Moscow Shopping Center Market Thaws Out

Consumer demand is now demonstrating slow but stable growth. Accordingly, retail turnover in Russia is slowly but steadily rising. From January to August of 2010 the turnover increased by 4.3% YoY. The amount of private long-term (one year plus) deposits also increased, according to the Central Bank of Russia. As reported by Rosstat, the share of spending on nonfood articles is on the rise as well. This data is corroborated by the statistics of retailers. The share of home appliances sold on credit keeps rising. Thus according to Russia’s biggest retail chains (Eldorado, Technosila, M.video) compared to the previous year sales on credit have increased by up to 20%. Many automobiles are also selling on credit, especially in the middle price range; the portion of car purchases with the help of autoloans is 30-35%, which is even slightly higher than before the crisis.
No wonder that retailers, in the light of said trends, are now much keener to open new places of business. What does the retail property market represent today? Is it capable of quenching the thirst of existing and new retailers for shop floor? What’s the outlook?

Supply As informed by Cushman & Wakefield, total retail space in quality shopping centers has increased by 315,000 sqm (see Table 1). The delivery of another 326,000 sqm to the market is possible towards the year’s end. Therefore the aggregate gross leasable area in the segment of up-to-date retail areas totaled 3.545 million sqm by Q4 in 108 properties, as reported by Magazin Magazinov in association with CBRE, which translates to 336 sqm per 1,000 residents. According to the company, the accrual of contemporary rentable retail areas in Moscow in Q3 was the highest since 2007.

According to Knight Frank, the retail space supply is swelling due to projects whose construction had reached “the point of non-return” by the beginning of the crisis; for all that, commissioning times are often postponed. A large number of projects put into operation this year were originally slated for opening in 2008-2009. “Construction on large shopping malls, which have already opened their doors or will open by the end of 2010, began prior to the crisis. The Moscow market still lacks new projects launched in this or in the previous year,” confirm the experts of Colliers International. Inauguration of two big projects is expected in Moscow by this year’s end: the 70,000-sqm Gagarinsky and 114,000-sqm Mall of Russia. Several mid-size shopping centers, including Tsvetnoy and Severnoe Siyanie, are also due to open this year. Developers are announcing their construction plans. Two outlet centers – Fashion House and Outlet Village Belaya Dacha – will be built in Moscow next year (see more details on pp 42-46). Redevelopment is getting ever more popular. Several large redevelopment projects have been announced in Moscow, including Waymart and Auchan City Capitol.

Demand Demand for shop floors from potential tenants increased in the third quarter compared to the second quarter. The retail property market saw a seasonal splash of activity. According to Jones Lang LaSalle, the vacancy rate in Moscow dropped to 7% in Q3 2010. Even though an impressive bulk of retail areas was thrown onto the market in the third quarter, vacancy remained at the same level. This was the result of higher activity on the part of retailers leasing vacant areas in the existing shopping centers including the recently opened malls. According to Jones Lang LaSalle, the new centers are already 8090% occupied by the time of grand opening compared to the 60-70% occupancy levels seen in the crisis period. The most successful shopping malls are 100% occupied, whereas in less successful projects the share of vacant areas is 5-8% (down from 15-25%). Commercial terms During the third quarter of this year the Moscow retail real estate market tended towards rent growth. According to Magazin Magazinov in association with CBRE, the growth averaged 7-8% for new lease agrements and even reached 15% at Moscow’s best shopping malls.

Average rent rates for anchor tenants are now varying between $100 and $600/sqm/year, according to the company’s experts. “Thus the average rental rate for hypermarkets is 100-180 $/sqm/year, for movie theatres – 120-180 $/sqm/year, for home appliances and electronics – 350-450 $/sqm/year, for supermarkets – 350-500 $/sqm/year, for DIY hypermarkets – 150-250 $/sqm/ year (all figures are given exclusive of VAT and operating expenses). Agreements with anchor tenants are normally signed for 10-25 years, say experts at Magazin Magazinov in association with CBRE.

The average rental rates for the tenants of shopping galleries occupying more than 50 sqm are in the range of 500-2,400 $/sqm/year less VAT and operating expenses. The term of contracts is 3-5 years. The average amount of operating expenses is 150-170 $/sqm/year less VAT.

As reported by Cushman & Wakefield, tenants signing lease agreements are now eligible for appreciable benefits: the security and upfront payments have been significantly reduced (down to the monthly rent each). Most tenants also demand the warranty of center’s occupancy at least by 70% at the time of signing the acceptance statement. Talking about the trends in the rental policy, the following are worth mentioning, according to Jones Lang LaSalle: rental vacations are offered until the time when a shopping center is 60-80% occupied, the step-up rental rate remaining very popular; almost all retailers are offered a turnover percentage as an alternative rental scheme, but in this case a minimum fixed rate is also stipulated in the lease agreement. Anchor tenants are normally offered to fix the maximum level of rent as well.

Tenants Retailers are active on the market again. However, as estimated by all experts we polled, retailers are now more cautious, selective and fastidious in choosing new premises – they are interested only in quality retail premises boasting of good location.

Additional evidence of the market upturn is robust expansion of many large retailers who bring new projects to the market and take over competing businesses. The following events/trends on the retail market are worth mentioning:

- X5 Retail Group (Russia’s number one grocery retailer) bought out 16 Ostrov (Island) stores and declared its intention to buy stores in the Kopeyka chain.

- The biggest Russian grocery retailers are on the march to regional cities – Lenta and Seventh Continent plan to open 30 and 10 stores in the provinces, respectively. Victoria Group acquired the Tula chain Semeynaya Kopilka. Magnit plans to consolidate in Omsk via acquisition of a local player.

- International retailers keep announcing their plans of entering the Russian market. Prada plans to expand on the Moscow market by opening mono-brand stores. Adidas, which declined to sign contracts with biggest Russian sporting goods chains, is also betting on branded stores. The Russian multi-brand chain Fashion Alliance (affiliated with Tashir Group) will develop the British brand Quiz, having signed an exclusive franchising agreement. The Denmark-based jewelry chain Pandora will also be expanding in Russia through franchising. In addition, the British brands All saints and Reiss intend to open their stores in Russia.

Growing personal income and retail turnover, characteristic of 2010, as well as the entry of foreign players to the Russian market, expansion of regional chains and higher activity of existing retailers push many retail operators, according to Colliers International, towards new lines of business and new retail formats. Thus Euroset is going to launch a chain of intellectual hypermarkets in Russia, bringing together two concepts – trading in gadgets and books. The German retailer Metro Cash & Carry is launching a small-format Metro Punct store in Moscow and is trying to exploit the Russian cyberspace, following the example of its competitors.

O’KEY plans to bring out a new “tough discounter” grocery chain: a limited variety of fresh foods, plain decoration of the shop floor and minimal personnel costs. Eldorado repositions itself from “the territory of low prices” into “the territory of best prices”, underscoring a shift in consumer appreciation for the value of purchased products as opposed to only the price.

The said trends show that the retail real estate market will be rapidly expanding in the years to come. Because of the burgeoning demand from retailers, the massive opening of shopping centers in this and next year won’t negatively impact the vacancy rate. In addition, the vacancy rate will be contained by possible delays in the commissioning of some retail centers. Following the recovering demand on the part of retailers, developers are contemplating the construction of new projects and restarting of the earlier frozen projects. This has already influenced investors, who began taking interest in the retail projects under construction in the third quarter: according to Jones Lang LaSalle, several deals related to the sale of such assets were recently closed and their share has soared from 11% for the first nine months of 2009 to 29% in the respective period of 2010.

Forecasts According to various estimations, from 500,000 to 750,000 sqm of rentable areas in modern-day shopping malls are currently under construction in Moscow. By year’s end this figure will decrease after several projects are commissioned. Save for specific outlet centers, construction on large-scale projects has not yet been relaunched. Therefore if the current trend persists, the annual pace of putting new retail areas into operation may slow down remarkably in a couple of years. This will be another factor in the mounting deficit of quality retail areas. “Along with gradual exhaustion of the areas due to be commissioned in the near term, this also creates prerequisites for the market to grow,” forecast experts of Cushman & Wakefield. Although Russia is a European leader by the number of shopping centers to be commissioned in the near future, by a gross margin, the list of planned projects does not swell any further.

“Demand for retail premises from potential tenants will keep at a high level in the months to come. The growth of average rent rates in Moscow shopping malls may reach 10% in 2010,” assume the experts of Magazin Magazinov in association with CB Richard Ellis.

Experts are confident that relatively small shopping centers as well as warehousing premises are now in demand on the market. “Malls with areas in excess of 150,000 sqm represent a considerable share of ‘frozen’ retail projects. Smaller projects with a thoughtout concept will have the highest odds to become market leaders in the years to come. Therefore in case of design alterations the areas of some big retail projects can be decreased – this measure would lower the level of investments in construction works and make these projects more feasible,” conclude Knight Frank’s experts.