Developers and Retailers to Beat down Each Other’s Price

During three quarters of this year the area of commissioned retail space exceeded 300,000 sqm, says a research of Becar. Consulting. Roman Evstratov, retail real estate director at Colliers International SPb, points out that the rates in street retail have soared during the year, especially at street retail routes, such as Nevsky and Bolshoi prospects. At some locations the rent grew 2-2.5 times, while the maximum rate fixed by Colliers on Nevsky came to 6,500 EUR/sqm/year exclusive of VAT. Even in summer an upturn on the retail real estate market continued. Developers built and designed several dozens large shopping centers and retailers were willing to open new outlets even on Nevsky, notwithstanding the exorbitant rentals. The Felicita mall (second and third phases totaling 100,000 sqm) and City Mall (second and third buildings spanning more than 100,000 sqm) developed by Makromir as well as the 45,000-sqm-odd mall Atmosphere developed by Adamant. On the whole, developers and retailers were to commission up to 400,000 sqm of retail space during the year but in autumn the situation changed radically.

Overheated risks

This autumn the world financial crisis reached mother Russia and banks became very cautious in how they credit the business. First and foremost, their caution was manifested with respect to the most overheated market – retail real estate. The interest rates on loans for mall developers rose above 20%, but even on such a high interest it is still difficult to obtain a loan. As a result developers who got used to delivering projects on loaned funds were left without financing. Many of their projects were frozen, to say nothing about the fact that the financial crisis dealt a sever blow on the consumer purse and hence on the revenues of retailers and their landlords.

Boris Yushenkov, director of Colliers International SPb., points out that because of financing problems more than half of development projects, including those aimed at the construction of shopping centers, can be suspended for different times. At the nationwide level it became known that Midland Group, Developers Diversified and Torgovy Kvartal decided on large-scale project conservation. St. Petersburg was no exception. Because of the problems with financing the project of Petersburg’s first outlet mall Nevsky Coliseum worth 120 million EUR was frozen. Sistema-Hals also experienced problems with financing construction on the 112,000-sqm $300-million-worth Leto mall on Pulkovskoe shosse, says an employee of Sistema-Hals SPb. The fate of Graf Orlov and Greenwich projects developed by Makromir is also nebulous. Makromir owned by Andrei Rogachev steps out of the joint projects with LEP because of his variance with another shareholder of the construction company, Pavel Andreev. However a source, close to Makromir, points out that the company wouldn’t hasten with the construction of these properties anyway, on account of the crisis.

President of Adamant, Igor Leitis, stated early in October that his company wasn’t going to develop new projects and would better focus on those already available. The only source of financing available to developers is crediting on the security of their real estate assets, or malls. However, as can be seen from the experience of Kaliningrad-based developer Vester, whose assets are jeopardized because of the conflict with Bin-bank, this is now the safest scheme of borrowing in times of crisis.

Trouble for some and fat season for others

As noted in the report by Astera, only 80-100,000 sqm out of the planned 190,000 sqm of retail real estate planned for delivery in the last quarter of this year will actually be put into operation. The crisis tells on retailers as well. Unlike the developers they continue to obtain bank loans but on a higher interest rate, which sometimes reaches 20%, according to the spokesmen for two large banks. Retailers also began saving. Thus X5 Retail Group, Russia’s largest retailer, announced a 30% staff reduction, while Vitaly Kliuchnikov, CEO Dixie, assumes that up to half of retailers will freeze their development programs because of interruptions in financing. The crisis has not yet affected the rental rates, note the experts of Astera. As estimated by this company, they range from $225 to 380/sqm/year for anchor tenants and from $750 to $1,650/sqm/year for small and middle-size tenants. However Astera already predicts the rates will be reduced by 10-15%.This opinion is shared by Colliers International’s Evstratov. In his words, if the crisis continues during the next two months, landlords will have to contemplate the rate reduction.

Many small retail chains won’t be able to survive this crisis, point out large players and get ready for acquisitions. At the end of September Lev Khasis, chief executive director of X5, announced the conservation of capital construction projects and the desire to channel the released funds to the purchase of cheaper retail premises. Already at the end of September the selling prices on retail premises in the regions were 30-40% lower than in August, Khasis said at that time. They also hope at X5 that the value of retailers bearing a heavy credit burden will also go down.

But not everybody is willing to sell business at dumped prices. The deal of selling the hypermarket chain Lenta is known to have gone wrong because the shareholders wouldn’t go for the bid proposed by the major claimants, Wal-Mart, Carrefour and Croatian Agrokor Group, soon after the financial crisis broke out in Russia. Before the crisis the potential buyers were ready to stump up around $2.2 billion for Lenta but now the selling price dropped to $1.7, given that the debt of the chain is about $500 million. The chain of construction hypermarkets Metrika also cancelled private placement because of the unfavorable financial situation.

It is absolutely certain now that the crisis has dramatically altered the general picture in the Russian retail real estate market. Some chains that have been rapidly developing during the past year may leave the market. The main issue now is whether large players have enough funds for buying their wrecking colleagues. It won’t be easy to borrow funds in the present-day situation. In the upshot those who are not limited in equity capital will come out as winners.

Sergey Kovalev,
in charge of Perekrestok retail chain expansion into Northwest:

The financial crisis affected all players in the retail real estate market. And the chains of X5 Retail Group (Pyaterochka, Perekrestok and Karusel) are not an exception. Yet I can confidently assert that we’ll come out from this crisis as a stronger company. I am saying that because almost all retail chains ceased their expansion and our company is the only player still looking for new premises and planning to open numerous new retail outlets next year. In addition, there are more candidates for acquisition on the market in times of crisis. First and foremost, these are regional companies and chains which have been expanding on loaned funds in recent years. Acquisitions may give an additional impulse to our chain.

The relations between retail chains, on the one hand, and landlords and developers, on the other hand, certainly change during the crisis. It should be noted that it is cheaper to open new shops because of sinking rental rates. I predict that the rent of retail premises for anchor tenants may fall by 50% next year. The construction of retail premises also became cheaper because of the slump in construction materials prices. For now the impact of the crisis on the population’s purchasing power is not quite clear. But at any rate grocery retailers are the safest in the sector, since people will give up on quality foods in the last place.

Nikita Kondrushenko,
CEO of SPb Fashion:

Traders in luxury commodities will suffer more than others. The sales of expensive clothes and accessories are the first to sag in times of any economic crisis. In our estimation the Petersburg luxury retail market may shrink by 50% during this year.

Sergey Igonin,
managing partner of IB Group:

For now the crisis has not reflected on the Petersburg retail realty market. The flow of buyers remains unchanged as does the relationship between tenants and landlords; in particular the rental rates have not dropped. The shopping complexes slated for delivery at the end of this year continue to open. Construction on other large-scale shopping and leisure complexes, such as Stockmann and Gallery, also goes on.

The crisis will start affecting the market early next year, although the market won’t see any serious scarcity of retail space as it is not a secret that problems cripple the operations of both developers and retailers. Some retailers freeze their expansion programs, while others, such as Banana-mama altogether leave the market. Next year we’ll surely see the tenant’s market. Developers and management companies will make serious concessions to lessees. First and foremost, this will be expressed in the reduction of rental rates, which may go down by 10-15% already in February-March. In addition, landlords will start grappling for quality tenants, proposing the best places to them for reasonable prices.

Aleksey Kramarev,
general director of the consulting company Torgovye reshenia:

For the time being the crisis did not tell on the consumer’s conduct but already before the New Year traders in manufactured goods will feel the slump in the purchasing power of the population. And next year the reduction in consumer spending will affect the grocery retail as well. People will have to reorient towards cheaper foods to the advantage of some retail formats such as discounters. On the whole the average per capita portfolio will be reduced by 10-15%.

Arina Sender,
retail real estate director at Knight Frank SPb:

Only at the beginning of next year, when the depth of the crisis becomes clear as do the main trend and the consumer’s response, will it be possible to predict the further development of the consumer goods market. But it’s already clear that retailers will take a very weighted approach towards choosing places for their new shops.

Uncertainty still reigns in the street retail market as well. The owners of retail premises cannot bring themselves to rent reduction – the step so eagerly awaited by retail operators. But at the turn of the next year the rates will most likely fall a little, given they were unjustifiably overstated on the central street-retail routes of Saint Petersburg. In spite of record-breaking turnovers on Nevsky some of the shops suffer losses. In times of crisis not all retailers will be able to afford the upkeep of such retail outlets. Already now it is evident that retail chains no longer struggle for places on the central street-retail routes for their flagship stores. Street retail is developing bedroom districts instead, which still abound in exciting spots. Trading in luxury commodities deserves a special mention. Such retailers have not felt any outflow of clients at present. While the delivery of some boutiques scheduled for opening next year will be postponed till better times, some brands continue their search of suitable premises.

Igor Leitis,
president of the holding company Adamant:

Surely the financial crisis became the main event on the real estate market, including retail real estate. The dearth of finances makes developers freeze their projects. Adamant is not an exception: we are going to complete four of our projects and postpone the delivery of several other properties, including two large SCs in the south of St. Petersburg. Next year we’ll only be working with the already existing properties.

The slowdown in retail space delivery won’t create any deficiency because retailers also cut the pace of their expansion. The market will most likely turn towards retailers and rental rates may even go down with time, because competition for quality tenants will intensify. But for now we do not plan to lower the rates: the shopping centers of Adamant are situated in favorable locations near Metro with intense human flows.

It’s hard to say now how the crisis may reflect on our tenants. But whatever might be the impact, the consumer will continue buying clothes and foodstuffs anyway, although the demand may shift towards lower segments. Entertainments and public catering companies, on the contrary, will switch into high gear. Because of the economic slowdown people will have more time and they’ll more frequently visit restaurants and cinemas.