GUIDING LINES: Lessons of the East

Western consultants frequently arriving in Moscow on reconnaissance missions at the request of foreign investors believe that the Russian capital should pay attention to the experience of Eastern Europe and China.

Moscow has fallen behind Shanghai, Warsaw or Prague by five to seven years. The rate of return developers can secure through construction of shopping malls in Moscow – 20-30% – is 2-3-times higher. The Moscow retail real estate sector is about to take the lead in Europe in terms of the number of square meters developed annually.

In Shanghai, for example, a similar boom ended about five years ago. In the early 1990s the city was hit by a wave of retail development. The market was caught off guard because it still didn’t have enough sellers or buyers. Some of the malls were too large against the backdrop of low demand. Hence, vacancy rates soared.

Shanghai landlords committed yet another mistake when they opted for a mass sell-off instead of attracting tenants. Such a policy is believed to be deeply erroneous in the West because it destroys the general concept and undermines the efficiency of the mall. By the end of the 1990s the situation improved following the advent of international retail chains such as IKEA, while local developers began to draw on Hong Kong’s experience.

The retail industry in Hong Kong is over 30 years old. These days in Shanghai the third generation of shopping malls is thriving as the sector becomes a buyer’s market where retailers have a chance to select successful malls and experienced developers capable both of erecting and running a property.

The Russian market may follow in the footsteps of Poland whose market is three times smaller than Russia’s. But compared to the rest of Eastern Europe Poland’s retail market is the largest. Warsaw is the richest city in the country with 2 million residents who spend 60% of their incomes on consumer goods.

In Moscow that spending accounts for nearly 80%. At the first stage of development – in the years from 1995 to 1997 – Poland saw the emergence of supermarkets and hypermarkets, and then large malls were developed beyond the city limits. These days, consumers prefer to shop within the city boundaries prompting developers to move away from the countryside.

Western consultants advise Moscow developers that they should draw on the experience of comparable markets, warn them against “giantomania” and remind them that successful malls do not necessarily have to occupy new developments in downtown areas. Also, they strongly advise Russians to pay more attention to long-term planning.

Maybe such an approach is not necessarily justified. Russian and Eastern European economies have similar traits, but the style of doing business in commercial real estate is shaped by the countries whose representatives dominate the market. For the time being, Moscow is filled largely by Western businessmen.