Money Growing: A Potential Oasis

Firstly, Russian experts include among such real estate the capital’s stations which could potentially be turned into modern shopping and business centers. As though it heard this advice Russian Railways (RZhD) has actively become engaged in the redevelopment of these buildings. The most important thing is that they don’t become side tracked from their core business. "All railway, stations, platforms are a bag of money right in front of you. It is important to accurately lift it up and not scatter the coins everywhere.

Railway stations are a guaranteed stream of consumers and an excellent opportunity for the accommodation of retail directed at mass demand. If RZhD will be engaged in the professional development of the trading potential of these areas, this area of income, for a short period of time, will contribute a significant share of the income of the company. These areas are currently being used extremely inefficiently," considers Ilya Shershnev, director for development at Swiss Realty Group.

"The idea to unite transport services and retail in one place belongs to German companies. The central railway station Promenade Hauptbahnhof in Leipzig, has been transformed into a large shopping center after complex reconstruction. Later railway stations in other cities of Germany, for example in Hanover and Cologne, and then in France, Hungary, the Czech Republic and across the whole of Europe, began to undergo the same procedure. The buildings of stations have turned into multipurpose premises which can not only be considered a point of departure from one place to another," says Andrei Zakrevsky, senior vice-president of consulting company Knight Frank.

Market-Station

The future oasis of retail looks unattractive. "At the moment the tenants of shopping areas at stations are mainly mobile phone shops, chemists, newspaper stands and small entertainment zones," says Elza Rosental, vice president of Torgovy Kvartal. In her opinion, the low level of rental rates and weak structure of tenants of the shopping areas at Moscow stations have been caused by several key things.

Firstly, Moscow railway stations traditionally possess a negative consumer aura due to the many petty crimes that are registered at the capital’s stations, the low sanitary-hygiene standards of theses areas, and also the presence of a lot of people from the lower social scale of society. Secondly, the total redevelopment of these areas, according to the expert, is impossible. Stations are basically monuments of architecture with centuries old history, which actually excludes the possibility of the conceptual re-planning of the premises and the installation of modern ventilation, communication, safety systems, etc, and this is a serious barrier for retailers.

Thirdly, in Rosental’s opinion, the features of the locations of Moscow’s stations in their modern condition exclude the possibility of infrastructural development: the creation of effective navigation systems and distribution systems of visitors, large parking zones, and multiple entrances and exits. And fourthly, the internal systems of services are often a varied and ineffective combination of separate companies which are responsible for this or that sphere: cleaning of the premises, safety and security, the possibility for the rest and leisure of passengers, etc., which is also unacceptable for retail.

In addition, according to Shershnev, the status of stations in Russia is significantly lower than stations in, for example, Switzerland and other European countries, where railways are a means of transportation for various categories of the population. "A hundred years ago expensive restaurants and shops were located at stations in Europe and the US, but today they have been replaced with retail chains. In Russia there is still nothing. Stations as objects of commercial real estate are still developing spontaneously. Various companies - from retail chains to individual businessmen - rent premises for the sale of products, services and food, but it is still early to talk about a developed market," considers Shershnev.

Another distinctive feature of Moscow stations, in the opinion of Sergey Filchenkov, an analyst at investment company Finam, is the low level of transparency of their management. "On the one hand, they are attractive areas providing huge streams of consumers. On the other, they are rented mainly by small shops and public catering premises operate in the low price segment. It is also possible that behind them there are several proprietors, but as a rule, they are just small limited companies. It is possible to say that stations are premises whose rental potential has still not been used to the full,” the expert approves.

Go to the exit

The first stage of transforming the territory of stations is to change their environment. According to Regina Lotchmele, head of the research department at DTZ, areas in immediate proximity to Moscow stations are most attractive for new construction. "This is logical because of the huge volumes of passengers," the expert notes.

"Already there is the experience of overcoming the negative image of stations from the construction of Atrium shopping and entertainment center opposite Kursky station and the Evropeisky complex next to Kievsky station. With the backdrop of astounding prices for land plots in the center of Moscow it is possible to assume that the qualitative development of Moscow stations as commercial real estate premises can be expected in the near future," says Rosental. The continuation of this trend is the construction of an underground shopping center at Paveletsky station and AFI Development’s project under Ploshchad Tverskoi Zastavy opposite Belorussky station.

Since Moscow, the idea of building shopping centers at stations in other cities has already been picked up. In particular, in St. Petersburg in 2006 the Varshaksky Ekspress shopping and entertainment complex in the building of the Baltiisky station opened, and Aditum is currently realizing a project for the construction of an underground shopping and entertainment complex on Ploshchad Vosstaniye at Moskovsky station. Following the development of the surrounding territory it will be necessary to move onto the station complex itself.

In Filchenkova's opinion, stations can be used as specialized office centers focused on transport and small travel agencies. "However their potential will be realized to the greatest degree if they are oriented to shopping premises, in particular various chains using areas up to 200 sq.m: clothes shops, home appliance and electronic stores, perfumeries, etc. Of course, the image of stations in this plan is spoiled, but the problem of selecting tenants can be solved rather quickly," she says.

For this, according to the expert, first of all it is necessary to raise the level of openness, for example distributing the premises through tenders. "It is necessary to involve consultants more actively, present high requirements for the level of tenants, be oriented towards the creation of high-grade shopping galleries and create the possibility for the accommodation of tenants’ advertising," the analyst adds. Moreover, "RZhD needs to carry out an open international tender and order several alternative concepts of development for retail at stations in large cities and central points. Then take one of the concepts and start realizing it," Shershnev says.

A transparent tender, in the opinion of market participants, should attract a professional managing company. "It is thought that the start of active work by RZhD in selecting a professional managing company should become the start of full-scale and quality transformation of Moscow’s stations into modern, improved complexes that will be a highlight of the city," Rosental notes. In her opinion, the updated stations have every chance of successfully accommodating good shopping, office and hotel real estate, and the effective ratio of these elements will provide for the optimum use of commercial areas.

As Rosental notes, a classic model of the development of a railway complex could become, for example, the following. On the first floor – shops, the tenants of which could be supermarkets and restaurants, clothes and shoe shops, perfumeries and gift shops. On the second - offices of insurance companies, banks, financial organizations, transport firms and other companies, and at the top of the station – a hotel.

"The number of passengers at railway stations is increasing everyday. The most advisable is the accommodation of shops oriented to middle class buyers, which would provide for the additional opportunity to purchase goods both of necessity and those that they hadn’t considered before, for example, watches and books," considers Sergey Kolegov, general director of Prime City Properties.

Advice taken

In spring 2007, RZhD representatives announced the creation of a new structure within the limits of the monopoly Management of Railway Stations." More than 300 station complexes, i.e. about 60 per cent of all railway stations in Russia, including nine in Moscow were transferred to the company.

Initially the Ministry of Transport planned for the stations to remain the property of Federal Passenger Management, which would have compensated for unprofitable passenger transport with the profit from the work of the stations. But in the end, the stations were allocated to a separate structure. The representatives of RZhD then spent almost a year looking for a candidate for the position of the head of the new management. In December 2007 the former prime minister of the Republic of Chechnya and an ex-auditor of the audit chamber Sergei Abramov was appointed. Head of RZhD Vladimir Yakunin, told Itar-Tass after the new appointment, that Abramov’s post would demand much the same from him as the Caucasus did, "hard work and the skill to not cave in under bullets and unjust pressure."

In particular, the new head recently created Management of Railway Stations to transform Railway station complexes into modern shopping and business centers. According to the press service of RZhD, in 2008-2009, 30 more pilot projects are planned to be carried out across the whole territory of Russia. Several projects will concern the reconstruction of Moscow’s stations. It is not yet known what they will do with these premises, but according to the press service of the transport monopoly, the investments of the company in these projects will be more than 31.5 billion rubles. In the second quarter of 2008 the first open tenders to select a management company will be carried out.

RZhD has announced that Management of Railway Stations plans to involve leading Russian companies with experience in managing large projects. In particular, Mirax Group has already been chosen (and not casually, in the opinion of market participants) for the technical development of the competitive documentation in projects assuming the renovation and reconstruction of the territory of Kursky station.

The transformation of stations into shopping centers is part of RZhD’s new strategy on the development of its "immovable" assets. Just in Moscow the monopoly plans to develop about 30 sites located near to tracks. The town-planning documentation for the realization of 17 projects should be approved in 2008. Within the limits of this program Mirax Group is actively cooperating with the railway monopoly.

The company has already started to develop land in the area of Kievsky station. In particular, Mirax Group plans to construct a residential complex above the tracks. In December 2007, it became known that Polonsky's company had become a co-investor in the construction of a cargo area at Rizhsky station. On the territory of the station the construction of almost 735,000 sq.m of residential and commercial real estate is planned.

"Recently special attention has started to be paid to not only stations, but also to the railway lines. The government of Moscow thinks that these sites can be used more effectively. Western experience shows that they can be far more useful to a city - above them it is possible to develop commercial real estate and car parks," Kolegov says. According to him, besides Mirax Group other players have also already become interested in these projects. In particular, Stroyinkom-K is developing a project for a multipurpose complex above the tracks between Belorussky and Savyolovsky stations. However, in the expert’s opinion, it is necessary to consider that such a construction will require expensive technical solutions, which will significantly increase the time it takes to recover the costs of the project.

"RZhD, judging by statements by the company’s representatives, plans to transfer the stations of both capitals into their management with the purpose to upgrade them, accompanied by comprehensible re-conception and an increase in the level of profitability," Rosental generalizes. According to the expert, taking into account the fact that the current income from renting out areas in Moscow’s stations is about $15 million, which is approximately 8-10 times less than the potential level, the chosen managing company can expect quite good dividends.

"Besides on behalf of the state monopoly such a managing company could receive a powerful and influential partner and lobbyist, and also in the long term - the opportunity to develop some promising land plots in Moscow that belong to RZhD," the expert adds. According to her information, RZhD plans to select the managing company this year.

The Question of Money

The redevelopment of stations will also naturally change the level of profitability that Russia’s stations bring RZhD, especially Moscow premises. According to Rosental, more than 1 million people a day pass through Moscow’s nine stations – any retailer’s dream. "However there are no shops that belong to leading chain operators at stations and the mid-annual rental rate is at improbably low levels by Moscow standards - $300 to $500 per sq.m a year," says the expert. According to Kolegov, the rental rate for such premises does not exceed $300-400 per sq.m a year. In reality, the revenue from renting railway premises is even lower. According to RZhD, in 2007 the income of Management of Railway Stations increased 30 per cent from 2006, but totaled only 1.4627 million rubles ($61,000). As market participants note, this means, that RZhD does not receive a large part of the rental payments, which actually end up in the pockets of numerous intermediaries.

The redevelopment of railway complexes, in the opinion of experts, will logically lead to an increase in rental rates at these premises. Under the most modest forecasts, Kolegov says, for shopping premises at stations they may triple. Numerous kiosks and stalls won’t be able to afford such rates and more solid tenants that provide a higher quality of service will move in. "In connection to this expenditures on redevelopment will be paid back quicker and will make good profit in the future. First of all it is necessary to set the specific level to which tenants should correspond," the expert notes.

"Rental rates for shopping areas should be the maximum, i.e. on the verge of what a tenant is prepared to pay for the stream of people at stations which would be guaranteed income for retailers," agrees Shershnev. "In view of the fact that at the moment nobody has information on the current rates, it is difficult to predict their changes, but they could correspond to shopping centers in sleeping areas," considers Filchenkov.

However some experts go further in their forecasts. "If premises will be optimized for the requirements of chain players, rental rates could increase to market average levels, i.e. up to $2,500-$3,000 per sq.m a year ", says Alexei Averyanov, general director of Vesco Consulting. According to his estimation, the cumulative rented area of the 300 stations is about 250,000-270,000 sq.m. The passability of stations is no less than the main business streets of Moscow, and sometimes even exceeds it. Even at the most modest calculations, the new monopoly will receive an income of about $0.25 billion a year, the expert says.

In Zakrevsky's opinion, rental rates at stations could be 10-15 per cent higher than in other Moscow shopping centers. "Many chains are interested in such areas and are prepared to pay more for places with high passability. The replacement of small tenants from the territory of stations is a natural process. The higher the level of the operator, the higher the quality of the goods and services. And passengers can only win from this. Another matter is that for the comfortable work of shops and for the creation of a positive atmosphere at a station, a high level of safety and security should be provided. This is one of the most important questions that will influence above all tenants in choosing a premises on the territories of stations," the expert argues.

In Lotchmele’s opinion, the experience of other cities in the realization of railway station projects will help Russia. "Only redevelopment that will harmoniously combine the modern requirements of tenants and buyers with the historical value of Moscow’s stations, many of which are unconditionally monuments of architecture, will be successful and durable," she adds.