Money-Growing: Shopping Revolution

Retailers Betting on Eastern Europe

For Western analysts Russia is an economy in transition. Of all the commercial real estate sectors in Central and Eastern European countries it is the retail sector that offers the widest development opportunities, according to experts from Jones Lang LaSalle. Future growth will be determined by changes in consumer demand and the ongoing restructuring of regional retail markets.

Jeremy Kelly, director for European research at Jones Lang LaSalle, says that although personal incomes in Central and Eastern European countries are much lower than in Western Europe, retail operators are optimistic about the chances for a permanent increase in demand for consumer goods as Central and Eastern Europe is still lagging behind the West in terms of supplies. The situation is different, perhaps, only in the three richest cities of Central and Eastern Europe – Prague, Bratislava and Ljubljana – where the annual volume of purchasing capacity – over $25,000 – is comparable to that in Western Europe, says Kelly.

The growing retail activity in Central and Eastern Europe has triggered the rapid development of the retail properties market. “According to our evaluations, today there are some 6.5 million square meters of modern retail centers operating in the region,” says Kelly. “The highest concentration is registered in Poland, Hungary, the Czech Republic, and Estonia. The tendency is such that the volume of retail space will grow rapidly – approximately by 3 million square meters in the next two years.”

Richard Bloxam, associate director of European retail markets at Jones Lang LaSalle, highly evaluates the investment activity in the retail sector. “Investment activity in the region is growing fast,” he notes. “In the years 2001 to 2003 investment turnover tripled, and considering that in the first nine months of 2004 that figure exceeded 1.8 billion euros, on the whole this year will most likely be a record.”

Bloxam believes that the expansion of the investment market in Central and Eastern European countries contributes not only to cross-border cooperation but also attracts a wider range of potential investors. “Until recently investors focused entirely on the leading markets – Poland, the Czech Republic and Hungary,” Bloxam explains. “But now, as the yields of those markets are nearing the European average, investors [both strategic and institutional] are looking for advantages on the emerging markets of Russia, Romania, Slovakia and the Baltic states.” Over the past 18 months institutional deals were effected in Moscow, Bucharest and Bratislava, JLL reports.

Geographical priorities in the retail sector are changing. Investors have switched their attention from Southern Europe, which used to be highly attractive, towards the Central and Eastern European countries. Experts at Cushman & Wakefield / Healey & Baker (C&W/H&B) say that Southern Europe is still some five years ahead of Central Europe in terms of development in the retail real estate sector, while Eastern Europe is five years behind the Central European region.

Shifting Focus

Meanwhile C&W/H&B analysts are focusing their attention primarily on Russia. They expect over 1.2 million square meters of new retail centers to enter the Russian market in the second half of 2004 through 2005. Thus, Russia’s retail space will expand by a record 93 per cent. The annual report on shopping center development in Europe prepared by C&W/H&B’s experts, examined shopping centers of over 5,000sqm regardless of their location – whether in the city center, on the outskirts, or even in commuter areas.

Other European countries planning to expand their retail properties over the same period are Greece (102 per cent), Ukraine (109 per cent) and Romania. Another future record-breaker is Bulgaria, where the first-ever shopping center built in compliance with European standards will open in the near future. Russian experts also confirm the future growth forecasts.

“Russia’s growing economy, and, as a consequence, improving well-being of the population gives us hope that the market will be able to [annually] digest up to 50 new shopping centers within another decade,” says Natalia Oreshina, head of retail at Stiles & Riabokobylko in association with Cushman & Wakefield / Healey & Baker.

New Tendencies

The year 2005 will be a record-breaking one for the European market, as retail space is set to increase by 6.4 million square meters after over 200 new shopping centers are commissioned and many existing retail properties are expanded. The total retail space in Europe will reach 93 million square meters. This year retail space grew by 5.3 million square meters.

In 2006 retail space will near the 1-billion-square-meter level in Europe, says Stuart Drummond, managing partner of Cushman & Wakefield / Healey & Baker. “This is another reason to consider shopping centers one of the most promising retail formats.”

“We do not examine shopping centers situated on the outer limits of a city or beyond,” notes Drummond. “The latest tendency that has gripped the more developed countries of Western Europe and is now spreading to the new EU member countries is for shopping centers to be situated in areas as close to the city center as possible.”

For example, the outlets of two retail chains – the Ahold chain’s Albert occupying a renovated building and the newly built shopping center Delvita – peacefully co-exist with one another in downtown Prague, in Karlova Square.

Unfortunately, Moscow has virtually no free sites left in the city centre. St. Petersburg developers, however, are erecting the shopping center Opera in the square of Kazan Cathedral. The designers want to preserve the atmosphere and historical style of the square, and the columns of the shopping center are quite similar to those of the Kazan Cathedral.

Capital vs. Province

“The ongoing expansion of retail space in the regions is the main trend of the outgoing year,” notes Natalia Oreshina, head of the retail department at Stiles & Riabokobylko.

There are economic conditions for such growth. On 18 November the international rating agency Fitch Rating upgraded Russia’s long-term sovereign rating from BB+ to BBB-, with the outlook described as ‘stable’. In an official statement issued by the agency it said that swelling government coffers on the back of high oil prices and reasonable fiscal policy made the country better able to repay its internal and external debt and to form a stabilization fund.

However, the economic situation differs from region to region. There are barely more than a dozen of the 89 Russian regions where living standards are comparable to Moscow, while in most of the others salaries are low and the subsistence level is substantially lower than in Russia’s two capitals – Moscow and St. Petersburg. Moreover, in many cities consumers are simply not yet ready for major shopping centers. Even large cities with populations over 1 million differ in terms of their levels of retail development.

“While large shopping centers have blended well into the economic environment of Samara and Yekaterinburg, in Volgograd, for example, we consider their emergence premature,” says Yelena Florinskaya, director general at Leeds Property Group. Western retailers attach great importance to the development of consumer culture whereby people plan their shopping in advance, making up a list of the shops they want to visit and goods to be purchased.

The negative experience of western retailers failing to exercise a differentiated approach to the Russian regions is just more proof that the development of retail chains in each region has its own specifics.

“We sell our goods in all the regions at the same prices,” says Aniko Kostyal, head of Mango Russia. “The sales of the three Moscow outlets equal the sales of the 17 regional ones.” Mango, a retail chain offering women’s clothing and footwear in the medium to low price range, has been active on the Russian market for six years now and runs 20 outlets with turnover varying greatly from region to region. Clearly, some regions have proved unable to keep up with the soaring prices of the capital. That is why retailers have to offer them a different, cheaper range of goods.

Research conducted by C&W/H&B and the UN Statistics Division reveals that Russia’s demand for modern retail space is growing stably. More and more foreign and regional investors are trying to break into the lucrative market. Moscow and St. Petersburg are the most attractive in terms of investment.

Along with the major reconstructed shopping malls in downtown Moscow – GUM, TsUM, Petrovsky Passazh – there are scores of large shopping centers on the outer limits of the capital. In total, there are over 40 shopping centers in the city, according to Stiles & Riabokobylko.

At the same time, the threshold for entering the market is growing, too. “A group of European investors announced their intention to enter the Russian market with an initial capital of $50 million,” says Yelena Florinskaya. “After we arranged a traditional tour for them of [Moscow’s largest retail centers] Ramstor-City – Krokus City Mall – Mega I, the entrepreneurs decided to amend their plans concerning the level of investment. Our market proved to have reached a qualitatively different level from how they had seen it.” The turning point was the tour of the Krokus City Mall where the delighted visitors even started touching the decorations as if making sure they were real.

Investors’ Fair

Loans account for up to 70 per cent of the funds used for financing the development of retail centers, according to financial and credit institutions. Remarkably, foreign investors focus mostly on Russia’s two capital cities and the Kaliningrad Region, while other regions receive financing mostly from Russian investors and offshore firms, established earlier for taking money out of Russia.

Aleksei Chuvin, head of the directorate for financing development projects at Sberbank, Russia’s major savings bank, noted that when giving loans to real estate projects, including retail projects, the bank deals mostly with Russian partners and quasi-foreign developers operating through offshore firms. Considerable amounts of funds come from offshore firms actually come from Russian businessmen.

Russian investors in the retail sector can be divided into two groups – those who join a project for the purpose of making profits, and those who later become anchor tenants. The latter include the well-known retail chains Sedmoi Kontinent, M.Video, and Sportmaster.

Foreigners, for their part, prefer investing in established businesses, and of all the commercial real estate sectors they opt for office and hotel businesses. “Those are less profitable but less risky investments,” Vedomosti was told by an employee from an Italian law firm examining investment projects at MAPIC-2004 for its clients. The international commercial real estate show was held in November in Cannes.

Notably, investors are showing interest not only in large-scale projects, but also in smaller ones at a regional and municipal level. In the opinion of Natalia Oreshina, Russia’s retail market is becoming more complicated. “This is happening as a result of aggressive development by retailers and developers from the capital and other regions,” says Oreshina. “The growing competition sets new standards in the sector and demands a more professional approach.”

Russia’s three leading retail space developers are IKEA, Auchan and Vremya Group. The largest owners of shopping centers are IKEA, Ingeokom and Bosco. The list of the most interesting retail projects includes Mega II by IKEA, Rostokino (Kashirsky Dvor, financed by private investors), and Kaluzhskaya Ploshchad by Golutvinskaya Sloboda, financed by private investors. The projected total retail space of the two latter centers is 150,000sqm, to be commissioned in 2006 and 2007 respectively.

In terms of total retail space Great Britain holds the lead with 13.5 million square meters, followed by France and Germany, C&W/H&B reports. Norway ranks first in terms of retail space per 100 residents, followed by the Netherlands and Sweden.