Money-Growing: Restaurant Deficiency

The further you move from the center, though, the harder it is to find a decent eatery. Restaurateurs are ready to spend money on new outlets on the outskirts of the capital but in those areas there are no suitable properties available.

In the first half of 2005 Moscow had 25 seats in cafes and restaurants per 1,000 residents, Leeds Property Group reports. That figure is about eight times lower than Europe, Jan Al-Nuri, commercial real estate consultant at Penny Lane Realty, says.

The situation in New York is roughly the same as in Europe: the city has 150 seats in restaurants per 1,000 residents. In Moscow, the lowest figures of less than one seat per 1,000 residents were registered in the districts of Koptevo, Khovrino and Beskudnikovo.

“An ideal property for a restaurant is a detached building of 1 to 2 stories, no less than 500sqm in size, next to a metro station, with intensive pedestrian flow, with a catering profile and technical equipment and characteristics such as combined extract and input ventilation and power capacity of no less than 200 kw/h,” Marty Whelan, development director at Astera. “But such properties are hard to find in commuter areas.”

Exploring the Outskirts

Moscow’s numerous catering establishments operate in various price segments, ranging from small fast-food joints on busy streets where an average bill is between $1.50 and $5, to posh restaurants charging their guests $50 to $100 on average, says Elina Zanina, deputy head of commercial real estate and development at Miel-Nedvizhimost realty,

Catering establishments fall into a variety of categories: cafe-diners on the premises of office buildings, coffee houses, pizzerias, beer restaurants, restaurants catering for medium-income clients and top class restaurants. The farther you move from the center the fewer of these there are. This is especially true in the case of delicatessen restaurants where guests have a chance not just to have a snack but also to relax and enjoy their leisure time, either after work or on weekends.

“By going to a restaurant in the city center many residents are forced to avoid drinking alcohol because at some point they will have to drive home, or they have to go to restaurant without a car and use public transport to get home, which, of course, creates serious difficulties,” says Irina Zharova-Right, managing partner at Nordblom Group. “That is why Muscovites often decide against going to a restaurant. New outlets on the outskirts could help solve that problem.”

Vyacheslav Limonov, general director at the prime real estate company Novoye Kachestvo, says there are a number of chains of cafes, coffee houses, beerhouses and restaurants seeking to develop their business in commuter areas. One of those is Shokoladnitsa, a major chain of coffee houses. Their key requirement is that new outlets are situated in busy locations, in immediate proximity to metro stations.

Chains of Italian Pronto pizzerias, fish restaurants (Zolotaya Vobla), fast-food restaurants Rostiks and McDonald’s are now actively moving towards the Moscow outer ring road (MKAD), says Balla Fai, head of strategic development at Paul’s Yard.

Rostik Group has launched a number of outlets near the Oktyabrskoye Pole metro station; Pizza Sole Mio has opened an outlet near Rechnoi Vokzal (River Port) metro station; RPCom runs the Beck’s restaurant on Simferopolsky Boulevard, 7 Kron on Petrozavodskaya Street, and Kolbasoff at the Fifth Avenue retail center; LiteLife runs the Tanuki restaurant on Narodnogo Opolchenia street; Lunch operates the caf? Little Japan near the Yugo-Zapadnaya metro station. The Vesta-Center International has moved beyond the outer ring road and opened Yakitoria restaurants in the districts of Zhulebino and Mitino.

“Of the over 100 restaurants belonging to Rosinter Restaurants, which owns the Il Patio and Planet Sushi brands, the Central Administrative District accounts for no more than 20,” notes Marat Manasyan, managing partner at MovEstate.

By late 2005, several delicatessen restaurants opened in the Moscow suburbs. An Indian cuisine restaurant Ganesha, named after the deity of wealth and prosperity, opened its doors to customers on Korolyov Street; the Paddock Club restaurant, offering – in addition to exquisite meals – a chance to watch sporting events on a 30-square-meter TV screen, appeared on Khoroshovskoye Shosse.

Other restaurants operating outside the city center are the Mediterranean cuisine restaurant Hills on Krylatskiye Kholmy Street, the Bolshiye Goroda (Big Cities) beerhouse on Leningradsky Prospekt, and Georgian cuisine restaurant New Black Sea Style on 60-Letia Oktyabrya Prospekt.

Commercial property analysts believe that for the time being the situation with new catering establishments is better in large retail corridors such as Leninsky, Kutuzovsky and Leningradsky avenues. Restaurateurs also willingly go to areas where upscale and business-class residential development is on the rise.

Those are, to begin with, the districts of west and southwest Moscow (the Western and Southwestern Administrative Okrugs), as well as the Shchukinsky and Sokol districts in the north. However, the demand still considerably exceeds the existing supply. For example, Yakitoria on Michurinsky is always packed in the afternoons, with people standing in line at the doors to get inside. The same is true for Planet Sushi next to the Molodyozhnaya metro station.

The east and southeast of the city are the worst when it comes to provision of catering establishments. Vostochnoye Izmailovo, Zhulebino, Tekstilshchiki and Biryulyovo Zapadnoe have only one delicatessen restaurant each. Most cafes and restaurants operating in those parts are of poor quality. Yet, an average bill at such establishments stands at $6 to $10 in cafes and $15 to $30 at restaurants, which is comparable to prices at centrally located restaurants.

“Launching new moderately priced restaurants and cafes makes sense in areas of large-scale housing development, I think,” notes Balla Fai. “Expensive restaurants are not needed on the outskirts; the highest demand is for moderately priced restaurants with an average bill of $20 to $30.”

Alexander Osipov, consultant at Leeds Property Group, believes that the restaurant business is likely to prosper, first and foremost, in areas with a high-income population. For example, coffee houses could do well in Krylatskoye or in the vicinity of the Akademicheskaya and Profsoyuznaya metro stations.

In addition to those, other attractive districts are those included in the list of residential areas where the demolition of obsolete housing is slated by the Moscow city hall. Least favorable are districts with low population densities and low levels of income, as well as a high concentration of industrial facilities. “Those are the 11th micro-district of Tushino, Kapotnya, Biryulyovo, Losinoostrovsky, etc,” the consultant says.

They Are Different

“Restaurants on the outskirts of Moscow differ greatly from those in European capitals, both in terms of the quality of service and interior design,” Vyacheslav Limonov says. “Some segments are not represented in Moscow at all, such as family-oriented pastry shops with small halls, measuring no more than 50sqm, with just a few tables, where you can order fresh pastry and coffee, with half-baked foods and pastries available for take away.”

In most European capitals, restaurants operate not only in central locations. In Brussels several restaurant streets run directly from the central square, with some properties housing up to three catering establishments. Those streets are divided into themed areas, offering seafood, meat, Oriental cuisine, etc., respectively.

“The British like downtown where all the fashionable restaurants are situated,” says Konstantin Kovalyov, managing partner at Blackwood. “In remote areas there are decent Italian restaurants, but they are relatively rare. With most offices being centrally located, establishments in remote areas are not as profitable; they have no lunch time.”

In Rome, on the contrary, there are plenty of small pizzerias and fish restaurants in the city outskirts. Each corner of the Italian capital is a historical and architectural monument, and tourists never feel bored wherever they are, whether in the center or in remote parts of the city. Good cuisine provides them with energy to continue sight-seeing.

Alexander Osipov says that family-oriented and entertainment restaurants prove to be the most successful establishments in commuter areas, as local residents account for 80% of all the guests there.

For example, top managers at the Kruzhok chain of beerhouses report that their outlets have taken on a role as local clubs, regularly frequented by the same guests. In such restaurants, employees know their clients by name, remember their preferences, their favorite dishes and even know who their favorite waiter is.

In Search of Property

“The demand for properties suitable for restaurants and cafes still exceeds the supply,” says Dmitry Furmanov, head of commercial real estate at Domostroi realty. “As to restrictions in terms of location, there are practically none.”

Elina Zanina says the Central Administrative District (Okrug), or the city center, is the most popular with would-be tenants, accounting for 34% of all applications. 39% of applicants do not indicate any specific location in their requests. Location is not as important as the property’s proximity to a metro station, on busy streets or thoroughfares. As to potential buyers of properties suitable for operating a catering outlet, 33% of them do not specify desired locations in their requests. “Such requests are much easier to satisfy,” says Zanina.

Sergei Lobkaryov, head of commercial real estate at MIAN Real Estate Agency, said that most new applicants seek tenancies in southwest Moscow, followed in descending order by the western, northern, northwestern and southern administrative districts. Few take an interest in the eastern, southeastern and northeastern districts, but upon learning of the scarcity of supply, they agree to rent properties in any part of the city.

The number of applications for tenancies received by Miel’s commercial property department during the first nine months of 2005 exceeded the available supply 5.24 times. The same is true regarding the situation with the sale of catering facilities, with the demand exceeding the supply 6.08 times. The average size of properties available for rent in 2005 stood at 312.53sqm; for sale – 465.94sqm.

“At the moment Moscow has practically no properties available in the street retail segment that would fully meet the client’s requirements,” says Marty Whelan. “The only exception is retail centers and facilities where all the conditions are being calculated and designed in advance.”

The supply grows mostly at the expense of the redevelopment of existing properties into catering facilities, or new construction, Balla Fai says. Opening a new outlet requires re-equipping property. Besides, few landlords welcome caterers as prospective tenants. “If the property fails to meet regulations by at least one criterion, the landlord will face problems with sanitary officials, fire inspectorates and the like,” adds Marty Whelan.

Sergei Lobkaryov believes that the best option for caterers is a detached building with an adjacent territory that can be used as a parking facility. “But the supply of such properties is far lower than the number of tenancy applications filed,” he says.

Another option for restaurateurs is available at retail centers where they can secure a part of a food court. Catering facilities are part and parcel of developing large shopping malls. Designers and developers also welcome caterers on the premises of office centers being developed on the city outskirts close to transport thoroughfares, as well as in the city center.

Residential Restaurants

“These days we are witnessing a shortage of properties for public catering establishments in most municipally-owned new constructions which may be largely explained by insufficiently though out concepts for new residential areas,” says Jan Al-Nuri. Restaurants operating within a residential building face certain restrictions on opening hours, Marat Manasyan says. Such establishments usually have to close at 23-00.

The number of seats in such restaurants must not exceed 50. “Besides, such a facility operating at an apartment block must be separated from residential quarters by a technical floor,” says Marty Whelan. “And while they are present in most newly built developments, old buildings rarely have them.” To open a restaurant, entrepreneurs have to go great lengths: installing double-glazing in the above floors, renovating entrance halls and providing residents with other kinds of compensation.

A restaurant must have two entrances – for guests (with direct access to the dining hall, for fire safety purposes) and a rear entrance for the personnel. Properties on the premises of residential compounds rarely meet those requirements.

Another mandatory requirement is combined extraction and input ventilation, which is rarely available in most apartment buildings, except upmarket residential estates. Tenants can install ventilation themselves but it is not always technically possible. “Besides, few operators are ready to spend money on re-equipping facilities in line with the necessary requirements,” says Balla Fai.

Restaurants and cafes in residential compounds can be found not only in Moscow. In most world capitals restaurants occupy the ground floors, with the family of the owner usually living in an apartment on the floor above. Otherwise, landlords have to offer special benefits to prospective buyers and tenants of the neighboring apartments. In London, for example, such apartments are sold for 10-20% less, Knight Frank reports.

Difficult Rules

The minimum size of a catering facility is 125sqm, with a dining hall of 50-70sqm, says Sergei Khramov, development director at 4Rent Estate. On average, restaurants seek properties of 350sqm, with 150 square meters reserved for the kitchen and the remaining space occupied by a dining area, a checkroom and lavatories, says Marat Manasyan. Seat numbers are calculated proceeding from the assumption that there should be 1.6-1.8sqm per person; thus chain restaurants usually offer 80 to 100 seats, on average.

The requirements that cafes and coffee houses have to meet are not so strict. A coffee house could measure 70sqm, with 16 seats – i.e. four tables. “Such coffee houses usually offer a menu of desserts, coffee, tea and other drinks; the choice of alcohol drinks is restricted and smoking is prohibited,” says Khramov.

Astera’s consultants note that great importance is attached to the purpose the property is used for. Redesigning a retail property as a catering facility is quite difficult. “That requires extra time and spending,” Marty Whelan says.

“Restaurateurs are interested, first and foremost, in the size and the layout of the future restaurant. They welcome properties with large rooms,” says Marat Manasyan. “Ideally, it should be a square or a rectangle with supporting columns.” Elina Zanina believes that the ceiling height matters, too. Most tenants are keen on properties with a ceiling height of 3 meters and over. Japanese cuisine restaurants, on the contrary, must have low ceilings, because that is the traditional design of such establishments.

Catering operators are also demanding when it comes to power capacity. On average, a restaurant needs 120 to 250 kW of energy. “For each concept we have drawn up our standard requirements for the property, depending on location,” says Valeria Silina, spokesperson for Rosinter Restaurants. “Before we decide on the launch of a new restaurant our experts examine the site to determine whether the property meets the standards. Each property has to meet requirements in terms of the size of the kitchen, ventilation, etc.” For example, an Il Patio restaurant with 90 seats requires a property measuring a total of 250 to 320sqm; an outlet of 90 to 150 seats – 320 to 450sqm; an outlet of over 150 seats – 450sqm.

To meet Rosinter Restaurants’ key requirements a property must occupy a basement, the first and the second floors, with a separate entrance on the first floor and large wall to wall windows. The building where the outlet is to be opened must have parking facilities available or enough area available for that purpose, a load-bearing capacity of least 200 kilograms per square meter, a power capacity of 150-250 kW, and at least two telephone lines.

Avoiding Mistakes

“Many restaurant operators own outlets on the outskirts because the average bill is nearly the same (the difference being some $1.20-1.50) as in centrally located restaurants, while rental rates are lower and administrative problems are fewer,” says Marat Manasyan.

An exception is the popular retail corridors along Leninsky, Kutuzovsky and Leningradsky avenues where rental rates exceed the average rates in those districts by some 20%. “Restaurants pay for the location, not for the size of the property,” Sergei Khramov says.

Rental rates differ from one district to another; availability of certain options also plays a role. Rental rates vary from $400 to $2,500 per square meter per year, says Irina Zharova-Right. The highest rates are in the city center; above average rates are charged in northeastern, western and southwestern districts. “Rental rates in the center, on Petrovka, Maroseika [streets] stand at $1,800 per square meter per year; $800 to 1,000 in Strogino, and $1,200 per square meter near the Akademicheskaya metro station,” she adds.

Rates in upscale districts of southwestern Moscow run as high as $900 to $1,000, while in eastern areas, such as Perovo, along Shosse Entuziastov, they do not exceed $500 to $700, Balla Fai says. “The demand there is lower, competition is weaker, hence lower rates,” he says.

“The lowest rental rates for cafes and restaurants – charged outside the Third Ring Road – stand at $650 to $950 per square meter, while the lowest sale price is $3,500 per square meter,” says Dmitry Furmanov. Vyacheslav Limonov says that rental rates in commuter area are no less than $350 per square meter, the minimum sale price is at least $2,400. Sergei Lobkaryov has reported that in recent months alone rental rates have grown by 10-15%.

“With rental rates growing yearly, the rental costs sometimes exceed the profitability of the establishment,” says Irina Zharova-Right. “It can be the case that a property, perfectly suited to the purpose, remains vacant due to soaring charges. The cost of opening a restaurant, operating and maintenance costs make up a considerable amount as well, and the owner has to make sure that his investment pays back within a set time.”

Restaurant operators themselves believe their business will be profitable if the rental rates don’t exceed $900 per square meter per year (for a property measuring 300 to 400sqm), Marty Whelan adds. “Where rates exceed $1,000 such outlets take longer to pay back, make no profit and eventually have to be closed,” Whelan says. On the whole, top quality restaurants pay back after three to four years, or longer, say Alexader Osipov.

Investing in Business

Opening a new restaurant requires considerable investment. That includes purchasing or renting a property, equipment, furniture and so on. Sometimes, a property has structural defects requiring extra spending. Most often, operators experience problems arising from insufficient power capacity. The easiest solution is to buy extra kilowatts, which is possible only provided the local substation has free capacities available and the power cable is not overloaded.

The official price of 1 kilowatt is 1,000 euros. Where lines are overloaded a tenant will have to pull a new cable from the substation. The costliest option is the reconstruction of the local substation or the building of a new one for their own use. Reconstruction of an existing substation is likely to cost at least $200,000, while the cost of building a new substation may prove to be as low as $75,000, including the cost of obtaining all the necessary permission, experts say.

The amount required to open a new outlet of the Rostiks chain depends on the property where the future restaurant is to be situated, whether it is a retail center, a detached building meeting the chain’s requirements, or a residential compound, Valeria Silina says.

In most cases, $250,000 to $1 million is enough. Opening a new restaurant, such as Planet Sushi, Il Patio or TGI Friday’s, requires an investment of $500,000 to $700,000.

The investment required to open an upscale restaurant with exquisite cuisine depends on the owner’s imagination and may be as high as $500,000 and even exceed $1 million. Analysts note that the number of investors willing to splash out on restaurants in commuter areas outstrips supply.