Money-Growing: Retail Ring

The Garden Ring is a bustling thoroughfare with an hourly capacity of 30,000 cars carrying potential buyers. At the same time, motorists often find it difficult to park here given the heavy congestion and layout of the street. The Ring is notorious for chaotic parking areas that sometimes block entrances to retail outlets for pedestrians as well. Nevertheless, large retail centers continue to sprout up along the Ring.

The Garden Ring includes 18 streets and boulevards. The stretch between the Smolenskaya and Mayakovskaya metro stations includes the Novinsky Bulvar [boulevard], Bolshaya Sadovaya and Sadovaya-Kudrinskaya streets. The stretch between the Mayakovskaya and Kurskaya metro stations includes Sadovaya-Triumfalnaya, Sadovaya-Karetnaya and Sadovaya-Samotyochnaya.

Then there are the Zemlyanoi Val, Zatsepsky Val and Krymsky Val streets smoothly flowing into one another. Zubovsky Boulevard leads to Smolenskaya Square. Zemlyanoi Val is noteworthy because in the 1940s and 1950s it was originally planned as a retail area with shopping and public catering outlets being included in the design of the first floor premises, says Olga Yasko, retail real estate analyst at Colliers International.

You can also move along the Garden Ring anti-clockwise and divide it into sections as one finds convenient as there is no generally accepted zoning for this corridor.

Statistics show that the Garden Ring has some 80,000 square meters of street retail outlets – either built-in or detached retail properties facing the street. Additionally, there are 150,000 square meters of shopping areas within retail centers and office-and-retail buildings, according to leading realty consultants. Moreover, six new shopping centers, each with a total space exceeding 50,000 sq.m., are due to open along the Ring within the next two years.

Once that happens the influx of buyers and cars on the Garden Ring is likely to double. However, there is no word of any plans to widen the road.

But City Hall plans to streamline the traffic by turning the Garden Ring into a one-way road and imposing restrictions on large-scale projects. Igor Bakhirev, head of the road traffic regulation department at the research institute for general planning, does not rule out that the Ring will become a one-way road soon.

It is considered feasible because the Third Ring Road has helped to partially alleviate the congestion in the city center. “The Garden Ring is very attractive for retailers, but they are deterred by the heavy car flows which sometimes make it virtually impossible to park at a shop,” says Mikhail Gets, head of commercial real estate at Blackwood.

Anna Shiryayeva, director general of the real estate consulting company Magazin Magazinov, believes that the introduction of a one-way traffic system could facilitate motorist access to the shops, but at the same time the number of those wanting to occupy parking lots near major shopping centers, such as Atrium, will increase. Incidentally, Atrium already suffers from a shortage of ground-level parking spaces.

The future changes on the Garden Ring can be considered part of City Hall’s grandiose plan of turning the historic center of Moscow into a tourist and recreation area with fewer cars and building sites and more pedestrian zones, similar to the widely publicized Golden Ring project.

The provisions of the Moscow City General Development Plan till 2020, eventually endorsed on April 27, 2005, restrict the development of large-scale shopping centers and office buildings in downtown Moscow. The Moscow City Hall decree No.99-PP of February 24, 2004 on the development of territories within the Central Administrative District contains a provision, in line with which the number of office and retail properties within the Garden Ring area must be restricted. Nonetheless, most developers and real estate consultants have not been informed about the decree, a poll has shown.

The Going Rate

The vacancy rate on the Garden Ring stands at 3-5%, which means that only 1,000 square meters stands vacant, according to Blackwood. The diversified and heavily congested retail corridor is at the same time remarkable for price stability. Rental rates and sale prices for retail properties in the Garden Ring have remain unchanged for years, the Blackwood experts say. Hence, landlords do not rush to sell. Instead, they prefer stable income from renting out their properties, as the rate of return on rentals reaches 15-20%.

“The Garden Ring borders districts that differ by the nature of their developments, buying audience and commercial specifics. But on the whole we can say that the Garden Ring is a single retail area as the central location has a great impact on retail profiles in each of its sections,” says Antonina Lairova, research analyst at ABN Realty. “The area is characterized by a relatively low concentration of residents which is compensated with enormous flows of ‘day-time’ population, which is what boosts retail on the Garden Ring and makes it highly attractive for tenants.”

The annual rental rates in the busy sections of the Ring with intensive pedestrian flows – Zemlyanoi Val, Novinsky Boulevard, Smolenskaya Square – can reach $2,000 per square meter; in less bustling areas, for example at the intersection of Zemlyanoi Val and Nikoloyamskaya Street, properties are rented out at $600 per square meter per year. Sale prices in the Garden Ring sometimes run as high as $10,000 per square meter, according to Colliers International.

The average sale price, according to Blackwood, is $5,500. Despite the prevailing price stability in the area, Olga Yasko does not rule out that prime locations in the Garden Ring may see an increase in rates in the future.

Retail profiles prevailing in the Garden Ring are service-oriented businesses such as bank branches, travel agencies, photographer's studios, workshops, etc. They account for 19% of all the outlets operating in the area, says Anastasia Dovchenko, analyst at Cushman & Wakefield / Stiles & Riabokobylko. Cafes and restaurants account for 16% of retail properties while bookshops, shops selling office stationery, sports goods and toys account for 8%.

One of the largest retail properties – 1,850 square meters at 3/3, Sadovaya-Spasskaya Street – is occupied by an outlet of the M.Video home appliances chain. With 83 outlets across Moscow, the Sedmoi Kontinent retail chain operates a 750-square-meter shop at 54/2, Arbat. Other giants are Sportmaster with a 900-sq.m. shop at 6, Smolenskaya Square, Podium (800 sq.m. at 18, Novinsky Boulevard), the Hyundai car salon at 8, Sadovaya-Chernogryazskaya (600 sq.m.), says Olga Yasko.

Target Audience

The Garden Ring retail corridor, according to market analysts, primarily targets the middle-class buyer. “The Garden Ring does not have as many expensive shops as, say, Tverskaya Street or Petrovka,” says Antonina Lairova.

The Ring is a suitable location for such [major clothes and shoes] retail chains as Reebok, Nike, Ecco, Ekonika, Adidas, Carnaby, Hugo Boss, and “Zh”, says Mikhail Gets.

But, of course, there are also shops catering for the rich. Take, for example, Smolensky Passazh. Olga Yasko believes that the sections between Smolenskaya Square and Novinsky Boulevard and between Novinsky and Triumfalnaya Square that lie within the more prestigious western area of the city, may be of interest for boutique operators.

Room for Development

Despite the density of development, the Garden Ring still has building sites to offer. The area is dominated by dilapidated and obsolete buildings. “Some of them could be replaced with new retail properties,” maintains Anna Shiryayeva. “But this should be done with due caution, because the Garden Ring location alone does not guarantee the commercial success of a retail project.”

The office-and-shopping plaza Smolensky Passazh on Smolenskaya Square, commissioned in 1998, was one of the first to consider expanding its premises. Passazh’s owner, Mosstroiekonombank, announced the plan in 2004. The company intends to develop 60,000 square meters of additional retail properties on a site vacated after the demolition of several old houses in nearby 1st Smolensky Pereulok [lane].

The total space of Passazh currently stands at 64,000 square meters. According to preliminary plans, about 30% of the newly developed premises will be occupied by retailers. (The basic cost of retail construction in the city center is $1,000 to $1,400 per square meter; the cost of capital repairs for mansions redesigned as class B offices is $500 per square meter.)

Among the large-scale projects built on that stretch of the Garden Ring – between the Smolenskaya and Mayakovskaya metro stations – there is the 78,000-square-meter retail-and-office center Novinsky Passazh (31, Novinsky Boulevard), with a retail space of 10,500 square meters and commissioned in 2004.

Development of a multifunctional center featuring a supermarket at the intersection of Novinsky Boulevard and Novy Arbat has been resumed by the Korean Lotte Group. The project was launched over five years ago but put on hold, reportedly in the wake of the 1998 financial crisis. Analysts expect the first phase of the 85,000-square-meter New Century mall to be commissioned by the end of this year. The center will feature office and retail facilities as well as a hotel.

Bolshaya Sadovaya Street is the address of the landmark Peking hotel. The Sistema-Gals development company has undertaken to redevelop the hotel and build additional properties on the adjacent territory. Sistema-Gals told Vedomosti that the project is aimed at the development of a multifunctional center including a four-star hotel, office and retail facilities, as well as an underground parking area.

The total space of the area under reconstruction, including the Peking hotel itself, is two hectares. The projected total space of the future complex is 110,000 square meters. The project is being carried out on the basis of a Moscow government decree “On reconstruction of the hotel and office complex Peking and the comprehensive development of adjacent territories,” of December 24, 2002 (No. 1064-PP).

According to the developer, the project is complicated and its implementation will take several years. At the current stage the company is negotiating its design and town-planning concept with the city authorities. After the reconstruction is completed the square in front of Peking will be turned into a public garden.

Anna Shiryayeva says the project is interesting. However, judging by the fate of other similar projects, most of which were privatized on special terms (and often at prices different from those set by the market. – Vedomosti), landlords make bigger profits by running those properties without undertaking costly redevelopment.

The Atrium mall – a Moscow oasis of Sunday shopping and entertainment – is situated on the stretch between the Mayakovskaya and Kurskaya metro stations. Atrium was one of the first projects of its kind to be erected in central Moscow. The initial design had flaws, and the concept had to be revised during the development process.

As a result Atrium transformed into what is now seen as a model shopping center on the Moscow market. The construction of the mall, with a retail area of 40,000 square meters, was financed by Ingeokom and City Hall. It was built in 2002. The Sadovaya Galereya shopping center, built in 2001 (12,000 and 5,000 sq.m.), is situated on the same stretch of the ring road.

The section between the Kurskaya and Smolenskaya metro stations is best-known for the 6,000-square-meter Zvyozdochka fashion shopping center, built in 2001. Among the new projects under construction in the area is the 63,500-square-meter Citydel complex, featuring retail outlets, a fitness center with a spa zone, restaurants and caf?s, which is due to open in 2007, according to Blackwood.

The project is being developed by ZAO Tema and financed by Vneshtorgbank and a syndicate of French banks. The general contractor is Bouygues Batiman International. The total investment is estimated to be worth $100-120 million.

Another multifunctional center to be developed in the same area in near future will be the city’s fourth underground mall. Similar facilities were developed at Okhotny Ryad, and will soon appear at Pushkin Square and the square of the Belorussky train station. The key investor of the mall to be developed near the Paveletsky train station is the company Tekhinvest which is set to spend over $150 million on the project.

Tekhinvest has experience of working on ambitious real estate projects, such as the Moscow International Business Center Moscow-City and Atrium. The projected total space of the mall near Paveletsky is 130,000 square meters, most of which will be used for retail.

Analysts at Colliers International believe that the Garden Ring retail corridor will follow the general trends of street retail development in Moscow; more public catering outlets will appear and banks, beauty parlors, and travel agents will expand the range of services offered. The supply of properties will grow mostly at the expense of first floor premises in residential buildings, the redevelopment of basements and administrative buildings.