Money Growing: Victory of the larger format

In 2007 the trend for the displacement of the construction of shopping centers closer to the MKAD and their integration remained on the Moscow shopping real estate market. Aydar Galeyev, director of the consulting and research department at MIEL - Commercial Real Estate, explains this is a result of the deficit and high price of large land plots in Moscow. "Building small shopping centers is unprofitable," he says.

Bigger and more expensive

According to Maxim Gasiyev, regional director of shopping real estate at Colliers International, in Moscow more than 20 new shopping centers with a total area of more than 100,000 sq.m may be opened by the end of 2010. Among them are the River Mall (250,000 sq.m) Zolotoi Vavilo Rostokino (240,000 sq.m), Metropolis (205,000 sq.m.), Mall of Russia, Moscow-City (180,000 sq.m.), Paveletsky (119,000 sq.m.), Tverskaya Mall (113,000 sq.m.), etc.

Blackwood names the active development of the luxury and premium segment as one of the brightest trends of 2007. Within a year in Moscow two large shopping complexes opened: Lotte Plaza on the Novy Arbat and Novinsky blvd intersection and Vremena Goda on Kutuzovsky prospekt. The developer of Lotte Plaza was Korean company Lotte Lotte. The total area of Lotte Plaza is 23,100 sq.m, with a shopping area of 18,100 sq.m. The multipurpose complex also includes a class A business center and a 5* hotel. The anchor tenant is Azbuka Vkusa supermarket.

Vremena Goda shopping complex, according to experts, is interesting for the alliances of large companies involved in the realization of the project. These include Oktan + Alpha, Slavyansky Credit bank, MARR Kapital group, etc. In the city center on Nikolskaya ulitsa the Sheremetevsky shopping-office complex (12,000 sq.m.) with a premium segment shopping area has opened. The entrance of several significant projects in the luxury & premium segment at once has affected average rental rates, reaching at the top end $8,000 per sq.m a year.

The development of underground sites in the center of Moscow has practically become the only possibility for the construction of large shopping complexes in the central part of the city. Advisers also think that there is a reserve for the accommodation of shopping premises in existing above-ground constructions. "We expect the occurrence of underground pedestrian crossings with rows of shopping stalls, mainly near metro stations," says Alexei Averyanov, general director of Vesco Consulting.

According to Yulia Dalnova, director of the shopping real estate department at Knight Frank, in 2007 14 new shopping centers came on the market (total – 568,000 sq.m). Approximately 200,000 sq.m of extra shopping premises were due to the opening shops in residential and non-residential buildings, and also street-retail, adds Vladimir Kuznetsov, head of the project consulting and analytics service at Welhome.

The total area of professional shopping centers, according to Knight Frank, stands at 4.9 million sq.m, and the total supply of shopping premises has exceeded 6 million sq.m. "For the first time the share of shopping centers in the total volume of shopping premises in Moscow has exceeded 50 per cent," says Galeyev.

"At the end of 2007 the greatest concentration of shopping and shopping and entertaining centers is still registered in the north and northwest of Moscow - almost 28 per cent - and in the south - 25 per cent," says Marina Petrova, an analyst in the valuation and consulting department at DominionM.

Although volumes of quality shopping premises have noticeably increased, demand exceeds supply. "The level of vacant premises is still low and does not exceed 2 per cent in successful projects, but the quantity of vacant premises in off-market shopping centers will gradually increase,” says Alexander Osipov, head of the consulting department at Astera Oncor. On the main shopping streets of Moscow the volume of vacant premises is traditionally a little above 6-7 per cent and is connected with high rotation and high rental rates, Petrova adds. Welhome research shows that highest demand to rent premises in shopping and entertainment complexes is for blocks measuring up to 50 sq.m and from 50 to 150 sq.m, which make up 52 per cent and 34 per cent of total demand respectively, whereas only 3 per cent of clients are interested in larger premises (from 500 sq.m).

Underissue

Delaying the deadline for putting shopping premises into operation has become a trend in recent years. Welhome explain this is because the development of a project takes at least 2-3 years during which time the conditions of its realization may change: building materials and energy prices may rise which entails an increase in expenditure calculations and the necessity to look for additional financing.

“Many developers working on projects for the first time make this mistake,” says Alexei Vanchugov, general director of Mall Marketing. According to Astera Oncor, in 2007 the dates of the openings of the Rion Grand (Dmitrovskoe shosse), Aerobus (Varsavskoye shosse), Prazdnik (Tushinskaya ulitsa), Zig Zag (Lobnenskaya ulitsa), Voentorg (Vozdvizhenka ulitsa) shopping centers, etc, have been changed. S.A. Ricci / King Sturge estimates that in 2007 in Moscow 646,000 sq.m less shopping premises were put into operation than planned.

Overtook Europe

In 2007 in Moscow several significant shopping centers opened. Among them were the second phase of the Mega Belaya Dacha shopping and entertainment center (developer - IKEA Mos), and Shuka shopping and entertainment center (Don Development).

The second phase of Mega Belaya Dacha (110,000 sq.m) includes in addition to the shopping area, a large skating rink, a bowling center and a 15-screen cinema. Together with the first phase the area of the shopping center now totals 270,000 sq.m making it the largest shopping center in Europe.

Shchuka (Shchukinskaya ulitsa in the Northwest Administrative District) is in the top ten largest shopping centers in Moscow and the Moscow region and top five largest shopping centers in Moscow. The shopping complex measures 105,400 sq.m, with shopping space measuring 42,000 sq.m. The anchor tenants are Alye Parusa supermarket, Detsky Mir, Каrо Film, and Kiber Drive entertainment center.

among the shopping complexes opened in the first half of 2007, experts name the second phase of the Global City shopping and entertainment center (developer - Global City) and Prazhsky Passazh (Rent Estate Service). Both premises are in the south of Moscow, where the provision of shopping premises is low. Global City shopping and entertainment center (38,000 sq.m), has shopping space measuring 14,100 sq.m and is located on Dnepropetrovskaya ulitsa. The anchor tenants are childrens store Detsly Mir, an 8-screen Cinema Park, Kosmik bowling alley and Playday entertainment center. Prazhsky Passazh (35,000 sq.m, shopping space 24,500 sq.m) is on ulitsa Krasnogo Mayaka. Among the anchor tenants are Sedmoi Kontinent supermarket and a 4-screen Sezon Cinema.

The largest shopping centers opened in the second half of 2007, in addition to those already named above (the second phase of Mega Belaya Dacha, Shhuka, Lotte Plaza and Vremena Goda), are Domodedovsky shopping center (TechnoStroiDevelopment, anchor tenants - Viktoriya supermarket, Tekhnosila home appliance store and Detsky Mir) and AST shopping center on Izmailovskoye shosse in the east of Moscow measuring 26,000 sq.m. The anchors are Perekryostok supermarket and Detsky Mir and other stores include Arbat Prestige, Adidas, Reebok, Nike, Puma, Gloria Jeans, OGGI, and Sbarro, Rostiks, KFC, Teremok and Kofe Khaus restaurants.

The key to the future

High demand for shopping premises is a good stimulus for the construction of new premises. Increasing interest is being shown by foreigners. "Previously foreign developers preferred to buy ready projects but now they are prepared to engage independently in the realization of projects from stage zero," Vanchugov says. For example, Swedish company IKEA plans to construct a fourth Mega shopping complex in Moscow. They are currently looking for a site. According to preliminary data, the shopping and entertaining center will be northeast from the MKAD.

Ramenka has announced its intention to construct a multipurpose complex in north Butovo on the territory of the Sadki municipal zone. The total area of the complex will be 30,000 sq.m.

Large multipurpose complexes with a shopping and entertainment component will be constructed in several Moscow districts. In the Northwest Administrative District a shopping center with a total area of 172,000 sq.m will be builkt on the junction between Zvenigorodsky prospekt and 3rd Silikatny proezd. In the Northeast Administrative District a shopping complex with a total area of more than 240,000 sq.m (Zolotoi Vavilon Rostokino) on ulitsa Prospekt Mira will be built. And an order for the construction of a multipurpose complex on the junction between Profsoyuznaya ulitsa and Novoyasenevsky prospekt (Southwest Administrative District) has been signed. The total area will be almost 72,000 sq.m.

Making money from a shopping center

Andrei Marusov, director of commercial real estate at Inter-regional development company, notes that the shopping premises market still remains attractive for investments. Western developers continue to strengthen their positions on the Russian real estate market. "The profitability rate is 8.5-11 per cent," he notes. For comparison in 2006 this was 9.5-11 per cent.

According to GVA Sawyer, several funds at once have have announced their intention to invest funds in shopping real estate in the capital. Among them are Eastern Property, Rutley Russia Property Fund, Aberdeen Property Investors, East Capital, etc.

Rodamco Europe has bought 50 per cent of 330,000 sq.m shopping premises in the Metropolis multifunctional complex that is under construction on Leningradskoye shosse from Capital Partners. Apollo Real Estate Advisers have bought a total area of 34,000 sq.m in the Metro shopping center at Kotelniki (formerly the Marktkauf shopping center). Danish fund BPT Arista has bought the first phase (16,000 sq.m) of Global City on Kirovogradskaya ulitsa. Austrian investment fund Immoeast has bought 75 per cent of the Hudson shopping center on Kashirskoye shosse, which measures almost 145,000 sq.m, from Phoenix Development. The deal is estimated to be worth $500 million. The opening of a shopping center with a total area of almost 145,000 sq.m is planned in 2008.

Investment fund Quinn Group has bought the Kaspy shopping and office center which is under construction on Kronstadtsky blvd. The area of the future premises will total almost 17,000 sq.m, with the shopping premises measuring almost 10,000 sq.m. The deal is estimated to be worth approximately $50 million. Baltic Property Trust has bought Kukhnistroi shopping center (8,000 sq.m) located on the external part of the MKAD (71st km). The deal is worth $20 million.

Investment group Ivanhoe Cabrige (Canada) has invested almost 400 million euros in purchasing Vremena Goda. "The conclusion of the deal illustrates the interest of foreign investors in the Russian shopping real estate market and the growth of the investment appeal of the given segment," notes Kuznetsov. In the background of gradually decreasing profitability on the shopping real estate market, new investment deals concerning the sale of constructed and not constructed premises are expected.

Foreign developers are entering the Russian market through the creation of joint ventures with local market players. Developers Diversified has announced that it will enter the Russian and Ukrainian markets. With a German company ECE it will create a joint venture for the construction of shopping complexes. American developer Hines has bought 51 per cent of the project Belaya Dacha and is creating a joint venture with Belaya Dacha.

Turkish company Migros has announced the sale of 50 per cent of its assets in Ramenka for $542.5 million to Enka Insaat Sanayi AS, the owner of Ramenka’s other 50 per cent of assets. Trigranit Development, one of the most successful development companies in Eastern Europe, has bought 50 per cent of Torgovy Kvartal’s assets. The deal is estimated to be worth $200-$300 million. The companies have joint plans for projects with investments totaling almost 1 billion euros. "As a result of the union, Torgovy Kvartal will receive extensive resources for investments while Trigranit Development will get the opportunity to enter the promising Russian real estate market," comments Blackwood.

Significant deals in which Russian companies have participated in are the purchase by X5 Retail Group NV (X5) of 100 per cent in the business and assets of the Strana Gerkulesiya chain which operates in Moscow, and the Moscow and Tver regions, the purchase by Podium holding (the company owns a chain of clothes and jewellery boutiques by the same name and the Discount-center hypermarkets) of the Kvadro shopping center measuring 16,200 sq.m on Kutuzovsky prospekt from Partiya, which is closing its retail chains Partiya and Domino.

Rental surprises

According to Ilya Shuravin, a partner at S.A. Ricci / King Sturge, a surprise in deals and agreements of 2007 were actual rental rates for DIY format stores of $300 per sq.m a year, and for larger entertainment zones and supermarkets of $600 a year.

Cinemas in good locations paid $200-$300 per sq.m a year. In many respects the increase in rental rates was caused by the steadily falling dollar and continued high demand for quality shopping premises. "More proprietors of shopping centers are asking for a percentage of the turnover of the store instead of a fixed rental rate," he says.

Among the largest tenants GVA Sawyer names Eurogarden, which is the first to rent premises in the Big-Box retail park (68 000 sq.m), which is under construction on Novorizhskoye shosse under the Zelyonaya Strana brand.

According to Osipov, in 2007 rental rates increased 15 per cent on average. According to Torgovy Kvartal’s estimations, the average rental rate in quality shopping centers in Moscow at the beginning of 2007 was $1,650 per sq.m a year (excluding operating costs), and by the end of the year had reached $1,930 per sq.m. Maximum base rates are in the range of $3,100-$3,400 (for shops with an area of 100 sq.m in shopping galleries located on the first floor).

According to Knight Frank, in general in the city grocery hypermarkets and other stores with an area from 1,500 sq.m were rented at rates of $100-$350 per sq.m year, and supermarkets and stores up to 1,500 sq.m for $170-$550 per sq.m a year. In galleries the lowest rental rates are for childrens and books stores - $350-850 per sq.m a year, while clothes and shoe stores paid $1,050-$2,100 per sq.m and leather accessories, gifts and jewellery shops paid $2,000-$5,800 per sq.m.

According to Dmitry Zotov, general director of Torgovy Kvartal, the leaders by rental rates remain shopping centers located within the limits of the Central Administrative District (CAD), while centers within the limits of the Third Transport Ring lag behind a little. The average rental rate of a shopping center in the CAD has exceeded the $3,000 per sq.m a year mark whereas for shopping centers located within the limits of the Thrid Ring are $2,750 per sq.m.

"The price of street-retail format shopping premises located in the city center range from $18,000 to $60,000 per sq.m," says Osipov. According to Petrova, in quiet areas the cost of shopping premises in 2007 was $2,000-$5,000 per sq.m, 15-20 per cent more than in 2006. "In some cases the prices have risen by 50 per cent," she specifies.