The development of retail-entertainment chains proves the ever more efficient strategy. There are still no quality retail properties in the cities with less than half a million population. A developer opening a mall there may not fear competition for several years, whereas in Moscow competition is already at a rather high level. Very soon cities with one million plus population will also reach the peak of saturation with retail grounds and then both leading Russian retailers and Western players will rush to the cities with population ranging from 300,000 to 600,000. Consultants also try to make their presence more noticeable in the province.
After Sochi was announced the capital of winter Olympics 2014 investors reached out for this remarkable place. At the present time the level of competition between retailers is still very low, experts point out.
Making use of a single brand for chain projects has been a stable trend of the two recent years. So far they’ve been more frequently integrated only by single color and interior solutions as well as the centralized management. The architectural and tenant mix largely depends on the site parameters and the marketing situation in each particular region.
The interest of international institutional investors in the domestic market of retail real estate keeps growing too — largely because for the first time in the newest history of Russia the world’s leading rating agencies (Standard & Poor’s, Moody’s, Fitch) awarded the investment rating to its sovereign bonds. The outgoing year confirmed that international investors, are willing to acquire both operational shopping centers, which are not so risky as investment properties, and those under design and construction. The main incentive for overseas investors is the rate of capitalization reaching 8.5-9% which is higher than in Western and Eastern Europe. Meanwhile the yield from home equity for an operational investment property filled with tenants is 20-25%. The expected return on owned capital investment for the developer may be as high as 30% p/a. Builders now have an opportunity to attract cheaper money and to make use of international labor organization technologies. Moscow’s largest projects — the 241,000-sqm Golden Babylon Rostokino developed by Immoeast, the 205,000-sqm Metropolis developed by Rodamco Europe and some others in addition to the joint activity of such companies as Meinl European Land and Vremya Group creating the regional chain Park House, and the investment fund TriGranit which bought a 50% stake in Torgovy Kvartal — may serve as vivid examples of global capital cooperation and involvement.
The domestic retail real estate market with its insufficient supply has so far been characterized by a limited number of formats. This concerns both shopping complexes and their anchors. The retailers of both capitals are ever more frequently declaring that they mainly focus on hypermarkets and different types of DIY stores, seldom experimenting with luxury mini projects on their specific properties. For example, Detsky Mir Group is currently modernizing the former Toy House on Yakimanka expressly with this purpose.
The increasing number of developers implementing multipurpose commercial projects adds retail space to their composition. Some even turn into retailers with time, diversifying their business, whereas it dawns upon large retail operators that the surest way is built-to-suit projects.
The aggregate area of Moscow’s shopping centers exceeded 3.5 million sqm as of the mid autumn. Moreover, at least 700,000 sqm of new retail space were expected to be injected into the Moscow market before the year’s end. But because of the autumn crisis on the world stock markets many developers had to wind up a number of projects or put off their realization until the financing problem is solved. Altogether 25 retail complexes with the total area of 1.26 million opened in Moscow in the year 2007. The total leased space at shopping complexes reached 2.54 million (up 660,000 sqm YoY.)
Moskvorechye Gallery
The retail-entertainment complex Gallery Moskvorechye, a project of the Garant-Invest Bank and its subsidiary development structure Garant-Invest-Nedvizhimost will open near to Kashirskoe shosse in the second quarter of 2008. The mall will lie at the exit from Kashirskaya subway station. Saturation of this area with retail and entertainment centers is rather low within the radius of 8-10 km. The area of the three-level complex is 35,000 sqm and it will house 110 shops, 10 cafes and restaurants and a 540-vehicle parking area. The floor layout is traditional shopping arcades with a mandatory anchor tenant on every floor. At the lower floor this will be a 2,500-sqm self-service store and on the upper floor — an 8-screen cinema. Other floors will house shopping galleries.
Gallery Moskovorechye is the largest out of the five new shopping projects of FPK Garant-Invest in Moscow. Total investment will come to $55 million while the mall on Kashirskaya will call for about $20 million of investment. The aggregate sales area in all these centers exceeds 53,000 sqm.
Metropolis
The retail and entertainment function of the mixed-use Metropolis on Leningradskoe shosse will reportedly be delivered in the second quarter 2008. Concurrently the 80,000-sqm third phase of the office part will also be completed. The developers are Capital Partners and Kazcommerzbank while Jones Lang LaSalle acts as consultant and broker. Three world-renowned architectural bureaus – British RTKL, Russian ABD Architects, and Turkish Oncuoglu Architecture & Planning – are involved in design and architecture.
The 330,000-sqm complex is actually the redevelopment of Radikon factory. It comprises two self-contained parts – a retail-entertainment complex and an office center sitting on a common single-story platform with Grand Plaza designed in the middle. The total sales area will reach 215,000 sqm; the cost of construction nears $500 million. In the opinion of independent experts, the period of recoupment is 6-7 years.
The inner space will be comprised of several shopping malls with variously styled shopping pavilions accommodated along the edges. The complex will be anchored by the 10,000-sqm Perekriostok hypermarket, the 7,500-sqm Stockmann, the 12-hall Kinostar multiplex and a food court with 18 restaurants. Former Radikon’s tenants with long-term leases — Snezhnaya Koroleva, M Video and Champion Bowling — will also be given a chance to gain a foothold in Metropolis.
The Dutch Rodamco Europe, specializing in real estate investments, bought 50% of the project’s sales area from Capital Partners (the total of 80,000 sqm and part of the parking space.) The amount of the transaction came to 200 million euros.
River Mall
The 221,000-sqm River Mall, one of the most large-scale retail-entertainment centers in the Moscow inner city, will be built on the former grounds of Likhachev Works (ZIL). Its opening is slated for the end of 2008.
Kuznetsky Most Development intends to invest around $200 million in this project; most of it will be loaned funds, according to the developer. The Bank of Moscow, having close links with the company’s founders, will presumably be one of the main investors, as reported by the developers. Colliers Int. acts as the project’s exclusive consultant and broker. In March this year the developer signed a land lease agreement to the site at 16-18 Avtozavodskaya Street.
River Mall will supposedly comprise a 10,000-sqm hypermarket, a 1,500-sqm supermarket, home improvement, electronics household appliances, sports clothes stores and a shopping arcade. The project also envisages an ice rink, a multiplex, a food court with 11 catering operators, an entertainment area and an outdoor children’s park on the Moskva River shore and a 3,000-vehicle parking garage. The upper floor will house three panoramic restaurants opening with superb views of the river Moskva.
Kashirsky Mall
The $207 million super regional Kashirsky Mall, to be completed by Crocus Group by the end of 2008 at the 24th km of MKAD and Kashirskoe shosse, will be positioned as a life style center. All world-renowned trademarks will be represented here. According to the project developers, the variety will be geared towards the middle-class buyers. EBRD opened a $207-million crediting line to finance this project.
As reported by the project consultant, Cushman & Wakefield Stiles & Riabokobylko, the complex will house 200,000 sqm of sales areas on two levels — altogether 300 stores including a hypermarket, the electronics and household appliances White and Brown, a themed park and a multiplex cinema in addition to about 250 boutiques of the shopping arcade.
Kashirsky Mall will become a sort of “city inside a mall”, thanks to extraordinary design and architecture. The interior design of each sales area will be different. The galleries are decorated as streets of the world’s different cities (Bazaar in the oriental style, etc.). The guarded underground and above-ground parking areas will hold 3,500 vehicles. The average rental rate is $10,000 per month less triple net.
RIO
In the third quarter of 2008, a RIO shopping and entertainment center will open in City Park Moskva at 163a Dmitrovskoe Shosse, on the intersection of Dmitrovskoe and the MKAD. It will be one of the network’s largest retail projects. It will become the latest addition to the Dmitrovskaya commercial zone, in which the wholesale grocery center and administrative hotel complex, SK-Plaza are also situated. The project’s developer, Tashir, is already operating a RIO project on Sevastopolskii Prospekt.
The Tashir project will be implemented in the wholesale grocery market, and the developer is not worried that Ramstore, Auchan, and even Mega have already been operating in this format. Tashir intends to create an entire retail city of shops, entertainments, restaurants, hotels, and offices. The developer will attract consumers with its greater concentration of diverse shops and simultaneously bring in tenants with attractive leasing conditions, as well as with the opportunity to occupy an office in the same complex.
The area of the lot will be 25 ha, while the total area of the shopping and entertainment center will be 220 thousand sqm. RIO will include Nash Gipermarket, operating on 17.5 thousand sqm, a film theater on 3 thousand sqm, and restaurants on 2.5 thousand sqm. The food court will occupy 3 thousand sqm while a gallery of boutiques will include 60 thousand sqm. A parking lot is planned to accommodate 4 thousand vehicles. In 2008, Tashir will be operating 10 separate shopping and entertainment centers under the RIO brand, with a total area of 600 thousand sqm, four of which are in Moscow, where the demand for new shopping complexes has stayed steady for several years now.
Please name for us the most significant trends and events of 2007
Natalia Oreshina, director of retail, Cushman & Wakefield Stiles & Riabokobylko
The year 2007 was fruitful like never before in terms of the aggregate announced retail space of all types. Companies and corporations literally from all business sectors — from energy and oil refinery to milk and clothes making plants — plan to try their aptitude for the development of shopping centers. The average property size on the market is 100,000 sqm. Announcing a lesser size is considered bad form!
Development leaders, whose projects evoke the interest of most tenants by their ubiquitous geography and the ever better exposing brand of the developer or retail chain, became better visible in the outgoing year. Regional expansion was the underpinning strategy of most leaders who were rushing to grab the best land plots and announce their projects on the market. Being the first to build a 100,000-sqm property in a regional city means a serious blow on competition. This is why we could observe not only a serious struggle for the best land lots in the cities with one million plus population but also in municipal entities having 500,000, 300,000 and even 150-200,000 residents. This new expansion geography gained headlong momentum in the outgoing year. The situation with development land distribution is very complicated in most cities because they lack master plans. Sale and purchase deals are sometimes very messy, and information on a plot and its direct neighbors is often missing. This entails conceptual development problems, leads market players astray and occasionally makes them give up on a project.
I see the strengthening positions of 7-10 leading developers who will continue buying land in the upcoming year as the main trend of 2008. About 20% of all announced projects (Macromir, June, Collage, MEGA, Park House, Kalinka-Malinka, Planeta et al.) are implemented by chain developers. These are normally properties with similar concepts and sometimes with the same “anchor” tenants. Those who develop single spot SC projects may soon encounter great problems since they do not get any competitive advantages: less convincing arguments for tenants and high expenses on advertising, management and the procurement of construction materials.
Igor Chaplinsky, development director at MAGAZIN MAGAZINOV:
Stiffening competition on the market of retail real estate in 2007 stood behind a more weighted approach of regional developers to project implementation. Truly skilled contractors – advisers, architects, project managers, management companies – are ever more frequently engaged in the projects. The administrations of most Russian cities are seriously pondering the planning of retail development proceeding from the development perspectives of some or other territories and the population’s solvent demand. We are on the brink of the curious events to happen in the nearest future such as the beginning of construction on the world’s second tallest and Russia’s tallest skyscraper, Tower Russia (the height exceeds 600 meters; the architect is Sir Norman Foster.) We also greatly expect the opening of SC New Coliseum in St. Petersburg in the announced outlet-center format. According to the recent information, the Italian developer failed to come to terms with a large tenant of the outlet format and he decided to attract a pool of Italian tenants which have not so far been represented in Russia. On the whole this is an awesome challenge and it would be great to meet it adequately!
Dmitry Khechumov head of the retail realty department at DTZ
One of the main trends in 2007 was the further rise in rental rates at the high-quality conceptual Moscow malls, which is related to a limited supply of quality retail spaces in the capital. A number of projects were either cancelled or suspended for different reasons (the inability to get approvals etc.) At the same time we saw a slump in rental rates at those properties which had significant conceptual flaws. Therefore the space cost gap between the quality and floundering complexes was further widened.The general trend of the recent 2-3 years is the rising project quality and active involvement of professional consultants and architects. This trend became even more apparent in the outgoing year. Thus Samara’s Kosmoport, whose developer (a local company) successfully made use of professional advice and attracted such large Western anchors as Auchan, Markt and Leroy Merlin, had already been partially leased out.
Large chain projects are rapidly developing in the regions. Among them is MEGA (developed by IKEA), Park House (Vremya Group), June (Regions Group), RTM Development which successfully floated its IPO a short time ago. The inauguration of Vremena Goda retail-entertainment center on Kutuzovsky Prospekt is one of one of the most memorable recent events on the Moscow Market. The developer (Oktan – Alfa) takes special pride is the Chanel boutique opened directly by the brand holders. Among the largest retail tidbits now under construction in Moscow and soon to be vigorously let out is the office-retail center Tverskaya Zastava developed by AFI Development, a subsidiary of Africa Israel Investment Ltd, on the square of Belorussky train station, retail-entertainment center Metropolis on Leningradsky prospekt developed by Capital Partners, the underground SC Paveletsky developed by Eurasia and the largest of all announced retal properties in the capital, Rostokino mall in Moscow northeast, a joint project of Wakelin
Promotion and Austrian fund, Immoeast. All of these properties are expected to open their doors in the year 2008.
Maxim Gasiev, regional director of the retail realty department at Colliers International
The outgoing year saw the following trends: Investment sales are turning into a regular financing instrument. The number of forward funding deals (Zolotoi Vavilon Rostokino, Good Zone et al.) is on the rise. The projects of shopping and entertainment centers are steadily enlarged: more than 20 new retail centers, each exceeding 100,000 sqm in space may open in Moscow by 2010. Now there are less than 10 such properties in the city. The currencies of contracts are getting more sophisticated: changing for the euro, the use of synthetic currency and a basket of currencies, extra terms for the rate of exchange (for instance, the lower limit on the rate of exchange.)
Developers are rapidly developing cities with population from 300,000 residents (Tver, Vologda, Ivanovo et al.) In some cities the development activity is already waning (Kazan and Yekaterinburg.) New chain Russian developers as well as international chain players are entering the domestic market. From the beginning of 2007 ten shopping centers have opened in Moscow. The retail space supply accrual nears 390,000 sqm (about 200,000 sqm of sales area.) The aggregate retail space in all Moscow’s shopping centers exceeded 3,446,000 sqm including more than 1,760,000 sqm of sales area or 169 sqm per capita. Till the year’s end 700,000 sqm of new retail space are expected to be delivered to the market.The most significant retail properties of Moscow to be commissioned in 2008-10 is the 250,000-sqm River Mall, the 240,000-sqm Zolotoi Vavilon Rostokino, the 205,000-sqm Metropolis, the 180,000-sqm Mall of Russia, the 119,000-sqm Paveletsky and the 113,000-sqm Tverskaya Mall.
Vitaly Efimkin, vice president of Tashir Group
One of the most apparent and significant trends of the Russian retail property market in the outgoing year was vigorous regional expansion of the leading players. As the demand for retail space in Moscow and in the cities with one million plus population is saturated, the retail operators rush to smaller regional centers with population under 500,000 residents. Therefore against the backdrop of drooping super profits in retail, a better quality intensive market development is going on and the market grows ever more competitive.
At the same time, demand prevails over supply as in the previous years and so the rental rates at quality retail outlets keep rising everywhere, and Moscow is not an exception. This explains the tendency towards property enlargement at the expense of extra levels or development spots along with functional differentiation. The largest projects developed in 2007 are normally the retail and leisure areas of multifunctional complexes, special suburban recreational and business areas and hotels with powerful business infrastructure for holding congresses and conventions. Retail is actively claiming the status of “cities inside the cities,” entering even such new formats for the domestic market as office-exhibition projects.
Amiran Mutsoev, aide of CEO Regions Group in charge of project development
In our estimation the most significant event of the outgoing year was stabilization of economic development of the Russian regions and announcement of national infrastructural projects by the Russian government. Regional expansion of high-profile investors and developers continued in 2007 and hopefully the events of the outgoing year laid a firm foundation for successful realization of strategic investment programs by the developers.
In our opinion, the most significant properties slated for opening in the year 2008 are the retail-entertainment centers in our chain, namely June-Krasnoyarsk and June-Ufa. As for the projects of our development colleagues, I’d mention Moscow Metropolis, Gallery-Piter and Krasnodar-City. These are the properties that will last long in spite of competition owing, first and foremost, to their fortunate location, since the success of every regional project depends on the mall location and also on the expertise in regional marketing distinctions and using them to the best possible advantage for creating a unique offer for local consumers.
Dmitry Stepovoi, managing director of City Property Management (Atrium mall, Moscow)
Of all events in the world of Moscow retail properties in the year 2007 I can single out only one, to which I personally gave much time and effort, namely, the rotation of tenants in our retail-entertainment center Atrium. This year the term of the first five-year leases with our tenants expired, and new interesting operators came to our mall, despite the higher rental rates, which brought remarkable shop decoration concepts with them. Perhaps only now after five years of incessant operation can we see all pros and cons of some particular solutions made by a young team of one of INGEOCOM divisions at the dawn of the new retail format making.
As regards the upcoming year, I am not ready to come up with any unambiguous forecasts: let’s wait a bit in order to obtain more complete information given the run-up to presidential elections.
Jerome Depeille, expansion director of Auchan Russia In the past year we have seen the third wave of development engaging Russian cities with less than 500,000 citizens. The cost of projects has grown considerably, from construction and land expenses to utilities networks as well. At the same time, serious gaps have been observed in the competence of city authorities and local legislation to standardize the development of shopping complexes.
Pavel Breev, vice president of M Video
The market for high quality retail real estate is steadily growing throughout Russia, creating a new, more sophisticated culture of supply and demand. Our hypermarkets of 2-2.5 thousand sqm and more than 20 thousand product lines will be appearing in the Krasnoyarsk shopping and entertainment center by RosEvroDevelopment, Planeta, and in Izhevsk and Nizhny Novgorod on properties by Torgovyi Kvartal. After the completion of construction on the MEGA Belaya Dacha, the largest in Europe, we will finally have our flagship. In 2003, we were the first company of Russian origin to become a strategic partner of IKEA in the regions, winning the bid based not only on our prices but on our ideas.
Natalya Chinenova, general director of SELA’s Moscow Branch
The opening of a large quantity of new shopping centers has created interest among the owners of new brands. The most attractive for tenants in the coming year, in our view, will be the shopping and entertainment center, Metropolis of Voikovskaya, Zolotoi Vavilon 3 of Rostokino, RiverMall, Kashirskii Mall, and the project near the Tverskaya turnpike.