Money Growing: Nizhny Novgorod Keen on Work and Shopping


Developers' activity brings about a slump in returns on shops and office properties. Warehouse property sector remains underdeveloped as investors are warded off by high risks such projects are believed to be fraught with. The hospitality sector, too, is in the early stages of development. The city still has no luxury hotels; there are only two first class hotels and the supply of moderately-priced accommodation (2- and 3-star hotels) is scarce.

Plenty of Shops

Nowadays, the city’s stock of retail space is estimated at 65,000 to 750,000sqm, according to various analysts. There are approximately 3,000 shops operating in the city, 20 of which are large shopping centers. Last year six malls were launched in Nizhny, measuring a total of 200,000sqm. Those include Zolotaya Milya (24,000sqm, raised by development company Elektronika), Muravei (26,000sqm, Zemlyane), Perekryostok on Plotnikov Street (11,800sqm) and Park Avenue (10,500sqm, Gorodskoi Proyekt). In October 2006 Ikea opened Mega Mall in a suburban area outside the city (113,000sqm).

Alexei Chemodanov, head of information and analysis at Triumf Group, says that yields -- expressed as the ratio of annual rent to the property sale price -- are the highest in office and retail sectors. Although, in 2006 those indices dropped from 32 to 25% and from 22 to 17% respectively. Chemodanov explains the drop in yields by the fact that office and retail investments are becoming less risky. “Retail property market is becoming increasingly competitive,” agrees Tatiana Romancheva, head of Nizhny Novgord Scientific Expertise Center (NTsNE). Local authorities have reported that in 2006 retail turnover in Nizhny Novgorod Region grew 10.9% to 169.8 billion rubles. January 2007 saw a 18.7% increase, to 14.9 billion rubles.

Oleg Sorokin, general director at the company Stolitsa Nizhny, says that the city still feels a shortage of shopping space. He estimates the shortage at 200,000 to 300,000sqm. However, Sorokin is skeptical about the sector's prospects. “Individual incomes grow by 15% per year, while the stock of retail space increases by nearly 40%. In some three years from now the crisis will hit, as the city will have more shopping centers than retail operators and rents will drop," the developer is convinced.

Sorokin’s pessimistic forecasts are based on the following arguments: the city has allotted so many plots for mall construction that the number of planned projects may prove much higher than Nizhny Novgorod needs. Today, all of those sites are actively developed. Construction of numerous shopping centers is planned in 2007-2008. The largest are Mosmart, a 30,000sqm facility raised by Gipertsentr Development, Okay Hypermarket (10,000 to 12,000sqm, Dorinda), retail and office center Lobachevsky Plaza (40,000sqm including 15,625sqm of shops), shopping and leisure facility Kalinka Malinka (150,000sqm, ADM Group), etc. The company Stolitsa Nizhny plans the second and third stages of the shopping and leisure center on Rodionov Street; as a result the area of the mall will increase to 150,000sqm; Striot, another developer, has pledged to launch a shopping center measuring 20,000 to 25,000sqm on Beketov Street.

Andrei Chernov, director at shopping center Avrora, says that as early as today practically all shopping spaces across the city are occupied and tenant migration has begun. “Well-known nationwide brands have established a strong presence new shopping malls while smaller shops are dominated by local retailers,” Chernov says. Vacancy rates at Nizhny Novgorod retail centers do not exceed 2 to 3%. In some of the shopping centers developers let units on competitive basis. Such tenders are practiced, for example, by developers Zemlyane and Elektronika. Only overpriced units remain vacant.

Chernov anticipates an imminent drop in rental rates as a result of glut. That will cause many owners of shopping centers to rethink their strategies: some will redesign their properties for office use, others will focus on narrower specialization in retail, and still others will move their businesses to the outskirts. Romancheva says that today practically all major brands have established their presence in Nizhny Novgorod; operating malls are actively expanding their leisure and catering facilities, creating new opportunities for tenants by offering them a wide range of services, including centralized security.

Retail centers are distributed unevenly across the city. Central districts have supermarkets and large department stores, while the parts of the city across the river are still underdeveloped. Roman Trushin, leading specialist at the Center for Commercial Real Estate (TsKN), explains that historically the upper Nizhny Novgorod comprises prestigious districts where residents have higher incomes and greater purchasing power than on the outskirts.

Format Scarcity

For the time being the majority of retail outlets operating in Nizhny Novgorod are either Soviet-era stores or newly-built retail centers. Property experts call for development of alternative formats.

These days, for examples, chains of DIY stores are opening across the city. Several years ago construction materials were sold in smaller, poorly equipped properties. In 2006 OBI launched two specialized hypermarkets – in Mega and on the premises of a shopping and retail center of Rodionov Street.

A bit earlier the city saw the arrival of Moscow-based and international retail chains Ramstore (the development company Ramenka), Metro Cash & Carry (Metro AG), Karusel (Pyaterochka, St. Petersburg), Auchan (at Mega), and a chain of children’s goods Banana Mama (Moscow).

Yuri Kuzmichev, head of the company Biznes Dlya Biznesa (Business to Business) believes that convenience stores have good prospects in Nizhny Novgorod. Also, retailers and developers could benefit from car dealerships operating next to major shopping malls and offering a wide range of cars of Russian and foreign make. For the time being, that segment is dominated by Gorkovsky car plant (GAZ), which actively develops a chain of its dealerships.

Forecasts With Reservation

According to Triumf’s estimates, by early March 2007 retail space in the city was let at the average rental rate of $29 per 1sqm, following a 17.5% growth in 2006. Chernov says that rents grew by 10-25% over the past year. Today, shops in the upper part of the city are let at $100 to $150 per month. In less prestigious parts of the city across the river tenants pay $30 to $60 per 1sqm per month, although sometimes small units are let at rates exceeding $300 per 1sqm per month. Romancheva has reported that a monthly rent for a built-in unit on the city's main street Bolshaya Pokrovskaya stands at $50 to $70; units at large retail centers are let at $45-50 per 1sqm and over.

Marina Ushenkina, senior investment manager at Marchmont Capital Partners, says that rental rates for especially competitive units grew 1.5-fold in 2006; sale prices grew by 77.8%. TsKN has reported that as of late February, retailers were charged 200 to 6,000 rubles per 1sqm per month, depending on location and quality of property. The highest rents were charged in Nizhegorodsky District (420 to 6,000 rubles), the lowest in Sormovsky (250 to 1,200 rubles per 1sqm). Sale prices range from 19,000 rubles per 1sqm in Kanavinsky District across the river to 120,000 rubles in central parts of the city.

Most experts refrain from making forecasts concerning rent and sale price dynamics in retail sector for the next year, those figures being too dependent on a variety of factors, such as inflation, arrival of new operators, location of properties rented or sold, etc.

Opinions of those who do venture on making estimates vary greatly. Chemodanov believes that rents in bustling commercial areas may increase by 20-25% within the next 12 months, whereas Chernov says that growth is unlikely to exceed 10% as shopping centers slated to be launched this year have already been rented out. Trushin expects no surges in retail prices in 2007, similar to those registered in April – June and November 2006, along with an increase in home prices. “The demand for retail space is yet to be satisfied, vacant units are scarce,” he adds.

Waiting for Office Centers

The market of office property market in Nizhny Novgorod is relatively young. Business centers launched in 2005 and 2006 fall short of top class criteria. The only class A office property in the city, according to real estate specialists, is the 22,000sqm Stolitsa Nizhny on Gorky Street in Nizhegorodsky District, owned by Stolitsa Nizhny group of companies. .

The city’s total office stock is estimated at 1.5 million square meters. This includes modern business centers and older administrative developments, as well as first-floor units in residential compounds, redesigned for office use. Analysts hope that the market situation will change radically in 2007 through 2009. The launch of several prime office buildings are planned for that period. Those are Lobachevsky Plaza, first stage of the regional World Trade Center, office and exhibition center Penthouse Palace, office centers Na Strelke, London, and a property on Rodionov Street. Today, there are over 20 projects under construction in the city, which are to provide a total of 120,000sqm of office space.

Triumf Group reports, that within the next two years approximately 200,000sqm of offices (including units planned in residential buildings) will be launched in Nizhny Novgorod, increasing the office stock by 13%. At least 150,000sqm of offices are to be build in centrally located districts Nizhegorodsky and Sovetsky. Romancheva believes that over 200,000sqm of offices will be commissioned.

By 2010, the second and third buildings of the World Trade Center complex are slated to be launched (85,000sqm) by Regionalny TsMT management company. Construction of the first stage of the City Strelka business center will be finalized in 2012-2013, by development company Razvitiye Nizhegorodskoi Oblasti (Nizhny Novgorod Region Development). The center, estimated to be worth $4 billion and measuring a total of 3 million sqm, is to be built in seven stages, the first stage being 2 million square meters.

What, Where and How Much

Nizhegorodsky District of the city accounts for 38% of NN”s office stock, Romancheva reports. Smaller units measuring below 100sqm are especially sought-after. Sergei Ryabov, head of information and analysis department at the agency Vybor, says the demand exceeds supply 2.5-3-fold. Chemodanov notes that today the only offices that fail to attract tenants are either units of poor quality or highly overrated properties.

According to Vybor, the demand for large and medium-size office is satisfied only by 20 to 30%, as offers are quite scarce. “The demand for smaller offices is higher but they are easier to find," Ryabov adds. He anticipates a further increase in demand. This is brought about both by economic growth and arrival of Moscow-based and international investors. “As recently s some 3 or 4 years ago investors did not show such a keen interest in our region," he says.

Office rents and sale prices are growing faster than in the case is in retail. In 2006 rents grew by 40-50%. By late February 2007 offices were let at 100 to 1,562 rubles per 1sqm, TsKN reports. The cheapest units were to be found in Sormovo (100 to 1,140 rubles per 1sqm); rates soared in Nizhegorodsky and Leninsky districts, 267 to 1,500 and 300 to 1,500 rubles respectively. Office rents in Kanavinsky District, near Moscow Train Station stood at 1,562 rubles per 1sqm per month.

Sale prices fluctuated between 12,015 rubles per 1sqm in Sormovsky District and 110,000 rubles in Nizhegorodsky.

“The emergence of modern office centers in NN will bring this segment of the market onto a qualitatively new level, which on the one hand may stop the growth in prices and rents charged for lower-grade properties, on the other, result in higher prices throughout the sector," Chemodanov notes.

In his opinion, this year rents are likely to rise by 15 – 20%. Vladimir Lashmanov, commercial director at TsKN, agrees ,but notes that the actual increase will depend on a variety of factors, including housing and utility rates and the overall market situation.

Warehouse Proceeds

The rate of return on industrial and warehouse property sector did not change in 2006, Triumf Group reports. It still stands at 20% per year. Investors are not keen to tap that sector as risks are high, Chemodanov explains. Trushin says that warehouse property sector in the region is underdeveloped as Nizhny Novgorod is still behind other major cities such as Samara or Kazan. Nikolai Zarubin, head of logistics at Logoprom Sormovo, says that companies offering services of better quality are likely to secure higher returns.

The city’s stock of warehouse space amounts to 378,000sqm, TsKN reports. According to the experts at PLA (Volga Region Logistics Association), in mid-2006 Nizhny Novgorod had 360,000sqm of office space. Chemodanov admits that precise statistics are not available. Some experts believe that the city has at least 4.5 million square meters of warehouse and industrial facilities. “That figure may seem impressive, as compared to other segments of the market, but those are for the most part low-grade properties,” Chemodanov explains.

The only class A storages operating in the city are a 10,000sqm complex of Alidi, regional distributor for Procter & Gamble and Nestle, and a 5,000sqm property redeveloped by Logoprom. There are prime storage facilities operated by grocery distributor Sladkaya Zhizn and Coca-Cola but they do not let space to outsiders.

Zarubin says that by the end of this year Logoprom Sormovo plans to complete refurbishment of the entire warehouse complex of 50,000sqm and transform it into a class A terminal. By 2009 the company plans to raise a multimodal (motor-rail) logistics facility on M7 motorway, 10 km southwards from Nizhny Novgorod, with a capacity of 150 coaches and 200 trucks per day. As a result Logoprom’s container terminal capacity is expected to exceed 250,000 TEU per year. Today it stands at 100,000 TEU.

In 2007, 200,000sqm of storage facilities are to be launched in Nizhny Novgrorod, PLA reports. On the list of ambitious projects is the development of a logistics complex on the site of Doskino farm in Avtozavodsky District of the city. Regional government is looking for an investor for that project. TsKN expects developers to vie for building plots along M7 motorway near Nizhny Novgorod. Today, the company Alidi has a warehouse complex in the area. Within the next few years Alidi plans to launch another 40,000sqm of prime storage facilities. Some of them will be commissioned in 2008.

Storages in Nizhny Novgorod are let at $40 to $100 per 1sqm per year. The size of rent does not depend much on location. Importance is attached to quality of facilities, proximity to transport route and rail links. “Unheated storages are the cheapest, while heated storages in good condition are let at the highest rates. Especially expensive are small storages in Nizhegorodsky and Sovetsky districts where supply is scarce,” Trushin adds.

In 2006, the average rent grew 33%; as of March 1, 2007 it stood at $72 per 1sqm per month, Chemodanov reports.

Andrei Ivanov, PLA president, puts rental proceeds at 170 to 200 rubles per 1sqm of storage space on average, which is half as much as in Moscow, while paybacks exceed 10 years. But Ivanov believes that warehousing and logistics outsourcing has good prospects.

Most experts assume that further development of the retail sector will boost construction of warehouses. For the time being local operators are not strong enough to afford to take up construction of class A properties for own use. “Nizhny Novgorod is only 500 km away from Moscow, and logistics services are provided chiefly by companies from the capital,” Ivanov says.

Inhospitable Business

The hospitality sector is widely believed to be a business of great expectations but small projects. Numerous Moscow-based and international hotel operators constantly announce plans to build new accommodation facilities in Nizhny Novgorod. The Moscow-based retail company Russkaya Troika plans to raise a 25-storied shopping and leisure complex featuring hotel on Meshchersky Boulevard. Volgo-Vyatskaya building company (VVSK) considers construction of a complex comprising a 7-storied hotel and a residential estate, 25 stories tall, near Sennaya Ploshchad in Nizhegorodsky District. Hotel projects are planned in World Trade Center, currently under construction, and on the premises of the business center City Strelka. Kempinski, Marriott and Accor have expressed interest in the city.

Investors also examine hotel projects in countryside locations. Moscow-based Heliopark Group is set to launch construction of a hotel complex Heliopark Port Savin in Borsky District, 30 km away from Nizhny Novgorod, on the bank of the Volga River. The company plans to spend $30 million on the project, slated to be commissioned in late 2008. The complex will feature a 3-star hotel facility providing 212 rooms and 26 bungalows.

Hotels launched in the region in 2003 through 2008 were small properties, raised chiefly by local developers. Those include first class hotel Alexandrovsky Sad (49 rooms) on Nizhne-Volzhskaya Embankment and Nikola Khaus (31 rooms) near Bolshaya Pokrovskaya. Alexandrovsky Sad was built by a local company Vika; Nikola Khaus by Dmitry Volodin, a local entrepreneur.

Today, NN has over 60 operating hotels, Marchmont Capital Partners reports. Approximately 10 of them are large properties, including the 3-star Tsentralny (Central Hotel) with 500 rooms, Oka (3-star, 200 rooms), Volna (first class, 198 rooms), Volzhsky Otkos (180 rooms, 2-star) and Zarechny (141 rooms). Other properties provide less than 100 rooms each.

Local hotels are either new developments or refurbished Soviet-era complexes, Romancheva says. Oka underwent reconstruction in 2005, having spent $1.5 million on the project. Central Hotel, too, has been refurbished.

Hotel complex Nizhegorodsky is to be refurbished by late 2008. The project is estimated at 90 million rubles. The redeveloped facility will provide more rooms, including two penthouse suites.

Regional officials hope to boost hotel construction by promoting the city as a travel destination. Lately, the authorities have focused on distribution of travel guides and actively participate in nationwide and international travel industry forums. Last year, the regional government adopted a plan for tourism development for the years 2007 to 2010.

The authorities are ready to partially reimburse interest payments on loans raised by hotel developers and participate in creation of museums and organize staff training. The objective is to raise at least 7 billion rubles for the industry. Officials expect up to 1.4 million Russians and 100,000 foreign tourists to visit the region annually.

Oleg Rybin, chief architect of the region, believes that as commercial activity grows and the region's standing improves major companies establishing their presence in the city will generate demand for top class hotels.

According to the local government’s department for foreign economic ties, occupancy rates at Nizhny Novgorod hotel grew by 10% and reached 25% on average in 2006. Experts put that down to widening of economic ties and an increasing inflow of business travelers. Romancheva notes that occupancy rates soar only during forums, exhibitions and major conferences held in the city.

Chemodanov is skeptical about the city’s tourism potential. “Nizhny Novgorod is an industrial city with numerous commuter areas. The only field represented here is river tourism. But even those who come by boats [on river cruises] do not stay here,” Chemodanov says.

Hotel prices soar despite poor quality. Guests at 4-star hotels Volna and Alexandrovsky Sad are charged 3,640 to 4,940 rubles per day, for a single standard room. Luxury suites at Alexandrovsky Sad cost 20,370 rubles per day, at Volna $37 to $1,300. The cheapest room at Nikola Khaus costs 2,950 to 3,700 rubles, a standard room 4,660 to 5,500 rubles, and luxury room 9,250 rubles. Economy class hotels charge 2,500 to 3,200 per room, luxury rooms cost 8,000 to 8,700 per room.

Experts believe the local hospitality sector has good prospects given NN’s economic potential. Major operators do not rule out that in the future they may take up hotel development in the city. But that will not happen until retail and office sectors are fully developed. Stolitsa Nizhny is considering hotel projects. “But for the time being we are cautious about the prospects of that sector as it is very specific,” Sorokin admits.