. Any questions so far? Yes, I can see a hand there. Yes, please. If you would say your name and where you are from, that would be great.
Hi, Bart Gysens from Morgan Stanley. Marek, one for you. You intend to invest a lot over the next couple of years. We have seen you raise equity, but also sell an asset this year. We heard Marius make the case for the base assets, the non-flagship assets. But that is exactly what quite a few of your peers over the last 10 years have been selling, or have been trimming. What should we expect from you? How are you going to fund all of this growth? Will it be a combination of equity and disposals, or are we going to see an increased focus on flagships? Any color you can provide on that would be great. Thank you.
Okay. Next couple of years.
No, that is a very good question, and I like this question because the answer to it is very nice because we do have options. We are in this very sweet spot that having, again, I know I repeat myself, but prudent balance sheet allows you to have options. We can do this forward thinking, and we have optionality of funding the strategy for growth. At the end of the day, it is quite mathematical and a bit operational because just to give you an example, the bottom 10 to 12 assets generate NOI of Silesia. Now you ask yourself questions. Isn't that right thing to do from operational and agility point of view of the company? This is kind of thinking we implement. At the end of the day, it is cost of funding versus the return you can do and kind of refinancing your portfolio.
The beautiful thing about our portfolio is that none of the asset is under pressure that will make us sell the asset. It is thinking about what is the best source of capital that may trigger decision on selling asset to fund the further growth. I think not many have those options. To answer your questions, everything is on the table. We are not emotionally attached to our properties, although we regret a bit, some of us, with Ozas. I am joking. What I wanted to say, if you have options, that is how you need to manage a company, and we do have them. You may expect any route, depending on what market brings. If our share trades at NAV, that is quite easy. If we are trading at discount, but we can sell at premium to NAV or book value properties, then probably this would be the route.
Look at Ozas. It is 14% or 17% premium to book value while our shares trade at NAV. Mathematically, you go this route. There is no straightforward answer, but optionality is what we always want to have.
Thank you. Any questions at the moment? If not, I wanted to move on to NEPI's. Yes, please. Yes, please. Thank you.
Hi, this is Steven Brown. For the next five years you should how to create value in the past, you have ambition to acquire non CEE. What are the financial metrics you're looking for in five years? What assets do you have? What asset value creation? Whatever for should we expect? There is such a necessity for NEPI at this point in time, given that we have individual assets that are being offered, which we like.
Valerie, when you look and you analyze listed retail landlords, what separates them out in your mind?
Well, as you said, I think having a strong balance sheet today is a key differentiator. If you look at the share price of the various listed landlords, there is clearly a premium from having a strong balance sheet. Then I think it is about the growth. You have, as we talked today, the growth of the center and the tenant sales and the rents. I think from an investor point of view, it is also about how much of this growth can translate into earnings growth and into dividend growth. I think that is quite important and something that is looked at.
Doug, when we talk about different markets, we have talked about it from an opportunity point of view, but to what extent do you take cultural norms into account? Anybody who spent any time in this part of the world, as I did some time ago, would understand that the high street was not a feature of what went on. That was the political system in which they lived, more so in Spain. To what extent, how do you take that into account?
Well, I think you have to, at a baseline level, you have to understand the cultural sensibilities of the audience, right?
Yeah.
As you would, in sharing any performance, and I look at this very much as performance.
Yes.
You do. You have to understand the cultural norms and sensibilities of the audience. With that said, I think that audiences also don't like to be patronized, having their own culture fed to them.
Right.
Right. I think they like to be surprised as well. I think there's a really interesting dynamic, in a company based in the CEE, coming into a market like Spain and on the one hand, understanding the Spanish culture for sure, but on the other hand, bringing its knowledge and its experience from other regions into that market as well. I think that adds a really interesting dimension, and huge opportunities.
Great. Any further questions? Yes, please. Here at the front.
Yes. Thank you.
Oh, sorry. There's a question there too. Okay. Should we do Let's go with where the mic is, and then if you get a mic for this lady, too, afterwards, that would be great. If that's okay. Sorry.
Aaron Guy from Citi. Just a quick one. In terms of the growth going forward, how would you look to stretch potentially the balance sheet if a large acquisition came up short term? I know equity is an advantage for you guys, but how much flexibility do you have there to sort of push the LTV up? Would you look to move into any gentrification opportunities and alternative uses on your sites and moving into retail adjacent sectors like logistics, for example?
Yeah. Thank you. For the first part, when it comes to our ability to stretch a bit our balance sheet, we do have this flexibility. I mean, 35 is there, and if we do an acquisition where we, let's say, will use our revolving facility and then exceed to 37, nothing wrong with that as long as we have credible story of getting to sub 35. That's part of business plan, and we have done it before. But I don't think we will ever make a decision to stretch ourselves to get to 43. I think there is a point in time where equity owners start to punish the companies for taking just too much risk. I'm looking at Steven, who may confirm or not.
I just say that there are too many examples of taking too much debt in the companies for the sake of growth to satisfy equity holders. Those days are over, I think. We don't want to over-risk. As Eliza was mentioning, when we do the EUR 760 million altogether, we have temporarily went over 35, but quickly went up to 34. So we can do it. But it can't be there and stay for longer. Let me put it that way. If there is no credible way to deleverage, then I think that this is too big a risk. Then the second part of the question was whether we like other asset classes, right? That was the question, if I got it right. Like logistics. Did I get it right?
While I think Steven nailed it, what I love about retail is that we do control the margins and profitability of our tenants. No one will move Inditex from Bonarka and develop a shopping center next to us in hope that Zara will move. They won't move because they do EUR 5,000 per sq m with NEPI in Kraków. This is why they are there. When I look at the landscape of offices in Warsaw and I compare to retail, the main difference is the location decision-making factors. In offices, it's just because it's newer, it's better, it's maybe cheaper, and maybe the CEO lives closer. This is not happening in retail, and this is what anchors our base tenants with us. We want to continue playing that game for as long as we will see that we do the right job and a good job, so to say.
You're doing quite a lot of resi around the malls and Promenada, there's a hotel. I mean, you are engaging with that and not missing the opportunity.
This is a good point. When we look at those resi developments, I would call it rather highest and best use of the assets we possess. We have land, so either we sell it so it's not cost to us, or we control quality of resi development next to our shopping centers. Nothing wrong with that, Andre. We're more than happy to do more resi, but it's not a strategic goal per se. We wouldn't pursue resi development downtown Warsaw just for the sake of doing resi. On your mixed use, this is the answer to what Doug was saying. Mixed use, one of the most amazing developments in that part of the world, which is in Bucharest, and we are preparing one more in Gdańsk as a response to how the market is changing. The backbone of each of those projects are shopping centers.
Yes, please. This should be the final question then.
Thank you. A tricky question maybe for Marek, since we haven't commented on this asset class retail parks. This is really the big boom in retail in Poland over the last, let's say, decade, in terms of new supply, probably also in Romania. Do you have a view as tenants generally tend to experiment with this format as well as they see more and more, let's say, locations on offer? Do you see this as, call it, renegotiation with some of your tenants who may not like the higher service charges with higher energy costs?
That's a very good question. I'm actually happy you raised it because I need to surprise you in the first instance, because we are managing tens of thousands of retail parks, but they are extensions to our shopping centers. The performance of, for example, Arena Zagreb, combined with the retail park we have developed next to it, is just amazing example. I like the product as such, but I just am terrified with the ease at which one can develop one to the other. Before we make investment decisions, I speak to my tenants and I say, "Guys, what do you think about it?" They say, "Marek, we open at EUR 8, we pay EUR 1 service charge, we get the tenant incentive, we open everywhere. In five years time, we'll close half of it.
It won't be our problem anyway." Do I want to play that game? Not really. There's another factor. All those leases in the retail parks, they are mid-size and anchor tenants, so to say, big size. All their service charges are capped. They just pay EUR 1.5, see you in 10 years. Well, good luck. In inflationary environment, the scissors open up and your NOI is or will be under huge pressure. I know example in Poland already of that happening. I think to your point, if you are a smart developer who develops and sell quickly, this is the way to do retail parks. But buying them to hold long-term, I don't see that being a compelling stories yet.
Thank you very much. Thank you very much to all of you for your attention this morning and your enthusiasm, and to the panelists, all of you. Thank you very much indeed. It is now my pleasure to say that we are going to have lunch where if you had breakfast here, it is up there. Just follow the crowd. If you are leaving to go to the Warsaw afternoon trip, we need to meet very promptly at 3:15. If you have a yellow dot on your pass already, that is you. We cannot be late because the buses cannot stop for very long in the city. It is really important that we are on time for that. It remains for me to thank you for embracing me today in your community, and bon appetit.
Thank you so much.