The Overall Situation

The heightened political risks combined with the global banking crisis does not allow us to perpetuate our merry reports about the wild growth in Russia as a whole and in Moscow in particular. Data from the Federal State Statistics Service regarding the decrease in investments into Russia’s economy is a disquieting factor – results for the first half year indicate that the country’s investment appeal has dropped by 30% in comparison with the same period last year. Nevertheless, the fact that investments worldwide have subsided, and Russia is not exceptional in this regard, is comforting. Furthermore, according to results from January to July, the sales volume of retail in Russia grew by 15.2%, representing 7,417.8 billion rubles, and the Russian consumer revolution will not subside, nor will the commercial real estate market.

The major events of the past half year are as follows:

In early spring, Coach, a major American gifts and accessories store, opened in the Vremena Goda shopping center;

It became known in April that a Mall of Russia shopping complex would be built in Moccow City. The developer will be AFI Development, the overall surface of the complex will total 179,000 sq m and will host some 400 stores;

In April, the Australian chain Gloria Jean's Coffees opened its first coffee house in the Mega Belaya Dacha shopping center just outside Moscow;

The British chain of department stores Debenhams announced its second attempt to enter the Russian market (its first Moscow department store just closed). A new Debenhams store will open in Moscow in the fall. It was announced that the retailer plans on working in Russia with a new partner;

Due to a conflict with its landlord, the Finnish retailer Stockmann closed its department store in the Smolensky Passage. The company intedns to recover its losses through legal action;

The Japanese clothing retailer Uniqlo, working in the same niche as the Spanish chain Zara and the British Marks & Spencer, announced its intentions to enter the Russian market. The chain plans on opening its first store in Moscow next year.

Supply

According to data from Magazin Magazinov, Moscow has 144 shopping centers with an overall retail area of almost 2.72 million sq m (i.e., 260 sq m per 1,000 Muscovites). However, specialists at the company list about 80 shopping centers as contemporary with a total of nearly 2 million sq m (188 sq m per 100 people). Colliers International list 63 working professional shopping centers with a total area of 3.564 million sq m (the retail surface of GLA is about 1.869 million sq m). Since the beginning of the year, the Moscow shopping center market grew by an additional four facilities:

The Oblaka shopping and recreation center on the Orekhov Blvd. 22A (total area – 96,000 sq m, retail space – 42,000 sq m, amongst its major tenants – Eldorado, NASH Hypermarket, Banana-Mama, etc.);

The multifunctional complex Neglinnaya Plaza on Trubnaya Square 2/20 (total area – about 75,000 sq m, out of which 14,000 sq m are retail space, with such tenants as Azbuka Vkusa, M.video, Eurodom, Zara, etc.);

Aerobus shopping center on Varshavskoe Shosse 95 (total area – 17,400 sq m, retail – 11,100 sq m, most of the tenants are children’s stores);

Zig Zag shopping center on Lobnenskaya Street 4-6 (total area – 28,400 sq m, retail space – 16,000 sq m, tenants – Perekrestok, Telemaks, Beliy Veter and others).

This means an increase for the first half of the year of just over 80,000 sq m. During the same period last year, according to various sources, some 130,000-150,000 sq m of retail space was created; i.e., this year’s pace subsided somewhat. However, this did not influence the number of plans announced – as previously the announcements have been made that would in sum increase the number of facilities by at least by one and half times. Hence, according to data from Astera in alliance with Atisreal International, by the end of the current year 20 shopping centers are scheduled to open with an overall area of 1.452 million sq m. According to data from Panfilov, Podkova and Partners, the volume of new quality shopping facilities planned for the second half of 2008 totals 2.3 million sq m (1.2 million sq m of retail space). Nevertheless, experts agree that not all promised facilities will be inaugurated on schedule. Analysts at GVA Sawyer that speculate that the real growth will not surpass 600,000-700,000 sq m.

Amongst the most outstanding facilities to be inaugurated by the end of the year are the shopping and recreation center Chokolad in Reutov (retail area – 90,000 sq m), Auchan Troika on Verkhnaya Krasnoselskaya (retail area – about 80,000 sq m), Novoyasenevsky on Novoyasenevsky Prospect (46,000 sq m), Metropolis on Leningradskoe Shosse 16 (retail area – 80,000 sq m), Rio on Dmitrovskoe Shosse 163a (retail area – about 50,000 sq m), Megapolis on Prospect Andropova (44,000 sq m of leasable area), Gudzone on Kashirskoe Shosse (66,000 sq m) and others. It should be noted that the opening of many of the listed facilities was planned for last year and were delayed for various reasons. As we can see, the area of many expected openings surpasses 50,000 sq m and most of the large projects are being inaugurated beyond the Third Ring. Consequently, these projects will join the operating large malls along the perimeter of the MKAD. Time will show whether we should be expecting a decrease in the customer flow in such popular complexes like the Mega shopping centers. Nevertheless, we can ascertain that the landlords of the shopping centers presently under construction will experience more difficulties than their colleagues whose shopping and recreation centers already operate successfully; in certain cases attracting customers to a new facility requires enormous efforts to realign the established customer flows, since the competition in certain of the capital’s neighborhoods is already sufficiently high.

According to data from London Consulting & Management Company, by the end of 2009 and according to announcements made by developers, retail facilities should grow by 2 million square meters. If considering longer terms, Cushman & Wakefield Stiles & Riabokobylko’s data indicates that in Moscow at the present time there are about 5 million square meters of retail space in planning or under construction and announced for completion by 2016. The company’s specialists estimate that some of the announced projects will be frozen or set aside due to the financing difficulties and systematic market saturation with quality retail facilities.

With regard to territorial distribution of quality retail facilities in Moscow, analysts at GVA Sawyer indicate that the capital’s highest concentration of quality retail facilities remain in the center, southwest and west districts, and the lowest is in northeast, south and north districts. As indicated at the company, due to the inauguration of various projects in peripheral neighborhoods (Auchan-Sokolniki, Metropolis, Gudzone, Marino, Rio, Kashirsky Mall, Golden Babylon Rostokino, Abramtsevo, River Mall, Chocolad and others), the greatest concentration of retail facilities will move from center town to the south and east districts by 2010.

The Demand

The capital’s market remains attractive to international retailers which constantly announce their intention to enter the Russian market. Amongst major international players, such companies as the British supermarket chain Tesco, which is searching for space for its stores in Russia, the French Carefour (stores of its chain are preparing for opening in Moscow, Krasnodar, Samara and other Russian cities), and also the major international retailer Wal-Mart, which this summer along with Carrefour participated in the battle for the purchase of Lenta, which ended in a delay in its entrance into the Russian market.

Amongst the reasons for western retailers to delay their entrance into the Russian market, experts consider the lack of quality facilities, a distinction between the mentalities of foreign and Russian customers, corruption, an underdeveloped logistics infrastructure, and political risks which lately have become quite topical. Another restraining factor for their expansion is the global liquidity crisis, under which circumstances the companies lower their business activities in anticipation that the situation on the international markets will improve.

Nevertheless, according to the results of the first half of 2008, the investment activity on the retail real estate market remained quite high. According to data from Panfilov, Podkova and Partners, the overall volume of transactions, without consideration for the partnership transactions, for the past eight months represented $1.7 billion, which is comparable with the same period of 2007. Of these transactions, 73% took place in Moscow. Amongst the buy-sell transactions on the retail real estate market related to investment, we can mention the following:

In March it became known that the Finnish investment company Sponda bought two Sun Paradise shopping centers from the British investment fund London & Regional Properties (L&RP). The transaction was worth $109 million;

Orco Property Group bought the multifunctional complex Na Bagrationovskom (under construction) from Rubin Development. The transaction surpassed $300 million. The inauguration of the complex is scheduled for the beginning of 2009 and at the moment of the purchase 98% of the facility was leased;

It was announced last spring that Sistema purchased 20% of the shares of the supermarket Detskiy Mir on Lubyanka from the Moscow Government and became the sole proprietor of the building. The overall sum of the transaction reached about $40 million. The store was closed last summer for renovations, which according to Sistema’s plans will cost about $200 million.

Among the more noticeable transactions between retailers was the purchase Auchan of 14 Ramstore hypermarkets from the Turkish Enka for a sum of 182 million EUR (the transaction took place at the end of 2007), and the purchase of the the Karusel chain by X5 Retail Group for a sum of $950 million (the actual purchase consisted of 22 hypermarkets Karusel and the land for the construction of another 20 stores).

The demand for quality retail centers remains higher than the supply, which results in a low vacancy rate (1-5%), and the prevalence of preliminary lease agreements. As indicated by specialists at London Consulting & Management Company, shopping centers being inaugurated during 2007 and the first half of 2008 were nearly 90% leased out. The high level of tenancy of the shopping centers is supported by the active development of networked retailing.

Rates and Investment

According to data from Cushman & Wakefield Stiles & Riabokobylko, the profitability on the capital’s retail real estate market represent on an average about 8.8% for quality shopping centers with contemporary concepts. In such a way the profitability on Moscow’s retail real estate remains high in comparison with European cities.

Rental rates continue their moderate growth which according to various estimates represents 8-10% (in rubles). The rental rates in shopping centers are as follows:

• $150–500/sq m per year for anchor tenants;
• $200–800/sq m per year for operators of entertainment areas;
• $600–6000/sq m per year for tenants in retail galleries.
  

With regard to rental rates for retail space outside shopping centers, according to Penny Lane Realty, in the first half of 2008 they ranged from $650 to $3,800 per sq m a year. In addition, the highest rates are found on the center’s retail streets. Such facilities are being leased for as much as $10,000 per sq m a year.

The introduction of a system for the calculation of rental rates based on a percentage of the revenues continues its expansion, and results in the landlords sharing part of the commercial risk with the retailer. The trend to replace the dollar with the ruble for calculating lease rates also continues to spread, and the introduction of various schemes that allow to lower the dependence of the landlord on the currency rates: application of multicurrency indexes, fixation of the dollars rate and so on.

Trends

The Muscovites’ busy schedules incites time savings by making purchases close to the residence which directs the customer flow to be towards neighborhood shopping centers;

There is an increase of facilities being bought out by foreign investors at the construction stage, which indicates a lack of operational facilities appropriate for investment purposes;

There is change in consumer habits: Muscovites are adapting their demand toward better and more expensive products. There is also a decrease of the proportion of spending from food towards durable goods;

The trend towards determining the leasing rates based on a percentage of the tenants revenues continues to spread. It is most common among anchor tenants in shopping centers.

Forecast

In today’s environment it is somewhat difficult to make long-term forecasts on the development of the Moscow commercial real estate. The decrease of income among Muscovites, the global crisis, and the uncertainty of the international situation – all these factors can have a negative influence on Russia’s economy and on the capital’s retail real estate development.

All the while, the forecasts for the development of the capital’s retail real estate remains optimistic. Experts are however not expecting the market to reach saturation for another two to three years. Forecasts for rental rates also remain positive. Will these forecasts come true in Russia’s complicated economic situation? Only time will show.