Kazakhstan has long presented foreign investors and developers with a construction oasis. The country’s wealth of natural resources, the personal savings of its citizens and rapid pace of economic development have prompted local finance groups to seek opportunities for additional investments. Kazakhstani market players have begun allocating a mass of resources to the development of the commercial market, with particular emphasis placed on the office real estate sector, and some local players are even investing abroad. However, regardless of this investment activity and development of office facilities, Kazakhstan’s retail real estate sector still lags behind. As such, Kazakhstanis are waiting for new market players to come and shake up the current market dynamics.

“Existing retail areas in the major cities for the most part fail to meet international standards or satisfy the demands of cosmopolitan consumers. As such, there is a great potential to develop more quality retail spaces using foreign investment,” states Peter Goranov, marketing director at Scot Holland CB Richard Ellis. In turn, local retail networks and foreign operators are paying more attention to the quality of newly-delivered premises. “The demand for commercial real estate has long surpassed the supply, thereby putting little pressure on developers. However, now, the amount of offers has increased enough to strengthen competition on the market, and accordingly, developers are laying greater emphasis on a project’s concept and quality of execution,” argues Gulmira Pazilova, director of the department of research and analysis at SIP Adviser.

No Trespassing
The retail real estate market in Kazakhstan is distinguished by the fact that it is almost completely dominated by local players. “The majority of retail developers on Kazakhstan’s market are local companies,” notes Charles Raether, head of Jones Lang LaSalle Kazakhstan. “Development in Kazakhstan is characterized by a high level of business consolidation and integration among local players. Most developers are affiliated with banks that finance development projects. In turn, the banks integrate into the structure of major financial industrial groups (FIGs), which work through subsidiary companies to develop retail networks,” explains Yuriy Eremin, director of the finance expertise group at the FINAM Investment Company. As a result, both retailers and developers work within the framework of one big group, causing the number of projects on the ‘open’ market to rarely represent more than 15-20% of a company’s profile. Consequently, as Mr. Eremin argues, it is difficult for new players to enter the market.
According to data from Peter Goranov, the majority of retail real etsate investment comes from the mining and energy sectors of the economy. Corporations in these industries use their massive resources and profits to invest in retail estate, including retail premises. Additional stimulus for real estate development comes from companies that own the assets necessary for realizing development projects. “The opportunity for high profits in this sector is attractive not only for major real estate market players, but also for companies that have land plots or the financial capabilities to engage in real estate development,” argues Mr. Pazilova.
Numerous real estate developers are affiliated with banks, but the vast majority of them are engaged in residential and office projects, not retail ones, probably as a result of the added complexities and specific know-how of developing shopping centers. The main retail developers in Kazakhstan, according to Charles Raether, are the local companies Astana Group, Capital Partners, Oriental Real Estate, and TS Engineering. Mr. Raether also notes that the absence of foreign developers is particularly interesting in light of the wide-scale participation of foreign architects, construction companies, and consulting firms.
Experts attribute the absence of Western developers on Kazakhstan’s retail real estate market to the lack of foreign retailers. “The sole international retailer in Kazakhstan is Ramstore, which has a rather good position and commands a strong presence on the market,” notes Peter Goranov. Other factors impeding the arrival of foreign retailers include the country’s small population, which does not justify major investment on the part of global retail giants, as well as underdeveloped infrastructure in a large part of the country. Furthermore, experts believe that the consumer habits and style preferences of Kazakhstan’s population are a bit outdated and not on par with those of European consumers, which would make it difficult for German and French retailers such as METRO, Auchan, and Carrefour to adapt to the market.

Marching Orders
“The absence of foreign developers is due mainly to fact that they lack information about the market, such as which investments are the most promising and which methods are the most effective for executing projects,” believes Charles Raether. He further notes that Western investors do not understand Kazakhstan’s market potential and are concerned about the country’s political and economic stability as well as the purchasing power of its population. “The perceptions of many investors are not based on empirical data, but rather are the result of a shortage of market information. The more effectively information about the market is presented to developers, operators, and investors, the more accurate (and likely positive) their assessments of the market’s potential and risks will be,” explains Mr. Raether.
Western companies are also limited by the market’s ‘closed’ nature, the insularity of local players and the need to establish insider connections. “I think that that without a local partner, development is Kazakhstan is not possible. In fact, I am certain that partnering with local companies is the only way to enter the market. At least this is this case for developers. It may be possible for retailers to enter independently, but they will certainly be fraught with various difficulties,” states Ilya Shershnev, director of development at Swiss Realty Group Russia.
Charles Raether notes that cooperation with the local authorities is also no small hurdle for new market players. “In many respects, the particularities of the approval process for new plans are very similar between Russia and Kazakhstan. Obtaining approval for a project can require a lot of time, but unlike in Russia, we rarely ‘receive’ land plots here. Rather, the amount of land owned by the authorities is not very great, so plots are more commonly bought directly from owners. However, connecting to utility lines without the help of the administration can be problematic in certain area and may increase construction costs,” states Mr. Raether.
Another limitation that experts believe is inhibiting the development of foreign companies on Kazakhstan’s retail real estate market is the sudden and unexpected liquidity crisis. The majority of major development projects in Kazakhstan are financed by Western banks, which also act as minority shareholders in many Kazakhstani development companies. For example, the European Bank for Reconstruction and Development owns shares in Capital Partners. “The most widespread practice among Kazakhstani developers is to obtain loans from abroad. Kazakhstani banks that head large financial groups also prefer to be refinanced in the West. Local banks technically have enough resources to finance real estate projects, but they are reluctant to spend such ‘precious money.’ So of course, in this respect, foreign investment is more attractive for developers,” notes Pazilova.
It is for this reason that the mortgage crisis in the US painfully affected the Kazakhstani economy. In fact, due to the credit boom and the country’s high level of dependency on foreign capital, the rating agency Standard & Poor lowered Kazakhstan’s sovereign long-term credit rating in foreign currency from a “BBB” to a “BBB-“, as well as changed its economic forecast from “stable” to “negative”. After this, the ratings changed for several state companies, including: the Development Bank of Kazakhstan, Kazpochta, Agrarniy Credit Corporation, the Kazakhstan Foundation for Guaranteeing Mortgage Credit, Kazmunaigaz, Kaztransoil and Kaztransgaz.
“Up until the recent liquidity crisis, practically every company with available resources entered the real estate market. Such projects not only provided companies with an opportunity to make highly remunerative capital investments, but also helped them create a more positive image. However, the situation changed with the liquidity crisis in the US, which influenced the banking sector and froze retail estate development in Kazakhstan. Depending on how things shake out in the next few months, weaker market players will likely be forced out, leaving behind a smaller and stronger number of developers ,” recounts Mr. Raether.
According to Raether, until the crisis, practically all major Kazakhstani companies tried to deploy their resources on the real estate market. “This phenomenon affected all levels and spheres of activity, including private individuals, oil companies, industrial groups and banks, all of which served as drivers of the dynamic growth in real estate construction and prices, but were heavily hit by the problems on the global finance market. Many developers who depended on borrowed foreign financing had to suspend their activities immediately after the crisis,” reports Raether. As a result, companies that refused to enter the commercial real estate market at its peak came out on top. “At one point, the temptation to participate in some highly-profitable building project was very great. But, after analyzing the situation with a high growth in real estate prices and a large number of speculative land deals, we came to the conclusion that the market prices may be corrected by the end of the year. In addition, our bank has always focused on retail,” recounts Vyacheslav Kim, chairmen of the board of directors of the Caspian Bank.

The Demand is Out There
Considering Kazakhstan’s lowered credit rating, it has been very difficult to attract Western players. However, there are several factors that have led experts to believe that retail real estate projects will be realized in Kazakhstan in the near future. “As long as the profit margin for real estate remains at a high level, this industry will attract companies from various sectors,” states Mr. Raether. Moreover, Raether believes that Kazakhstan’s current market dynamics may encourage specialized developers, especially those in the retail field, to generate more activity on the real estate market. According to Gulmira Pazilova, the number of foreign companies on the Kazakhstani market is continuing to increase, although most of these companies are from countries such as Turkey, Korea, Russia, and the UAE.
In addition to the high profit margin, potential investors and developers are attacted by the market’s insatiable demand. ”All existing retail spaces in Almaty are so well absorbed that their occupancy is practically at 100%,” recounts Peter Goranov. “In Astana, the construction of new retail spaces is also going at a fast rate, and many retailers, especially Turkish, local, and Russian operators, are seeking quality retail spaces in newly built centers and complexes. There is also potential to be found in the other cities, but it usually depends on the size of the project,” reasons Mr. Goranov.
Kazakhstan also has a high demand for land plots, which are quickly becoming more expensive. According to Aaron Haber, head of the investment division at Swiss Realty Group, experts have identified interesting trends on the country’s most active markets: “Today, due to the deficit of land plots, the price of land for a project in Almaty has already surpassed 15 million dollars per hectare. This has prompted developers to increase the scale of their projects in order to lower the incremental cost of the land plot in the overall net cost of the project,” Mr. Haber explains.
Experts have determined the main reasons for the increased price of land in Almaty to be the shortage of properties in which profits from key economic industries can be reinvested, as well as the nature of the city itself: Almaty is surrounded by a ring of mountains, which essentially limits its development. As a result, it is not possible to increase the number of land plots under construction, while the seismic activity in the area prevents the construction of highrise buildings.
Nevertheless, the high demand for retail real estate projects has prompted new retailers to enter the market. “International players continue to enter the markets, and such firms as Ikea, Inditex, and Stockmann are studying Kazakhstan’s market, meeting with potential partners and formulating entry strategies for the near future. Although it is possible that the high margins seen in the last few years may decrease, local commercial premises still hold a lot of investment appeal,” states Charles Raether. In his opinion, while the retail market remains far from the saturation point, the most important task for developers is to attract international operators with new, fresh concepts. It is also particularly important that Kazakhstan attract developers with experience building major retail spaces of over 100 thousand sqm.

Northern Neighbors
Experts agree that Kazakhstan is attracting new players with the help of a middleman - the Russian market. “Russian companies traditionally have had a strong presence on the Kazakhstani market, especially since they are not restricted by a language barrier and therefore can maintain their competitive edge on the market in relation to both foreign and local investors and developers,” reasons Peter Goranov. Charles Raether argues that Kazakhstan’s simply needs the entrance of additional investors with experience working in developing markets, such as Russia.
“Most likely, the best option for foreign companies that decide to develop in Kazakhstan will be to educate themselves about the activities of Russian businesses that will enter the country. Another option is to partner with local players,” notes Yuri Eremin. An example of such partnerships might be the collaboration between the Russian company Coalco, belonging to Vasiliy Anisimov, and the Kazakhstani developer Capital Partners. The first company initially sold 650 thousand sqm of warehouse space that was being constructed on 120 hectares to the second company and ICD International. In response to this, Vasiliy Anisimov decided to build the largest retail-entertainment center in Astana according to a design by Norman Foster.
Along with Russian developers, new retail networks are arriving in Kazakhstan, such as the Kaliningrad-based retailer Vestor, which plans to open a new 6,000-sqm hypermarket in Karaganda. In order to do so, the company concluded at ten-year lease agreement with the local retail center Tair.
“Of course, the specifics of the Kazakhstani market are such that it easily manages to get along without new players. The realization of raw mega profits in addition to a notably small population reduces the prospects for retail development. Kazakhstani companies are already investing more in the CIS than on the national market,” explains Mr. Eremin.
However, Gulmira Pazilova contests that “the arrival of new players will only strengthen competition and force local developers to raise the quality of their offers to international standards.” “We believe that global retailers will inevitably come to Kazakhstan, and at least two world-class players will begin to operate on the local market by the end of this year. If the problems with logistics and infrastructure are solved, then the process of including global retail leaders on Kazakhstan’s market will be accelerated,” concludes Mr. Goranov.