Retail Goes to Asia

Founded in 1743, Orenburg was originally a defensive outpost along Russia’s southeastern borders and also served as a stopover point along the Eurasian trail. Consequently, the city was an important trading center for Russia. Furthermore, beginning in the 1970s, Russia built Europe’s then­largest natural gas production and refining facility in Orenburg to begin natural gas production. To complete the project, Gazprom, the country’s major natural gas production company, used imported equipment from Italy and France; therefore, many of these respective countries’ gas­production experts could be seen in Orenburg more often than in Moscow, the capital. If fact, the local flea market sold breathtaking pictures of France and Italy for 10 rubles (the exchange rate at the time was $1 to 60 kopeks) and jeans for 100 rubles.
Orenburg today has a population of 600,000 with a mean income of 5,800 rubles ($220) per month and an investment­attractiveness rating of 3B1, as assigned by the Russian rating agency Expert RA. The city’s main employers are the Gazprom subsidiary Orenburggazprom and the TNK­BP subsidiary Orenburgneft. The local population still takes pride in knitting the city’s namesake goat­down shawls and the city is at the crossroads of Europe and Asia, along the Ural River.
Market experts today consider Orenburg to be underrated in terms of commercial real estate potential. Despite the lack of modern shopping centers, office buildings, hotels and warehouses, the city has not been completely neglected, as the local officials have kept the streets repaired and well­kempt. However, retail­sector projects seem to have trouble getting from gestation to completion, with a prime example being the Atrium Shopping Center (the so­called mayor’s tomb) in the city center, which has been halted in mid­construction.

Retail
According to information provided by Ross Group, for every 1,000 citizens in Orenburg, there is 106 sqm of retail space, which, in the opinion of the company’s analysts, means the city has high potential for development. The total leasable retail space is 80,600 sqm. Moreover, according to Ross Group, the Orenburg Region is very sparsely populated – with a population density two­times less than the Samara Region – and there is not a single major city within hundreds of kilometers of Orenburg. This means that those living in the outlying towns travel to Orenburg to do their shopping. “The Orenburg retail market is in an embryonic state,” says Nina Novikova, research director for retail property at CB Richard Ellis Noble Gibbons. “This is because the city has historically not been affluent, although the outlook is good.”
Moscow realtors say that there are only two shopping centers worth mentioning in the city, Voskhod Trading House and the former Dom Byta building. Both of the shopping centers, built over 30 years ago, are located in the city center and recently underwent reconstruction.
The reconstructed Dom Byta was recently renamed TS Centr and is located on Volgograd St. The total floor area of the six­story building is 5,500 sqm, with 4,000 sqm set for tenant space at five to two hundred sqm per tenant. There is also underground parking for up to 100 cars. The shopping center’s anchor tenants are Fahrenheit furniture store, Vassa, Gas, Naf Naf and Sotline, with lease rates ranging from $266 to $1,100/sqm per year.
The Voskhod Trading House, which is in a state of permanent repair at the expense of the tenants, comprises 10,000 sqm of leased floor space. The five­story interior decorating trading house is similar to the pavilions at the Central Market located close by, and lease rates are up to $650/sqm per year.
In addition, in the city there are several Soviet­style retail centers (Gorizont, Druzhba and Raduga) as well as makeshift retail centers located in former industrial buildings that anount to little more than covered markets. Realtors say when this type of retail areas appeared seven­eight years ago, they become popular with the locals because of the low prices.
The average cost of retail space in Orenburg is $180/sqm per year, taking into account retail space on the outskirts of town. The lease rate for street retailing increases to $670/sqm per year on Sovetskaya Ulitsa, which is the city’s central pedestrian thoroughfare leading toward the Ural River embankment.
Today a more civilized form of retail is replacing the old one. For example, on September 2 of this year, the two­story KIT retail and entertainment center, with nearly 17 ,000 sqm of retail space, opened on Zagorodoskoye. KIT’s anchor tenants are the Kupets hypermarket and the PIR food court. Although one of the drawbacks could be that the shopping center is not located within walking distance of any of the communities, the owners believe, “the current growth in car ownership will allow literally everyone to come to the new shopping and entertainment center, even those who live in the regions and neighboring districts.”
Another retail complex, Metro Cash & Carry, is planned for opening this November. According to the company, the complex has been under construction since June this year. The total floor area of the complex exceeds 10,000 sqm, with retail space occupying 6,500 sqm. The stores are expected to sell around 25,000 brand­name foodstuffs and non­foodstuffs.
Altogether, the only national chains present in Orenburg are Patterson (the company is franchising in the regions) and Magnit. Additionally, the Bashkortostan­based Polushka chain and the local Orbita chain of supermarkets have opened several stores, respectively, in the city.
In March 2007 construction is set to begin on the Alye Parusa (Scarlet Sails) retail and entertainment complex, for which Ross Management is the marketing agent. The single­story, pavilion­type center comprises 70,000 sqm. According to the project developers, the complex will specialize in offering a large selection of retail and small wholesale foodstuffs and non­foodstuffs and a wide variety of services.
The complex’s floor space will be assigned as follows: foodstuffs and storage of foodstuffs will occupy 6,500 sqm; the entertainment complex will comprise 7,900 sqm; building materials and household items sales will take up 14,000sqm; clothes and shoes will occupy 5,900 sqm; sporting goods will cover 1,400 sqm; furniture will comprise 4,200 sqm; and household appliances will cover 3,600 sqm. According to Ross Group, the retail space is being readied for lease, with a lease rates ranging from $120 to $1,200/sqm per year.
Another national company, Astoria Group, has announced plans to expand into Orenburg by investing $70 mln. By the end of 2008 the company plans to build a retail and entertainment complex comprising 50,000 sqm of floor space at the main entrance to the city near the airport. At this time the project is in the design stages and construction is set to begin in October this year. The company has also announced that there will be several supermarkets, cinemas and restaurants built on the territory.
Despite the afore­said, fortune has not shown on all projects in the past few years. Consequently, the Atrium, a retail, administrative and service complex that according to a previous announcement by local government officials should have been larger than Okhotny Ryad (Moscow’s large underground shopping complex), has not yet been fully constructed. Building began on the underground retail center in the very center of the city in 2002 on Sovetskaya Ulitsa and envisaged five floors, including parking, a number of restaurants and other entertainment establishments, as well as large retail areas and boutiques. The total floor space was to have comprised 23,000 sqm, with the Tehnosila, Perekriostok and Sportmaster chains having expressed their wishes to lease space in the complex; however, after four years the retail center remains just a foundation and the locals have taken to calling the structure the mayor’s tomb.

Offices
In terms of office space, there has not been any significant development, although local market players say it is not difficult to rent offices. The average lease costs for office space in Orenburg are $130 to $750/sqm per year. Nevertheless, the only available premises are in Soviet­era buildings, such as the research institutes and other such civil service buildings of times pastthat lease bare space for $130 to $750/sqm per year.
One of Orenburg’s purely office projects is a three­story, 2000­sqm business center on Tomilinskaya Ulitsa. The building was constructed about 45 years ago and was bought in 2000 by the Uralstroiservis company. The new owners have reconstructed the building and lease office space for $155/sqm per year.
Moreover, The Iron and Cement Factory bought a sixteen­story building in the city center and turned it to a 12­story class B business center set to be leased this autumn on Leninskaya Ulitsa. The company has invested 180 mln rubles ($6.8 mln) in the project to date.

Hotels
There are around 10 Soviet­era hotels in Orenburg, with two being considered the main hotels: the Orenburg and Fakel (Torch). The former, located on Ulitsa Zhukova, has 200 rooms, with singles going for 1,000 rubles ($38) a night. The latter, Fakel, is situated on Parkovaya Prospekt, not far from the train station, and also has 200 rooms. A single costs 1,100 rubles ($42) per night. The level of service in both hotels is best termed as “Soviet.”
There are also other hotels in operation at the same level of service, while others offer even lower service. Among these are the Lada (82 rooms), the Niva (69 rooms), and the Priyut (26 rooms). Several official hotels are also in operation: Bely Lebed (White Swan of the Strela production enterprise); the Invertor factory hotel; Gazovik; Oblpostreyusoyuz; Garnizonnaya; and several other mini­hotels, which are largely private.

Warehouses
The available warehouse space in Orenburg is leftover from the Soviet era and is located in the Yuzhniy, an industrial zone, and Stepnoi districts and also along the way to the Berda housing development. No new logistics developments have been built in Orenberg, and it seems that none are in the planning.
Nevertheless, warehouse operators are expected to follow in the footsteps of the retailers who are starting action this autumn. According to the local retailers, warehouse space significantly exceeds demand. Furthermore, a large number of warehouse leaseholders are trying to convert the property into car washes, service centers, stores, etc. Realtors also say that existing industrial premises are seldom leased for use as warehouses.
Leasing an unheated warehouse costs $26/sqm per year, although one can be found for $21. A heated warehouse will cost $45/sqm per year.