St. Petersburg’s population is prospering and so the demand for retail premises is expanding. High-quality properties are still in short supply even though the new retail facilities opened last year broke records for both quantity and quality and began to slow the rush on the market. Market experts doubt that there will be any lack of tenants or consumers any time soon.

The General Situation
According to data given by the city of St. Petersburg, the total value of retail real estate traded during the first half of 2007 was 206.1 billion rubles, up 19.3% from the same period last year. This growth reflects the growth of the population’s purchasing power, stimulating the entry of a widening throng of retail operators crowding the market and driving up demand for appropriate real estate.
In 2006, the retail centers in the City on the Neva experienced a true construction boom, and more than a million square meters of retail real estate were constructed, half of which will enter the operation phase in 2007. Though experts do not expect this boom to repeat itself soon, the tempo of construction will stay high and new players will continue to enter the market, including experienced developers and even large companies from other fields, hoping to diversify their business. Market experts also note a marked growth in new investors in the commercial real estate market, and plenty of new operators as well, including:

the German clothing, footwear, and accessories boutique, Elegance, which opened their first branch in Russia (the largest of their stores in Eastern Europe) in March on Nevsky Prospekt.
Meta Group’s new hypermarket, Real, their first in St. Petersburg, which opened in April at the retail-entertainment complex, Raduga. The hypermarket will cover 17,000 sqm, and the second, 16,000-sqm Real will open at the beginning of 2008, in the retail center, Severnyi Mall.
Evrogarden, which officially declared its plan to develop a network of centers called “Zelenaya Strana,” which will be developed simultaneously with the large Dutch network, Intratuin B.V. The first of network’s new centers will open in Saint Petersburg and Moscow next year.
the Finnish group, Fazer, which has entered the Petersburg market of fine dining establishments, intending to construct and operate a chain of cafes at business centers and retail centers.
the Moscow group, StartMaster, entering the St. Petersburg market with the immediate opening of eight new computer, high-technology, and electronics boutiques. Before the end of 2007, the opening of two more such shops is planned.
the Kaliningrad grocery chain, Vester, which plans to open three hypermarkets in the city with areas between 4,000 and 20,000 sqm.

The Supply
According to the data provided by Maris Properties, in association with CB Richard Ellis, the total area of retail space in Saint Petersburg, not including outdoor markets, now exceeds 3.4 million sqm. The company’s experts estimate that there are 88 properties of especially high quality, including multi-purpose areas, covering 2.32 million sqm and a gross leased area (GLA) of 1.627 million sqm. The analysts at Colliers International have counted 122 new retail centers since the beginning of July, 2007, with a total area of 2.99 million sqm and a GLA of 1.93 million sqm.
The AB Group has delineated a number of criteria by which a quality retail center may be judged, including the organization of consumer traffic within the retail center and through the zones of tenants, the management of automotive traffic, the tenant mix within the retail center, the presence of necessary services for moving, loading, and unloading products, and many others.
According to the company’s data, 36 of St. Petersburg’s retail centers meet these conditions, with a total area of 1.44 million sqm and a GLA of 952.4 thousand sqm. The company’s analysts believe that another valuable indicator of quality may be the actual volume of the property over the number of square meters on which it is built, but a majority of retail centers do not yet publish this information.
During the first half of 2007, Astera Oncor noted that St. Petersburg retailers began the operation and management of 16 new retail centers with a total area of 251,800 sqm. Colliers International estimates the total new area to be 298,000 sqm, noting that this total is actually ¼less than during the same period in 2006. From January to June of 2006, 400,000 sqm of new retail real estate were opened.
By the end of 2007, between 129,500 sqm (AB Group) and 517,000 sqm (Maris Properties in association with CB Richard Ellis) of new retail property will be placed in operation. Market experts point to a number of traditional construction complexities to explain the roughness of the calculation. Becar Commercial Property estimates that more than 250,000 sqm of retail space is scheduled to begin operation before the end of 2007, but at the same time they believe that between 160-230,000 sqm of new property will have been built this year. In this way, pundits do not expect the new supply of retail real estate in 2007 to touch the 2006 record, when more than 1.2 million sqm of new retail area was developed.
According to London Consulting and Management Company, operation and management began on 843.3 thousand sqm in new retail centers, for which GLA was around 506,000 sqm. The company’s figures suggest that 40% of territory will be re-designated in 2009. Colliers International maintains that 48 properties were launched into construction in August of 2007 totaling 847,500 sqm of space. Additionally, nearly 90 projects are currently under construction, with a total area of over 2 million sqm.
Among the recently started projects now under construction are:

The mixed-use Adamant Park between Pulkovskoe Shosse and Dunaisky Prospekt totaling more than 127,000 sqm and developed by Adamant. The project’s total investment is approximately $200 million dollars, and completion of the project is scheduled for 2009.
The Clover Group has invested $500 million in the construction of CB Richard Ellis Noble Gibbons’ new multi-purpose center, Clover Plaza, on Ushakovskaya Naberezhnaya. The total area of the complex is 315,000 sqm, of which nearly 30,000 sqm will be devoted to retail. The project will be completed in 2011, according to the company’s predictions.
LCP Group has claimed the territory of the old Elektrik plant at #10 Prospekt Medikov. In place of the old factory shops, a multifunctional complex is planned. The complex will include class A offices and retail-entertainment properties with an area of 80,000 sqm. The company will complete construction in 2013.
Makromir has begun construction of the Graf Orlov gallery on Moskovsky Prospekt, where 150,000 sqm of retail space (65,000 sqm GLA) will be turned over for operation in 2010.

The Demand
Market experts observe that, due to the record number of new retail centers opened for business in 2006, Saint Petersburg’s general deficit in retail space has been reduced slightly– but demand for quality retail areas has remained high. According to the opinions of experts at Maris Properties in association with CB Richard Ellis, demand for modern retail areas has in fact grown by 15-20% this year, about half of the growth observed in supply.
A majority of analysts have estimated that the occupancy rate of successful retail centers is close to 100%, as always. The centers themselves can virtually have their pick of potential tenants for the moment. Experts at Praktis CB have calculated that from 92-94% of retail centers are occupied.
Retail real estate has continued to attract investors. The growth of investment activity among both Russian and western players has been observed to be steady. As Colliers International asserts, a number of large investment funds like Africa Israel Investments (Severnye Investitsii,) CA Fastigheter, Morgan Stanley, and Sponda, have concluded large contracts. Such companies as Capital Land, Europolis, Gemolab Group, Invesco, ORCO Group, Plaza Centers, Raiffeisen Evolutions, and TriGranit Development Corporation have also declared their intention to invest in Saint Petersburg’s real estate. The growth of investment activity among western players is linked to the growing confidence of investment funds and the stable development of Saint Petersburg’s commercial real estate. The stark lack of ready properties has made investors more willing to enter the market.

Rates and Investment
With the market’s development – the increased competition, the decrease in risks for investors – retail properties are becoming less and less profitable. As Maris Properties in association with CB Richard Ellis has pointed out, from 2003-2004 the expected rate of return for retail properties was approximately 20%, dropping to 16-18% in 2005-2006, and to 15-17% in the first half of 2007. For comparison, the expected rate of return for commercial real estate in London or in Berlin at the moment is only 5-6%, and from 10-11% in Warsaw and Prague.
According to the data of Astera Oncor St. Petersburg, the range of annual leasing rates for anchors at retail centers in St. Petersburg is from $140 – 570 per sqm, and $450 – 2500 per sqm for tenants of retail galleries, not including VAT, or utilities and operating expenses. The rise in rates is not outrunning inflation, according to experts, and the average rates in the city are growing as a result of higher quality property’s entrance into the market, bringing significantly higher rates.
Experts at Colliers International point out that the annual operational expenses for anchors run from $30 to 35 per sqm, and from $45 to $90 for small and average tenants. Large anchor tenants defray costs themselves with communal and maintenance fees; for small and average tenants, however, these costs are included as part of their rents, though recently it has become the practice for even these costs to be paid separately.

The Tendencies

Western companies continue to influence the shape of the current real estate market, and their activity is not slowing: foreign investors and developers, international architectural companies, even retail operators from abroad – all are becoming more and more active in the market.
The grocery and appliances hypermarket format is actively developing.
As competition becomes more intense among retail properties, the entertainment functions of retail centers are playing a more significant role.
Developers are considering the possibility of bringing more new formats into the market, for example the ‘factory outlet’ and ‘retail-park.’
The market is beginning to accept the practice of charging tenants extra fees based on the traffic that their establishment attracts.
Among existing and proposed projects, there has been an increase in multi-functional projects, in which the retail function will be combined with office or hospitality facilities.

The Prognosis
As a result of the slowing pace of retail center construction in Saint Petersburg observed in the first half of 2007, market experts predict the currently dramatic expansion of retail centers to slow down. Significant expansion is not anticipated in the near future, nor do experts expect to see a significant drop in leasing rates or vacant retail space. With the increase in quality observed among operational retail projects and the expanding number of choices available to consumers, it is possible to predict the gradual disappearance of the older, obsolete retail centers, triggering a drop in leasing rates for individual properties. As incomes rise throughout the city, customers are virtually guaranteed for the existing retail centers and for those currently under construction, and it will be two or three years before it is time to worry about the next new problem for Saint Petersburg’s commercial real estate – market saturation.

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