Money Growing: Shopping in First Place


"The main stream of investments is directed at new constructions in the sphere of retail real estate," chairman of the committee for the commodity market of the administration of Yekaterinburg Elena Tchernyshev says. "In 2007 in Yekaterinburg six large shopping centers and five trading complexes will be put into operation. It is expected that such federal players as О'Кey, Castorama, etc. will be located in the complexes."

According to Yulia Tokareva, an analyst of the consulting and valuation department at Cushman & Wakefield/Stiles & Riabokobylko (C&W/S&R), since 2004 the supply of space in the city's shopping centers increased 63 percent in 2005, and 48 percent by the end of 2006. The total space on offer in the large "Yekaterinburg" shopping center at the end of last year stood at 683,000 sq.m (handed over area - 380,000 sq.m). The most significant premises that opened in 2006, were the Greenwich shopping center (53,000 sq.m), Mega (127,000 sq.m), Karnaval (57,000 sq.m), and the second phase of the Antei shopping center (34,000 sq.m).

In 2007 it has been announced that almost 270,000 sq.m will enter the market. Before the end of the year the following will open: Megapolis (planned total area of 30,000 sq.m), the third phase of Sibirsky Trakt (10,500 sq.m), Prisma shopping and entertainment complex (100,000 sq.m) and the second phase of Karnaval shopping and entertainment center (trading area 68,800 sq.m). DVI's project, the Rok-n-Moll shopping center (total area 66,300 sq.m) will also be realized. Thus, the predicted area in shopping centers in Yekaterinburg supplied to the market this year will be 950,000 sq.m, 640,000 sq.m of which will be trading area.

This is a 39 percent increase from last year. But even taking into account the significant increase, experts at Malysheva 73 (the developer of Greenwich shopping and entertainment complex project), think a deficit in good quality trading areas will remain. But then the situation will change. "By 2009 there will be no deficit in supply but a deficit of tenants as there aren't many factors that point towards significant growth of consumer demand and the purchasing ability of the population. The market cannot bear such a large quantity of large-format shopping and entertainment complexes," the company considers. Consultants stick to this point of view.

Polina Zhilkina, deputy director of the strategic consulting department at JLL points out that to satisfy existing consumer demand, considering the potential of the market and the purchasing capacity of the population of Yekaterinburg, 600,000-700,000 sq.m of good quality trading space is needed. The company currently estimates there to be 300,000 sq.m.

“Considering that the incomes of the population are dynamically growing, in 3–5 years these figures could be much more,” adds Zhilkina. “We can say a lot and talk for a long time about parameters – the number of square meters of trading area per 1,000 inhabitants, the average fillability of a shopping center, etc. But it is important to understand the main thing: if the premises has an original and thought over concept, it will be demanded by both tenants and buyers, no matter how many square meters there are per inhabitant in the given city,” supports Igor Sukhanov, general director of Oboronsnabsbyt, supports this.

Experts at JLL consider an increase in the share of entertaining segments in complexes as a future line of development in the format of shopping and entertainment complexes. "As the population's expenditures on entertainment are gradually growing, we think that the most promising direction in the near future will be for integration and diversification of entertainment components within shopping centers. From formats of trade, in our opinion, the most promising are department stores, discount centers and retail parks," says Zhilkina. Sukhanov agrees: "In the regional market new trading formats are actively developing - recently in Yekaterinburg the 'First Ural Outlet' appeared, Ekonika reformatted its shops into shoe caskets, and the Oboronsnabsbyt group is building the first regional retail park," he gives as examples. Kuznetsov agrees that department stores are a promising format, but notices that they practically absent from the market in Yekaterinburg.

In Malysheva 73's opinion there is another promising segment. "In the near future there will be demand for small trading complexes "at home" with areas measuring 5,000 for daily shopping," the company thinks. Paul Kuznetsov, managing partner at BK-Real Estate points out indefatigable interest of operators in street retail. "With the development and increase in the supply of the shopping center segment some small shops will, probably, move from the streets to shopping centers, however the street retail segment will always be called for. We are observing great demand for shops located in through streets. Even the liberation of areas from the closure of gambling establishments (after the law on gambling zones came into force) will not satisfy this demand," assured Kuznetsov. Yarmarka supports this: "real estate premises in residential buildings are highly demanded still because here will always be people passing them and they are not expensive." According to the analytical department of Yarmarka, in May 2007 the average price for such premises was 80,000 rubles per sq.m. "In the given segment maximum rates of growth have been recorded - from January to May the price per sq.m increased 18 percent," according to the statistics of retailers.

"The guarantee that a shopping premises will work successfully is in the competent selection of tenants," Sukhanov reminds us. "In the segment most developed in Yekaterinburg - namely shopping and entertainment centers - as a rule, there is a standard pool of tenants. The anchor is a supermarket or hypermarket, home appliances or DIY store. It may also be a sports or children shop. All other tenants in the galleria are either standard chain stores that are present in practically all shopping and entertainment centers in any region or local operators who work only within the city, but are also developing as a chain," says Zhilkina.

According to her, this leads to shopping and entertainment centers in different cities, not just in one region, being like twins. "In the largest shopping centers in Yekaterinburg the majority of trade marks are developing in the regional cities of Russia. To speak about uniqueness, unfortunately, is not necessary, as the market of chain operators is rather limited throughout Russia," explains Zhilkina.

The Mega-Mall shopping center in Yekaterinburg can boast about a unique set of tenants: here there are shops of which there is only one of in the city," says Tokarev standing up for Yekaterinburg. Malysheva 71 has also promised to surprise the market with a set of exclusive tenants in third phase of the Greenwich shopping and entertainment center. Olips, which is carrying out three shopping and entertainment center projects; Magnet, Park and the second phase of Dirizhablya, also promise something especial.

"The problem of selecting tenants can be solved by precisely defining what niche in the market the premises is aiming for, and by positioning it exactly," Sukhanov assures. In his opinion, this can be done by means of pricing policy or the creation of an unusual concept." In this case it is possible to count on the target buyer who knows what it wants coming to the shopping center. There are still not enough such example of this on the market," the expert regrets. But, for example, in the building-finishing retail segment he expects the arrival of new players Castorama, Home Depo, Karauta and Leroy Merlin.

The struggle of proprietors of shopping centers for "their own" tenants is accompanied by qualitative changes of conditions of rent. "Trends on the rental market are the same in regional cities as in Moscow: periods of rent are getting longer (from five to 15-20 years), the practice of exemption of taxes and operational payments from the rental rate is being established, lease agreements are being formed on the basis of a percentage of the commodity turnover, etc," analyzes Zhilkina. According Alexei Alekseyev, an analyst of the regional trade real estate markets in Russia at C&W/S&R, currently in Yekaterinburg the average rental rate is $626 per sq.m per year, including VAT. Average rental rates in shopping centers range from $540 to $780 per sq.m, including VAT. Under his forecasts, as the market becomes saturated the position of conceptual shopping centers will become stronger and rental rates should stabilize. Unsuccessful premises will be compelled to reduce rental rates or to change their concept. Kuznetsov assures that pending saturation of the market of high quality shopping centers, rental rates will increase 10-20 percent a year. "No sharp jumps in prices should be expected. Banks have now introduced mortgage systems for commercial real estate, and the leasing system is also growing. This will increase demand and will simultaneously increase the number of good quality offers. The next 2-3 years the rental rate of different premises will level out. New, high quality shopping centers will increase in price, and unsuccessful or out-of-date premises will fall in price a little or will remain at the same level for tenants," Dmitry Knutarev, an expert on business real estate at Yarmarka summarizes.

Warehouses in Deficit

The development of the trading sector is perhaps being held back by the lack of logistic capacities in the city. "While in other segments of commercial real estate premises are already under construction, projects of warehouse terminals in Yekaterinburg are only being announced. And their construction certainly takes no less time than that required for the construction of a shopping and entertainment complex, which is at least two years," Guram Tukhashvili, an analyst at the Ural chamber of real estate, says.

According to the assessment of Yekaterinburg's administration, there is 800,000 sq.m of warehousing real estate, 85% of which is class C and D. Officials estimate the deficit of warehousing at 0.9 million sq.m. Approximately 600,000 sq.m of which, is a deficit in class A and B warehouse premises.

According to the administration, by 2015 warehouses with a total area of 1.12 million sq.m will be built near Yekaterinburg. The largest projects will be constructed by Eurasia-Logistic. The company is already building the class A Logopark Pyshma complex, with an area of 280,000 sq.m (the first phase measuring 85,000 sq.m has already been completed) and is looks for a place for a second terminal, which will measure 250,000 sq.m.

Abak is already building part of a class A logopark (Chkalovsky terminal) with a total area of 250,000 sq.m.

The Euro-Asian international transport-logistics center (whose founders include the government of the Sverdlovsk region, the administration of Yekaterinburg, State Unitary Enterprise Rostek-Yekaterinburg and large participants of the transport-forwarding services market (Ural-container and Lorry) are working on the Euroasian logistics center project. This should open the international transport corridor and connect Yekaterinburg with the largest capitals of the world. The total area of warehouses will measure almost 70,000 sq.m.

The National Logistics Company will also build a class A warehouse complex on 40,000 sq.m. The high quality premises will be constructed by Leader. AVS Group has announced plans to build 200,000 sq.m of class B and B+ warehouses.

At the end of May in Yekaterinburg an international agricultural logistics center was presented. The center is expected to include almost 65,000 sq.m of class A premises. The total amount of investments in the project should stand at 260 million euros. The region plans to attract German companies as strategic investors. If this happens, they will become pioneers among foreign investors to enclose funds in warehousing in Yekaterinburg.

There are a lot of projects, but none of them are completed yet, Sergei Gerasimchik, director of the NLK-Yekaterinburg branch, sums up. He is not afraid of a possible glut on the market even though the total amount of planned premises is almost double the current deficit. "The situation on the market will change: class A requirements will increase, projects will be reconsidered. But, possibly, some players will face problems in selecting tenants," he predicts. Tukhashvili does not agree with this. "The need for warehouses will increase. Just Auchan will be five times bigger, and many new trading operators will still enter the market," the analyst says.

In Tukhashvili's opinion, owners of warehouses will hardly face problems selecting tenants, but it is possible to expect rental rates to stabilize. According to Olga Naumova, a member of the board at AVS Group, the cost of rent for warehouse space in Yekaterinburg is close to Moscow rates and is now almost $100 per sq.m per year. In her opinion, this negatively affects the profitability of business of transport-logistics companies. The expert observes a constant increase in prices for warehouse real estate and services of warehousing, and also a growth in rental rates. According to the estimations of market participants, the average rise in prices in this market segment is 25 percent a year. "Unjustified high prices for warehouses at the lowest level of developed infrastructure is one of the main obstacles in the development of the market of transport-logistics services," considers Naumova. The stabilization of rental rates and an increase in supply should, in her opinion, revive the market.

Offices Everywhere

In the opinion of Alexander Kurochkin, head of office real estate projects at Becar Commercial Property St. Petersburg, the trends developing in Yekaterinburg in the office market follow all-Russian practice. The main of these being rapid development of the segment. According to the administration of Yekaterinburg, in 2006 the volume of high good quality offices totaled 95,000 sq.m, and this year 184,000 sq.m of class A and B offices are expected to be replenished. By 2010 no less than 350,000 sq.m of high quality premises will be built, officials predict. The most significant projects are being carried out by Urals metallurgical company Yekaterinburg-City (400,000 sq.m) and Strazhy Urala (100,000 sq.m), and business centers will be built by Renova-Stroygroup (100,000 sq.m), and the third phase of the Antei business center (110,000 sq.m)." "More than 1.1 million sq.m of areas in business centers and multifunctional complexes are currently under construction (more than 60 premises). An even greater volume of offices which are at the design stage, will come onto the market in 2009-2012," according to the figures of the Ural chamber of real estate.

Andrei Bril, chairman of the board of directors of Korin Holding picks out as one of the main trends on the office market the gradual refusal of sale of areas in "fine cutting" business centers. Olips development company agrees, explaining why such practice is still widespread. "From the point of view of the developer, such an approach is often quite justified - today on the market there is stable demand for such areas. Office-by-office sale of a building is accessible to a broad enough audience," they say at Olips. According to the company, buyers in such cases are not only companies, who plan to use offices for their own needs (by an expert's estimation, about 70 percent), but also private investors who want to sell a premises after it has been constructed (about 10 percent) and delivery of areas for rent (20 percent).

"In separate cases developers, reacting to the fears of investors concerning the large number of proprietors, selling a minimum of a floor/level, rarely offer a building in its entirety. Now, however, the number of companies that don't sell offices at the early stages of the realization of the project, and focus on receiving profit from renting the premises are increasing. As a rule, such premises are usually class A or B+ business centers," analysts at Olips say. As a consequence, on the market the share of so-called "private traders," i.e. speculative minor investors who have been especially active in buying offices in the last year, has reduced - as a result of a sharp jump in prices on the residential real estate market.

"It will soon be unpromising to rent small premises from different proprietors in one business center, and this will lead to an outflow from the market of private investors," believes Bril.

One more tendency, which, according to Bril, will gain strength during the process of saturation before 2012, is reminiscent of a situation that developed in the trading real estate segment. As there become more and more premises, they will be differentiated by their quality, and as consequence, tenants will moves from old business centers into new, modern ones. There will be more and more tenants in the office market, and the number of buyers will begin to decrease. "Reason should triumph and owners of companies should understand that buying their own office is often a rather short-sighted solution. As a rule, it is more favorable to rent," assures Bril. Kuznetsov agrees that this tendency is already evident on the market. "Our realty company has noticed an increase in the interest of clients in renting offices. Earlier more than 70 percent of queries were requests about purchasing offices, now this share is gradually declining," he says.

Experts at Olips assume that as the commercial real estate market develops less and less offices will be offered in the central areas of the city. The center currently still remains the area richest in office offers (38.2 percent of the total amount). In areas approaching the center, the share is 34.4 percent. Decentralization, in the opinion of experts at Olips, is hindered by the absence of business park projects. Developers are being held back by the difficultly in predicting the profitability of such projects, and also by the absence of good roads and communications, explains Bril. The arrival of new participants - first of all western funds, should urge the development of the market forward and bring new formats. "But in Yekaterinburg there are still no transactions under sale and lease-back schemes, funds have still not arrived," he ascertains.

The situation with prices and rates in the office real estate segment is a repetition of the state of affairs in the retail segment. According to Korin Holding, the rates in high quality class A and B business centers have grown 12-20 percent a year. But because prices have stagnated in bad quality offices the general market growth does not exceed 4 percent. In mid 2007 the average rental rate of a class C office was 600-800 rubles per sq.m, in class B offices ranged from 800-1,500 rubles per sq.m depending on the location, and in class A offices ranged from 1,700-2,000 rubles per sq.m, including operational costs.

Prices to purchase office real estate, according to the analytical department at Yarmarka, in the first five months of 2007 grew 15 percent - from 74,400 rubles to 85,900 rubles per sq.m. At Olips they are assured that last year's record prices in this segment (77 percent growth) will not be beaten. "A continued deficit in office premises will lead to an increase in prices from 30-40 percent," experts at the company believe.

Top-level hospitality

The main task of the hotel sector in Yekaterinburg is to provide enough hotel rooms to accommodate all the heads of states for the Shanghai Organization of Cooperation (SOC). This event will take place in the summer of 2009.

Alexander Vysokinsky, head of the economic committee of the city's administration has publicly promised that this problem will be solved, but how it will be solved has not been revealed. Currently, according to the committee for the organization of domestic services, there are about 6,000 hotel rooms in 40 hotels in the city. According to officials' estimations, there are at least 5,000 hotel rooms. The committee is not hiding that all hope rests on foreign players. The head of the branch of the Russian Hotel Association for the Sverdlovsk Region, and director of the Sverdlovsk Hotel Igor Lachugin agrees with officials.

"Development of the market is still thanks to foreign operators which participate in the realization of projects," says Lachugin. For example, the main hotel for visitors of the SOC summit, in his opinion, will be the Hyatt. This hotel is currently under construction as part of the Yekaterinburg-City project and according to plans should be completed next year.

But if the "average" participants are catered for, the question about where the presidents of several countries, remains open. The first apart-hotel will appear in the city this year - the second phase of the World Trade Centre Yekaterinburg (WTCY). A representative of WTCY has disclosed that expensive apartments will be located on floors 19-24 floors, but these are mainly considered for long residencies. Penthouses are included in the project and despite having been advertised, have not been sold yet. In the WTCY the Atrium Palace operates, the only 5* hotel in the city in which there is presidential suite. There is another apart-hotel project in one of the towers of the Yekaterinburg-City project, but the date of its delivery is not certain.

Olips considers the inclusion of new office centers and apartments in hotels as a new trend of the hotel market. "They will only come on the market in the second phase of WTCY, but in the next few years the sale of apartments will be widespread," experts at Olips note. According to their data, 12 percent of business centers under construction have announced that within their structure there will be a hotel.

Lachugin thinks that the share of such hotel rooms will be insignificant and will not satisfy the demand of business tourism. Although hoteliers note that projects that have been realized can solve the problem of filling the city with expensive hotels. "There is huge demand for hotels in the 1,500-1,700 ruble price range. Nobody undertakes such projects these days because of the long time it takes to recover outlays. Probably, after the top segment has developed there will be projects in the most demanded sector of inexpensive hotels," he hopes. The city's administration assures that by 2015 in Yekaterinburg more than 50 hotels (in total there will be 90) "for all tastes and purses" will appear.