Waltz on the Danube

Topics: Cash flow, Rate of return, Shopping mall Pages: 14 (4982 words) Published: April 3, 2006
Waltz on the Danube

Executive Summary
The purpose of this case is to establish the viability of the €75 million shopping center project located along the Danube River in the city of Gyor. As the director of Hungarian operations for ECE Projektmanagement Dr. Philipp von Wilmowsky had worked for two years on the 30,300 square meter shopping center. So while Gyor lack significant a shopping center thus creating a site that had great potential there were several major questions that would define the success of the project.

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

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

1. Is there an adequate market in Gyor?

Gyor was chosen as an attractive site on the basis of the adequacy of its market. Gyor is a central geographic location within Hungary's burgeoning economy and that has been accentuated as the strength of the labor market has become more consistently reliable as apposed to erratically undependable. Gyor also has some demographic characteristics that would interpolate a strong market potential for the region. So while Gyor is only fifth largest principal city in Hungary with only 130,000, the city is more modern than other major cities in the country and has the largest catchments area after Budapest. Central Location

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

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

Also due to demographic factors there would tend to be more discretionary income in Gyor relative to Hungry as a whole based on the purchasing power index. The purchasing poser of...
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