Money-Growing: Eastern Moscow to Master Sales Skills

Shoppers residing in eastern Moscow, or East Administrative District (Okrug), experience a shortage of modern shopping venues, property consultants maintain. Investors’ plans to develop malls in the east have failed; many projects remained forever on the drawing board, on some of the sites construction works were launched but never finished.

The East Administrative District is the largest Okrug of the capital, accounting for over 14% of the city’s territory (15,468 hectares). The district has 1.3 million residents, or 11.5% of Moscow’s population, making it the second most densely inhabited part of the city after the South District. In other words, eastern Moscow is ripe for mall development, experts at Torgovy Kvartal development company say.

The district has 508.1 square meters of retail space per 1,000 residents, with grocery stores measuring a total of 157.2 square meters. On the whole, it transpires that local residents are provided with retail space even better than other Muscovites. Moscow’s consumer markets and services department reports that on average the city has 453.3sqm of shops per 1,000 residents. The East District, however, practically has no large shopping centers – measuring 20,000sqm and over – such as Rio and Festival in Southwest District.

Eastern Moscow accounts for only 1.5% of modern shopping centers operating in the capital. Property consultants at Knight Frank assume that the East District has only two complexes that meet modern standards – Metro and Podsolnukhi on Podbelsky Street. Analysts from other real estate companies sometimes add Semyonovsky, Rogozhskaya Zastava and several other projects to that list.

Experts do not think that the East District is not suitable for retail development. Rather, its potential remains underestimated. It remains unclear why it is so but experts polled by Vedomosti have named several possible reasons, some of which sound quite plausible.

Industrial Estates, Parks and Roads

Initially, there were three reasons behind stalled mall development in eastern Moscow. Large parts of the district are covered with natural parks and conservation areas (Losiny Ostrov, Sokolniki and Izmailovsky) where commercial and housing development is banned; the district has many industrial territories, local residents for the most part have low incomes. That is why developers first focused on the areas where they expected higher profits. Moreover, in the 1990s – early 2000s the shopping center format as such was an experiment for Moscow operators.

“In the beginning all the developers were interested in western, southwestern and northwestern parts of the capital – the most prestigious districts. Later on, they moved to the south and southeastwards, as those parts had many newly built residential areas, large suburbs and high population density. Besides, in the south and southeastern Moscow there are many vast industrial territories that need redevelopment. The north and northeast districts are growing more stably, without going into surge. As to the east, so far it has remained unaffected,” says Nina Novikova, head of retail real estate at CB Richard Ellis / Noble Gibbons. “The East District today has only a handful of modern retail centers, given the specifics of the area,” she says. “There are many parks in those parts. As to residential areas, it is not very easy to find a suitable plot for retail development there.” But the situation is changing gradually and in several years eastern Moscow, too, will be built up with shops, Novikova holds.

“Historically, the [East] district provided housing to workers of industrial enterprises, whose purchasing power is quite low,” says Oleg Voitsekhovsky, managing director of the Russian Council of Shopping Centers. “The East accounts for a large number of industrial zones; besides, numerous transport roads run through the area. That factor diminishes the chances to find a successful plot for a retail center and breaks up the zone it would cater to.” But, in the opinion of Maxim Gasiyev, head of retail real estate at Colliers International, many industrial estates in eastern Moscow are slated for reorganization, and the demand for quality shopping centers there is by no means lower than in any other district of the capital.

Low incomes, a large number of dilapidated residential blocs, production facilities, and other factors, of course, have direct influence on rental rates in retail centers operating in eastern Moscow and in the long run – on profits, holds Dmitry Ivanchenko, leading marketing analyst at Russian Research Group. Rents are lower than elsewhere in the city. Hence, projects take longer to pay back.

Olesya Longus, analyst at Cushman & Wakefield / Stiles & Riabokobylko, believes that the East District is no longer as short of shops as it used to be several years ago. Today, more than half of all shopping centers, the construction of which is to begin or which are to be launched in 2006 and early 2007, are to be found namely in the east. Thus, the East District may be considered underestimated in terms of retail development, holds Dmitry Ivanchenko. Investors and developers shun eastern Moscow, being convinced that making money there is impossible. But judging by the number of residential developments, already commissioned or currently under construction in eastern Moscow, the potential demand for shops is high.

Mark Afraimovich, partner at Ross Group, expects modern shopping center to appear along the Third Ring Road of Moscow and the outer ring road (MKAD) in the near future. The district government has voiced support for mall developers. Speaking at numerous conferences and in the media local officials complain that the district is increasingly short of retail centers while its population grows. Developers, too, note that the district administration welcomes retail projects. “The top prefecture officials do not impede the development,” notes Tatiana Kovalyova, deputy general direct at Ekoofis. The company has a project in the east – Podsolnukhi.

Unlucky Sites

Despite the authorities’ favorable attitude towards developers, the east is notorious for dolgostroi projects – i.e. uncompleted developments and construction projects that are, literally, long in the building. That is another reason why shopping centers in the east are fewer than there could be. In previous years many projects were launched on leaseholds in the East District never to be completed. The reasons are to be found in faults of concrete plots, developers say but refuse to elaborate.

Finding a building plot in Moscow and raising a property there is a difficult task, in principle, holds Tatiana Kovalyova. Problems may arise during any stage of the project – when obtaining approval of the architectural project and permission for construction, plugging into engineering lines and in the course of financing of the project. For example, according to Yulia Dalnova, head of retail real estate at Knight Frank, one of the projects that have remained on the drawing board for years is Mosmart at 1b Stalevarov Street (43,000sqm). The project is planned to be launched in 2009, the developer is the company Gipertsentr-7. Moscow city hall decreed on allotting a plot for construction of Mosmart as early as in July 2000 (No.513-PP). Also in 2000, the city hall issued a decree concerning the project Inter MTD at the 1st km of MKAD, estate No.10, measuring a total of 33,000sqm.

A vivid example of a protracted redevelopment of an industrial territory is the industrial estate of the Serp I Molot (Hammer and Sickle) plant. The production facility, established in 1883, is one of the oldest metal works in central Russia. The city hall has long planned to move the plant beyond the outer ring road. But what made the task more complicated is that the plant facilities are divided between several owners. In line with the town-planning program for reorganization of the industrial zone No. 23 (Serp I Molot) measuring 550 hectares, effective production facilities are to be preserved while utilities and warehouse properties are to be relocated. As early as in the late 1990s the city hall planned to reduce the industrial zone by nearly 90 hectares. The plant Serp I Molot is situated next to Sokolinaya Gora industrial zone, which was included in the list of industrial territories that are to be preserved. But the zone No. 23 is not on that list.

Serp I Molot has a long history. Back in the early 1990s the Moscow city government issued one of its first decrees concerning the plant. The decree called for improving financial and economic situation of the plant, which had already been transformed into a joint-stock company by that time. The company had been hit by a heavy financial crisis since 1993. Although, the company claimed in its reports that by 1998 it had managed to increase output of steel 2.5-fold as compared to 1996, the plant was still deep in the red. By 1999 its total debt amounted to 431 million rubles (according to the Moscow decree of April 1, 1999, No. 35/1). Before the 1990s Serp I Molot was one of the key suppliers of metal products to enterprises operating in Moscow and the Moscow Region. But in the changing economic conditions the plant turned into a loss-maker. The city hall secured a stake worth 85 million rubles – the equivalent of the plant’s debt to the municipal budget. As a result, Zone No. 23 was included in the list of city-owned territories, slated for reorganization.

Already in those days it became clear that plots within the zone would be let to privately-owned companies, some of which pursued commercial development projects. Also, it was then that the first plans to build shops and offices in that zone were announced. As a result, the area soon saw the launch of an office building, a shopping center and a residential estate, developed by three different companies. In 2005, the city hall issued a new decree ordering reorganization of an industrial territory at 5 Volochayevskaya Street, which is part of Zone No. 23 Serp I Molot. The title is held by the company KROK Incorporated who plans to build an office complex there (the city hall’s decree of Oct. 31, 2005 No. 2172RP). A part of the plan territory was used for development of the Rogozhskaya Zastava retail center, with 16,500sqm of rentable space, by Sigma management company. Several years have passed since the days when the first rumors about the project began to spread and before construction works began. But delays in such cases are not to blame on the developer; they were caused by problems that had existed from the very beginning.

A lot was written about the retail center project in Abramtsevo, eastern Moscow. The hypermarket was to open as early as 2004. IKEA secured an 8-ha plot near MKAD in 2003. But it turned out that the plot was a part of the Losiny Ostrov national park. Furthermore, the government of the town of Balashikha near Moscow and the park administration both claimed title to the site. The court ruled that the disputable area was part of the conservation zone and banned any commercial development there. IKEA still has not built anything there. This year, public relations manager at IKEA Russia/Ukraine, Natalia Altynova, said the company did not abandon its plans to build a mall in Abramtsevo. The latest report by the company’s press-service says that IKEA plans to continue operations on the site in line with functional purpose of land. The developer is set to realize the project. The site, they claim, falls into the category of land bordering on a conservation area. Head of the federal environmental watchdog, Rosprirodnadzor, told Vedomosti earlier that IKEA may hold a freehold within a conservation area but it still would not be allowed to use it for construction.

Failing to Compromise

A project by Markos Group to build a 42,000-square-meter shopping and leisure center on a 2-hectare plot between Prishvin Street, Altufievskoye Shosse and Kostromskaya Street, is not a case of protracted construction. But judging by the policy pursued by the developer it is likely to become one. In 2005 the two buildings the complex is comprised of were raised to the level of floor 3 each. The complex is under construction on the site of a marketplace owned by Markos, at the company’s own expense and with a loan extended by Sberbank. The project is estimated to be worth $45 million. At first, everything went well. Developers agreed with the company Torgovy Kvartal that the latter would help them to develop the concept and find tenants for the project. The draft concept envisaged invitation of anchor tenants such as a 6-screen movie theater, a grocery supermarket, children’s amusement facilities and a home appliances store. Markos hoped to let space at the center to Perekryostok. But later on Torgovy Kvartal withdrew from the project and refused to sign a deal to run the future property.

One of the former participants in the project says that the consultant had been forced to sever ties with the landlord as the latter wanted “too much”, in other words, demanded that the management company ensure revenues seen as unrealistic by TK. Maxim Gasiyev of Colliers International, the company Markos had tried to establish ties with before signing a deal with Torgovy Kvartal, puts revenues, which may be achieved at a retail complex of such concept in that location, at $600 to $1,000 per 1sqm per year. Markos Group was unavailable for comment.

Markos Group has been active on the Moscow market for about five years, building commercial properties for rent. The group owns shops at Tsaritsyno radio market, near VDNKh metro station, several office buildings on Sretenka and a site formerly occupied by a market near Altufyevo metro station. The company reports a turnover of $50 million. Another project recently launched by the group is the underground retail and entertainment center near VVTs – the All-Russian Exhibition Center in northern Moscow.

Analyze the Market

The company Torgovy Kvartal, currently examining a building site on Budyonny Prospekt for development of a shopping center, has carried out an in-depth marketing survey of the area, Yelena Brunova, marketing manager at TK, has reported. The results are as follows: Sokolinaya Gora district has 80 production companies and research institutes employing 12,000 to 14,000 people. Then there are 900 small businesses active in the district. Budyonny Prospekt houses retail complexes of varying quality, raised at different times. To a certain extent they may vie with the future project.

One of the potential rivals is the 5,000sqm Semyonvsky shopping center, launched in 1997. It is situated in a bustling area near a metro station and has convenient driveways making it easy to access it from Shcherbakovskaya and Velyaminovskaya streets. But the complex falls short of top class standards due to lack of famous brands and poor quality of fine finish, in the opinion of the authors of the survey.

Another complex operating in the area is the 7,000-square-meter Pervomaisky, with Shchyolkovskaya metro station and several bus stops in the vicinity. Built in the 1980s, the property underwent reconstruction, which was confined only to changes in internal layout of the building. The concept is ineffective, TK’s analysts are convinced.

The shopping center Rogozhskaya Zastava is situated at the intersection of Shosse Entuziastov and the Third Ring Road. Tenants are famous companies Pyaterochka, Familiya, Sprandi, Platinum Fitness and others. The center has a well-organized parking area. The complex is a redeveloped industrial facility.

A retail store on Izmailovsky Boulevard run by the Sunflower chain is seen by the authors of the survey as Torgovy Kvartal’s key rival. Other potentially strong competitors are the second stage of Semyonovsky retail center on Semyonovskaya Square, Mosmart on Shosse Entuziastov, Gorod on Ryazansky Prospekt, Mozaika on 7th Kozhukhovskaya Street and Podsolnukhi on Oktrytoe Shosse.

Not all of the Big Four consultants recognize the above-mentioned projects as "modern and quality shopping centers." But those four leading real estate consultancies (which make up the so-called Big Four) apply rather strict criteria of assessment of such properties.

Kovalyova admits that the company's experts took their time to study the market in order to determine what type of property should be raised on the site acquired from the company Rosbuilding next to Ulitsa Podbelskogo metro station. If the company had opted for mall development on the site, the project would have had to be built from scratch or the existing property would have had to undergo redevelopment. As a result, 2005 saw the launch of Podsolnukhi. What is to be seen today on the site is but the first stage of a more ambitious project planned by the company.

For the property not to stand idle and to bring revenues developers decided to reorganize the existing facilities and launch shops of various retail profiles on the site. The shopping and amusement center occupies the area of 4.6 hectares and is comprised of three buildings – two shopping venues measuring a total of 20,000sqm and a 1,900-square-meter office facility. The project also features an open-air parking area providing 500 car-spaces.

One of the buildings houses a furniture store Mebel Rossii (Furniture of Russia), the other has a Perektryostok supermarket, a home appliances and electronics store Eldorado and a clothes shop for medium income buyers Familiya. The complex features a shopping gallery with shops selling shoes, clothes, linen and underwear, jewelry, leatherwear, etc.

“We do not specialize in shopping centers, but we came up with Podsolnukhi because we had ruled that the site was most suitable namely for development of a retail center,” says Tatiana Kovalyova. “Besides, there was no such major complex in the area before. What is favorable for Podsolnukhi is the proximity to trunk roads, including the planned Fourth Ring Road, metro and light metro lines, as well as an increase in local population.”

For the time being Podsolnukhi targets residents of three districts – Bogorodskoe, Preobrazhenskoye and Metrogorsk. Developers expect the project to pay back in two years. Kovalyova says that in the beginning the company was tempted to building something similar to a covered market, especially considering that the district is populated largely with low- and medium-income households. But at some instant the Ekoofis team came to realize that the site could be used for construction of a profitable quality shopping center that would attract buyers not only from local areas but also take on regional significance.

In the future Ekoofis plans to build a modern shopping center next to shopping pavilions. The developers would like to include an exclusive feature in the project, something none of Moscow malls have ever seen before. Kovalyova says that perhaps that will be some unique format of a department store – a model widely used by German operators whereby they unite several well known brands of clothes and shoes under the same retail brand. Ekoofis was lucky to secure the site. The prefecture was interested in construction of a shopping center or amusement facilities that could be used for holding all sorts of community events. A square near the entrance to Podsolnukhi carries out that function today. “Our wish in this case has coincided with the plans of the administration,” Kovalyova notes. Ekoofis paid $8 million for the property of a motor depot. Reconstruction costs ran into $3 million. The company had to re-route engineering lines. On the whole, the project currently in operation on the site has required spending approximately $14 million.

On the opposite side of the Yauza River Ekoofis has acquired another freehold, at 11 Semyonovskaya Street. The property occupying a plot of 3 hectares is to be redeveloped into a commercial project with shops and offices.

In the opinion of Dmitry Ivanchenko, the East District has good prospects. Experts at Torgovy Kvartal agree with him. The population of the area is likely to grow. New housing construction will be launched in the areas where Soviet-era 5-storied residential blocks are being pulled down and on the sites of production facilities slated for reorganization. The population is likely to grow 1.3 to 1.5 times as new apartment houses are raised.