Investment in the regional retail real estate market is rapidly increasing. Large, Moscow firms, federal and Western developers and retailers are heading for the regions. A key factor influencing the development of retail in Russia is increased consumer income, creating higher consumer spending power. So what are the key retail projects to emerge in the regions? How will the regional market develop? And which retail formats are in highest demand? We have attempted to answer these and other questions in this market review.

The positive forecasts for the construction of shopping centers in the regions are based upon solid growth in consumer spending power and the appearance of a large number of modern, professional retailers and service providers who are the potential tenants of new shopping centers. Also there is a severe shortage of modern retail infrastructure i.e. shopping centers. All this makes the situation look very promising for Western investors.
Yet a number of factors are hindering foreign investment. They include a shortage of reliable management partners, clearly-defined ownership rights, a lack of transparency and accounting practices complying with international standards. However the situation is constantly evolving. Apart from Moscow and St. Petersburg investors are increasingly interested in cities like Nizhny Novgorod, Krasnodar, Rostov, Yekaterinburg, Perm and Novosibirsk. When it comes to cities with populations of 500,000 and less, however, the level of interest drops off considerably.

Central Federal District
Apart from Moscow, the Central Federal District does not have a single city with a population of over a million. Developers are showing most interest in cities with populations of over 500,000 like Voronezh, Yaroslavl, Ryazan and Lipetsk. It should be pointed out that even in smaller cities like Ivanovo, Smolensk and Kaluga some interesting retail projects are also being developed.
“Today the market in virtually all large cities is at a stage of growth with demand outstripping supply. However in 2-3 years’ time, when all the announced projects are completed, many of these cities will be saturated with shopping centers. Rental rates in shopping centers in the Central Federal District, like those in the rest of the retail real estate market, depend primarily on location, concept and profile. On average rental rates for retail galleries are $500-700/sqm per year. For smaller locations they can be as high as $1,500-1,800/sqm per year (less VAT and operational charges),” says Denis Kolokolnikov, general director of Russian Research Group (RRG), a consultancy.
“One of the most up and coming cities from the perspective of retail real estate is Lipetsk. Demand is high and the supply volume is small. By 2009 there will be over 150,000 sqm of retail areas in the city however this will still not be enough for a city of its size. Today there are only 2 small shopping centers,” says Grigory Pechersky, vice president at ADG Group.
According to experts, in Voronezh the situation vis-a-vis retail areas is better than in Lipetsk. There is one modern shopping center and another 5 are in the pipeline. By 2009 it is anticipated that there will be over 300,000 sqm of professional retail space
In Ivanovo the largest retail site is the Serebryany Gorod shopping center (110,000 sqm). Demand substantially outstrips supply. However there are plans to build a 30,000-sqm RIO-Grand shopping center and a 25,000-sqm Topol shopping center.
One of the most interesting cities in the Central Federal District is Yaroslavl. The first shopping and entertainment centers to open in the city were the Tashir and the Faraon (Pharaoh). By the end of 2007, Tashir also plans to open a Rio Grand shopping and entertainment center with a total area of 45,000 sqm. Last year the first phase of the Altair shopping and entertainment center was opened (20,000 sqm). In April, a pool of investors realized the Yaroslavsky Vernisazh shopping center (40,500 sqm). The main anchor tenants are a REAL hypermarket (a division of Germany-based Metro Group) and the first Russian DIY Home Center (part of Israeli Manufacturing Conglomerate, Fishman Holdings).
Next year, German developer ECE Russland plans to start the construction on a shopping and entertainment center near the historical part of the city which will be its first project in Russia. The total area of the finished projects will be 130,000 sqm and the opening date is planned for 2010.
When it comes to Western investment, a key player is the German Metro group which has shopping centers in several large cities of the region.

Northwest Federal District
In the North-western Federal District the most actively-developing city from a retail real estate perspective is Kaliningrad; however Arkhangelsk and Murmansk are also taking off.
ADG Group has already successfully realized the Kaliningrad Plaza project which is the city’s first modern retail and office project. It includes stores, cafes, restaurants, a seven-screen multiplex, entertainment center, conference hall, underground car park and class A office areas. The anchor tenants are KARO Film, the Viktoriya supermarket chain and leading European fashion brands.
The shopping center market in the city includes an impressive list of shopping centers, namely: City Center, Mega-Center, Mega-City, Mega-Market, Grand, Mayak, Arkpol, Epicenter and Kaliningrad Plaza. There are also several large projects under construction which will increase the total retail areas in the city by 145,000 sqm. Despite a shortage of construction land in the city center there are currently two large projects under construction in the center. Gamma Management Group is building Evropa-Center - a retail, office and hotel mixed-use on Pobeda Square. Opening is planned for the end of this year. Not far away construction is under way on the Clover House multifunctional complex (retail, office and hotel). It will have a total area of 49,000 sqm and will also be completed by the end of 2007.
In Arkhangelsk there is virtually no modern format retail. Tenant compositions and shopping centers are very similal, which has created an impression of an oversaturation with retail space. In central part Arkhangelsk there are about 20 shopping centers but they are all outmoded and do not meet modern retail standards. However increases in consumer income and the total absence of modern shopping centers gives every reason to believe that this situation will change. Local developers have already launched new projects and the local construction firm, Treugolnik, is building a 18,000-sqm shopping center in the city center which will have a large entertainment area and office areas. A number of other projects are also planned.

Volga Region
The most promising cities are Nizhny Novgoroad, Kazan, Samara, Togliatti and Ufa. “The market is at a stage of growth and demand outstrips supply; however by 2009-10 the retail real estate market in the Volga Region will be close to saturation. A recovery phase will commence from 2011-2012. The greatest number of projects will be in Ufa. In Kazan the retail real estate market is already saturated,” comments Mr Kolokolnikov. The rental rates in the majority of large cities average 450-500/sqm per year (excl. VAT). It should be pointed out that rental rates in Ufa are higher than the regional average.

Samara
The Samara commercial real estate market is rated by experts as stable. In 2006 a number of new retail sites, including: Mega-City (58,000 sqm), Castorama (11,500 sqm), the second phase of Park House (34,000 sqm), Molot (3,256 sqm), Myagkoff (15,000 sqm) and the second phase of Intermebel (10,000 sqm). Today in Samara there are 48 operating shopping centers with a total area of 585,000 sqm. There are 509 sqm of retail areas for every 1,000 inhabitants of which 327 sqm are modern retail areas. Developers have announced another 14 shopping center projects with a total combined area of 727,000 sqm. In September 2007 the completion is planned of a Mega-IKEA (120,000 sqm) in the district of Krasny Pakhar in Krasnoglinsky district of Samara.

Kazan
Today in Kazan there are 28 shopping and entertainment centers with a total combined area of 600,000 sqm. The largest and most well known are: Mega, Tandem, Yuzhny, Rivierea, Koltso, Park House, Grani and Savinovo. There are 4-5 shopping and entertainment centers in each region. The tenants include popular foreign and Russian brands. In reality however the total number of retail areas in the city is much larger. According to analysts there are 900,000 sqm of retail areas if you take into account small stores located in the city center (the bulk of shopping centers are located in residential districts). The main shopping street in the city is Ul. Baumana which is a pedestrian street and Kazan’s answer to the Stary Arbat. It has stores from all the leading brands. Naturally competition for shoppers is increasing rapidly. According to experts from Suvar-Nedvizhimost the pay back period for shopping centers in Kazan is currently 6-8 years but this may increase to 10 years. Strong competition is forcing developers to focus on creating concepts for large format retail with an emphasis on large anchor tenants and chain operators and bigger entertainment components.

Nizhny Novgorod
Another large city in the Volga region, Nizhny Novogord, is developing at a slower pace. In 2006 several large-format shopping centers opened with a total combined area of 215,000 sqm. They include: Mega-Fedyakovo, Park-Avenue, Muravei and the second phase of Novaya Era. According to Knight Frank, the total area of modern retail centers in the city is 162,000 sqm. In 2007-2008 the total new supply will be 400,000 sqm of modern retail areas which will increase the total retail areas in the city by a third. However despite the active growth of new projects the retail real estate market is still unable to keep pace with retail growth. Modern format retail requires larges areas and it is anticipated that there will be a shortage of retail areas in Nizhny Novgorod for some time to come.

Southern Federal District
The most actively developing cities are Volgogoard, Krasnodar and Rostov-on-Don. “Judging by the volume of projects being considered and the number of developed cities, the Urals Region provides the greatest interest for foreign investors,” says Mr Pechersky. Moreover the structure of the regional retail market is dominated by integrated buildings and there are several very interesting projects.

Volgograd
The first modern shopping and entertainment center in Volgograd was Park House which opened several years ago. Unlike Park House, the Piramida shopping and entertainment center was not developed from scratch but was built in the restaurant area of an unfinished hotel building. Despite a controversial commercial concept the project proved a success. It has an excellent location at the intersection of the city’s main transport routes. A Metro shopping center has been operating in Volgograd for several years and a Real shopping center has opened in the Sovetsky district. In May of this year the official opening was held of the first phase of the DVI Group’s shopping and entertainment center (87,000 sqm). It is located close to the city center and the first phase includes a Carousel hypermarket (13,500 sqm). The main anchor operators are Carousel, Castorama, M. Video and a 7-screen DVI Cinema multiplex. It also includes a furniture center, car salon and food court.
Despite the appearance of new shopping centers, demand for retail areas still exceeds supply. The bulk of retail sites are housed in outdated buildings or redeveloped factory buildings. Diamant Development Group developed the Tsaritsynsky Passage shopping center on the site of a former unfinished industrial building. The seven-story shopping center is located in the central region. Another example of this type of development is the Diamant shopping and entertainment center which was completed in the autumn of last year. Today a number of significant projects are underway. The majority of the city’s retail areas are concentrated in the central district. This means there is high demand in residential areas which is becoming the focus for developers. Projects have been announced for Krasnoarmeisky district (local developer) and Sovetsky district where 70,000 sqm has been acquired for the construction of a shopping center by Leon Group. Construction is also underway on the Plaza shopping and entertainment center, the Volgograd-City and a number of other projects.

Krasnodar
The real estate segment in Krasnodar is currently estimated at about 180,000 sqm of modern retail areas. These include the Krasnaya Ploschad shopping center (105,000 sqm) and the City Center shopping and entertainment center (22,000 sqm) which was realized by a local firm. These two retail properties are the largest in the city. Currently a number of projects are underway and construction of an Auchan hypermarket is nearing completion. The opening date is planned for the middle of December, 2007. In the second quarter of 2008 a Leroy Merlin will open in the city.
Specialists from Cushman & Wakefield Stiles & Riabokobylko comment that the city has a marked shortage of modern retail areas. However by 2010 the situation is expected to change. DVI Group plans to build a 90,000-sqm shopping and entertainment center on Rostovskoe shosse. The planned opening date is the first quarter of 2009. Investment firm TPS is building the Krasnodar City shopping and entertainment center in the city center (94,000 sqm). Construction will be completed in the autumn of next year. An OZ Lifestyle Center will be built on the Krasnodar-Kropotkin highway. The developer is AIM Property Development, and it will be built on a lot of 37 hectares.

Urals Region
The most actively developing cities in the Urals Region are Yekaterinburg and Chelyabinsk. Economic growth in Russia as a whole and in the Urals in particular is leading to increased consumer spending power. The retail turnover in Yekaterinburg is second only to Moscow and St. Petersburg and the retail real estate segment is developing rapidly. According to Ural-Hermes, at the end of 2006 there were 21 shopping centers in Yekaterinburg with a total combined area of 620,000 sqm including 550,000 sqm of modern retail areas. Recently a number of shopping centers have opened in the city. Here are a selection of them:

1st and 2nd phase of the Greenwich shopping and entertainment center (53,000 sqm) commissioned in 2006;
Mega shopping and entertainment center (120,000 sqm) which opened in October, 2006;
Karnaval shopping and entertainment center (75,000 sqm) which opened in December, 2006

A substantial number of shopping centers are nearing completion, including the Megapolis (30,000 sqm), Evropa (35,000 sqm, Lenin St.), Nebo (94,000 sqm), Rock-n-Mall (6,630 sqm) and the second phase of the Karnaval shopping and entertainment center. “Rental rates in Yekaterinburg are quite high. For up to 100 sqm they range from $900-1,000 per year (inclusive of VAT and operational charges). For areas of over 300 sqm they range from $500 per sqm per year. Rental rates also vary according to location (floor, proximity to escalator),” says Marina Malakhatko, commercial director at DVI Group.

Chelyabinsk
Today in Chelyabinsk there are over 20 retail sites but only a few of them could be described as modern shopping centers. One example of such is the Sinegore shopping center (35,000 sqm). Projects in the pipeline include the second phase of the Russky Dom shopping and entertainment center (100,000 sqm) and the City Park shopping and entertainment center (40,000 sqm). “It is hard to estimate average rental rates because the range is very wide – from $200 to $1,000 per sqm per year. For locations on central streets they range from $250-1,500 per sqm per year,” says Ms Malakhatko.

Siberia
The most actively developing cities are Novosibirsk and Omsk followed by Kemerovo, Krasnoyarsk and Barnaul.
In Omsk classical shopping and entertainment centers are the most highly demanded format. Large federal chains and local firms are rushing to fill the niche. Key projects in the pipeline include Planeta shopping center from RosEuroDevelopment which will be built on the right bank. The left bank will house a joint project from Torgovy Kvartal and Partner Development (it is not yet known whether it will be called Torgovy Kvartal or a new name will be decided upon). Omsk is the first city in Siberia where construction has started on an IKEA complex. DVI Group and Park House are currently looking for construction lots.

Novosibirsk
In Novosibirsk retail real estate is the clear leader in terms of investment. Today the total volume of completed retail areas is 1.5 million sqm of which 800,000 sqm are located in shopping centers of over 20,000 sqm in size.
The most expensive street retail areas are located along the retail corridor which comprises, Ul. Krasny Prospekt, Sovetskaya, Vokzalnaya, Prospekt Marska. Small areas here range in price from $6,000-7,000 per sqm with an upper limit of $10,000 sqm. Growth in rental rates per year is about 50-70% and for street retail premium rates range from $1,850-2,000 per sqm per year.
After the end of 2007 Novosibirsk is anticipating the launch of several large shopping and shopping and entertainment centers. In autumn a new Mega (developer IKEA, 140,000 sqm) will open near Kalinin Square. A Royal Park (77,000 sqm) developed by Avtoyarus will also open soon. Local development firm, Trud has announced the commissioning for the first and second phase of the Manhatten shopping center (48,000 sqm) in this year, and RosEuroDevelopment is realizing a shopping and entertainment center project (150,000 sqm) on the banks of the river Ob.
ADG Group is currently developing super-regional shopping and entertainment center projects in Novosibirsk and Omsk. Despite an abundance of project announcements, the retail real estate segment is still attractive for investment. Rental rates in shopping centers range from 2,000-2,500 roubles per month for boutique areas.

Russian Far East
The most actively developing city in the Russian Far East is Vladivostok. The majority of large retail sites are located in the central part of the city and include GUM, Zolotoi Rog and Clover House. Along the main transport routes you can also find Maxim, Grand and Eldorado shopping and entertainment centers. Most shopping centers in the city are multi-story (5-7 floors) because of the small size of land lots and the need of developers to build the maximum possible number of retail areas.
Overall there are virtually no Western-style shopping centers in the city with the possible exception of the recently built Clover House. The retail zone opened in March 2007 and the family leisure center, Ostrov Sokrovisch, developed by Clover Group will open in the autumn.
At the end of 2008 the reconception was completed on the GUM department store building which was originally erected at the end of the eighteenth century. Consulting, brokerage and investment was provided by Torgovy Kvartal. It has a total area of 19,606 sqm and parking for 201 cars. The average rental rates for retail real estate range from $360-840/sqm per year and up to $1,800 per sqm per year in the center (Tsentralny shopping center). Over the next few years the construction has been announced in Vladivostok of another 13 retail properties; however most of them will be under 5,000 sqm in size. The largest properties will be the Orion (10,000 sqm) on Russkaya St. and a shopping and leisure center (10,600 sqm) on Red Banner Prospekt.