In-Depth: Slowing down the market’s fall

In the middle of September last year the statement by head of Oneksima Mikhail Prokhorov in relation to the poor prospects of Russian developers, caused indignation from developers and was followed by accusations of incompetence ob his behalf. However it took less than two months for the forecast to seem even unduly optimistic.

Without doubt it was nice to hear about a calm island in the ocean of global financial instability, but when another proprietor of retail real estate on Tverskaya calls with an eternal Russian problem, illusions will go. A drop in the price of assets of development companies, the tendency of a decrease in sales for retailers, a reduction in plans for development of the leading chains, daily fights over rental rates - the list could go on, however excessive dramatization of the crisis does not do good to the market either.

The general expectation of the bottom of the market has unexpectedly helped a big group of large foreign companies already present in Russia and ones waiting for a favourable time to enter the market. These players possess their own funds, have operational experience of crisis times, and most importantly, they don’t consider the Russian market as a field of miracles, which at times is their Russian counterparts’s idea.

Russian companies’ access to credit financing previously available significantly raised the threshold of development for foreign retailers. In particular, this was because under conditions of limited supply of quality retail premises and the strategy of development actively carried out by Russian chains due to loans, rental rates were dispersed to the limit.

However since October the situation has became the opposite. Many have started cancelling lease agreements, and Russian players have seriously become concerned not about the development of business, but about finding ways to rescue them by means of refinancing. In shopping centers planned to be completed there have already been cases of agreed contracts being cancelled, the level of vacant premises has noticeably increased, and rental rates by the end of the year had on average decreased by 30%. Proprietors’ previous attitude to maximize the profitability has turned in favour of tenants and now tenants lead rental relations.

In this situation, on the background of optimising the structures of Russian chain operators, large foreign chains (Inditex, Stockmann, KFC, McDonalds, etc.), possessing sufficient resources from operational activity, on the contrary, have actively shared plans with the mass-media on expansion in the Russian market.

At the same time, the threshold of output on the Russian market for those companies who for a long time have been observing the work of their direct competitors in the market has significantly fallen. The market in general has become less competitive. Companies that trade in premium and high-class goods are being forced to carry out only a conservative strategy of development as during the crisis their turnover dramatically decreases.

Thus, those few companies that have not frozen projects or are actively looking for developments, can now dictate their own terms, choosing between already numerous variants and new interesting offers that are available. The number of the latter is growing every day proportionally to the number of landlords, who have started to judge the developing situation realistically. In this sense it is quite logical that many clients are not in a rush to make a final decision, reasonably believing that the market may fall even deeper and a landlord will become even more compliant.

A very important note for a landlord at negotiations is the prospect of signing a long-term (from 5 years) rental contract with a large international retail player who will be a reliable and solvent partner. That guarantees the proprietor an opportunity to easily overcome the crisis and see precisely its own financial situation in the intermediate term prospect. As result, during direct negotiations between parties a 30% discount is quite standard, and often can even reach 50% of the primary offer.

A tenant’s criteria for selecting a premises have not undergone serious changes, and the range of areas required by foreign companies and final rental rates remain wide - from 150 to 4,000 sq.m and from $200 to $3,000 per sq.m. As a whole, the market has of course begun a displacement in the lower price segment and in the future until the end of the year this is expected to remain.

Despite the general trend of falling rental rates, leaders of the Moscow retail real estate market (Evropeisky, Okhotny Ryad, Atrium and several others) have a main and most important advantage over others: they can afford not to reduce the rate as they keep generating high customer attendance for their tenants and the corresponding turnover and they have valid waiting lists.

Among famous and large foreign companies involved in various retail segments and planning to open shops in 2009, are such players as Uniqlo (clothes retailer), Hamleys (children's goods), and Yoshinoya (public catering). This list continues, and it is quite probable, within a year it will be much longer. Considering the significant resources of foreign chains and the general mood among landlords, that the next two years may be the best time for development, especially considering the quickly becoming cheaper real estate seems interesting. In fact this idea logically follows from the atmosphere that now reigns in Western Europe and the US: "It never has been and never will be as cheap as it is now."