Money-Growing: Affordable Entertainment

Especially for Women and Children

The entertainment sector is expanding most rapidly in retail centers, according to Ilya Shershnev, development director of Swiss Realty Group (Moscow). The payback period on multiplex movie theatres, many of which are anchor tenants, amounts to three years on average, with the most popular occupying up to 40 per cent of the entire space of a retail center, enabling investors to earn a return on their investment faster.

Approximately 45 per cent of the city’s shopping malls offer their customers a chance to combine shopping with entertainment. Food-courts and multiplex movie theatres account for a large share of retail space, according to Stiles & Riabokobylko. 55 shopping malls house 40 food-courts and 13 multiplex cinemas.

Annual rental rates for ‘entertainers’ that occupy from 1,000 to 3-4,000sqm on average, amount to $120 to $200 per square meter. According to Colliers International, most of the six retail centers to open in Moscow by the end of 2004 will include entertainment facilities.

In 2004 Moscow will see the completion of 15 new projects in the retail sector, with a total space of 450,000sqm, of which the most significant are Tobtim (38,500sqm) with a 6-screen movie theatre, owned by the Paradise company that runs the popular multiplex Pyat Zvyozd (Five Star); Waymart-2 (55,000sqm) with a 16-screen theatre, a family playground, Q-Zar, tenpin bowling, and a skating rink, as well as Mega-2 (230,000sqm) with a multiplex.

Shershnev also reported that a 12,000-sqm children’s entertainment center named Atriland would soon open at the Atrium shopping mall near the Kursky railway station. The entertainment center, housing a children’s cafe, a discotheque, slot machines, attractions, go-carting and many other facilities, will have a capacity of 5,000 guests.

Crocus International plans to build a second, 100,000-sqm building at its Crocus City Mall retail and entertainment center on the Myakinino floodplains of the Moscow River outside the capital, of which only 30,000 square meters will be used for retail purposes proper, while the remaining space will house a casino, a movie theater, a bowling alley and other entertainment facilities, as well as “a Venetian style atrium” with a 25-m high dome. The new building will cost investors approximately $56 million -- 40 per cent more than the first part of the Crocus City Mall.

“Entertainment facilities at retail centers do good business, but they are a heavy load for the owners of those centers,” holds Natalia Oreshina, retail director of the Stiles & Riabokobylko real estate agency.

“A developer planning to include an [entertainment] zone in a retail center project must realize that such an anchor tenant, unlike interchangeable retail chains, will be both strong and indispensable,” say ABN-Realty analysts. Designing a multi-screen movie theatre implies that architectural and design solutions would have to meet certain requirements, in terms of bay spacing, ceiling height, etc.

Ironically, casinos and gambling arcades – entertainment providers who are able to pay high rental charges of $500 to $600 per square meter per year – are not really welcome in retail centers, says Yulia Nikulicheva, deputy director at Jones Lang LaSalle. The crowd attracted to slot-machines does not always fit the target audience of family-oriented shopping malls.

Entertainment Centers Thrive Alone

Multifunctional outlets focused solely on entertainment services in Moscow are still few and far between. The most significant examples, according to Ilya Shershnev, are the Samolyot entertainment center on Presnensky Val and Champion on Leningradskoye Shosse. Building such complexes requires huge investments with a lengthy payback period, says Shershnev.

Entertainment operators leasing space from retail centers do not have to spend millions on construction, while a retail center owner, by leasing his property, secures a stable source of income in the form of rental payments, regardless of who his tenants are.

But Elina Zanina, deputy director of Miel-Nedvizhimost’s commercial real estate and development department, notes that the number of multifunctional entertainment complexes offering attractions for children, bowling alleys, roller-skating etc., is growing every year.

“The market of entertainment services is expanding and growing more independent from retail centers. The ever-increasing demand for entertainment-oriented facilities has brought about the emergence of a separate segment in the commercial real estate market,” Zanina said, naming the family-oriented leisure center Tsentr na Tulskoi and Fantasy Park on Lyublinskaya Ulitsa [street] as examples of purely entertainment centers.

The Pushkinsky movie/concert hall, built in the late 1960s, is due to re-open by autumn 2006 after reconstruction as a modern cultural and entertainment complex featuring a multi-screen theatre. Pushkinsky is enormous – 2,350 seats – but the sole cinema hall is outdated, which results in a loss of profits. The Pushkinsky reconstruction project will be financed by SP Karo, the company that rents the theatre, according to a Moscow government decree. The level of investment has not yet been disclosed. Yulia Nikulicheva hails the decision to launch reconstruction, but, according to her estimates, the project will require at least $10 million.

In the wake of the Transvaal water park disaster many believed that water entertainment centers had been placed under a ban. However, it is not ruled out that in the future the facilities at the Transvaal entertainment center will re-open, although the complex will no longer include what was referred to as the ‘tropical’ zone of the Transvaal indoor water park proper.

Recently Pyotr Biryukov, the head of the South Administrative Okrug [district], informed residents in Brateyevo that two new major retail centers and a water park would be built in their district in 2005. One of the shopping malls will appear at the 19th km of the MKAD (the Moscow Ring Road).

Authorities are also planning to build a water park at the Moscow International Business Center Moskva-City. Should those projects be implemented a new type of entertainment will be available in the capital, but, of course, the tragic lesson of Transvaal should be taken into consideration, the press-service of the city construction department is convinced.

The Park of Wonders

The children’s Park Chudes, or the Park of Wonders, in Nizhniye Mnevniki is, perhaps, the most grandiose and controversial project in Russia’s entertainment sector. Its concept and development plan were endorsed by the public architectural council under the mayor of Moscow on 15 October 2004, while the very first decree on the Park of Wonders was issued by the Moscow city government as early as 1992; the idea of building a Soviet alternative to Disneyland first occurred to the authorities way back in the 1960s. The only construction at the site so far remains a fence.

After the council session Moscow’s top architect Aleksandr Kuzmin told the press that the new entertainment complex would include attractions such as a simulation of a space flight, a journey in time and an exploration of flora and fauna.

Also, the complex will house a creative work center for children, a subsidiary of the Moscow Zoo, a puppet-show and a shadow theater, numerous children’s playgrounds as well as shops, restaurants and a hotel. The project was designed by the artist Zurab Tsereteli who is the director general of the Park of Wonders Fund, set up by the Moscow government. The 400-hectare site in Nizhniye Mnevniki has been transferred to the fund for unlimited use, of which only 50 hectares will be used for construction; a pedestrian zone will be built between the picturesque riverside landscape – to be included in the list of the city’s nature reserves – and the entertainment complex.

The construction of the entertainment center and the engineering work is to be carried out on an investment basis. The first phase of the project – 33.36 hectares – will be financed by the Sotsialnaya Initiativa (Social Initiative) Corporation, under an investment deal signed in 2003. The construction is to be launched in the first half of 2005 and will begin with a 200,000-sqm hotel and office center, a 207,500-sqm shopping mall and 11 restaurants.

Seeking to invite co-investors the corporation has published a list of the facilities on its official web-site. Social Initiative plans to complete the first part of the project – infrastructure facilities – by 2010, while the second part – construction of the entertainment facilities – will not be finished before 2020. Earlier Nikolai Karasyov, president of Social Initiative, told Vedomosti that the first part of the project would require $600 million, while the entire project, according to different estimates, is likely to cost from $3.5 billion to $5 billion.

Yulia Nikulicheva says that projects on such a grand scale take a long time to implement, and the payback period may be at least 7 to 9 years, with much depending on the potential and expertise of the investors.

“We have to admit that Social Initiative has a lot of experience on the Russian residential real estate market,” says Ilya Shershnev. “But projects like the Park of Wonders where the company acts as a general investor require profound knowledge of retail, entertainment and hotel markets. Given the ever-changing investment climate and land legislation in Russia and Moscow, such far-reaching and costly plans are simply ill-considered. An example from the recent past is the Moskva-City project that has been at a standstill for five years now, and construction has still not begun.”

Meanwhile, a no less ambitious project to construct a 500,000-sqm entertainment zone at the Moskva-City business center, with a daily capacity of over 150,000 visitors, is in the offing. The new center will comprise retail areas, an enormous atrium under a glazed dome (with a height of over 30 meters and 70 meters wide), entertainment facilities, a concert hall, restaurants and cafes. The cost of the project, underground facilities excluded, is put at over $300 million.

Top executives at the Perekryostok supermarket chain owned by Alfa Group have voiced their intention of implementing the project. Incidentally, the Moskva-City project is seen as a key rival to the Park of Wonders in terms of attracting investments. Given its central location the Moskva-City enjoys an advantage of better access, but both projects are long-term, and people will not be looking for entertainment at the Moskva-City until the construction of the entire Moscow International Business Center is completed, real estate analysts say.

“The list of investors involved in Moskva-City serves as evidence that major investors, both in and outside Russia, are interested in participating in any part of the project, be it the development of entertainment facilities, retail, office or residential space,” says Ilya Shershnev.

“Whereas the list of companies taking part in the Park of Wonders project has never been officially published or confirmed, although it has been nearly ten years since the project was launched. Most likely, the investors already involved in the development of the retail and entertainment sector of Moskva-City – the payback of which will indeed be swift – will not be interested in putting up money in a project that could take ages to pay back.”

Olga Yasko, retail real estate analyst at Colliers International, recalls that some construction projects of entertainment complexes were never implemented. The main reason for those failures is the risk involved, given the high cost of state-of-the-art equipment and a lack of market research confirming the profitability of such investments.

Entertainment Deficiency

On the face of it, Moscow is packed with entertainment establishments. However, the services they supply often lack quality, diversity and are not easily accessible for those who live outside the city center, says Yulia Nikulicheva. Anna Shiryayeva, the general director of the real estate consulting company Magazin Magazinov, believes that the demand for entertainment facilities is high but operators are few and the market is far from satiated with interesting offers.

Olga Yasko notes that there are virtually no chain operators – neither Russian, nor foreign – on Russia’s entertainment market, with the exception, perhaps, of the Star Galaxy chain of entertainment complexes functioning in shopping malls, such as Crocus City, Tvoi Dom, or XL. The market of alpine skiing facilities, too, is underdeveloped.

“Unfortunately, entertainment establishments offer a limited range of mostly adult-oriented services. Those are restaurants, night clubs, casinos, bowling alleys, etc. Entertainment and leisure venues for families with children are scarce, while children’s cafes are so scarce you can count them on the fingers of one hand,” says Valekh Rzayev, head of the marketing, advertising and PR directorate at KRT Group. That is why KRT is pinning its hopes on the development of the family-oriented entertainment industry.

In the framework of the Zolotoi Ostrov (Golden Island) project in the Zamoskvorechye district of Moscow KRT plans to build a variety of cultural and entertainment facilities with a total area of about 350,000sqm, Rzayev reported.

They will include family-oriented leisure clubs, art galleries, movie theaters, a concert hall, a state-of-the-art dance hall to serve as a venue for fashion shows and dance contests. The complex will also include two restaurants, one of which is to be built on a revolving platform at a height sufficient to offer its guests a good view of the entire city center, while another is being conceived as an aquarium restaurant, to be built under water, near Bolotny Island.

The family-oriented entertainment and leisure industry has a lot of potential, according to market analysts, but only provided the national economy grows and living standards improve, says Marina Markarova, managing director at Blackwood.

Different Potentials

In the 1990s countries like Germany, according to Swiss Realty Group, saw a 10-fold increase in the number of new retail and entertainment centers that opened. Meanwhile, retail centers built earlier, in the 1970s-1980s, expanded and underwent renovation.

Western businesses are not afraid to invest in large leisure development projects, said Ilya Shershnev, citing a project for the construction of a 390,000-sqm retail and entertainment center on the site of a former power station in central London. The landmark power station will retain its historic appearance but will be entirely re-built inside.

Another example is the redevelopment of an industrial estate in Lodz, Poland, into a 150,000-sqm retail and entertainment center where entertainment facilities occupy 40 per cent of the entire area. Large shopping and retail centers are mushrooming in resort areas. The most interesting projects include Freeport Lisboa in Portugal and WTC Shopping Rijeka in Croatia.

The range of entertainment services in Russia does not differ greatly from that available in the West, says Natalia Oreshina. “Other countries do not enjoy a great diversity of forms of entertainment, either,” Yulia Nikulicheva agrees, “but what Russia lacks is professionally built theme entertainment centers.”

Yulia Dalnova, leading expert of the retail real estate department at Knight Frank, notes that Western consumers are more fastidious, which makes developers seek more interesting and, as a rule, more costly solutions.

There are examples of retail centers with slopes for winter sports and rock climbing facilities. The only Moscow retail center that offers rock climbing facilities is Waymart, at the 71st km of the Moscow Ring Road (MKAD). Another distinction is that abroad where cinema theatres are considerably less popular they are rarely incorporated into new shopping complexes.

According to Stiles & Riabokobylko, combining shopping with movie-going, bowling, fitness centers or night clubs, is less popular in Europe. However, European shoppers take great pleasure in combining shopping with going to cafes and restaurants – 40 per cent of Europeans combine shopping with eating out and only 5 per cent with bowling.

“A 500-member fitness center would hardly play a crucial role for a large retail center, while bowling and billiards are entertainment options more popular in the evening and nighttime hours, after most shops close for the day,” says Dalnova. All the major retail centers built in recent years include entertainment facilities. That scheme has long been successfully implemented in the West, and there are plenty of reasons to suggest that Russia, too, has adopted it.

Yet, there is just one snag, says Marina Markarova: “In western counties customers spend over $100 on a visit to an entertainment complex offering a standard range of services or a movie theatre, which middle and upper class people are quite able to afford. In Russia, where the so-called middle class is only a small fraction of society that is concentrated in big cities, the subsistence level in the second quarter of 2004 amounted to 2,363 rubles (approx. $80) and visiting state-of-the-art entertainment establishment is beyond most consumers’ means.”

Proposed Classifications

Developing classification systems for facilities in various segments of the real estate market has become increasingly popular in Moscow lately. Nevertheless, analysts believe talk of a classification system for entertainment centers is premature. “That market has only been developing for a short time – the early 1990s – and rather chaotically. Existing facilities are few and far between. Only the entertainment facilities operating within retail centers form a more or less significant group,” says Ilya Shershnev.

However, says Elina Zanina, developing working standards has already become possible. “On the whole, the basic requirements entertainment facilities should meet are similar to those for retail areas. They are, first and foremost, convenient driveways, proximity to transport and pedestrian flows, a large parking area as well as the general attractiveness and popularity of the district where the building is situated,” Zanina says.

According to Ilya Shershnev, entertainment establishments can be classified by target audience into family-oriented or youth-oriented, and by the range of services supplied into mono-profile or multi-profile complexes. Each of those categories can be further classified by their guest capacity and price policy, i.e. by the customers’ income level.

Marina Markarova adds that entertainment facilities can also be classified by the type of recreation into the active entertainment offered by sports centers and night clubs and passive entertainment available at restaurants and cafes.

Arcade chains, such as Vulkan, Superslots and Jackpot, are operated, for the most part, independently, outside retail areas. Sergei Kuzmin, head of Ritzio Entertainment Group that operates the Vulkan chain, evaluates the annual turnover of Russia’s gambling business – slot machine halls and casinos – at $1 billion, of which Moscow accounts for 45 per cent.

The ever-growing wish to buy and have fun creates profits for investors involved in this sector of the real estate market. David O’Hara, managing director at Stiles & Riabokobylko, evaluates the average annual returns of Moscow’s retail and entertainment facilities at $14 million. Such returns can be achieved by implementing a 2-year project to develop a 49,000-sqm complex, with two anchor tenants and an average annual rental rate of some $300 per square meter.

According to O’Hara, the most serious problem that confronts major developers is finding a site for construction, in which they are forced to “bargain” with investors involved in house-building. “That takes as long as six months and consumes 10 per cent of the total cost of the project,” says O’Hara.

The 90,000-sqm multifunctional L-153 complex opened on 3 November at 153, Lyublinskaya Street, in the Maryino District of Moscow. In addition to 80 shops, the new center includes a sports center, a skating rink and a food-court (Planeta-Sushi, IL Patio, Rostiks, and a Moka-Loka cafe, all operated by Rosinter-Restaurants). The official opening of L-153 was announced by the TEN group of companies and Auchan Russia, which also marked Auchan’s advent in Moscow; all the other Auchan hypermarkets are situated beyond the city limits.