s the population’s income grows and, consequently, purchasing power, St Petersburg is seeing an increase in the number of shopping centers offering consumers all the conditions for comfortable and convenient shopping. The rising supply of quality shopping premises is causing competition between shopping centers to intensify, forcing developers to pay more and more attention to shopping center design, and rent rates in shopping centers that do not meet the market’s new demands. However, there is still a long way to go before market saturation.

Overview
Shopping centers remains the most dynamically developing segment of the commercial real estate market. This is facilitated by the rising retail turnover throughout the country. St. Petersburg is no exception – according to data from the Economic Development, Industrial Policy and Trade Committee of St. Petersburg, retail turnover in the first half of 2006 was 158.6 billion rubles, which represents growth of 24.2% in actual prices and 16.3% in comparable prices in relation to the same period last year. The favorable economic situation is attracting shopping operators from Moscow and abroad to the northern capital, as well as contributing to the expansion of local retail chains. In the near future, large international operators such as Auchan, Real, and OBI are expected to enter the market.
In comparison to large European capitals, the volume of shopping premises in St. Petersburg remains fairly low, which is why new quality shopping real estate buildings are in high demand from both tenants and shoppers. But insofar as the retail market is adopting an evermore civilized form, developers need to put serious effort into responding to the needs of retailers and consumers, and to face the competition in the shopping center market. A shopping center’s well-devised concept, high quality of fittings and building management, parking, and leisure components are all factors that influence a shopping center’s success. But the effort is worthwhile – market experts calculate the return can be as much as 20%, although intensifying competition will lead to its gradual decline.
Some of the most noteworthy events in the sphere of retail and shopping real estate in St. Petersburg this year are as follows:

Parnas holding company announced conclusion of a deal for the sale of its share in the Eliseevsky store – the so-called fish hall – by the company Benetton. Previously, St. Petersburg city authorities had objected to the re-profiling of the renowned delicatessen, however, the objection only referred to the store’s main hall. The purchase-sale deal should compensate the company’s financial losses from renting the historical shopping hall of the Eliseevsky delicatessen.
Margheri group of companies (Italy) bought 400 sqm of land near the village of Bugry in Leningrad oblast, to start building the Nevsky Kolizei shopping and entertainment complex with a total area of 100,000 sqm. The complex will recreate the Roman Coliseum to real scale. The complex is scheduled for inauguration in the 1st quarter of 2008.
At the end of January, Torgovy Dom Perekrestok Spb announced its plans to build its first hypermarket in St. Petersburg in 2007. The magazine will be located within the city boundaries. The shopping area of the future hypermarket will be 4,000 sqm, which is three times higher than the size of the chain’s current stores in St. Petersburg.
The local company Start intends to create a chain of DIY-format hypermarkets. The chain’s first hypermarket with an area of 15,000 sqm is planned to open in December this year in Kupchino. The company intends to develop the chain first in St. Petersburg, and subsequently in the regions, and potentially in Moscow as well.
The Eldorado chain of electronic goods stores has entered St. Petersburg with a new format – hypermarkets under the ETO brand. The new brand’s stores are targeted at shoppers with average and above average incomes, who have “grown out of” the discount-format stores. The first ETO outlets were inaugurated at the end of June in Moscow and Kazan, and at the end of August the ETO store opened in St. Petersburg within the Piter shopping center on Tipanova street.

Supply
In the first half of 2006, the rise in the number of new shopping centers was significantly higher than in the same period last year. Market experts differ on the volume of new supply:

According to data from the company Praktis, in the first half of 2006, 341,000 sqm of new space came online;
Analysts of GVA Sawyer appraise the volume of new supply at 395,000 sqm.
Colliers International data shows that in the first half of this year 12 new shopping buildings came online with a total area of 400,000 sqm.
According to London Consulting & Management Company (LCMC), developers plan on opening 733,000 sqm of retail space in shopping centers during 2006, over twice the amount created in 2005.

The new supply includes a large proportion of redevelopment projects due to the lack of appropriate sites for construction and the significant number of industrial premises within the city boundaries. The following shopping centers are examples of redevelopment projects in the last half year (source Colliers International):

Grand Canyon shopping and entertainment center, located in the unfinished buildings of the Iskra textile factory;
Varshavsky Express shopping and entertainment complex in the Varshavsky station building;

At the end of the first six months of the year, St. Petersburg had 87 shopping centers in operation with a total area of 1.92 million sqm, according to Colliers International. The company’s analysts believe that the leading districts in terms of numbers of shopping centers remain Primorsky and Vyborgsky (20% and 17% of the total supply of shopping space, respectively). At the same time, specialists from Becar.Consulting value the total volume of shopping space at 1,295,215 sqm, and estimate that by the end of 2006 this volume will rise to 1,878,000 sqm, which will double the level of supply in 2005.
The most noteworthy buildings planned for inauguration by the end of this year, include the following (data from Astera Oncor):

Mega-Dybenko shopping and entertainment complex in Kudrovo (210,000 sqm);
IKEA-Parnas in the village of Bugry (120,000 sqm);
Mega-Parnas shopping and entertainment complex in the village of Bugry (120,000 sqm);
Raduga-Piter shopping and entertainment complex on Prospekt Kosmonavtov (80,000 sqm);
Rodeo Drive at the crossroads of pr. Kultury, Severny and Lunacharsky (46,000 sqm);
June shopping and entertainment complex on the crossroads of Industrialny pr. and Kosygina street (43,000 sqm).

Demand
The expansion of Moscow and foreign retail operators and active development of local chains is leading to a rise in demand for modern shopping space. New supply is still unable to satisfy the existing demand for quality shopping centers. Meanwhile, tenants are interested in a well-developed engineering infrastructure, well-conceived layouts, quality fittings, etc.
According to Astera Oncor, the highest demand in a shopping center gallery is for premises of 50-100 sqm. For anchor tenants, generally speaking, demand is for between 1,000 and 12,000 sqm. The occupancy level of shopping centers remains high and according to market experts for successful projects reaches 98-100%. However, less successful shopping centers may have only 70-80%, forcing owners to reconsider rent rates or redesign the outlet. GVA Sawyer findings are that the level of vacant premises at the time of new shopping center being launched is on average 10-25%. LCMC however says that most shopping centers opened over the past two years have occupancy rates of 96-99%.
The proportion of purchase-sale deals in the total number of deals with shopping real estate, according to Colliers International valuations, is only 10-20%, due to the fact, in the opinion of the company’s analysts that there is a very low level of supply, which means that owners prefer not to dispose of such a valuable asset.

Rates
The average rent rate in a shopping center depends above all on its location – the most valuable locations are where the flows of potential shoppers are highest (main shopping streets in the city center, or proximity to underground stations, main roads or their crossroads).
In establishing rent rates within a shopping center the tenant’s profile is taken into account, as well as the occupied area, and ability of the operator to attract visitors. The location of the shopping premises in relation to shopper flows also comes into play.
According to data from Becar.Consulting, the annual rise in rent rates in St. Petersburg is 12-15% on average. Company specialists believe that rent rates rise when tenants change.
The dynamics of rent rate changes depends mostly on the quality of the shopping outlet – in less successful shopping centers rent rates have a tendency to stabilize and even decline.
Purchase-sale deals with shopping real estate are rare. Data from Praktis shows that the cost of 1 square meter is $3,000-5,000, and although 75-80% of customers would prefer to own their shop premises, they are forced to rent due to the lack of supply.

Trends

With new shopping buildings coming online and rising competition between them the role of a building’s infrastructure will increase, which will lead developers to put effort into expanding the leisure component of their shopping centers;
The deficit of sites for building in the city center will lead to new shopping centers being built in the suburbs. This will contribute to the development along the Motorway Ring Road of regional and super-regional scale shopping centers, located on the city outskirts with good transport access;
The trend for multi-format retail is emerging, whereby a single chain develops various store formats. As examples, the O’kei hypermarket chain with its O’kei Express supermarkets or Lenta shopping center chain with its project for Norma convenience stores.
St. Petersburg is seeing active development of shopping corridors, of which the most renowned are Zagorodny, Vladimirsky, Nevsky and Bolshoy Prospekt on the Petrograd side. On the city outskirts, shopping zones are being formed by new shopping centers located immediately adjacent to each other. Shopping complexes in these areas do not compete however; on the contrary, they provide each other with additional shopper flows. Leaders in the number of such zones are Vyborgskaya and Primorskaya districts.

Forecasts
Growing retail trade turnover will continue for several years, which will attract new retail operators to the market and lead to a growing scale of new shopping real estate construction. We forecast the further rise of shopping premises supply in shopping centers on account of the declining proportion of markets and non-stationary shopping outlets. Given the appearance of a large number of new quality projects and the rising competition between them we can forecast a decline of profitability, and consequently, rising investment return periods for new shopping centers. Nevertheless, in the near future demand for shopping centers will remain consistently high, which is why the level of vacant premises will remain low while rate growth continues.

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