Money-Growing: St. Pete Firms Set Their Sights on the Regions

Real estate experts from the Northern capital have already begun to compete on a par with Muscovite rivals and foreigners. In 2004 St. Petersburg consultants dispatched to the regions worked on a rotation basis. Many companies plan to open regional branches in 2005.

Taking the next logical step the St. Petersburg firms are launching their own investment projects in cities with populations over 1 million. While St. Petersburg developers are not yet in a hurry to build office centers and hotels in the regions, retail chains and companies involved in housing construction have already embarked on a rapid course of regional expansion.

Analysts agree that Russia’s regions will be a venue for the most interesting developments on the commercial real estate market in the near future. Yelena Tabala, director of Knight Frank St. Petersburg, says:

“The rippling development of markets from the center towards the provinces is obvious. Office real estate is the first wave, followed by the wave of retail development, and then warehouses. Some regions lag two to eight years behind the others. The Moscow market has been quite stable lately and is close to overheating. For the regions that means new prospects and opportunities. Our offices in London, St. Petersburg, Moscow and other cities have held a joint survey with a view to gaining a more or less objective and profound insight into the investment climate and state of affairs on real estate markets in major Russian cities. Comparing the investment attractiveness of Russian and European cities has revealed that Yekaterinburg ranked 6th, ahead of Amsterdam and Moscow. Calculations were made on the basis of 40 criteria, such as the economic and political situation, risk assessment, etc.”

“Regional commercial real estate markets are experiencing a boom and that is why they are interesting for us,” says Aleksandr Grishin, president of the Guild of Managers and Developers. “What pleases us especially is that by choosing consultants local developers opt for compatriots.”

St. Petersburg Advisers

Bekar was the first management company to head for industrial cities and those with populations over 1 million. In early 2004 the company launched operations in Chelyabinsk by entering into an agreement to manage a project for the construction of a multifunctional complex in the center of the city. At over 80 meters high, the 22-storied building is to become Chelyabinsk’s tallest.

The 50,000-sqm complex will house offices, shops and a fitness center. The estimated volume of investment in the project is $25 million. Bekar is set to take root in the Urals region and to open a branch there in 2005.

Later the company signed deals in Kaliningrad, Perm and Tyumen, where St. Petersburg agents consult local developers on changes of concept and redevelopment of existing properties. For example, Bekar is taking part in the modernization of the Kaliningrad Business Center owned by Gamma Management Group.

The 9,000-sqm office building is located in the center of Kaliningrad. Growing competition on the local office space market necessitated its redevelopment. By the end of 2005 developers plan to commission at least 100,000sqm of office and retail space, thus doubling the existing supply. Bekar’s experts have designed a new concept for the business center and are set to expand cooperation with its owner, taking part in other projects as well.

In Perm the company has signed a deal with Perspektiva, which owns the former Rossia movie theater. The owner is set to redevelop the 4,200-sqm building into a modern shopping and leisure center to be opened in the third quarter of 2005.

The Tyumen deal aims to redevelop the Geotron plant. A Yekaterinburg-based investor bought the plant, which produced oil equipment, with a view to building a business park on its territory. The plan outlines the redevelopment of the office block into a 10,000-sqm business center and new facilities on the vacant site.

“Investors are also very active on the commercial real estate markets of Nizhny Novgorod, Kazan, and Yekaterinburg. We, too, plan to work in those cities,” says Dmitry Zolin, development director at the Bekar management company.

In 2004 St. Petersburg-based IB Group signed two large deals in the province. The company offers its clients a full range of services from designing a concept of a future property to external management.

In Chelyabinsk IB Group works in tandem with Monolit-Invest, which is about to launch construction of what will be the city’s largest retail and entertainment complex, Magistral, with a total space of some 60,000sqm, including a parking area for over 1,200 cars. The complex is to be commissioned in the first quarter of 2007.

The list of main anchor tenants will include a Perekryostok supermarket, a Tekhnosila home appliance store and InvestKinoProekt’s 8-screen movie theater, with bowling alleys and a children’s leisure center. Protocols of intent with Sportmaster, Detsky Mir, Starik Khottabych and other retailers have been signed. In February 2005 IB Group opens its office in Chelyabinsk.

In Kaliningrad St. Petersburg consultants have been working on the multifunctional Evropa-Tsentr (Europe Center) project that will house offices, shops and a hotel. Its commissioning is slated for mid-2007. The total space of the 3-storied building in central Kaliningrad will be 78,000sqm, of which 27,000sqm will be occupied by shops. It will also have an underground parking area with 850 spaces. Considering the prestigious location of the complex its retail area is marketed as a ‘fashion center’.

Contracts are being negotiated in Yekaterinburg, Tyumen, Ufa, and Barnaul. “We are following in the footsteps of our clients – retail chains. But we won’t rush and will not take up a new project in the Southern Urals before it becomes clear that Magistral has been successfully completed. Sometimes we receive invitations from clients who have recently parted ways with famous foreign consultants failing to come to an understanding with them,” says Yuri Borisov, managing partner of IB Group.

Moscow retail chains account for the majority of potential tenants whom the company invites to shopping malls in the regions. Yuri Borisov is convinced that although his company is based in St. Petersburg this does not hamper its cooperation with Moscow retailers. According to his assessment, in terms of profitability real estate projects in St. Petersburg and those in the regions are comparable. The payback period is 5-7 years on average. The problems are also similar, in particular, there is a shortage of experienced designers and architects.

VMB-Trust and several other companies also have projects outside St. Petersburg.

Foodstuffs without Borders

Of all the St. Petersburg-based developers active in the province retail chains are most conspicuous. As is well known, Pyatyorochka – Russia’s leading retail chain – is from the Northern capital, although formally it is owned by Dutch firm Pyaterochka Holding. The chain, established in 1999, is run by OOO Agrotorg.

By the time the first Pyatyorochka opened in Moscow in 2001, as many as 51 supermarkets of the same chain were already been operating in St. Petersburg. In 2002 the chain launched its first outlets in the regions – in the cities of Voronezh and Chelyabinsk.

The company’s sales in 2004 reached some $1.6 billion, compared to $933 million in 2003. Outlets in Moscow and the Moscow Region, along with St. Petersburg and the Leningrad Region accounted for $1.2 billion of revenues. The other regions brought in $400 million. Each day over 700,000 people visit Pyatyorochka supermarkets.

The shops offer a wide range of goods, from 2,000 to 3,000 items. Agrotorg executives avoid using the word ‘discounter’ and prefer to call their outlets “economy class self-service stores”. The company plans to invest $160-200 million in the development of the chain annually. As of today, the chain includes over 440 outlets of which 112 are in St. Petersburg, 124 in Moscow and over 200 in the regions.

Figures are changing all the time. There are 37 Pyatyorochka stores in Volgograd, 26 in Ulyanovsk, 19 in Perm. Yekaterinburg, Samara, Omsk and Saratov also have their Pyatyorochkas. The chain runs stores outside Russia as well – in Alma-Ata and Kharkov. In the provinces and former Soviet republics – the CIS states – the chain is expanding by franchising. The company management values a franchise at $600,000 to $1 million depending on the volume of the local market.

In 2005 the company plans to enter six more regions. As early as spring 2005 the first outlets are set to open in Krasnodar, Novosibirsk, Kazan and Yaroslavl. In Nizhny Nogorod the company will launch a new retail format: by the end of this year the city will witness the arrival of a 15,000-sqm hypermarket named Karusel. Agrotorg only began developing the brand recently. St. Petersburg’s first Karusel hypermarket only opened in December 2004.

According to Oleg Vysotsky, manager of the Pyatyorochka retail chain, hypermarkets are likely to emerge in 3 or 4 other regions. This year the company plans to launch a total of 300 outlets. “Despite active regional expansion, Moscow and St. Petersburg remain our priority venues. We plan to open stores here till 2010,” Vysotsky says

The company Okay is another St. Petersburg-based chain set to open hypermarkets in the provinces. Luxembourg-based Dorinda will invest in the project and oversee the development of retail centers.

Dorinda Holding – the parent company of Dorinda – works mostly with western European pension funds. Dorinda was established with a view to overseeing investment projects in Eastern Europe, including, in particular, the development of two shopping malls in Tallinn.

The Russian program was launched in St. Petersburg where in May 2002 the company opened its first hypermarket. These days the chain comprises four large retail centers of 11,000-15,000sqm, offering a wide range of up to 35,000 items, including freshly baked bread, salads, prepared food, grilled products, as well as a large range of non-food items such as clothes, footwear and home appliances. Outside the supermarket there are small shops, cafes and other catering outlets.

Dorinda also acts as an investor for the development of shopping and leisure centers within which it plans to open its hypermarkets. The first such project of 70,000sqm is to be opened by the end of this year on Primorskoye Shosse.

In 2005 Okay will expand beyond the St. Petersburg city limits. In May it plans to launch a 13,400-sqm hypermarket in Rostov-on-Don, in the central part of the Severny residential micro-district. The outlet will be built in accordance with the standard St. Petersburg design. Dorinda is set to open one or two more outlets in the city.

The company has bought two plots of land in Nizhny Novgorod – near Komsomolskaya Ploshchad [Square] and on Leninsky Prospekt. Both previously belonged to the GAZ car plant. The first Okay supermarket will open in the city in 2006.

Dorinda also plans to construct two retail centers in Samara. As both projects require the re-housing of local residents the exact timing of their implementation remains unclear. Construction in Ulitsa Barkovksogo [Street] is to begin this summer, according to the plan. Two more hypermarkets are also set to appear in Krasnodar.

In Murmansk Dorinda plans to launch a project on a larger scale. The company is set to build a 45,000-sqm shopping and leisure center in the historic center of the city. The mall will include a hypermarket, a shopping gallery, with shops offered for lease, a multi-screen movie theater, a water park, exhibition halls and cafes.

The Murmansk mayor’s office has already agreed to allocate a 6.2-hectare site to the investor. In the near future the project will be examined by the city’s town-planning council. Dorinda hopes to launch construction as early as this summer.

The company is also showing great interest in the Moscow market. Three sites – in Butovo, Putilkovo and Altufievo – have already been selected. Hypermarkets in Butovo and Putilkovo are due to open in late 2005. The company is still looking for plots of 2-30 hectares, and for properties and retail outlets of 7,000- 20,000sqm in the capital.

Aleksei Krauze, director general of Dorinda, says the company plans to spend about $500 million on regional expansion. That amount includes the company’s own and borrowed funds. Over the next three years the company intends to build a chain of approximately 30 hypermarkets – 10 in Moscow, 10 in St. Petersburg and 10 in the regions.

Most probably, those figures are over-optimistic. In St. Petersburg at least, the company’s projects often fall behind schedule and fail to meet their opening dates. The rate of expansion and the company’s geographical span are nonetheless impressive.

“The cost of construction of hypermarkets in St. Petersburg and outside the city are comparable. So far, we are unable to compare the profitability of the projects. Of course, projects designed for St. Petersburg have to be adjusted for regional conditions. As a rule, we enlist the services of local designers,” says Aleksei Krauze.

The firm Lenta, whose chain includes 6 hypermarkets in St. Petersburg, also nurtures plans for regional expansion, though not as ambitious. In 2006 Lenta hopes to open its first outlets in towns of the Leningrad Region, surrounding St. Petersburg.

The MT Group holding, owner of the Northern capital’s largest hypermarket of home appliances and consumer electronic goods Matritsa (10,000sqm) – built in the style Germany’s famous retail chain Saturn – is set to introduce their format in other cities, though where exactly remains unclear.

Housing Initiative

In 2004 St. Petersburg developers launched housing construction projects in the regions. In June Peterburgskaya Nedvizhimost (St. Petersburg Real Estate) established the subsidiary Obyedinyonny Stroitelny Trest (United Building Trust), or OST, in Kaliningrad. OST oversees projects and acts as a general investor and developer, awarding contracts to local firms.

The company began by launching a relatively small project consistent with the city landscape, as large high-rise buildings are not typical in Kaliningrad. OST is developing two 5-storied brick apartment blocks (with an attic floor), of 50 and 30 apartments, in Borzova Street, central Kaliningrad. Both buildings are aimed at the ‘comfort’ class of residential estates.

The project will require investment of $2.8 million. The apartments are being offered at 600-660 standard currency units per square meter, at an actual rate of 31.7 rubles per currency unit. Over half of the apartments have already been sold. Both buildings are to be commissioned in the 3rd quarter of 2005.

Construction projects for two more residential estates are now being designed. They are an ‘economy’ class 16-storied brick house in Sudostroitelnaya Street and a ‘comfort’ class 5-storied building in Volodi Dubinina Street, within the green zone of a private residential area. The apartments in those blocks will go on sale in late summer.

“In St. Petersburg the reserve of vacant construction sites is virtually exhausted,” says Vyacheslav Semenenko, vice-president of Peterburgskaya Nedvizhimost. “Companies are ready to develop large scale projects but the shortage of plots is an obstacle. One of the solutions is to move beyond the cramped market. We have opted for Kaliningrad because it is a promising and rapidly developing city, and at the same time competition among developers there is not very fierce yet.”

In terms of profitability economy class projects in Kaliningrad are comparable to those in St. Petersburg, according to Peterburgskaya Nedvizhimost’s experts.

The OOO SK Impuls development company (which is part of an industrial and development complex of the same name) recently launched construction of two residential estates in Sochi. The total value of the projects is put at $11 million. The company plans to build an 18,000-sqm building in the city center, on Teatralnaya Street. Another example is the LSR group, which has entered the real estate market in Vyborg where it will build a residential block and an office and retail center. The parameters of those projects are currently being defined.