Money Growing: From the retail segment to the hospitality industry

Retailers disperse

In terms of the supply of quality retail areas Krasnodar has already overtaken St. Petersburg and Moscow, local analysts consider. And the possibility of saturating the market does not stop developers: a whole host of Russian and foreign companies have announced plans to open new shops in Krasnodar and construct multipurpose shopping complexes. Although, according to city’s administration, already 25 of the most famous retail chains have constructed hypermarkets in the city.

At the beginning of 2008 retail chains Auchan and Leroy Merlin opened their doors to the people of Krasnodar. The companies have invested 810 million rubles in a joint project. The area of the hypermarket is 40,000 sq.m (22,800 sq.m - Auchan, 17,800 sq.m - Leroy Merlin).

In April X5 Retail Group NV opened its first two Pyatyorochka stores in the city. In June the first of St. Petersburg’s Lenta shopping complexes measuring 12,000 sq.m opened in Krasnodar. The company has stated that one more supermarket will be open in the city by the end of year. In total Lenta intends to invest 1.65 billion rubles in the start of three new projects in the Krasnodar region (two in Krasnodar, and one in Novorossisk), al though it notes high competition in the local grocery retail sphere.

Lenta’s analysts have calculated that there are six large-format stores (Auchan, two O’Kei hypermarkets, Metro Cash Carry, Lenta, Magnet) for the 0.8 million people of Krasnodar, i.e. about one hypermarket per 130,000 inhabitants, but this does not include smaller premises.

According to experts questioned by Vedomosti, in the next 2-3 years competition will increase in the grocery retail and DIY retail segments. Bautsentr has two hypermarkets in the city, this year a store measuring 12,000 sq.m opened in Home Center. In August a Castorama hypermarket opened.

Rapid growth has also been noted in the segment of multipurpose complexes. According to Colliers International, there are currently a total of 256,000 sq.m of professional shopping and entertainment centers in the city. Among them are Krasnaya Ploshchad (105,000 sq.m) and Citi Tsentr (21,000 sq.m). In the summer IKEA opened a Mega complex near Krasnodar measuring 130 000 sq.m.

In November this year NT Computer (Moscow) plans to open the Galaktika shopping and entertainment center (112,000 sq.m). According to Magazin Magazinov (the exclusive agent of renting the premises), the complex is being constructed on the territory of former factory premises on Ulitsa Stasova. The anchor tenants of Galaktika among others will be the first Carrefour hypermarket in Russia (14,000 sq.m) and the first MediaMarkt in Krasnodar (7,500 sq.m).

There are currently several more large premises under construction in the city. These are the OZ shopping and entertainment center (AIM Property Development, 202,000 sq.m), Krasnodar-City (TPS, 150,000 sq.m), and SBS Shopping Mall (SBS Development, 146,400 sq.m).

AIM Property Development started the construction of the OZ shopping and entertainment complex on the Krasnodar – Kropotkin highway in March last year. According to the developer, investments into the project will exceed $290 million.

Investment company TPS plans to complete the first phase (95,000 sq.m) of the Krasnodar-City shopping complex by the end of this year. According to commercial project head Marina Isayeva, TPS will invest $110 million in construction. The second phase (55,000 sq.m) is planned to be completed by 2010.

DVI Group has promised to begin the construction of a shopping and entertainment complex on Rostovskoye shosse in the third quarter of 2008. According to the sales manager of the company Marina Malakhatko, its total area will be154,000 sq.m. Construction is planned to be completed in the second quarter of 2010. The first phase will include a household goods hypermarket (17,000 sq.m) and will be open in autumn 2009. In addition, according to Colliers International, construction is also being prepare of Yuzhnaya Stolitsa (170,000 sq.m), and Kalinka-Malinka (150,000 sq.m).

If all the premises will be completed, by the end 2010 - to the beginning 2011 the provision of quality retail space will reach 2,500 sq.m per 1,000 inhabitants, analysts at Macon Realty Group have calculated. However experts are not afraid of a glut in the market. The general director of Macon Realty Group Ilya Volodko says that unsuccessful premises will be squeezed out the market.

Construction on settlements

The majority of shopping and entertainment complexes under construction are located on roads leaving the city and in the suburbs closest to Krasnodar, while Mega is literally right next to Adygea. Analysts at Promotion Realty explain this choice of builders by the absence of free land in the center of the capital of Kuban. Dmitry Zolin, managing partner at LCMC agrees. According to him, for investors to get a site in the center "is rather difficult."

"In Krasnodar only agricultural purpose land is vacant,” says Svetlana Kolesnikova, deputy chief of the administration of commerce and consumer services for the administration of Krasnodar. If an investor wants to come into the city, it will be forced to build in areas with developed housing estates and will have to re-house inhabitants, "which leads to more additional expenditures," the official says. According to Volodko, moving tenants increases the expenditures of developers by 2, or even 3 times.

Another variant, according to him, "is to buy an industrial enterprise, put it to one side, and construct on its territory." TPS, for example, has bought the Kotare factory. But there are very few of such enterprises left in the city and therefore developers move to the suburbs.

Clearing for offices

Although developers agree to locate shopping complexes in the distant suburbs, they still choose the city center for office centers. There is a severe deficit in the Krasnodar quality office market, analysts at Promotion Realty say, and therefore the expenses of developers (on resettlement, demolishing old constructions, registering the land, etc) are paid back. "Demand for good quality offices exceeds supply by quite a lot," notes Promotion Realty.

According to Red-Consulting, in the next 2-3 years demand for good quality offices will not be satisfied by new construction. If builders will observe their announced plans and timelines, the supply of class B offices in 2008 will reach 53,110 sq.m and there will be class A premises, says Fatima Cahokia, director of Red-Consulting.

According to Macon Realty Group, the current total of office premises is 446,500 sq.m. Almost 80 per cent of them are poor quality and are class C re-orientated premises, analysts recognize. Class B business centers occupy no more than 96,500 sq.m. This includes Vesey Dom (7,400 sq.m) and Kuban-Credit (15,000 sq.m).

There are no class A building on the market yet, but several class A office center projects are near to being completed.

For example, on the top floors of the Kristal multipurpose complex (20,000 sq.m, of which 5,177 sq.m are offices) have already been rented. According to Macon Realty Group, the rental rate is 1,700 rubles per sq.m a month. The highlights are an 8-storey car park located next to the complex and connected to it by a covered walkway with panoramic windows.

Variant is ready to put its Olympic Plaza multipurpose center (18 000 sq.m) into operation this year. The 15-storey complex consists of several shopping galleries and a business centre, which is also positioned as class A. Near the building is a 6-storey secure car park. According to the company-investor, several years ago the developer bought the site with an incomplete construction on it, and continued to build it. Another center with good quality office premises is Zelyeniye Listya’s Green House (6,655 sq.m), which plans to open to tenants in October.

Development-Yug has promised to put into operation in the second half of 2009 the class A Development Plaza business center (56,500 sq.m). According to Dmitry Vasilenko, a leading marketing expert at Global Management Company, this will include a 5-star hotel with 195 rooms, a presidential suite and office premises (18,000 sq.m). The cost of the 15-storey complex is estimated by the company at $80 million.

Peresvet Region – Kuban is currently coordinating the design documentation for the construction of a class A business center (52,100 sq.m) in the city centre, close to the Mayor’s building. According to the company, it is planned to be put into operation in 2011. Investments will total nearly 3 billion rubles.

Krasnodar’s Biznes Invest will put the first phase of the class B Viktoriya office complex into operation in 2009. Its total area will be 82,100 sq.m, and investments in the construction of the first phase (39,000 sq.m) are estimated at 1.856 billion rubles, the company has disclosed. A second office block (43,100 sq.m) costing 928 million rubles is planned to be completed in 2010 and offices in it will be leased only, says Alexei Ivanov, executive director of Biznes Invest.

The Kuban River shipping company has started to demolish old constructions to build the River House business center (class B, 23,000 sq.m, investments - 1-1.2 billion rubles). Construction began this year and in 2010 the complex will be put into operation.

Hotels

With the construction of business and shopping centers developers often include hotel complexes in their projects. According to Colliers International, in the next two years there will be hotels within the structure Krasnodar-City shopping and entertainment complex, and the Kristall, Development Plaza and River House business centers.

In Krasnodar there is a big deficit in the hotel market, recognizes Macon Realty Group. According to various real estate agencies, currently there are from 45 to 61 means of accommodation in the city with a total of 2,000 rooms. Elena Ristavaara, director of consulting at Colliers International, says that approximately half of them are hotels with up to 30 rooms. Seven other hotels have a capacity of more than 100 rooms, of which five are 4-star, three are 3-star and two are 2 star. "In general the level of service in Krasnodar hotels is satisfactory. But even in 4-star and 5-star hotels service standards are still far from ideal," says Volodko.

This year Aton hotel (19 rooms, 7,000-12,000 rubles per night) received international 5-star status. It became the only hotel in Krasnodar to be licensed in this class, says Macon Realty Group.

In 2010-2011 Krasnodar’s Evropa Invest plans to open a 22-storey hotel with 262 rooms, says Sergey Filchenkov, an analyst at Finam. Investments in the project are estimated at 45 million euro and its operator will become Marriott. Valentina Starova, director of public relations at Marriott, has stated that she knows nothing about it. A representative of Evropa Invest admitted that the contract with the operator has not been signed yet, and that the companies are at the negotiation stage.

Investment company Kesko has changed its plans concerning the construction of two international class hotels in Krasnodar. In place of the primary located Tsentralnaya hotel, where Kesko intended to place a 3-star Ibis hotel, there will be a hotel-business complex including a 4-star Mercure hotel with 200 rooms. It will be managed by Accor Group. And on the territory of old city hospital #1, Kesko will construct a 5-star hotel. "The company is currently negotiating with operators and will choose a brand for the hotel in the near future. In addition Accor Group is in negotiations with two more international operators," specified Elena Ukhabina, the press-secretary for Kesko. Previously the company planned to construct a 4-star Novotel. Vladimir Bogdanov, director of Kesko-Krasnodar explained it was decided together with the Krasnodar authorities that "construction of more magnificent hotels" were needed because of the fast rates of development of the city. Bogdanov is assured that this "guarantees demand for high class hotels."

No place to put anything

According to Macon Realty Group, warehouse space in Krasnodar totals 350,000 sq.m, and by the end of year will increase to 364,658 sq.m. For comparison: at the end 2007 this parameter was 264,000 sq.m.

Usually the warehouses are part of abandoned factory premises near railways or an access road. Despite bad quality, they are expensive to rent as demand exceeds supply, says Filchenkov. According to his data, warehouse real estate in Krasnodar costs $150 per sq.m a year on average.

In Volodko’s opinion, the situation in the warehouse market will not improve before 2010, despite the number of applications of developers. According to Colliers International, Megalogix (a joint venture between Avalon and Raven Russia), Parkridge Holding, RPDevelopment, Development-Yug etc, have announced new, high quality warehouse projects to be completed by 2010. The total area of the announced projects stretched to 0.7 million sq.m.