Money Growing: Million-dollar Shopping

The implications of such "shopping mania" are self-evident. The rivalry between shopping malls for shoppers' purse is in full swing, while retail operators gradually come to realize that the consumer is, after all, the key figure for whose sake the entire investment project is initiated in the first place. From the standpoint of a man in the street St. Petersburg's retail real estate, having reached a certain degree of maturity in 2006, is only just entering the most exciting stage of development.

Shopping Rush

Analysts’ estimates of the volume of retail space launched last year vary as usual, but all agree that it has already exceeded the 1 million square meter mark. Colliers International puts the size of retail space commissioned in 2006 at 1.175 million square meters and the number of new shopping malls launched across the city at 39. Analysts at Praktis Consulting & Brokerage argue that as many as 48 new malls were launched, measuring a total of 1,211,700sqm including 821,400sqm of rentable space. IB Group’s statistics show that 46 projects measuring a total of 1,355,000sqm and providing 968,370sqm of rentable space have been launched.

The reason for those discrepancies is that developers permanently postpone commissioning of their projects and revise project parameters after building works start.However, it is clear that the long-anticipated retail boom in St. Petersburg has already begun. “A look into the dynamics of launches of new properties, of which 374,000sqm were finalized in 2003, 384,000sqm in 2004 and 280,000sqm in 2005, offers a clear picture of what exactly was happening on the market last year,” says Yuri Borisov, managing partner at IB Group.

The 4th quarter accounted for the largest share of shopping space finalized last year, with a total of nearly 650,000sqm launched in the last three months of 2006, Praktis C&B reports.

“Today, consultants come up with varying estimates as to supply of modern retail space per resident in St. Petersburg. In particular, they often put that figure at 200sqm per 1,000 residents,” Yuri Borisov says. “In our opinion, those figures are hugely understated. Of course, each consultant proceeds from his own perception of "prime retail space" but even if only rentable space in European-style shopping malls launched in 2006 is taken into account we will come up with the aforementioned figure of 200sqm per 1,000 St. Petersburgers. And this - without taking into consideration retail complexes and hypermarkets launched earlier as well as top-quality street retail projects on Nevsky Prospekt, Bolshoi Prospekt on Petrogradskaya Storona and other busy thoroughfares. I assume that following last year’s developments St. Petersburg holds the lead in terms of supply of shopping space in this country and is far ahead of other Russian cities.” Becar estimates the supply of shopping space at 441sqm of space built in line with international standards per 1,000 residents.

However, quantitative characteristics in this case are hardly the issue of utmost importance. In 2006, the market experienced a qualitative breakthrough. “St. Petersburg eventually saw the beginning of construction of the so-called format-driven shopping complexes with a well thought-out concept, not just such as occupy lucrative spots next to metro stations. The city now has family-oriented shopping and leisure centers where visitors are ready to spend a whole day on weekend,” says Yulia Drovyannikova, chief executive at Praktis Consulting & Brokerage.

A landmark event of the year is, undoubtedly, the launch of two Mega malls in Leningrad Region, just outside the city next to KAD (outer ring road) southeastwards from St. Petersburg (Mega Dybenko) and northwards (Mega Parnas). The two projects worth a total of approximately $300 million opened at an interval of two weeks one after the other, adding over 300,000sqm of shops to the city’s supply of retail space. IKEA expects a payback on both developments in 7 to 10 years.

The malls were built on freeholds of approximately 60 ha each, acquired by IKEA. . The projects are similar, just like all other Mega malls operating in Russia. Although, the Kudrovo mall (Mega Dybenko) is somewhat larger. . The total area of the super-regional mall exceeds 170,000sqm, 75% of properties are rentable. The main anchor tenants are IKEA (24,000sqm), Auchan hypermarket 20,000sqm, a DIY store run by Germany’s OBI chain (14,000sqm) and Media Markt (5,000sqm) – the first store launched by the German home appliance chain in Russia. In the fall of 2007 they will be joined by a multiplex cinema providing 9 to 10 screens to be run by Russian-U.S. company KinoStar (8,000sqm).

Mega Parnas in Bugry measures 138,000sqm, offering a similar choice of shops and leisure venues, although a home appliance store will be run by M.Video, not Media Markt. .

Southern Mega will bring together nearly 200 tenants; the northern mall will house approximately 150 retailers. Shopping galleries will house shops by Marks & Spencer, TJ Collection, Ecco, Mango, Bestseller, Adidas and others.

Both complexes have unprecedented parking capacity of 9,000 spaces in Kudrovo and approximately 7,000 in Bugry. The projected attendance rate for each mall is 20 million shoppers in the first twelve months of operation.

Yet another retail giant entered the market in February 2006. The shopping and leisure complex Grand Kanion (Canyon) was launched by a local developer on the northern outskirts of the city, near the metro station Prospekt Prosveshcheniya (on Engels Prospekt). The company OAO Solomon had rebuilt an unfinished development of the former weaving mill into a 75,000-square-meter shopping mall. Nash Hypermarket (run by the Moscow-based chain Sedmoi Kontinent) and the 9-screen multiplex theater Cinema Park launched operations at Grand Canyon, on 9,000sqm. Other anchors are M.Video, two department stores run by Stockmann – Bestseller and Seppola, children’s leisure center Premier Park and others. Curiously, the new complex was raised right next to an operating commercial center housing shops, billiards rooms, bowling alleys, fitness facilities, etc. As a result, the joint retail and entertainment zone expanded to 150,000sqm, thus challenging Mega Malls.

Enlargement of retail projects is one of the noticeable trends of the year. Properties measuring over 30,000sqm account for approximately 27% of all complexes launched in 2006. As many as 14 new super-regional and regional shopping and leisure complexes measuring a total of over 700,000sqm were built in the city (source: Praktis C & B).

Targeting Common People

Another visible sign of late is the decentralization of the city retail market. Developers are forced to admit that all the best spots in central locations and next to bustling transport hubs are no longer available for construction. Hence, their attention is now focused on commuter areas that remain largely underdeveloped in terms of retail. Even more so as the skyline of bedroom suburbs is changing rapidly as the city administration pursues the plan to step up housing construction in defiance of public protests. New residential estates targeting a burgeoning middle class are mushrooming within lower-income communities built up with standard panel apartment blocks.

As a result, last year the city witnessed launches of several shopping and leisure complexes, which are expected to have a profound impact on the way of living in communities that are far from prosperous such as Frunze, Kirov, Krasnogvardeisky districts.

The first mall opened in the area was Yuzhny Polyus (“South Pole” in Russian), launched in February 2006 in Kupchino, at the intersection of Prospekt Slava and Prazhskaya streets. The 35,000sqm project has succeeded in letting space to Perekryostok supermarket chain, M.Video, Bowling City, Intersport, family-oriented leisure center Star Galaxy, Mexx, TJ Collection, Carlo Pazolini, Peacocks and others. “Some two or three years ago few believed that this location was suitable for retail. However, [the mall] succeeded in creating a tenant mix comparable to that of the centrally located Sennaya Mall. That means for retailers an increase in locals’ purchasing power is self-evident,” says Yuri Borisov, whose IB Group developed the concept and acted as an exclusive leasing agent and property manager for Polyus in the first 12 months of operations of the mall.

In April 2006, Adamant Group launched its new retail project, the shopping and leisure center Kontinent, at the corner of Prospekt Stachek and Marshall Kazakov Street -- the largest shopping center in Kirov District. The five-storied complex measuring 60,000sqm houses a Perekryostok supermarket, household goods store Domovoi, children’s shop Detsky Mir, 7-screen multiplex theater Karo Film and a fitness center featuring a swimming pool Reebok.

In December, a 46,500sqm shopping and entertainment complex Iyun ("June") providing a 3-level indoor parking facility was launched at the intersection of Kosygin Prospekt and Industrialny Prospekt (Rzhevka Porokhovyye commuter area). The mall is the pilot project by Regiony Group who are set to build a chain of 20 shopping centers in large Russian cities. Anchors are Mosmart hypermarket - the first outlet launched by Mosmart in St. Petersburg, Detsky Mir and Sportmaster department stores. Approximately 50% of rentable space in Iyun is allocated for leisure facilities (Bowling City, Extra Sport fitness center, five-screen theater Matritsa and Star Galaxy).

Incidentally, such a correlation between leisure facilities and shopping space in newly built malls first became visible namely in 2006. Developers do not confine themselves just to bowling alleys and food courts and undertake more ambitious projects.

Last year St. Petersburg saw the launch of Russia’s first-ever mall oceanarium. The 5,000sqm 3-level facility opened in April 2006 at the 28,000sqm Planeta Neptun (Planet Neptune) shopping center on Marat Street, where 32 aquariums operate quite successfully in the company of a Perekryostok supermarket, Dino Park amusement park and a shopping arcade. The project is estimated to be worth $36 million.

The shopping and leisure complex Varshavsky Ekspress (Warsaw Express) launched on the premises of a landmark Varshavsky train station on the embankment of Obvodnoi Canal, claims the title of the first entertainment complex of citywide scale. The developer - Adamant - has allocated half of the entire area of 34,000sqm for a standard assortment of leisure facilities, including a 9-screen multiplex theater Karo Film, gaming complex Shangri La featuring a casino, restaurants, a night club and a mini-hotel, Game Zona amusement center, AMF bowling alley, etc.

Visitors queue up to the shopping and leisure center Rodeo Drive, launched in December in the northern suburb of the city (1 Prospekt Kultury). The point of attraction at Rodeo Drive is the water park featuring a spa center. Until recently, none of the developers working in St.Petersburg had ventured on combining shops and water amusement facilities, and the only water park in the city operated at Pribaltiiskaya Hotel. The developer of the ambitious project is the investment and property management firm Makromir. The cost of construction of the 47,450sqm complex is estimated at $51 million. Half of rentable space is occupied by the amusement zone, which features a multiplex theater, billiards rooms, etc. Makromir’s representatives believe that in long term Rodeo Drive’s leisure zone will give the mall an advantage over rivals and ensure high attendance.

“Unlike Moscow residents, St. Petersburg are less keen on shopping and prefer pleasant pastime. That is why leisure facilities will play an increasingly important role especially in district malls that are unable to vie, say, with Mega by the number of shops. This will inevitably bring about a slump in returns," says Yulia Drovyannikova.

The number of hypermarkets and specialized retail projects grew rapidly across St. Petersburg in 2006. For example, the retail chain Okay opened five new outlets. As many as nine Karusel stores and two Lenta supermarkets were launched.

The market of DIY stores has been formed. Several international chains of DIY stores arrived in St. Petersburg, seeking to challenge local stores of household goods and construction materials by offering similar goods at lower prices. In the summer of 2006 Castorama launched its first store in Nevsky Disrict. Within just a couple of months OBI opened three hypermarkets, in Garden City and both Mega malls. Finnish company Rautakesko launched two stores of K-Rauta chain near city exits. Local operators, too, reported active growth. Among projects launched by domestic retailers are two Metrika stores, a new Maxidom and the first hypermarket of the chain Start, to name but a few.

Chasing Shopper’s Purse

In the course of the past twelve months rents at professional malls grew stably, by 9-13% on average, Colliers International reports. The upper limit stood at $2,000 to $2,400 per 1sqm per year. The majority of shopping and leisure centers reported occupancy rates of 95 to 98%. Nevertheless, the questions as to how elastic the market is and when the crisis of overproduction will hit sound increasingly more emotional. “According to our estimates, the demand/supply curve of retail space is unlikely to reach the inflection point where the landlord’s market evolves into the tenant’s market prior to 2010-2012. Which factors impede retail saturation? An increase in individual incomes, a shift in consumer preferences towards retail chains, considerable potential of depressive zones within the city, ‘incorrect’ shopping centers that still exist and are being built, and arrival of new operators. Among those are retailers themselves, professional investors interested in acquisition of readymade shopping and leisure complexes and finally development network companies, of which there is still an acute shortage here. They are the ones who are supposed to introduce a new product that would arouse interest of institutional investors," Yuri Borisov assumes.

“I think that what is in store for us is not a crisis of overproduction but a normal natural selection, strictly according to Darwin, where weaker projects will be ousted by the fittest. Sadly, St. Petersburg has plenty of faultily designed, poorly built shopping centers with inappropriate tenant mix. Nonetheless, the market is still short of approximately 1.5 million square meters of truly professional space. Only after this shortage is eliminated the true rivalry will begin among modern projects, as tenants will be able to choose between the good and the best and rents may begin to drop," holds Boris Yushenkov, general director at Colliers International St. Petersburg. “That is why what we are likely to witness in near future is a mass re-conception initiated by sensible landlords, not price wars between them.”

The first examples of projects aimed at revising mall concepts were registered in the city in 2006. The shopping complex Torgovy Mir Svetlanvosky on Engels Prospekt – one of the oldest city malls targeting higher-income earners – underwent renovation, with support from Colliers International’s consultants. But then, the age of the complex is not the key. Owners of the newly-built Kosmopolis shopping center, launched in the spring of 2005 on Vyborgskoye Shosse, too, are considering revision of their mall concept. River House on Prospekt Medikov is another project in dire need of re-conception. All those properties operate in locations that are hardly ideal for retail that is why they were the first to suffer the implications of the growing competition.

In 2006, even the most widely publicized and quite successful retail complexes were contemplating promotion campaigns, while newcomers, despite their up-to-date concepts and a strong mix of anchor tenants, engaged in active struggle for buyers.

“The competitive environment of today is profoundly different from that of some three or four years ago," says Yelena Marinicheva, head of marketing and advertising at the property management company Adamant. “Back in those days our holding in fact held a monopoly on retail space, whereas today the buyers are given a choice of quality malls. As a result, over the past 12 months Adamant stepped up its marketing and promotional activities. In certain complexes we hold six to eight major advertising campaigns a year, targeting both local residents and shoppers from other parts of the city.

Grand Canyon holds at least one major campaign once in every four weeks on average, and a couple of smaller events (targeting locals). Events are timed both to public holidays and our “personal”, corporate events such as a launch of a restaurant, sports competitions, etc. In the first twelve months of the mall’s operation it held a number of promotion campaigns, such as April Lotteries, School Graduates Day, Starry Rain, to name but a few. Tenants, of course, take part in all the events.

New Shopaholics

Mall projects are becoming increasingly costly and complicated. In particular, investors have stepped up activity in the city center where hitherto ambitious retail projects were rare. Nowadays, in the area around the train station Moskvosky alone as many as three development projects are underway. The company Stockmann has begun construction of a 100,000sqm mixed-use providing offices and shops.A mall measuring approximately 200,000sqm planned by the construction company SK Briz is currently on the drawing board, while Aditum investment firm has resuscitated its plan to develop an underground shopping complex on Ploshchad Vosstaniya [square], where survey work is currently underway. The projected area of the two-level complex is 42,500sqm. "Only recently the idea seemed futile, costly and complicated from the standpoint of engineering, legal status of the future property, etc; but today we are certain that it may prove viable,” says Alexander Dymov, general director at Aditum.

“Retail construction will continue on the outskirts, first and foremost, along KAD (the outer ring road) and in new residential areas, such as Baltiiskaya Zhemchuzhina (Baltic Pearl),” Oleg Spivak, head of Becar Consulting, believes.

Another 750,000 to 800,000sqm of retail space are slated to be commissioned in 2007, Becar reports. In actual fact, analysts expect no more than 580,000 to 680,000sqm to be launched as it has to be born in mind that developers often fail to meet construction deadlines.

Among the ambitious projects expected to open this year are Piter Raduga, Severny Mall and other shopping venues.

“Last year we witnessed the first investment deal on the St.Petersburg retail real estate market. Austria’s Meinl European Land acquired the shopping center Severny Mall (Northern Mal), currently under construction, from the Italian firm Promocentro. 2007 will see the number of such deals rise as international funds are showing increased interest in our city," Yulia Drovyannikova assumes. "St Petersburg developers need to adjust to requirements set by such customers and bring their products in line with the standards applied by them. That is why as the retail market grows saturated investors’ attention shift from development towards operations with readymade properties.”