Market Know-How: Waiting for Godot

On the face of it, Russia’s retail real estate market is booming. Last year, investments into the sector amounted to $10 billion, Cushman & Wakefield / Stiles & Riabokobylko reported. 16 new shopping malls opened across the city, increasing supply by over 400,000 square meters.

“The retail property market in Moscow is growing rapidly,” adds Yulia Dalnova, deputy head of retail real estate at Knight Frank. "Over the past couple of years large shopping malls and shopping and leisure centers were built in almost all the districts of the capital."

“The specifics of a shopping center are such that its success depends on a great variety of parameters. And if a property fails to meet at least one requirement it will not be successful,” says Anna Shiryayeva, director general of the real estate consulting company Magazin Magazinov.

But, she says, almost every shopping mall in Moscow has engineering and architectural flaws caused by mistakes in the layout, poorly organized vertical ties, shortage of parking spaces, the unsuccessful location of food-courts, etc.

Most Russian retail developers are still not fully aware of how important the composition of the team involved in the project is. They still see their primary task in meeting deadlines.

“Quite often we see a project team without a project manager or professional architects, fire safety or parking consultants, and in most cases none of them are involved,” says Aleksandr Obukhovsky, deputy head of retail real estate at Colliers International.

As long as the market remains unsaturated virtually any shopping facility can be relatively successful, but the era of one-man teams will soon be over and then the investors will remember all the months they ‘saved’ that resulted in their failure to make million-dollar profits. Even today shopping malls with flaws in their concepts are failing to exploit fully their property’s potential and meet the targets set.

Calculating Miscalculations

The mistakes that developers make are numerous. The main one is the lack of any concept whatsoever. Or else, a concept, as they see it, can mean virtually anything, even the architectural design. Even if there is a concept, to develop it companies try to save funds by hiring amateurs who fail to conduct any proper research. And even if they do the research, they fail to interpret the acquired data correctly.

Well-known realty agencies that do not suffer from a shortage of clients experience a different extreme, Anna Shiryayeva says. They often use the same concepts for every project. It is not unheard of for the authors to forget to change the address of a previous property in the text of their documents.

Indeed, in Russia most shopping mall projects are literally carbon-copied. Often new shopping centers are not built based on the result of research and calculations but just because their development is fashionable.

In Russia, as a whole, developers’ motives differ from those of their counterparts in developed countries. Here a developer is not interested in creating a unique property; what he wants is to build a mall that is “the same as that one over there”, assuming that the ‘copy’ will make similar profits. But that is not the case.

For a shopping center location is the most important aspect. Usually, malls are erected where consumer flows intersect. “Favorable location helps many centers stay afloat despite grave mistakes committed by their developers,” says Shiryayeva.

Nothing can save a poorly located shopping mall. “A facility designed and planned with great talent but poorly located will not be able to attract enough shoppers, or tenants,” she explains.

Much has been said and written of the 17,000-square-meter Gvozd shopping center, at the intersection of the Moscow outer ring road (MKAD) and Volokolamskoye Shosse.

“Both roads carry enormous customer flows and, in theory, the idea to build a mall at the intersection of the two highways was more than well-founded,” Yulia Dalnova says. “But the given concept implies at least three vital conditions that have to be met. To begin with, if the mall is to succeed its vast space needs to be filled up with a large variety of tenants including several anchors; it must have convenient driveways and a spacious parking lot.”

None of those requirements had been taken into account by the developers of Gvozd. Even anchor tenants, such as Sedmoi Kontinent and Tekhnosila, fail to attract as many customers as their outlets in other parts of the city do. “The upper floors are vacant as customers rarely ever go there, and tenants are moving out,” Mikhail Gets, head of commercial real estate at Blackwood says.

Attempts to revamp the mall were made by several well-known consulting firms, but none of them succeeded. “At times, it would even reach the point of absurdity,” adds Dalnova. “Yet another real estate expert with experience of inspecting all sorts of properties would set off for the site and have problems finding the road.” In addition to the inconvenient road access, mistakes were made when designing the layout. For example, the large number of dead ends warded off would-be buyers and disrupted tenants’ operations.

Another example of an unsuccessful location is the French Galleries shopping center. “The approach was erroneous from the start. The mall was designed for well-off customers,” Mikhail Gets explains. “But getting to the galleries by car was virtually impossible and well-off customers ignored the mall.” Subsequently, the center was closed for reconstruction and reopened later on as the Nikolai Antique Stalls. The stalls, however, are not extremely popular either, according to market analysts.

The second most serious – and most widespread – mistake is poor layout. A mall’s design and internal layout are rarely based on a developed concept which determines the optimal size of the property, the number of stories, the correlation between retail, leisure and other zones of the mall, the required number of parking spaces. “Failure to observe that principle results in plenty of grave mistakes during the development of retail centers,” says Anna Shiryayeva.

Mikhail Gets cites Waymart-1, the 30,000-square-meter mall at the 26th kilometer of MKAD, as an example. “Several mistakes were committed during the development of the concept,” he says. “The main mistake was that an anchor tenant could be reached bypassing the shopping galleries. As a result, the tenants in the shopping galleries experience certain difficulties as most visitors never go beyond the anchors’ stores.

Also, until recently the building had no entertainment zone that could attract customers to the other shopping areas. The mall owners decided to change that and allotted a 1,300-square-meter property for a go-carting facility. The food-court is too small and lacks high-quality public catering outlets, Gets says.

Ironically, even market experts fail to agree on whether this or that mall toes the concept line or not. Yulia Dalnova believes the above-mentioned Waymart-1, along with the 16,500-square-meter Mosmart (at the 26th km of MKAD) to be the most successful projects where developers took into consideration all the necessary requirements, i.e. a well-thought out composition of tenants, optimal size, convenient access roads and parking area.

Zapadny retail center at 52, Rublyovskoye Shosse, too, has fallen victim to a faulty layout. “The Sedmoi Kontinent [supermarket] occupying the first floor has no shortage of visitors,” says Gets, “but they have no incentive to go upstairs, as the retail center – spacious as it is – has no food-court. Therefore, consumers do not regard that center as a leisure facility.” They only come here to buy groceries and the non-food items they can find in the supermarket.

The Yuzhny mall, situated at the intersection of the streets Kirovogradskaya and Sumskaya, is an example of the same mistakes made during the development of the concept, the gravest being that buyers can get to anchor-quality shops bypassing the smaller shops. Large tenants experience no shortage of customers, but smaller shop owners are forced to move on, regularly replaced by new ones.

The Global City shopping center is conveniently located near the Yuzhnaya metro station, but from the very beginning the project had a faulty layout with tenants placed ineffectively, numerous dead-end zones and irrational use of land, says Yulia Dalnova. “In all fairness it should be noted that the absence of an underground parking area is not critical for a commuter area; ground-level parking is enough here,” she adds.

The biggest mistakes made by the developers of the office and retail center at 31, Novinsky Boulevard are the small parking area and poor choice of tenants. Those kinds of faults are also quite common. The area allotted for the shops is too big and, as a result, cheap slot-machines are situated next to expensive boutiques, notes Yulia Dalnova. Such a poor layout is damaging to the mall’s image, she says. The mall lacks strong anchor tenants who can attract customers, while the shortage of parking spaces in the heavily congested city center is the final nail in the coffin.

“Customer numbers on weekends is a sort of litmus test that makes it possible to assess the effectiveness of consulting services,” Dalnova explains. “At 31, Novinsky, the shopping gallery is empty even on weekends. At the same time, the office facilities within the center operate successfully making considerable profits.” The 78,000-square-meter center has 36,700 square meters of office space and 10,000 square meters of retail space.

When it comes to parking facilities, many shopping malls are faced with at least three serious problems, says Aleksandr Obukhovsky. They are a shortage of car spaces, poor traffic control in Moscow in general and poor car traffic control within parking areas in particular. Ideally, a shopping mall needs 5 car spaces per 100 square meters of retail area; the critical level is 1 car space per 25 square meters, he says. That requirement is slightly lower for retail centers located near metro stations, such as Boom, for example, near the Bratislavskaya metro station.

The competent selection of mall tenants also requires skill. The choice of retailers must be made on the basis of the mall’s concept, as well as the purchasing capacity of the target audience, and the functional plan that determines which kinds of goods will be offered to shoppers. A certain proportion between stable and newly established chains should be observed.

“There are plenty of rules and specific requirements for placing brands within a retail center,” says Anna Shiryayeva. “For example, you cannot place a multi-brand shop next to a mono-brand outlet where both sell clothes and accessories in the same price range; instead, there should be several mono-brand shops, or just one multi-brand outlet.

“There is also the notion of compatibility of operators. Shops offering certain types of goods situated next to each other can either kill or mutually support their neighbors. For instance, you cannot place a women’s lingerie shop next to a shop with goods for newborn babies. Many women buy lingerie thinking mostly about intimacy, while a shop for newborns nearby may remind them of the related hazards, which is unlikely to boost sales of lingerie.”

Many retail centers have excessively large shopping areas, as is the case with 31, Novinsky. Anna Shiryayeva says her company often sees malls where the size of the facility is not compatible with the size of the plot it occupies or with the size of its shopping areas. For example, a 30,000-square-meter mall of a certain profile in a given location is able to attract, say, X rubles.

The properties of the retail area are such that increasing the size of the facility will not result in higher sales. “But it is not so easy to figure that out, or calculate that,” she says. “That is why developers, seeking to squeeze the maximum out of their plot, erect malls of 50,000 square meters which results in a dilution of the investment and substantial financial losses. Attracting tenants into such malls is more difficult, and they are constantly being replaced.”

Quite often, the authors of a concept fail to take into account potential competitors. When developing the concept it is critically important to remember that a new shopping facility emerging in a bustling retail district results in considerable changes in sales and attendance. Developers either fail to take into account or underestimate rival retail outlets operating in the vicinity, which is especially typical of regional businesses.

“The developer thinks that his retail center will win over consumers and their cash from clothes markets, stalls, bars, etc,” Shiryayeva explains. “In truth, this is not that likely. People’s consumer habits are formed over decades, and those habits cannot be easily forgotten. Our research has revealed that people in the provinces still buy up to 70-80% of their clothes and shoes at clothes bazaars.”

Many experts believe that it is still too early to examine the mistakes and defects of shopping centers. “Most retail centers in Moscow, and not only in Moscow, are successful. So far, any attempts to assess whether a certain solution is correct or erroneous are useless,” Aleksandr Obukhovsky says. “It is possible to doubt certain elements of the concept, say, the compatibility of tenants, an anchor’s profile or certain layout choices, but as long as everything works fine, talk of mistakes is premature.”

At the same time, preventing an illness is easier than curing it. It is no coincidence that some Moscow malls have undergone a change of concept. Incidentally, such measures are taken regularly at foreign malls.

Repositioning Shopping Malls

Most retail facilities undergo changes every once in a while. First and foremost, this concerns former Soviet-era department stores, such as Moskovsky and Pervomaisky. Moscow’s landmark department store GUM, too, has undergone changes recently. In particular, the location of tenants was changed and small food-courts were opened.

The initial concept of the Okhotny Ryad shopping mall, too, has been revised. “From the very beginning the developer wrongly banked on customers for boutiques, whereas the core of the customer flow in Manezh Square is made up of young people who congregate in the city center,” Mikhail Gets explains. “For them an entertainment zone, Internet-cafes and youth-oriented clothes stores were opened later on.”

The concept of the TsUM department store, too, underwent cardinal changes with the renovated facility now offering premium and elite merchandise only.

“If we are to be guided by the Western experience, it shows that the average life span of a retail center there is five to ten years, whereupon the concept undergoes radical changes,” adds Gets. “This is done so the facility remains attractive for the shoppers.”

The problem of a new concept arises not only for long-established retail centers. However, sometimes the changes initiated by investors are incomprehensible. For example, the Evropark mall on Rublyovskoye Shosse was originally launched under the name of Yekaterinovka. What prompted the owner to change the name after most tenancy agreements had been signed remains unclear.

Of course, it is better to introduce changes at the early stages of the project. “The earlier a professional team joins the project the more changes can be introduced to the concept,” says Aleksandr Obukhovsky.

“At the green field stage it is possible to consider several options for the concept, to calculate potential income, to evaluate the sustainability of the project, and choose the most agreeable option, namely – agreeable, because there is no such thing as a correct solution. Successful solutions will not differ greatly in terms of the internal rate of return.”

On the whole, over the past few years there have been no reports of major changes to the concept of a retail center taking place at the early stages of the projects, according to Knight Frank.

Importing Ideas

Examples of state-of-the-art malls across Europe, Asia and America are especially vivid against the background of traditional Russian carelessness.

The Almada Forum shopping center near Lisbon offers its visitors a 6,000-space parking area with over 5 million euros having been invested to improve road infrastructure in the vicinity.

“The majority of Russian projects implemented without professional teams being involved cannot even be compared with the truly high-quality foreign malls,” Obukhovsky believes.

The explanation is easy: Russia’s retail real estate market has not yet reached the saturation level, whereas European malls seem to have tried everything to attract customers.

There are also objective reasons for the differences between domestic malls and those abroad. In Western European countries retailers tend to develop single-story or two-story shopping centers. The most vivid example is the concept of the single-story Wezerpark malls. The French retail chain Auchan, as well as Sweden’s IKEA also use that concept when developing their malls, in particular Moscow’s Mega-1 and Mega-2.

European shopping malls, for the most part, cater primarily for shoppers offering few leisure facilities while in the U.S., malls are often viewed as a place for both shopping and leisure, Yulia Dalnova explains.

“However, these days Eastern Europe is seeing a considerable increase in the development of retail facilities with three floors of shopping areas, and more. This is due to the low saturation level on the market of prime retail space.

“Russia is witnessing the same trend, albeit with local specifics. Developers erect malls in places where they have secured a building plot. Moreover, the widespread approach towards such developments in Russia implies that anchor tenants offering leisure facilities should occupy the upper floors.”

As time goes by, Russian retail centers are gradually acquiring the characteristic features of foreign malls. A noteworthy example is the newly built house d?cor center, Dream House, at the intersection of the Rublyovo-Uspenskoye and Podushkinskoye motorways. The concept of the project was borrowed from popular European shopping malls such as Stilwerk in several German cities.

The retail center is positioned as a house of dreams where architects and interior designers make customers’ dreams of a more comfortable home come true. Dream House sells furniture and interior decorations.

“Russian and foreign malls have one thing in common: the leisure and entertainment component,” Mikhail Gets says. “For example, Europe’s largest – 134,000 square meters – shopping and leisure center Madrid Xanadu, featuring an indoor ski slope, has been built near Madrid.”

Russia has also adopted Western concepts of distribution of shopping space. “Today, virtually every Moscow supermarket sticks to the traditional European concept of zoning shopping space,” Gets continues. “The zone adjacent to the entrance (the fa?ade), is responsible for nearly 40% of the total sales. The second most important zone yields 30%, while the others 20% and 10% respectively. Redistributing consumer goods within the shopping area taking this into account helps to boost sales.”

In the more distant future Russia is set to adopt something else. These days Russian developers are guided largely by the anticipated rate of return and consider tenants to be their target audience. The main criterion is the size of income from rentals in the short-term.

“In a developed business environment the situation is different,” says Anna Shiryayeva. “A developer builds a property, develops it, achieves the planned capacity and then sells it to institutional investors, i.e. pension funds that accumulate huge resources in the course of their operations. Thus, Russian developers are more interested in the money the mall will make over the 12 months after it is commissioned, while a professional developer’s concern is the price at which the property can be sold in five or ten years after it reaches its projected capacity.”

The office sector has already seen such deals, and the retail real estate sector will soon witness them, too. But, says Shiryayeva, institutional investors are interested only in properties secured against risks in terms of various criteria, with long-term leases in place where tenants are large and stable firms. Such projects are still few and far between in Russia.