Guiding Lines: Illusive Fears of Developers

The long-awaited time when Russian cities will be filled with different kinds of shopping centers will not happen for at least another 5-6 years. Developers are always saying this, so we need to figure out why news about saturation has appeared.

It first seemed like just rumors in the mass media. But where there's smoke there's always fire: in 2005, research by consulting company A.T. Kearny made the news. According to their information due to the high activity of investors in recent years in Poland, the Czech Republic and a number of other countries including Russia, the markets had become saturated. Large trading companies such as Tesco and Wal-Mart started doubting their plans concerning expansion plans to Russia due to the research. Similar reports, as well as the huge declared volumes of investments in projects from Russian and foreign companies, could confuse observers.

According to Jones Lang LaSalle (JLL), in the first 10 months of 2006 the total sum invested in shopping and entertainment complexes in Russia totaled more than 1 million euros. In the first quarter of 2007 JLL calculated that the country took second place in continental Europe by volume of investment in commercial real estate. In connection with growing business activity and inflow of money experts make conclusions that the time of super profit in the Russian and especially the Moscow market is passing. But this doesn't mean saturation and stagnation.

For the time being it is possible to speak only about active development of the commercial shopping sector. Last year operating brands such as IKEA, Auchan and Ramenka and announcements by developers of shopping centers of their multi-million dollar projects did not leave the pages of the business press. RosEvroDevelopment has promised to construct centers in Russia worth $1 billion and Regions will spend not less than $800 million on creating a chain of shopping centers throughout the country, while total investments in the Tashir project stand at $1.5 billion and in the Interio Group project stand at $2 billion.

Chains of shopping centers have become the general trend, and testify to the readiness of developers to build on greater scales. Some chains, aside from those already mentioned, include Torgoviy Kvartal, Ross Group, Vremya (Mall Marketing) and Diamant Development Group. Investment funds do not lag behind ambitious retailers and developers: last year Austria's Meinl European Land took possession of most of the shares of Vremya and two Moll trading complexes for $400 million. Austria's Immoeas has bought two Zolotoi Vavilon shopping centers in Moscow from Slavyansky Kredit bank and Fifth Avenue shopping center from Na Khodynke trading house, spending almost $330 million on its purchases in Russia. The UK's London and Regional Properties has announced plans to begin the construction of the Centrum Park chain for which $300 million is required. The scale of development can be observed both in Moscow, and in the regions. Some players consider only doing business in the regions as a strategic plan.

But despite the frightening number of global projects, the market at this given stage is ready to accommodate them. Retail trade transactions in Russia in 5-6 years will be up to the standard of the leading countries of Europe. For now there is 58,831 rubles (2006) per capita in Russia but by 2009 this is expected to rise to 89,748 rubles so retail will grow, which means, retailers will need trading space. According to Cushman & Wakefield/Stiles & Riabokobylko, the share of free premises in shopping centers is less than 1%. It is a parameter for the great demand from tenants. Returns from commercial real estate in 2006 in Moscow amounted to 9.5-11%, and in the regions to about 12%. In large European cities (Paris, London, Berlin) this indicator has already fallen to 4.75-5%. In Russia there is still potential to earn money.

We shouldn't expect all the announced projects to come onto the market at the same time. The majority of them really still only exist on paper, as journalists like to write. All plans will be carried out gradually, and after five years, probably 90% of the planned complexes will be realized. For example, in 2006 new projects worth $10 billion in total were announced, but construction has begun only on $1.6 billion of them. Developers trying to draw attention to a future subject as soon as possible is a widespread PR approach to, in particular, intimidate less determined competitors.

There is one more detail testifying to the underdevelopedness of the Moscow market and the regions: they are lacking many formats. Among known formats are department stores (stores operated by one operator), outlet-centers (large shops in the suburbs or outskirts of a city where goods of leading brands are sold with a 30-70%), power-centers (shopping centers, consisting of several shops with anchor tenants and small gallerias), retail parks (several shopping centers with different formats incorporated by a general infrastructure) and life-style centers (where people come not only to shop but also to enjoy life and relax).

Of all these formats in Russia there is only the life-style format in the form of Kashirsky Moll, which is currently under construction. It will cover 200,000 sq.m, is located at the intersection of Kashirskoye shosse and the MKAD, and is being developed by Crocus Group. Secondly there is English department store Marks and Spencer, which has opened in the Evropeisky shopping center, and thirdly the retail park of Garant Invest, which covers 47,000 sq.m and is built along Varshavskoye shosse. But analysts expect every single format to appear in Russia en masse.

Of course, Russian cities are developed non-uniformly and some are built up quicker than others. After Moscow the most active cities in the sector are St. Petersburg, Kazan, Samara and Yekaterinburg. We should also define in which segments of commercial areas to expect saturation. Undoubtedly, bad quality post-Soviet shopping centers will be inferior to modern and conceptually thought over centers and there will be a redistribution of the market of which analysts for a long time have warned.

According to JLL's calculations, the volume of square meters for offer in shopping centers in Moscow at the end of 2006 totaled 1.6 million sq.m. In comparison: Paris has almost 3.8 million sq.m and Madrid, 2.6 million sq.m.