Who is Managing Retail Centers?

Market Evolution
The retail real estate market in Kazakhstan possesses significant potential for development. The country’s recent economic growth, which increased the population’s income and raised the number of residents with high incomes, is a major catalyst for retail development. According to data from Jones Lang LaSalle, residents in Almaty spend approximately 40% of their disposable income on non-food purchases and entertainment. At the same time, the number of quality retail spaces (meaning retail centers with effective concepts and a good selection of tenants, occupying a space of at least 5,000 sqm, built and managed as one property) in Kazakhstan approximately 120,000 sqm (and this figure will more than double by the end of 2009).
The overwhelming majority of companies working in retail are not network operators. Rather, most of the region’s retail centers are comprised of modified or improved flea markets. “The share of projects with well-conceived concepts is minimal in Kazakhstan,” says Dmitry Berdigan, general director of AB Retail. “In certain cities, one developer may have 2-3 properties, but usually such companies operate within a particular city. It is usually the case that they started by building one medium-sized complex, and then another… But, I repeat, many existing complexes are not well-designed. However, in recent times, more solid market players have entered the market, such as the company Astana Motors and their Mega retail center (naturally, this should not be confused with the Swedish network Ikea’s brand.) A French company provided the center’s architectural design and layout, while the center’s management plan was developed at the Turkish office of the German company ECE. The result of these efforts was the well-conceived and executed Mega Alma-Ata retail center, which raised the bar high for all other upcoming projects. We filled the retail center practically right after its opening. In my opinion, the developer managed to cover all the fine details as well as avoid the traditional pitfalls.”
Successful retail complexes include a project by the Ramenka company and the Ramstore supermarkets. Capital Partners is also carrying out several projects, with LaSalle acting as consultants. Kazkomertsbank, with its considerable financial resources, is also one of the strongest players on the commercial real estate market in Kazakhstan. The majority of developers are local companies, since, besides Ramstore, there are no foreign players yet present. Indeed, it is quite difficult for newcomers to enter Kazakhstan’s market, as connections to local authorities are key to operating in this region. In fact, one may argue that without insider relations, working in Kazakhstan is very difficult, if not to say impossible.
The level of competition on the retail real estate segment is not yet high; however, one should not forget that there are quite a large number of announced projects. For example, two modern retail centers are expected to open soon in Almaty – the Sary-Arka retail-entertainment center (by Capital Partners) and the second Mega-Mall. In 2008, several more retail centers will be delivered to market. As such, it is possible to safely say that the market is expecting a retail boom in the next 2-3 years. All things considered, the development of Kazakhstan’s retail real estate market trails behind that of Russia by a few years, but this distance is quickly narrowing.
One area that needs particular improvement in Kazakhstan is the management of retail complexes, as this segment is in many ways completely undeveloped. “In my opinion, retail center management is one of the most chalenging issues on Kazakhstan’s real estate market,” states Charles Raether, head of Jones Lang LaSalle Kazakhstan. “This sphere can offer serious profits to those who venture to tackle it first, which, in Kazakhstan’s case, will most likely be experienced foreign companies. Beautiful properties are appearing in this country, but no one is managing them. As a result, they quickly lose their appeal and tenants leave. Furthermore, the questions of retail complex management are decided differently according to each individual situation. For example, some developers have created their own management company by attracting Western specialists or training their own employees (as did Capital Partners), while others chose to manage the premises themselves. With the exception of some Turkish companies, there are practically no foreign players with competent management practices on this market, which thereby impedes the market’s ability to rise to an international level,” states Mr. Raether.
A similar point of view is shared by Dmitry Berdigan, who confirms that the project management segment is absolutely undeveloped in Kazakhstan. “However, even though there is no competition to overcome, it is still necessary to have a local partner in order to begin working in this field,” he reasons. “In any case, it is essential to build relations with companies that are based in Kazakhstan and have Kazakhstani management. As such, having good recommendations from local market players is key.”

Autonomous Rule
In the overwhelming majority of cases, proprietors prefer to manage their retail centers independently. However, due to local players’ limited experience and management skills, the practice of self-management can be very detrimental. The market for retail real estate management in Kazakhstan is still in its infancy, and so the concept of real estate “management” is perceived to be of little value to property owners as of now. But, as the market continues to develop and the number of high-class premises that demand quality management increases, owners will be compelled to turn to professionals for assistance. From the large range of services offered by management companies in the region, the most in-demand are security (with surveillance cameras), cleaning, building and ground maintenance, parking and insurance.
Eventually, local proprietors will understand that real estate management companies can assist in finding and attracting tenants and cooperating with them during lease negotiations, as well as can oversee the technical operation of the building. “Today, there are no professional retail real estate management companies on the market. Most owners pretty much manage their own projects,” states Gulmira Pazilova, director of the research and analysis department at SIP Adviser. “The market is characterized by the absence of professional players and weak competition on one hand, and on the other hand, the appearance of major international-level projects that could possibly interest professional management companies from abroad. Developers planning to build major premises are awaiting the arrival of international management companies.”
Another topic to address is the process of tendering, which is very developed and widespread among developers. This process runs from choosing the general contractor and anchor tenants to selecting management companies and investors. It is usually up to the developer to decide how the center will be operated. But, eventually, if developers want to maintain a high level of quality at their retail centers, they will have to turn to Western specialists.
Experts state that one of the main reasons the market of retail center management is underdeveloped is the lack of high standards for operating services. However, it is only fair to note that these standards are underdeveloped not only in Kazakhstan, but also in Russia. Such services, which are often created and installed by the owners themselves, include security, ground maintenance, optimizing the technical operation of the building, and advertising. A professional management company could provide such additional services as marketing research, creating a development concept, maintenance, an auditing system management, and establishing a lease plan. However, such services are not yet in demand in the region.
As such, it is clear that the local level of operating services does not correspond to Western standards; however, there are exceptions. For example, Capital Partners strives to introduce Western standards and practices in all their projects. This, in turn, requires that tenants also take a more professional approach, as local tenants do not always meet the international standards.
According to Yuri Borisov, present of the Guild of Developers and Managers and managing partner at IB Group, the problem with the underdeveloped management market is that not enough has been done to standardize business practices and too few people have professional education. Furthermore, Mr. Borisov notes that in the majority of cases, owners take a very amateur approach to managing their retail premises, almost as if they are simply managing their own apartment. As a result, the market of specialized management services is expanding very slowly, resulting in limited financial turnover, which further impedes progress in this sector.
There are two other reasons why owners are not hurrying to enlist the services of management companies. The first is that at the present time, absolutely no legal codes have been created in regards to management companies. Besides the main Civil Code on “Trust Management” (which was developed for the Civil Code of the Russian Federation,) no other legislation exists that regulates the dealings between an owner and a management company. The second reason is the fact that using a management company requires that all finances be transparent. And it is no secret that rent payments are often made with black cash in Kazakhstan. Only when the owner or his ‘pocket company’ are directly engaged in the management of his company can he be assured that his money will not be stolen and his papers will not be handed over to tax auditors.

Setting the Price
Just like rent rates, maintenance and operating costs for retail centers are also increasing. The price range for such fees depends completely on the region and the type of project, with the average being from $30-50/year/sqm. According to Charles Raether, the bracket of rates can run from $30 to $200 annually. Anchors tenants, such as hypermarkets, movie theaters, etc, pay minimum rates, while food court tenants play the maximum. The average rate for retail galleries is $100/year/sqm.
Naturally, rates for operational expenses also depend on the level of the project. For example, in the high-class Esentai retail center, the average operating expenses in a gallery space is expected to be approximately $200 per year. Likewise, discounts for operating costs depend on the volume of leased space or the popularity of a brand; tenants that have very attractive brands capable of attracting significant consumer flows often enjoy discounted rates (up to 50% off for anchor stores.)

The Kazakhstani Klondike
The future retail boom in Kazakhstan, which will occur the moment several major world-class retail centers enter the market (such as Mamyr, Esentai), will inevitably cause the field of retail center management to transform, as Western tenants will arrive with high demands and requirements. Market competition will act as the best stimulus not only for encouraging developers to create creative and well-executed centers, but also for attracting consumers and developing the market as a whole. After this, we can expect the arrival of professional management companies, as many developers are planning to attract either foreign management specialists (not only Western, but also, for example, Turkish) or professional management companies. “Today, many players are ready to pay for qualified specialists, but Western management companies have yet to show much interest in Kazakhstan,” states Charles Raether. “Major Western management companies do not yet see the potential for investment in the region, as the Russian market is much closer and attractive to them. It is very expensive to try to attract specialists for every single project. Kazakhstan is a real Klondike for major Western management companies. It’s a matter of time before they realize it” states Mr. Raether. “The business of retail center management can be very profitable when managing several projects,” believes Gulmira Pazilova. “Kazakhstan’s retail market is currently in a growth period and is ready to absorb not only investors, but professional market players, managers and consultants.”