From Quantity to Quality

Preferences of tenants
The year 2010 proved to all market players that the customer is always right, and that consumer preferences must be studied properly. Against the background of a growing consumer demand and stabilization of the market environment, the lively activities of retailers in the retail real estate market are more noticeable. Experts say that retailers have started opening smaller format stores, thus securing sales volumes comparable to those of larger stores. According to Olesya Cherdantseva, head of retail property and investment analysis at Jones Lang LaSalle, tenants began to concentrate more on monitoring the success of their stores, and now they are negotiating lease rate discounts, if they see consumer traffic decreasing. This was particularly the case in new shopping centers where some stores might be opening in otherwise empty galleries. Therefore, as the economy started to recover, the orientation of tenants towards high-quality shopping centers became the main trend. “When choosing a shopping complex, retailers need to understand what makes this particular center different from others,” says Galina Maliborskaya, director of retail real estate at Colliers International.
During the recessionary and post-recessionary periods, the shift of demand to lower price segments has been noted, and that is why companies working in the discounter format had the best sales this past year. By way of example, we can look at the retail DIY hypermarket chain Nash Dom, where products are sold 15–20% cheaper than at competing stores. “While average total purchase had declined during the recession, the retail chain did not feel a reduction in revenues because the number of customers had grown, thanks to the expansion of their target audience,” commented Vitaly Efimkin, Vice President of Tashir Group. At the same time the experts believe that the “developer’s market” turned into a “tenant’s market”. According to Alexander Ksendz, director of commercial real estate appraisal at the NEO Center Consulting Group, tenants started to become more attentive to vertical communications when choosing a shopping complex. They started evaluating the convenience of location, the number of elevators, escalators and travelators, when renting premises on the 2nd floor or higher. When this is insufficient, they insist on rent reduction or refuse further cooperation.

Lease conditions
As far as lease rates are concerned, according to data provided by Cushman&Wakefield, the present level of prices is similar to lease rates that existed in H1 2007 – $2,200 per sqm per year. According to the same data, the current average lease rates for shopping premises (per sqm per year) are 8.3% lower than the rates in the first half of 2009, and 21.4% lower than those in the second half of 2008, and 31.3% lower than the rates in the first half of 2008. According to NAI Becar, lease rates for the most liquid spaces will grow by 10–15% in 2011. Experts note that lease rates for most tenants in Moscow’s shopping centers have grown by approximately 5–7% since the beginning of this year. Rental vacations are granted only until a shopping center reaches an occupancy rate of 60–80%. Lease terms are always individual for each tenant. Some retail operators have switched to lease rates based on turnover percentage, while others stick to the fixed rate. “We still conclude agreements stipulating a fixed lease rate, because we consider that the turnover percentage scheme is rather unattractive for an owner, and one that implies additional risks and extra costs of monitoring the financial flows,” comments Vitaly Efimkin, Vice President of Tashir Group. We should also mention that the latest trend in rental payments is the “step-rent”, which is a gradual increase in the lease rate. “In its first year the tenant pays a minimal rate, in the second year the rate is a bit higher. The increase should not always be linked to the turnover percentage; it can be some constant expressed in USD at the current exchange rate. Such ‘step rent’ can continue for as long as three years or even longer,” explains Margarita Trofimova, director of consulting and appraisals at NAI Becar. The following well-known fact should be observed – when demand exceeds supply, the lease rates grow, and vice versa. Today’s situation is such that on the one hand, the number of high-quality conceptual properties is not sufficient, while on the other hand there are not that many well-established retail chains with an original positioning and elaborated promotion strategy. With all other conditions being unequal, both parties use their specific advantages when negotiating the lease rate and drawing up of agreements.

Statistics
Experts estimate the total share of vacant spaces in 2010 at about 7–10%. For 2011, they are forecasting a gradual reduction in high-quality spaces available, with a concurrent reduction in the commissioning of new shopping areas. “We expect several shopping centers to open in Moscow, with a total area of up to 170,000 sqm, which will become available for lease. The small volume of areas in shopping centers that will be commissioned will facilitate a return to a deficit of retail spaces,” explains Olesya Cherdantseva of Jones Lang LaSalle. At the moment, experts are pointing to a deficit of high-quality supply in Moscow’s retail areas – estimated at 3,443,000 sqm, which gives us a ratio of 326 sqm per 1,000 residents. By comparison the average figure in Eastern Europe is approximately 470 sqm per 1,000 residents.
Retailers
Foreign operators are becoming more active as well. Recent entries on the market are such operators as Thomas Sabo, UNIQLO (Atrium Mall), Burger King (Metropolis, Evropeisky and Golden Babylon) and Home&You, featuring a new concept of household products from Fashion Point Company. According to NAI Becar, the Russian market saw the return of the Coast brand as well as the independent entry of Apart (owned by the OTTO Group). Jones Lang LaSalle has noted that many retailers are canceling their franchise agreements and are starting to work directly; one example is Guess and Levi’s. In the future, the Tom Taylor brand will also work independently. According to experts, international brands are planning renewed development in Moscow. Prada will introduce mono-brand stores, the first of which are going to open at Stoleshnikov Lane and in Crocus City Mall. The mono-brand strategy has also been chosen by Adidas, which has refused to sign contracts with Russia’s largest sporting goods retail chains. The Russian multi-brand retail chain Modny Alliance (Tashir Group) will promote the British brand Quiz via an exclusive franchise agreement. Says Tashir’s Vitaly Yefimkin: “We have decided to increase the share of retail in the structure of the group’s business, and according to the results of 2010 this should have grown from 20% to 26%. The stores with a long history of success are now complemented with new retail projects. Among these there are chain stores Modny Alliance, Euro Fashion, SuperDiskont, Ranger, Wild West, Kids Garden, a chain of themed restaurants Comedy Cafe and others.”
According to Galina Maliborskaya, Retail Property Director, Colliers International, an increase in personal income and in sales turnover in 2010, as well as the entry of foreign players and the expansion of regional players, have motivated many retail operators to enter new spheres and develop new retail formats. For example, Euroset is planning to create a chain of intellect-oriented hypermarkets in Russia, combining two concepts – sale of electronics and books. The German retail operator, Metro Cash & Carry, may launch a pilot small-format store called the Metro Punct in Moscow, and will be promoting its sales through the Russian Internet.
The X5 Retail Group is preparing to launch a new store format, The Piaterochka-Maxi, featuring a limited choice of goods sold at very low prices. Maxim Trapeznikov, PR Director of X5 Retail Group comments: “We are planning to develop our existing store formats – hypermarkets, supermarkets, economy-class self-service supermarkets and neighborhood stores. Formats in the capital city region have been adjusted for Moscow, which means we will not be making any major changes.”
At the same time, experts have noticed a continued process of consolidation of food retailers. According to RRG’s Andrey Panfilov, the mergers and acquisitions will continue. “The takeover of smaller players by major operators is being facilitated by the resurgent willingness of banks to provide loan capital to the retail sector, as recently we have been hearing that large retailers have started to receive bank loans for their development needs,” says Andrey Panfilov.