UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS MASTER’S THESIS DEVELOPMENT OF THE STOŽICE SHOPPING CENTRE IN A PROJECT FINANCE SCHEME Ljubljana, June 7th, 2018 IVAN BARIŠIĆ AUTHORSHIP STATEMENT The undersigned Ivan Barišić, a student at the University of Ljubljana, Faculty of Economics, (hereafter: FELU), author of this written final work of studies with the title Development of the Stožice shopping centre in a project finance scheme, prepared under supervision of prof. dr. Aljoša Valentinčič and co-supervision of prof. dr. Andreja Cirman. 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Ljubljana, June 7th, 2018 Author’s signature: _________________________ TABLE OF CONTENTS INTRODUCTION ............................................................................................................... 1 1 REAL ESTATE DEVELOPMENT PROCESS ........................................................ 4 1.1 Real estate industry .............................................................................................. 4 1.1.1 Real estate cycles ............................................................................................. 6 1.1.2 Retail development .......................................................................................... 8 1.2 Steps in the development process ...................................................................... 10 1.3 Risks in the development process ...................................................................... 12 1.4 The role of flexibility and uncertainty .............................................................. 14 1.5 The theory of project finance and investment valuation ................................. 16 1.5.1 Investment valuation ..................................................................................... 18 1.5.2 Highest and best use analysis ........................................................................ 25 2 ECONOMIC AND DEMOGRAPHIC OVERVIEW Of SLOVENIA .................. 25 2.1 General information ........................................................................................... 25 2.2 Demographics ...................................................................................................... 27 2.3 Economic indicators ........................................................................................... 28 2.4 Taxation ............................................................................................................... 30 2.5 Comparison table of Slovenia and neighbouring countries ............................ 31 3 PROJECT OVERVIEW ........................................................................................... 32 3.1 Project overview .................................................................................................. 32 3.2 Location analysis ................................................................................................. 34 3.3 Zoning .................................................................................................................. 35 4 SPECIFIC MARKET OVERVIEW ........................................................................ 36 4.1 Retail market overview ...................................................................................... 36 4.2 Catchment area analysis .................................................................................... 37 4.3 Household consumption ..................................................................................... 40 4.4 Tourism and its potential impact on retail ....................................................... 42 4.5 Daily migrations and their potential impact on retail ..................................... 45 i 5 DEVELOPMENT STRATEGY ............................................................................... 46 5.1 Highest and best use recommendation ............................................................. 50 5.2 SWOT analysis of Scenario A versus B ............................................................ 52 5.3 Tenant layout analysis ........................................................................................ 53 5.4 Systemic arrangement of the most optimal tenants ........................................ 55 5.5 Analysis of potential risks .................................................................................. 56 5.6 Plan proposal for managing exposure to identified risks ............................... 57 5.7 Rent level analysis ............................................................................................... 58 6 FINANCIAL IMPLICATIONS ................................................................................ 59 6.1 Basic input data for evaluation.......................................................................... 59 6.1.1 Discount rate and capitalization rate ............................................................. 59 6.1.2 Depreciation, inflation and taxes ................................................................... 59 6.2 Revenue projections ........................................................................................... 60 6.3 Projection of operating expenses ....................................................................... 61 6.4 Cost of investment .............................................................................................. 62 6.5 Financing structure ............................................................................................ 63 6.6 Financial statements ........................................................................................... 66 6.7 Financial implications ........................................................................................ 68 6.7.1 Sensitivity analysis – investment costs and revenues ................................... 68 6.7.2 Sensitivity analysis – investment costs and capitalization rate ..................... 69 CONCLUSION .................................................................................................................. 70 REFERENCE LIST .......................................................................................................... 72 LIST OF TABLES Table 1: Overview of standard tax rates in Slovenia .......................................................... 31 Table 2: Comparison table of Slovenia and neighbouring countries .................................. 31 Table 3: Shopping malls in Slovenia, Croatia, Hungary, Austria and Italy included in the research, taken into consideration for one day shopping trip destination from Ljubljana ............................................................................................................. 37 ii Table 4: Number of shop in five different main categories and subcategories for “Miscellaneous” category in Slovenia, neighbour countries and in the capital .. 38 Table 5: Number of 10 most frequent shops in the researched area.................................... 39 Table 6: Shops of brands, connected to active lifestyle, their frequency in shopping malls in the researched area with the popularity of the brands as per different rankings . 40 Table 7: Number of overnight stays in Ljubljana in 2015 and 2016 as per tourist accommodation establishment ............................................................................ 43 Table 8: Arrivals and overnight stays in Ljubljana in August 2017 .................................... 43 Table 9: Forecast for tourism in Slovenia: value 2017-2022 .............................................