Money Growing: Last Bets

Gaming became an official disgrace quite spontaneously. Gambling operators, pleased at the abundance of clients, hoped that the market would grow at previous speed for many years to come: interest in gambling in Russia could only grow. According to the estimations of the Gaming Business Association, in 2006 the turnover of the Russian gaming industry exceeded $6 billion, in 2007 $7 billion, and by 2010 could grow to $10 billion.

Game of reason

The thunder broke in 2006 when officials and deputies, worried about the development of gambling addiction, began to regulate gambling operators. Market participants recognize that hanging the law was as necessary as air. As executive director of the Gaming Business Association Valery Milov says, more than ten variants of the law existed. The most active lobbyist of these laws was deputy Igor Dines who suggested passing a law on gambling in 2004.

But gambling operators stuck a stick in the wheel of all the legislative initiatives proposed by deputies, not wanting to change the settled gaming regulations which allowed them to earn considerable money. Nevertheless, in 2006, a rather soft bill entered the State Duma that would essentially limit the number of gambling establishments, and also introduce certain regulations and standards to the market. But this law was also not met with understanding by the majority of operators.

As a result in 2006, officials tired of the constant altercations and from the heart of the administration of the president, the State Duma passed a law forbidding the development of gaming in Russia (FZ No. 244 "On the state regulation of gaming"). Except for only four gambling zones, according to the authors of the law, the gaming market should not develop.

Now operators regret that they didn’t accept the first version of the law. "The version of the law preceded those that assumed the creation of gambling zones and in many respects met the requirements of business and society: a significant reduction in the number of gaming premises due to the closure of small slot machine halls, which cause the greatest irritation in society was supposed. Of course, some participants of the gaming industry were not happy about such a state of affairs. Others, on the contrary, for several years prior to all this spoke about the necessity of a law to meet world standards on gaming, capable of putting things in order in the sector," says Lavrenty Gubin press-secretary of Storm International (operates five casinos in the capital and the chain of slot machine establishments Super Slots).

The acceptance of the Draconic law has caused panic in the ranks of operators of the gaming industry, and representatives of public organizations all declared that the law passed would completely destroy the gaming industry and deprive the budget of tax revenues worth 30 billion rubles a year. But the worst thing, Milov considers, is that the right "to judge and lay down the law" on gambling operators has been assigned to the local authorities. This has led to the fact that in many regions gaming has been forbidden since July 1, 2007, when only the first part of the law assuming the serious reduction of casino and slot-halls was passed at federal level. All this has together led to thousands of square meters of commercial real estate located in attractive places for almost all retailers coming onto the market in Moscow, St. Petersburg and other large cities. So who will get these premises and are gambling operators prepared to leave them?

Repartition

According to the estimates of Vladimir Zhuravlyov, sales manager at NAI Russia, currently in Moscow, casino and slot halls occupy 220,000-250,000 sq.m. "This is no more than 4 per cent of the total retail premises in Moscow,” adds Aydar Galeyev director of the consulting department at MIEL Commercial Real Estate. “Today the purpose of use of about 40 per cent of gaming premises has changed."

This is in connection with the toughening requirements for gambling operators. According to FZ 244 the area of a casino should exceed 800 sq.m, and a slot hall 100 sq.m. In a casino there can be no less than 10 tables, and in a club no less than 50 machines (which should be the exclusive property of the owners of club). Other additional requirements for Moscow gambling operators have been introduced and taxes per gaming unit have been increased. All halls and casinos that don’t meet the new requirements have been forced to close.

These processes concern not only Moscow, but also other cities of Russia. According to the calculations of Vsevolod Shchbakov, an expert in the consulting and research department at Colliers International St. Petersburg, by 2009 in the city as a result of the liquidation of casinos and gaming halls approximately 100,000 sq.m of commercial real estate may be released. In other regions the figures will be smaller, but by local measures the volume of released premises will be rather high. "In Russia from 2000-2005 gaming experienced a boom,” says Yuri Yudakov, head of the office retail department at Praedium. “Now the number of such establishments has noticeably fallen." "All small halls not meeting the requirements of the legislation was closed in the last year, have been leased, or operators have opened other businesses on these premises," says Viktoria Didovich, a leading consultant at Magazin Magazinov. In the long term if the law continues such action, there will be no gambling institutions (at least legal ones) anywhere.

Retailers use the released premises with pleasure. "It historically developed that gaming operators were located in good places on busy roads, in the central streets and at crossroads, and on shopping streets as their income directly depends on streams of people” explains Natalia Davidenko, head of the brokering services department at Astera. “Premises are entering the market. This process has been going for a long time already and all released halls have been occupied by new tenants for a long time already - chain operators, banks, restaurants."

"We haven’t noticed any large rush of premises that may have been expected, considering the hullabaloo around lawmaking in the field of gaming,” Zhuravlyov objects. “It is valid, that by the end of 2008 to the beginning of 2009 a number of well located and expensive premises interesting from the point of view of investments and operation should come on the market. Nevertheless their share in the market is not so great. Because of big demand for such quality premises, and even more so because of the present deficit of commercial premises in the capital all the released areas will be taken over almost at once."

However, according to the experts, many premises previously used for slot halls or a casino do not enter the open market. "Practice shows that owners of "gambling real estate" are not in a hurry to get rid of it," says Dmitry Sazanchikov, director of the marketing department at GVA Sawyer.

Secretly many operators hope that the law on gaming will be reconsidered, and that the date it will come into force will be set back by a minimum of five years. Lobbyists have repeatedly suggested this, and a couple of months ago a letter from the head of the Russian Union of Industrialists and businessman Alexander Shokhin to deputy prime minister Alexei Kudrin was published in the press suggesting that the area permitted for Casinos in hotels and tourist complexes be no less than 800 sq.m or no less than 3,000 sq.m in separately standing buildings. It was also suggested that slot halls in hotels and tourist complexes in the capital should be no less than 200 sq.m and in other regions no less than 100 sq.m. For this purpose it is proposed for a number of amendments be made to the law on gaming. "If these amendments will be made, the premise of gambling halls and casinos will not come on the market in the next several years," summarizes Didovich.

An unequivocal reaction to Shokhin's and the gaming representatives has not followed. Sources assure that there is no talk of the amendments in the State Duma and independent experts tend to be of the opinion that gaming will be forgiven, and amendments will come into force. Operators hope for the best, but do not get tired of repeating that they cannot build business on hopes. "Personally I till now have not decided what the true purpose of the accepted law on gaming is,” says Gubin. “In Russia anything is possible!" His company recently closed one casino in St. Petersburg, as the owners understood that to buy it by “x” o’clock will not be possible. Gaming industry leaders are already mastering foreign markets, while thinking about how best to dispose of their premises that remain in Russia. According to Galeyev, about 30 per cent of gaming operators own their own premises while 70 per cent rent.

Give - take!

From the point of view of the commercial appeal of the premises of gaming operators they are extremely interesting for retailers. "The majority of gambling institutions have good locations that guarantee attendance,” says Sazanchikov. “Large casinos will be difficult to reorient for trading purposes, but they ideally suit the accommodation of such premises in the entertainment and restaurant business." For example, the Amadeus casino on Leninsky prospekt has already been turned into a fitness club, says Anna Rudakova, a real estate consultant at Russian Research Group.

In due course large casinos may also be turned into entertainment centers with bowling, a night club or snooker, and cinemas. At least, according to Vedomosti, operators working in these markets, wait with interest for the clearing of these premises and are ready to buy or rent them. "Many chain operators of other formats are waiting for when there will be premises which have been released or the gaming business, and some people even draw up their business plans in view of gaining them as a premises," says Zhuravlyov. But in official talks leaders of the cinema and entertainment market prefer not to discuss the prospect of purchasing large casinos.

Besides, according to Oleg Zdradovsky, general director of Terra Direction, many owners of gambling real estate will be engaged in its re-profiling independently. "Re-profiling is a logical and reasonable course,” the expert believes. “Professional advisers are employed for the re-profiling and reconstruction of a premises."

Premises previously used for slot halls suit almost all retail operators. "Slot halls are already starting to be partially reformed as street retail premises and public catering enterprises (bars, coffee houses, etc.),” says Zhuravlyov. This is because the majority of gambling establishments are near metro stations and have excellent passability." "Street retail premises, especially in the city centre, will snap up these premises," considers Rudakova. "As slot machine halls, as a rule, are located in busy places, the proprietors will have no problem in filling the free areas," agrees Shcherbak. And in the opinion of Konstantin Kovalev, a managing partner at Blackwood, it is possible to predict great demand for the premises of slot halls from operators of public catering as the site and format of such premises meet the requirements of the given structure of tenants.

However there are nuances. Gambling operators were always the most generous tenants (with profitability from 50 to 200-300 per cent it is no wonder), and were prepared to pay 1.5-2 times more in rent than other operators. The transfer of these areas to retailers promises owners a loss of income.

"With the arrival of other operators in the place of slot halls rental rates will be optimized,” hopes Arina Sender, head of the retail real estate department at Knight Frank St. Petersburg. “Under our forecasts, they will fall approximately 30-50 per cent. Thus, rental rates will balance out, and the premises located in good places, on crossing of transport and foot streams with high passability will become interesting to operators of other trading groups: local shops, banks, mobile telecommunication operators, etc "." As rates for gaming operators were some of the highest, the income of the proprietors of the released premises incomes may significantly decrease,” confirms Rudakova. “Especially if the rent is calculated as a percentage of turnover (or a base rate plus a percentage of turnover).

Your own shirt

Gambling operators will not say good bye to all their premises. On the recognition of the president of Storm International Michael Butcher, after July 1, 2009, the premises which the company possesses on a hire basis, will be returned to the proprietors, and rental agreements will be terminated. And what they will do with premises that it owns (Shangri La, Pushkin, and New York casino on Taganskaya), Butcher has not yet decided. Probably, in place of Shangri La there will be a high quality hotel, and the re-profiling of the New York casino is being discussed. "We need to understand that what it is possible to put in place of our casinos, according to city regulations, and then make a final decision,” says Butcher.

Meanwhile in 2007 the company started another pilot project - a chain of coffee houses under the Liberty brand. Now the coffee houses provide additional services for visitors of the slot halls and casinos. When these premises will be closed, the company will hardly want to operate 5-10 coffee houses, without the powerful financial back-up which was provided by the gambling establishments.

Ritzio Entertainment Group, belonging to Oleg Boiko, intends to develop local stores under the brand Relish in the Moscow suburbs and in the regions where slot halls have closed, informed Larissa Shishkin, the press secretary of the holding, earlier. The first shops have already opened in the Moscow region and some in other regions, and in the near future the chain may announce new projects. Also in St. Petersburg Oleg Briskly has managed to agree with discounter Dixi on opening mini markets of the retail shops of VMart in the place of former gambling halls. Jackpot, controlled by German Goglichidze, is moving in a similar direction, and at the end of last year signed an agreement of intentions with X5 Retail Group to open Perekryostok supermarkets in its premises. In total within the limits of the program it may open 100 to 200 supermarkets. The fourth largest gambling company – Zolotoi Arbuz – owned by Edward Amalyan and Dmitry Yakushev (also manage a chain of clubs by the same name, and also the Fan-fan chain) from the end of last year has developed a chain of florists called Iris and Tyulpanoff in place of its slot halls. It is possible that in the long term the remaining gambling halls of the company will be reoriented under this retail format.