Money-Growing: A Lot to Pay for Little Gain

Vacant Sites

On the whole, the plan to develop the areas around Moscow’s largest artery took shape long ago. One of most recently announced projects envisages the development of a top-class residential real estate – Park City – at the site occupied by the Badayevsky brewery. Other industrial estates to be relocated out of the area in the near future are 16, Kutuzovsky Prospekt (currently occupied by the Fili-Krovlya plant) and 3, Kutuzovsky (occupied by JSC Upravlenie Mekhanizatsii Metrostroya -- a subsidiary of Metrostroi, the construction company specializing in building metro systems).

However, in November no data concerning specific plans for the relocation of industrial estates or any investor interest in developing those sites could be found in open sources. That is why in the next three years retail space along Kutuzovsky Prospekt will most likely expand at the expense of two sources: firstly, as existing shops undergo renovation and, secondly, as a result of large-scale retail and office space development projects being implemented.

Availability

Vacant retail space in the Kutuzovsky Prospekt area amounts to approximately 12 per cent of the total. Each month that figure fluctuates by a fraction of one per cent either upwards or downwards, says Mikhail Gets, head of commercial real estate at Blackwood. The average rental rate in the Kutuzovsky retail corridor amounts, according to Blackwood, to $1,600 per square meter per year. Properties are sold at approximately $8,500 per square meter. Jones Lang LaSalle reports, that the sale price for retail space in the area is considerably higher - $10,000 to $20,000 per square meter.

According to Stiles & Riabokobylko, the total retail space of the avenue stands at 35,000sqm, while annual rental rates range from an average of $1,100 to a maximum of $1,500 per square meter, though in October those figures fell by $400 and $150 respectively. Jones Lang LaSalle analysts say that rental charges fluctuate between $1,400 and $2,000. Collier International puts that range at $1,300 to $1,500 per square meter.

The retail corridor that attracts most tenants does not include the whole of Kutuzovsky Prospekt, but only a part of it, say analysts from Stiles & Riabokobylko. It is the stretch from where it begins – the Novoarbatsky Bridge – to the exit to the Third Ring Road. Dolce & Gabbana, Gucci, Yves Delorme, Berghaus, Mercury, Dikaya Orkhideya (Wild Orchid), Arbat Prestizh, and Valentin Yudashkin’s clothing store are situated here.

“The boutiques and outlets of various fashion houses are not as numerous [in Kutuzovsky], as in Tverskaya Street,” says Mikhail Gets. “In this area they are mostly concentrated closer to the city center from the Kutuzovskaya metro station.”

Why We Love…

Consultants and analysts versed in the retail properties market along Kutuzovsky Prospekt are amazed by the anomaly. On the one hand the pedestrian flow along the avenue is very small and cannot be compared with Tverskaya or Novy Arbat. Most of the customers are motorists, who often change their minds about stopping, because there is no place to park a car.

On the other hand, the rental rates for the buildings facing the avenue are so high they can easily be compared to those charged for outlets situated along the city’s most bustling sidewalks. Analysts explain that phenomenon with Kutuzovsky’s reputation as a prestigious, expensive, governmental thoroughfare. That image has developed over decades and even the ‘wild market’ laws of modern retail could not destroy it overnight.

“Perhaps the established reputation is the main advantage of Kutuzovsky Prospekt,” says Olga Yasko. “That street owes its popularity mainly to its westward location which is considered the most prestigious, largely because it is linked to the government route along the Rublyovskoye highway.” Thus, Kutuzovsky’s reputation attracts representatives of expensive and prestigious brands who, in turn, further enhance the avenue’s image.

Marianna Romanovskaya, senior retail consultant at Jones Lang LaSalle, links Kutuzovsky’s reputation to the people who live in the area. Decades ago, when the area around the avenue was developed top military officers and their families settled here, and today they still form the majority of the local consumers. Of course, those people are no longer as wealthy as they used to be in Stalinist times, but…

Another group of customers for local retail outlets are those who have bought apartments on the secondary market. Namely on the secondary, as new residential estates in the area are very rare. One of the recent exceptions is Kutuzov House, currently being erected by Komstrin.

Another aspect that makes the avenue so attractive for shop owners and investors is the Moscow International Business Center Moskva-City being developed in the vicinity. Moskva-City, in itself, has been a magnet for investors and generated potential demand for retail areas, which are likely to prove highly profitable, given their proximity to what is going to become Moscow’s largest office complex.

Retail Bridge

The Tower 2000 office tower and the Bagration mall pedestrian bridge leading to the Moskva-City complex were among the first modern retail projects in the Kutuzovsky Prospekt area. Bagration proved to be one of the most convenient sites for retail outlets and restaurants. Its first floor is occupied by Sladky Butik (Sweet Boutique) of the Vensky Dvor restaurant and the beauty salon City-Studio.

The Brazilian restaurant Rio-Rio is situated on the floor above. The third floor and the covered part of the upper deck of the bridge are occupied by the restaurant and coffee house Vensky Dvor, the O Sushi sushi-bar and a bowling alley. The upper floor of Tower-2000 is occupied by Krasny Bar, which offers perhaps the most exciting view of the city, comparable only to another panoramic view restaurant at the Ukraina Hotel.

Perfumery Sellout

The Arbat Prestizh retail perfumery chain is one of the largest tenants on Kutuzovsky. The chain intends to further expand its presence on the avenue by…selling an outlet.

In March of this year Arbat Prestizh asked Miel-Nedvizhimost realty to sell a number of its outlets, including a 500-sqm first floor property at 8, Kutuzovsky Prospekt. Before March 2004 the Arbat Prestizh chain included 14 shops in Moscow with a total volume of sales in 2003 reaching some $202 million. Outlets, with a total space of over 9,500sqm, were put up for sale at $58 million. The outlet on Kutuzovsky is being offered for $20 million. Realtors say the price is overestimated, being twice as high as the market value of the property.

The company decided to sell its shops on Tverskaya and Kutuzovsky in order to get rid of its smaller properties and to raise funds for the development of the chain and the acquisition of more spacious outlets. However, Arbat Prestizh is not set to leave Kutuzovsky. On the contrary, it plans to open a new store there.

Analysts explain Arbat Prestizh’s wish to preserve its presence on Kutuzovsky as follows. Customers tend to spend much more here than in other outlets of the chain due to the proximity to the Moscow mayor’s office situated in the Novy Arbat high-rise, and Belyi Dom – the seat of the federal government. “A very convenient shop for those who drive home from work and want to make a pleasant purchase en route,” they say.

New Old Lands

Given Kutuzovsky’s established reputation as a retail corridor and the top class office projects being built in the area, the avenue attracts investors of all sorts. Specialized brand shops as well as multi-storied retail-office centers with shops on the ground floors are set to open there soon.

One such project will be developed on a site with a remarkable history – at the intersection of the avenue, the Third Ring Road and Kulneva Street. The plot facing the Moscow International Business Center Moskva-City is currently occupied by the federal agency President-Servis, effectively, a laundry and public service company for the administration of the Russian President.

Many companies have wanted to develop the site, even though at one point it was said to have been set aside for construction of the capital's Third Ring Road. The local authorities — the prefecture of Dorogomilovsky District — had planned to build an international center for intellectuals here.

The famous Swedish firm IKEA also had an eye on the site, with a view to establishing a new retail center there. But the city government refused to award the plot to the furniture maker, fearing that such a retail anchor would cause traffic jams and paralyze roads leading to the Moskva-City office center.

The Swedes changed their minds after Moscow mayor Yuri Luzhkov offered them other plots. In 2003 the federal authorities planned to use the site for developing the 300,000-sqm parliamentarian center – a new seat for numerous federal agencies and ministries currently situated in the city center.

But then to everyone’s surprise in 2004 the public town-planning council, headed by the mayor of Moscow, approved the project for the development of what would become the city’s second-largest office and retail complex of 368,000sqm.

The rights to the project were to be awarded to the little-known firm Mezhdunarodny Tsentr (International Center). According to data from SKRIN, the company’s shareholders are JSC Alfa Laran (34.4 per cent), Gold Line Company (19.9 per cent), Just-Media (19.9 per cent), JSC Transnet (19.9 per cent) and an individual (5.9 per cent).

The project, designed by Sergei Kiselyov and Partners, envisaged the construction of several 9-story buildings with a total space of 114,300sqm, two 43-story towers (106,880sqm) and a 4-level underground parking lot for 2,950 cars (118,600sqm).

International Center had expected the city government to issue a decree approving the start of work by September 2004, but in summer another company – Legion-Development – claimed the right to the plot. Somehow Legion had secured the rights to four large plots in prime locations of the capital, including a plot situated in the area of Kutuzovsky Prospekt and the Kievskaya metro station and the much-talked-about plot on Kulneva Street. By the end of 2007 Legion Development plans to erect a 70,000-sqm business center with two underground floors.

Another influential player in the Kutuzovsky corridor is the Sindika group of companies. Sindika was established in the early 1990s, initially as an operator offering retail space for lease. Today the group is involved in construction, reconstruction and the running of buildings, brokerage services, consulting and organizing financing for projects.

Sindika and its partners own the Troitsky, Pokrovsky, Usachevsky, Bratislavskaya, Tushinsky retail centers in Moscow and play a prominent role in the gambling business of the Kabardino-Balkar Republic [in South Russia].

Sindika’s chairman, State Duma deputy Arsen Kanokov was president of JSC Sindika from 1994 to 2000, and from 2000 to 2003 was a board member of the TsentroKredit bank. In 2003 he was appointed deputy envoy of the Kabardino-Balkar Republic under the President of Russia.

Sindika arrived on Kutuzovsky Avenue in the late 1990s and began by building a chain of kiosks in Dorgomilovo – the most expensive and well-located district of Kutuzovsky. According to the district authorities’ files, Sindika financed the development of retail outlets at 2-4, Kievskaya Street (since 2001), and a shop at 1, Bryanskaya Street. But realtors familiar with the situation around Kutuzovsky consider the group’s influence in the district to be much more significant.