The liquidity deficit currently affecting Kazakhstan’s financial sector has had a significant impact on the country’s real estate market, with the retail sector particularly affected. Investors have begun exiting the developing market, while rating agencies are lowering the country’s sovereign and corporate credit ratings.

Ice Age
It is no wonder that the current level of financing available for various industries in Kazakhstan has sharply decreased; the country’s government will most likely reconsider their forecasts for GDP growth, which was originally set at 9.9% in 2007. As noted by market experts, every single major construction company has frozen 50-80% of projects announced in 2006-2007. The current state of affairs may continue until March 2008, when, according to financial experts, the situation on the global market may change and take a turn for the better. “However, at the current time, speaking about change for the better is, unfortunately, extremely difficult,” notes Bakhytbek Katen, managing partner of the company Aristan Property Adviser. “If alternative sources of financing are not found, then we will face a regression in construction in the country’s main cities as early as winter of this year.”
As noted by Mr. Katen’s colleague, Nursultan Kasenov, the director of the department of retail real estate at Aristan Property Advisers, the rise in the price of construction projects naturally reflects the pace of development in the retail real estate market. “On one hand, the appeal of the overvalued assets is falling, but on the other hand, international strategic and institutional investors have the opportunity to support Kazakhstani market players through co-financing projects or purchasing them,” he notes.
A similar opinion is shared by Askar Mukashev, general director of UMEX Realty, who turned to the example of residential market players, who are working to substantially optimize the process for property sales. Due to the toughening conditions for obtaining real estate mortgages, potential clients will not be the end users, but rather potential investors who have “long-term” money. However, at the same time, short-term market players (with periods of 1.5-2 years) will suffer losses, as the owners of projects will be compelled to sell apartments with substantial discounts in order to exit from a crisis situation and continue the construction process.
Since most construction companies do not possess the necessary material resources to independently complete construction, the market will receive an influx of offers for partially developed future projects in which investors can receive a share. In the opinion of Mukashev, the sale of projects and the exit from the market of weak players will lead to a significant consolidation of current business. These shifting dynamics will mainly concern small firms, which are experiencing a serious deficit of financing. As noted by the general director of Team Broker, Turgun Masenova, a large number of construction companies across the country are already closing, with construction suspended and building sites left vacant.
Merger and acquisition transactions may change the face of the market. But will all niches be attractive for investors? In answer to this, it is possible to say with a large degree of certainty that the Ice Age will not affect the retail real estate segment. Considering the current situation in the republic’s financial sector as well as its real estate and construction market, experts predict that local and foreign developers will begin to actively invest their funds in the construction of retail and office spaces. Askar Mukashev suggests that the expected influx of investment will allow the market in Almaty to reach a more stable phase by December, while by the second or third quarter of 2008, the price and demand for real estate will go up.

Potential Buying Power
Until recently, the market for retail centers in Kazakhstan was developing rather slowly. However, the improvement of the socio-economic situation of the citizens and the growth in the population of Almaty encouraged businessmen to create new retail and entertainment centers. According to UMEX Realty, there are currently more than 9,000 retail premises and around 3 million sqm of retail spaces of various sizes and uses functioning in the city. This market segment is mainly distinguished by the construction of major retail centers with new formats. Overall, Kazakhstan is undergoing widespread reconstruction, but the acceleration of the country’s retail real estate market is still largely hindered by the fact that the country as a whole is still in the early stages of development. “In several cities, the development of the retail real estate market has reached a high level, but there is still much more potential for long-term development,” believes Mr. Mukashev. “The country’s purchasing power has doubled, which has led to high demand for more retail networks.”
The majority of experts agree that the current problems with the liquidity of banks will probably inhibit the development of projects, most of which are financed by credit. However, on the flip side, the retail real estate market is demanding quality projects, which, alas, are currently few. The growing consumer sector, in the opinion of Mr. Kasenova, is now one of the most attractive segments of the economy for investors. Even in the largest cities of Kazakhstan, he says, the retail real estate segment enjoys the largest demand for quality projects. “Kazakhstanis are travelling quite a bit throughout Europe and Asia and see international-class retail complexes firsthand, and they naturally want the same quality here in their homeland,” comments Charles Raether, head of Jones Lang LaSalle Kazakhstan .
As such, the market is demanding modern high-class retail complexes to suit international standards. Another matter is that the liquidity deficit can push back the delivery period of new projects. “Many of the construction projects announced by developers and builders in 2006-2007 cannot be completed by 2009,” reports Bakhytbek Katen. “Because of the very limited amount of offers for fall 2008 or spring 2009, the peak prices and rent rates will increase.”

Reconsidering Retail Consultants on the retail real estate market have reconsidered their forecasts from 2007, as they did not initially expect such a jump in the presence of medium and large-sized businesses and subsequent demand for class A office space. Now, after readjusting their calculations, experts predict that the demand will continue to surpass supply into 2009, even if capital market trends are positive. At the current time, the market rent rates for retail space is stably growing.
However, Nursultan Kasenov notes, “In this segment of the market, a lot depends on a retail premise’s effective format and concept, the presence of strong anchors, and other features that can attract a strong consumer flow. It is for this reason that rent rates can be notably higher in, shall we say, traditionally existing retail premises, including zones of disorganized trade. New retail centers often suffer from poorly-designed concepts and thereby drive away customers, who prefer to continue shopping at more familiar places.”
On average, rent rates for retail gallery space in existing well-designed retail centers, according to data from Aristan Property Advisers, now reach $1300-2000/sqm/year. The company asserts that on account of the lack of quality retail real estate offers, market rates will continue to rise.
Another factor effecting the growth of rent rates for retail space is the increased presence of strategic investors and investor trading facilities. According to Mr. Katen, the number of people breaking into the retail real estate business has grown since 2005. The inflation of rates and the demand for retail space has stimulated such investors to increase rent rates. In order to make a profit of no less than 20% annually from operating their premises, investors try to compete with the banks, whose deposit programs only provide a profit of up to 16% annually. With such rates, owners intend to recoup on their investment within 5-6 years. As a result, by 2008, rent rates will increase even in the major cities of Kazakhstan. Charles Raether, for one, argues that the level of rent rates in modern retail centers in Astana are nearly at the same level as in Almaty. “In the foreseeable future, as demand continues to exceed supply, we do not expect a decrease in lease rates,” he states.

Ready for Launch
Once again we note that the existing retail centers in Kazakhstan by and large do not yet exhibit a high enough standard of professionalism and organization. General director of UMEX Realty, Askar Mukashev, believes that many errors are committed during the planning and construction process, while in most cases, the tenants of retail centers are private entrepreneurs, rather than professional retail operators. Furthermore, many premises fall short of being considered legitimate retail centers due to the absence of anchor tenants. However, as was earlier noted, one has to bear in mind that Kazakhstan’s retail real estate market is still in the initial stages of development. As a result, the first generation of retail centers can be found only in Almaty and Astana. In the rest of the country, local operators still dominate the market. Some chain operators exist, but they are markedly few.
Mr. Mukashev reasons that the market in Astana has not yet been sufficiently developed due to its limited appeal to retail operators. “The expansion of retail operators into new regions is vital for the long-term development of the market; as such, it is necessary to further construct retail centers in the regions,” he argues.
The biggest names currently dominating the retail real estate market include the Mega chain stores (in Almaty, Astana, Shymkent, Aktobe and throughout the CIS countries), created by Astana Group, as well as the retail center chain Chagala Zere Malls, developed by Chagala Group and the Zere Corporation. Needless to say, the Astana Group created a big splash on the market last year with the launch of their Mega Mall in Almaty.
However, this November, yet another competitor will enter the market – a new modern retail center in Astana, built by the company Capital Partners. Next year, the company will launch another project – Esentai Park. “Esentai will be one of the best multi-functional retail centers in the whole country, even when compared with planned future projects,” argues Charles Raether, head of Jones Lang LaSalle Kazakhstan. “And still another developer, Oriental Real Estate, is planning to open two modern retail centers in Almaty and one in Astana, which may be ranked in the international class.” According to experts at Jones Lang LaSalle, the project Mamyr, now under construction by TS Engineering in the rapidly developing western district of Almaty, also promises to be attractive not only for tenants, but also for consumers. Furthermore, BI Estate (part of the BI Group) is actively working to enter the retail real estate market in Astana with several large projects.
Not counting Capital Partners, which represents an international company with Kazakhstani roots, it is safe to say that foreign players are generally absent on Kazakhstan’s market. “There are a few construction companies from South Korea, but they cannot be labeled commercial real estate developers due to the fact that they build mainly residential complexes with commercial infrastructure. Furthermore, they have begun work on only two projects, making their presence on the market very marginal,” notes Mr. Katen.
The same situation applies to the sellers and tenants. As of now, only Russian retail brands are gradually entering the market, while many Western brands will make the move onto the market only after Russian brands have set up shop. Charles Raether asserts that the Kazakhstani market is perceived by foreign operators to be “small and geographically remote, but those who have taken time to study the market see that it is a rapidly developing market with high returns.”
In the home appliance retail segment, the Sulapk chain (in collaboration with the Russian chain Eldorado) and the Tekhnodom chain are developing dynamically. These companies are actively entering regional cities with a population of over 100 thousand. In the supermarket sector, which is still far from saturation, the most developed retailers are Gros, Ramstore, SM Market and others, which are also actively developing in the regions. The DIY chain (Maxi, JYSK) and the pharmaceutical chain Amity are also gathering speed. International chains and trademarked brands are practically non-existent, but, “in the next 2-3 years, Russian and international brands will start to enter the market,” argues Nursultan Kasenov, director of the department of retail real estate at Aristan Property Advisers. “This sector is extremely attractive, and together with the continued growth of the market, arrival of international operators and increased professionalism in network management, we believe that the process of mergers and acquisitions will begin.”