Regional retail realty markets are on the make in a desperate effort to overtake those in the capitals. Many properties lose their positions in this race as they grow outdated and irrelevant. And then their owners resort to re-conception. At the same time their more far-sighted competitors try to modernize their properties before they “come out of fashion.”
According to Evgeny Melnikov, commercial director of the development company Olips, it’s hard to clearly define numerous “re” (re-conception, renovation, redevelopment, re-branding etc.) in Russia in the lack of universal standards. The market is still immature and it develops at too quick a pace, so each company uses these terms in its own way, although most players agree that re-conception is a complex of measures aimed at heightening the yield from a property. A specific set of instruments depends on each particular case: sometimes repositioning and re-branding would suffice while in other instances a serious renovation is required.
It’s not a secret that many shopping centers in Greater Urals were built at the time when almost nobody had a clear idea of formats and “proper” structure. Fast return on investments was the prime mover and concern. As a result many properties do not have any concept at all. Meanwhile the market is impetuously changing, competitive environment is getting tougher and even successful malls badly need re-conception with time.
“The real estate market generally goes through four stages: enlivening, expansion, redundant supply and recession,” points out Mr. Melnikov. “The closer the stage of redundant supply is, the tougher the competition. The share of vacant space increases and average occupancy rates drop. Competition stiffens and a working concept becomes all the more important.” In expert estimation, Yekaterinburg is now at the expansion stage. The share of vacant retail space does not exceed 3% in the city and there is a dearth of quality supply. The capital of Middle Urals has not entered the third stage yet but a number of companies begin to wonder whether their malls will be successful in the near future.
First Robins
Alexander Zasukhin, director of the consulting company Ural-Hermes, points out that the life cycle of the Russian SC concept is approximately 5-7 years. This period is longer abroad: 8-10 years. At the end of this time a property normally needs re-conception. At least a third of Yekaterinburg retail centers such as Yekaterininsky, Kit and others are in need of re-conception, the company’s experts assess. In 2008 nine centers will reportedly undergo re-conception. Such projects as Vostochny and Vesenniy also need re-conception according to the city head, Victor Konteev.
Dirizhabl was one of the first to embark upon the path of re-conception. It opened in 2001 and now its developer, Olips, and a player of the big four, Cushman&Wakefield Stiles&Riabokobylko, have prepared its re-conception implying construction on the second phase and the opening of Botanicheskaya subway station in close proximity.
General director of Central Market, Iosif Marach, says mostly unsuccessful malls are subject to re-conception in the Russian regions. On the other hand, many shopping centers are redevelopments of former factories, department stores and markets. “On the example of the central market in Ufa we can see that re-conception of old facilities is actually underway,” says Mr. Marach. “The most popular market in Bashkortostan has existed more than 55 years; the main buildings and structures were physically worn out and a relatively new building that opened in 2003 has become functionally obsolete. At the present time global re-conception is going on and the market will be redeveloped into SC Tsentralny. The pool of tenants will also change, to be sure. On the whole the management company faces the challenge to alter the property image.”
Another large-scale redevelopment project is construction on UfaPlaza mixed-use on the territory of the exhibition complex in Ufa. Not only will all showrooms be redeveloped; retail and entertainment facilities will also be created. The complex will comprise two parts: UfaPlaza and Bashkortostan showroom. The grow area will come to 40,00 sqm. As defined by consulting director at Perspektiva Corp., Olga Mazeeva, soft re-conception is underway in Perm’s TsUM. The sales area will be enlarged while small retailers replaced by big retail chains.
How much & How long?
The re-conception price comprises planning, construction and fit-out expenditures plus downtime losses.
As estimated by Mr. Zasukhin, the development of a new concept including marketing research nears 1 million rubles plus 360,000 rubles or more for a feasibility study. This is certainly less than in case of launching a project from ground zero and the recoupment period is only 3.5-4 years. It will take about 60 days to prepare a feasibility report plus 3-5 months to get ready a draft. The works will take 2-4 months.
Yet according to Mr. Marach, re-conception costs come near to the costs of new construction, even if it is not a global one. Dismantling costs are about 10-15,000 rubles per sqm while a new construction project will drain 30-35,000 rubles out of developer’s coffers. Thus the amount of investment in reconstruction of the Central Market is 864.5 million rubles and renovation of the exhibition complex will cost more than 1 billion. Construction on Tsentralny commenced in December 2006 and must be through in the fourth quarter of 2008. UfaPlaza and Bashkortostan will open their doors to visitors in the first quarter of 2009.
The second problem inevitably faced by developer, landlord or steward is what to do with tenants. Experts agree that all stakeholders on the civilized market realize the benefits of re-conception and are ready to suffer a temporary slump in revenues setting their eyes on the future return. To retain tenants and buyers, owners generally carry out alterations and refurbishment in a piecemeal fashion, section after section, and retailers pay lower rents during this time. On the other hand, re-conception offers a good occasion to management companies to get rid of some non-format tenants.
Passion for Consultants
“Re-conception should better be accomplished by a professional outsourced team or a specialized consultancy,” assumes Zasukhin. “In this case all research is done by a highly skilled group of experts. One should realize that re-conception is a painful process implying a temporary loss of property’s competitive ability and a threat to business stability.”
Choosing between foreign, nationwide and regional consultants is a relevant matter. Zasukhin does not believe it is necessary to involve transnational players. They surely have rich experience but it is for this very reason that their properties are very often identical. At the same time the regions now have professional players capable to do a very quality job and offer non-trivial solutions to their clients, and it is the originality that will soon become one of the main compettive advantages. In addition, local consultants know the market better. And finally the Russian divisions of the foreign players are staffed with domestic experts anyway.
However Ms. Mazeeva believes that large brands may “bring in” nationwide and foreign retail chains which are more trustful of transparent players. Regional companies cannot attract high-profile players. Iosif Marach opines that one shouldn’t blindly trust a consultant. If owners decided on re-conception, it would be wiser to hold a tender among consulting companies. Moreover it is necessary to check up the results because major consultancies can be ignorant of the local market specificity.
Conclusion
The situation is not uniform in the Urals region: cities with the oversaturated market of commercial real estate (Yekaterinburg) alternate with those suffering from an acute shortage of quality retail space (Ufa). At the same time the expansion of large national chain retailers and the general market development spurs the lagging cities. Thus the investment activity of Ufa has significantly increased of late and analysts expect a sharp leap of the market as regards the shoppingt centers. They point out at Perspektiva that in 2006 the total quality retail space in Perm reached 240,000 sqm while the aggregate area of all space scheduled for commissioning in 2007-08 will exceed 150,000 sqm. Now the re-conception process is not very active but in the nearest years the situation will change, opines Ms. Mazeeva. The development of retail centers will inevitably entail a change in formats. It means that many market participants should prepare for re-conception.