Money Growing: There are Places to Spend Money

According to advisers at Jones Lang LaSalle, the volume of the consumer market in Perm is $1.5 billion. Under such a situation, per 1,000 inhabitants there should be at least 220 sq.m of quality retail space, however currently in the city, in the opinion of Moscow analysts, only 20 per cent of this is satisfied. The total volume of the retail real estate market is about 700,000 sq.m, of which shopping centers account for 360,000 sq.m. In 2008 in Perm almost 30,000 sq.m of retail areas should be put into operation.

The center of trade

The majority of shopping centers in Perm are concentrated in the city centre - in Leninsky and in the core of the Sverdlovsky and Motovilikhinsky districts. In the last several years literally hundreds of modern premises have come on the market. The largest at present are Semya (Family) and Kolizei. The first phase of Semya was constructed in the Sverdlovsky district in 2003 and the developer was EKS group, which is controlled by the governor of the Perm region Oleg Chirkunov. In 2008 the second phase of the center was built next to the first. The cumulative area of the premises is 70,000 sq.m. Both centers have been constructed on a so-called highway of continuous movement, which the authorities have tried to create in Perm. The wide road should connect the remote areas of the city and make movement across Perm faster.

As a result Semya is actually in the middle of Ulitsa Revolutsiy in the rankings of the new center of Perm. Kolizei has begun to be constructed in the city centre as has Russian Industrial Alliance, which is controlled by State Duma deputy Yuri Borisovts. Where Kuibyshevsky market once stood Kolizei Atrium shopping center was constructed, the area of which is 24,500 sq.m. At the end of 2007 a second shopping center – Kolizei Cinema measuring 32,000 sq.m was put into operation. A third shopping center Kolizei Gallery is planned. The area of the premises will be almost 40,000 sq.m, and the construction, according to the estimates of advisers, will demand investment of $75 million. Work on the premises has not yet begun.

In the opinion of the general director of MVM Andrei Yaroslavtsev, the occurrence of the "same" shopping centers negatively influences the market. "When the same brand unites two phases of a shopping center, shops lose about a quarter of their clients. Having bought the goods in what was the first phase of the shopping center, the person will not make the same purchase in the second. As a result the chain loses buyers, and the shopping center itself loses loyal tenants," the expert explains.

Although old shops do not lose buyers even with the appearance o new and modern competitors. "The successful location of Gostiny Dvor where TsUM is located does not allow clients to pass by," says Yaroslavtsev. Although TsUM in Perm should have been renovated a long time ago - the soviet style department store looks weird with a background of modern counterparts. Head of the analytical department at Perspective Regina Davletshina thinks that shopping centers in Perm have been distributed by segments, on the basis of the purchasing power of the buyer. "Shops of old construction measuring, for example, 3,000 sq.m are focused on the less solvent audience. They are not competitors of 30,000-sq.m shopping centers with a cinema and food court, which in themselves are capable of generating a good stream of visitors," the Perm realtor considers. TsUM, Almaza and Kolizei are some of the most popular centers among tenants and where there is a waiting list. To rent an area in Almaza, companies need to pay a lump sum payment for the development of the shopping center, which is non-returnable and is used by the operating company of the shopping center. Perm analysts say that it is not even necessary for old format shops to reposition themselves and spend money on reconstruction in connection to this. Although doing so essentially allows companies to increase their overall performance.

For example, in 2007 MVM reconstructed its home appliance store Agat, which it owns and is located in a peripheral part of the Motovilikhinsky district. As a result of preserving the volume of trading area its turnover has essentially increased. Rental rates after reconstruction have increased in Agat by 20 per cent, and the profitability of the premises has increased 1.7 times, Yaroslavtsev says.

Developers are becoming more actively accustomed to peripheral areas. The long-awaited Shokolad shopping center on Ulitsa Geroyev Khasana was put into operation at the beginning of 2008. Although it didn’t make a big impression on real estate market participants: the shopping center is located on a street that has bad traffic and therefore is difficult to reach. Shokolad is not a city scale shopping center but a local scale complex, considers Davetshina. Yaroslavtsev adds that the Vladimir micro district in which Shokolad is located, is occupied by people with low purchasing power. Even the buyers who currently go to it, do not provide good profit. Rates of rent in shopping centers in Perm vary from 1,500 to 9,000 rubles per sq.m. The average price per sq.m of retail real estate, according to Perspektiva, is 79,900 rubles, and the increase from January to April was 2.5 per cent. According to the sales manager at Respekt Alexei Ananyev, prices for retail real estate during this period remained stable although some transactions were closed at higher prices. "Our client wanted to obtain real estate in a certain place at the beginning of the year and was prepared to pay 100,000 rubles per sq.m for it. Only three months later did such premises come on the market, but already they cost 120,000 rubles per sq.m. The buyer did not even begin to bargain," says Ananyev, adding that such cases are rare.

The next level

Office real estate in Perm is currently the most actively growing segment. After demand for retail real estate has pretty much been satisfied, investors became involved in office real estate, explains Davletshina.

In 2008, the class A, 5,500-sq.m Parus business center was put into operation. Gorizont acted as the development company. However, in the opinion of Perm realtors, it doesn’t completely correspond to the declared level due to several reasons: there is almost no parking, and there are several proprietors. In addition Parus is located on a highway of continuous movement – on Ulitsa Revolutsiy and adjoins old constructions of residential and office real estate. As a result some of the areas have not been rented out yet, says Ananyev.

Experts consider the Green Plaza project (class B) in the Sverdlovsky district as interesting. "This office center is successfully located near a large traffic intersection and the city centre,” says Yaroslavtsev. “I think premises in it will be in demand." Financial-Construction company Real is acting as the developer. The same developer intends to put the Gubernsky office center (class A, 12,000 sq.m) into operation in the second quarter of 2008.

Another good project is an office center on Ulitsa Chernyshevskogo which is being built by Stroiindustriya. According to the expectations of market participants, it will have the highest rental rates of up to 1,500 rubles per sq.m. Now the average rental rate in the office market is 718 rubles per sq.m, cites Perspektiva. Experts at Respekt add that the a number of office centers are vacant because of the miscalculations of developers. "Liner business center is uninteresting to both tenants and buyers as it is unsuccessfully located and has mistakes in its concept," Ananyev gives as an example. He explains that in the opinion of consumers this building is considered, first of all, as an electronics shop, which is located on the first floor of the business center. Sergo business center and the office building at 14 Ordzhonikidze, which are located opposite each other suffer from similar problems. "Both buildings are based on a one-way through road which suffers from heavy traffic. To get to them is difficult. And the concept of the buildings does not suit clients. Both business centers are reconstructed premises of a former military university and do not meet modern requirements in terms of lay-out. The main task of the operating companies are to fill the premises no matter what purpose the premises are for," says Ananyev.

Expensive, wrong time

Warehouse real estate is only starting to draw the attention of real estate market participants. The first modern warehouses in Perm were constructed by companies engaged in retail and the logistics business. Frans Maas Istra, together with Food Trade have constructed a warehouse measuring 1,500 sq.m. Perm distributor Mai on the basis of the warehouses of Permryba has created a logistics center measuring 20,000 sq.m specializing in the storage of frozen products. And company Norma which controls the Norman-Vivat retail chain, the largest in the Perm region, has constructed a warehouse center measuring 30,000 sq.m for its own needs.

Developers who have declared their desire to enter the warehouse market are mainly engaged in the retail or logistics business. Retail company Liniya-7 intends to construct a class A warehouse measuring 50,000 sq.m costing 2 billion rubles. RK Logistics has suggested to the government of the Perm region the construction of a warehouse costing $60 million, having addressed the authorities with a request to assist them in the search of a site for construction. The goals of the company coincide with the plans of the administration, which would like to have a warehouse for storage for enterprises in the Perm region. But the process has not really kicked off yet.

Non-profile players have also become interested in the construction of warehouses. Consulting company Ayr-capital (engaged in administrative, tax, legal and other kinds of consulting and whose clients include Uralsky, Silvinit, Nitrogen, Permenergo, Metafraks) has announced an alliance with developer Evrokapital under the Ayr-city trademark and plans to construct warehouse complexes in four cities of Russia, including in Perm. Interest in the Perm market has also been declared by Megalogix which plans to construct a logistics park as part of a chain created by it. Local market participants do not think that it is the right time to construct large warehouse complexes. "Critical demand for quality logistics centers has not been formed yet in the Perm region, Ananyev explains.

The hotel segment is also not developing very actively in Perm. Local analysts see the reason for this as the cost of land for such buildings is too high. Depending on the area it averages 250,000 to 500,000 rubles per sotka. The purchase of sites for the construction of hotels by third parties is unprofitable, and the opportunity to buy land at an auction organized by the municipality is limited, says Ananyev.

The current capacity of the hotel market in Perm is 4,500-4,600 rooms. The largest hotels in the city are the Ural (420 rooms), Prikamye (150 rooms) and Amaks Premier Hotel (140 rooms). A number of hotels have up to 70 rooms, and two thirds of hotels offer visitors from three to 10 apartments.

The most significant event on the market was the transfer of the Plaza Olympia hotel to the management of international chain Hilton. Hilton representatives have also announced plans to construct a 5* hotel in the center of Perm, behind TsUM. Although according to Ananyev, it is just one variant for the use of the site. In particular, ex-general director of MVM Anatoly Makhovikov (presently deputy mayor of Perm) announced the intentions to construct a class A office center in the same place.

Yaroslavtsev thinks that new premises of the international chain, as well as Plaza Olympia, will be oriented mainly for foreign tourists. According to Anastasia Talanova, marketing expert at Hotel Polet, in Perm the coefficient of 3.39 hotel rooms per 1,000 people is a small figure. There is no shortage of rooms in the average price segment unlike the high price segment.

KES together with Renova-Stroigroup had planned to construct a 25-storey hotel in the city center, with investments of $60-70 million. Evgeny Krasikov, head of the PR department at Renova-Stroigroup, says that the possibility of jointly building the hotel was discussed, but under a mutual decision by both parties the realization of the project was rejected.