Money Growing: Unfair Laws

The authorities cover their actions directed against the interests of both owners of open markets, and consumers, for whom it is important to be able to pay 2 rubles less for a good in spite of the terrible conditions in which they buy it, with pleasant talk.

“It has historically developed that markets have formed in busy places providing it with a high enough income and recoupment. Therefore these areas are interesting for many developers. It is necessary to also consider the fact that in Moscow there are few vacant land plots remaining that are suitable for construction," says Sergei Kolegov, general director of Prime City Properties. According to the head of commercial real estate at MIAN Real Estate Agency Ashot Barsegyan, it doesn’t take long to recoup the costs of the redevelopment of markets and therefore these land plots are popular.

Downsizing

Every year the Moscow authorities close several tens of markets. In 2003 in Moscow there were 240 such premises. "Today in the territory of Moscow there are 89 markets, the license of 12 of which expired in 2007, and 59 expire in 2008. In 2010 the license of the last market in Moscow will expire. The largest number of functioning markets as of April 2008 were in the Southern Administrative District, followed by the Eastern, and then the Western Administrative District," says Aydar Galeyev, director of the consulting and research department at MIEL Commercial Real Estate. According to Sergei Filchenkov, an analyst at Finam investment company, in total no less than 350,000 people visit these markets daily. However it is difficult to estimate their [real monetary] turnover because of the opacity of the business. "By rather rough estimates, their general trade turnover can be estimated at $1.5-$1.8 billion a year," the expert says. According to Galeyev, "now in the capital there are markets from which their owners make their only income." According to other experts, behind each Moscow market there is a large financial group. "Proprietors of markets rarely promote themselves, but practically in all cases we are talking about rather influential structures - weak proprietors were pushed out of this segment a long time ago," says Filchenkov.

According to Georgy Kuzin, the director of RDR-Holding, there is a set of historically developed structures which have been engaged in markets almost from the very beginning of their occurrence in Moscow. "There is well-known Russkoye Zoloto which controls the radio market in Mitino and there are the new owners of the former Nerli (Savyolovsky market),” says the expert. “The format of markets implies such serious streams of money that any owner by definition becomes a large structure. If the redevelopment of markets was interesting to them they would have carried it out a long time ago. The main earnings of a market are made through semi-legal payments. It is impossible to estimate the real earnings of a large market, there is no official data. However the question remains; why do we need to change them," he says.

Well, we should ask this question to the tax authorities, who are busy checking companies with foreign participation, where it is possible to find after searching legal offences in official accounting files and records. But for some reason, such attention is not paid to semi legal markets. Why would they bother to do this?

The city decides everything

The Moscow authorities began their fight against markets in the mid-nineties, having declared war on container markets where foodstuff was traded. "Since 1999 the Moscow authorities have stopped allocating land plots for the organisation of new markets. Since 2000 stage-by-stage work on reducing the number of markets and their transformation into civilised retail enterprises has begun, and also the building of modern shopping centers on their territories. The closure of the markets and reconstruction on their territories has happened for several reasons," says Barsegyan. According to him, first of all, the main role was played by the authorities desire to regulate trading activity on the territories of markets and for tax payments to be made to the city budget. Secondly, the closing of markets should lower the criminal situation and regulate migratory streams. Thirdly, the absence of markets may reduce fires and accidents arising as a result of the unprofessional operation of buildings, for example, the collapse of part of the roof at Basmanny market or the fire at Cherkizovsky. Fourthly, their reduction will help to resolve the transport problem. The authorities have taken note of all these arguments. The city authorities have repeatedly expressed its opinion concerning development in Moscow of markets. "Clothes markets for us, give us nothing positive. They bring zero to budget, the goods are of unknown origin, and as competitors they beat normal commodity producers," declared Mayor of Moscow Yury Luzhkov in April 2007. According to Vladimir Malyshkov, head of the department of the consumer market and services of the city, "contraband and fake goods, tax fraud and infringement of rights of consumers happen only at markets."

According to the city target program of development for the consumer market and services of Moscow for 2007-2009 in this time it is planned that all clothes markets will close, and in their place shopping centers will be constructed. In particular, by the end of 2009 on the place of closed markets 29 shopping complexes should be constructed. The federal authorities will help the city government to undertake this. According to federal law dated 30.12.2006. "On retail markets and the modification of the Labour code of the Russian Federation" as of January 1, 2010, equipping and constructing markets, except for agricultural ones, will be carried out by companies specially created for these purposes. Moreover, it will be forbidden for these companies to use temporary constructions, they are allowed to use only permanent constructions. All these innovations are supposed to seriously complicate the life of present markets. This process would be faster if Moscow had managed to win the bid for the youth Olympic games of 2010. "If God will give us the junior Olympic Games (2010), all markets will be closed, including Cherkizovsky," said Malyshkov on the eve of the announcement of the results of the winning city of the Olympics. However Moscow lost to Singapore.

Experts ambiguously estimate the plans of the Moscow authorities on the total reorganisation of markets. "According to a Moscow government program the number of markets will be significantly reduced, and therefore this trend is currently being observed. Although, in my opinion, the federal authorities have made a rather radical decision on their liquidation as such a format of retail real estate, at present is demanded by a significant share of citizens and private businessmen," says Galeyev. According to him, the natural evolution of markets would in fact push out this format and the reforms which are being carried out by the Moscow authorities are too radical.

"Plans are quite logical. Markets are centres of unregulated trade where there is no normal taxation, where the work of illegal migrants is still used, and where it is not always possible to control the quality of products. Creating shopping centers in the place of markets gives the city the opportunity to increase tax revenues," considers Filchenkov. However, according to him, it is also necessary to consider the social effect. "Markets are oriented towards the less well off segment of the population, who simply have no other place to buy goods at comparable prices. As a result, a growth in social tension is possible. Besides, it is necessary to consider that proprietors of the markets quite often work closely with officials, and have a very strong lobbying resource at a local level," he confirms. According to Kolegov, "the point of view of the government is clear: markets do not bring anything except problems." There are no payments to the budget, the goods are dodgy and create strong competition to quality products, and also a criminal environment surrounds markets, he says.

In search of concepts

In the place of markets, according to experts, it is recommended to build shopping centres of various orientation. However the concept of the retail real estate premises depends on a set of factors, one of which is the location of the site. According to Kuzin, "for the 10-15 years that markets have existed many people have created a subconscious connection between children's goods and Sovenok, electronics and Gorbushka, illegal software and Mitino, computers and Savyolovsky, clothes and Cherkizovsky." As the expert notes, all these connections have been accurately formed and buyers choose these markets without even thinking, despite the fact that the prices may be higher and quality of service lower. "The pool of tenants of the future retail real estate premises located in the place of markets depends first of all on the future concept. If redevelopment assumes the construction of permanent structures with small, divided areas the majority of former businessmen, will perhaps remain while, the construction of a modern complex will lead to an absolute change in the structure of the tenants," the expert says. According to Filchenkov, "the simplest solution is to preserve the profile of the market when modernising retail, warehousing and other premises." "This will allow for an increase in rent that will be compensated by the attraction of a wealthier audience. With such an approach, the revenue of the proprietor of the market can grow," he considers. "The best variant is to redevelop markets into shopping centres oriented to the sector of the population with low and average income. This audience makes up the main share of visitors of the markets," Kolegov says.

However for current tenants this may become a serious problem. According to the expert, the rental rate in this case will rise a minimum of 20 per cent, and in addition it would be necessary to stop trade for an unknown period as required by reconstruction. "New shopping centres become interesting to chain operators who, in our opinion, will also attract a new audience, and thus increase attendance and, accordingly, the profitability of the premises," he says. However owners of markets do not need to stop at the construction of retail premises. According to Filchenkov, on the base of a market it is possible to create a wide range of premises - from shopping centres to exhibition centers and warehouses. "It is difficult to calculate comparative efficiency as there is not enough information on the monetary streams of the proprietors,” he explains. “Real estate of the most varied functional purpose can be erected. For example, retail, office and residential construction is planned for the territories of Cherkizovsky market," Kuzin agrees.

Forced to obey

As a result, according to Galeyev, it is impossible to say that the plans of the Moscow authorities are not being realised at all. "Simply time and funds are needed for realisation. Recently MIEL Commercial Real Estate has often addressed the proprietors of market territories for help in working out the concepts of future premises, which proves the realisation of the program," the expert says. According to him, of the most recent examples of the construction of shopping centres on the territory of markets it is possible to name Prazhsky Passazh, which occupies part of the territory of Prazhsky market. The total area of the building which opened in 2007 is 35 000 sq. m. The anchor tenants of the complex are Perekryostok, Detsky Mir, M.Video, and Titanic-Cinema, and the rental rates are from $1,680 to $2,800 per sq. m a year, including VAT, but excluding operating costs. At the weekend attendance at the complex reaches 70,000-80,000 people.

Cherkizovsky also plans to uproot itself – and if truth be told, this time it is due to the initiative of its owners, who have decided not to argue any more with the Moscow authorities. In particular, in August 2008 the first stage of the 14-storey modern multipurpose Novocherkizovsky complex on the place of Cherkizovsky market is planned to open. The total area of the complex, located on the crossroads of Bolshaya Cherkizovskaya ulitsa and the planned Fourth Ring Road, will be more than 50,000 sq. m. In April 2008 rental contracts for 45 per cent of the total area were signed. The second phase of the complex measuring 10,000 sq.m will be constructed together with the Fourth Ring Road and will be connected to the first phase by a glass foot bridge.

The investors of the project are Safra Instruments, which is controlled by Zarakha Iliyev and God Nisanov, and has managed 15 hectares of the market since 1993, and also AST-Group, the beneficiary of which is businessman Telman Ismailov. Both these structures are considered the private owners of Cherkizovsky market. Developer activity is also observed at Mitino radio market. The first stage of a covered shopping complex is already operating. The total area of the shopping complex after reconstruction should be about 37,000 sq. m. Moreover, near the market Russkoye Zoloto is building a hotel measuring 11,000 sq. m. However, according to experts, despite the scale of reconstruction, the radio market is still far from a civilised shopping centre. In particular, in June 2008 officials at the Main Directorate for Combating Economic Crimes in the Northwest Administrative District of Moscow confiscated more than 1 million counterfeit CDs, units of polygraphic production, boxes and holograms, which were being sold at Mitino. According to preliminary data, they were worth more than 100 million rubles. "Usually smaller markets are closed, while larger ones are reconstructed as complexes. As a result of these actions, in Moscow there is a new format of shopping centres and complexes, so-called "markets under a roof," for example TIAS shopping complex on the place of the Petrovskorazumovsky market, Gorbushkin Dvor, and the Kashirsky Dvor complex on the place of a former construction materials market," summarises Barsegyan.

Let the markets speak

Despite the plans of the Moscow authorities to close markets, experts hope that in Moscow nevertheless there will be some markets. "Markets of their present quality are necessary for the city. Markets reduce the overall price level in the consumer sector. However the business model will inevitably change. Within 5-10 years many markets will move to the model of shopping centres, and perhaps, 15-20 per cent of them will remain as a platform for farmers," Filchenkov notes.

However not all market participants agree with this point of view. "Irrespective of which way the transformation of the city’s markets will go, whether modern shopping centers are built in their place, developers and investors who decide to reorganise the markets, will have no more than two years," says Barsegyan. According to him, it is necessary to remember that by January 1, 2010, all buildings and constructions located in their territory should be permanent, and investment in construction should be carried out using the proprietors own funds and attracted funds. "The reorganisation of markets, first of all, creates a new level in the organisation of trading in the city, and also optimises the territorial placement of such complexes taking into account transport streams, target audience of consumers and the integration of a entertainment component into the format of the premises," he says.

According to Kuzin, the redevelopment of markets is an objective process which is happening in Moscow irrespective of the will of the city authorities. "This activity is not in Luzhkov's program for the closure of markets. Markets on their own are simply dying off, and as a result there will be less of them. The market format will be limited by commodity categories, location, and operating times. The profitability of a competent shopping and entertainment centre may sometimes be better than a market. The process of closing markets and replacing them with such centres has been ongoing for a long time already," Kuzin notes.

It seems that the Moscow authorities have decided to listen to these arguments. In particular, as Malyshkov recently announced that roughly 90 markets should remain in the city. "This number of markets should remain in the city. This quantity is quite enough to satisfy the needs of Muscovites for inexpensive consumer goods. And to keep a nice tradition. After all, everybody likes to go to a market on a Sunday and bargain," he considers. However in this case it is not clear how what to do with retail premises that do not correspond to the definition of permanent, and whose licenses are expiring.