Retail is making a tentative, selective recovery, but there is no consensus on the role that Russians and foreigners — retailers and investors — will play in the new landscape.

Fear and greed effectively paralyzed Russia’s retail property market in 2008, wrote Natalia Oreshina, general director of Art Properties in early 2009. Subsequently retail rental rates fell between 20 percent and 50 percent by the end of the first quarter of 2009, Charles Slater, the head of retail at Cushman & Wakefield Styles & Riabokobylko, recently estimated. They subsequently stabilized for much of the rest of the year, he said, adding that much still needs to be assessed on a case-by-case basis.

One important consideration is that while some rents may have been lowered in Moscow, for example, others were unchanged, or tenants were offered defined discounts, Slater explained. “More powerful retailers used muscle to optimize their portfolios, but some malls saw no particular decrease as more advanced landlords gave an incentive for a period of time.”

Now, as economic data show Russia is likely emerging from recession, retail space in certain areas is also subject to more demand, said David O’Hara, managing director of commercial real estate at Blackwood. His caveat regarding location is key. Demand is likely to remain strong in prime locations but remain weak overall for 2010, said Inna Zakharova, a senior analyst at DTZ in Moscow. Indeed, in an overarching assessment of the commercial real estate market in Russia Mark Jagger, outgoing chairman at Jones Lang LaSalle, felt that 2011 would be the time for recovery.

There are signs, too, that companies are confident in their investments in the sector. Two major Moscow projects of over 100,000 square meters are due to come online this year, as both AFI Development and Crocus Group attempt to show to outsiders that they can push on through the tough times. AFI said in January that it had around 75 percent tenancy confirmed or near-confirmed for its Mall of Russia, while Crocus Group maintained that its new Kashirsky Mall would be finished in April, with 86 percent of its space already let. The first floor of the development has been filled almost entirely with tenants, Crocus Group said, while the second floor is designed along different lines, and a number of preliminary tenancy agreements need to be confirmed. Consumer confidence creeping

The pace of decrease in Russian retail sales slowed toward the end of 2009, the State Statistics Service announced in late January, while Russian consumer confidence rose five percentage points. This is perhaps a sign for real estate actors that they could expect growth in the retail market this year. Yet other indicators used to evaluate the population’s willingness and ability to spend are not as positive. January 2010 car sales were down 37 percent year-on-year, according to a report by the Association of European Business.

Although consumer confidence has begun a gradual recovery since its low point at the beginning of 2009, said Zakharova, it remains fragile. While “decreasing faith in the banking system and high inflationary expectations boosted consumption and partly supported retail turnover,” she explained, consumer defaults have increased.

This picture is further complicated by current disinflation, which Kingsmill Bond, chief strategist at Troika Dialog, said would “electrify the story in 2010”. In February inflation was around 6 percent, down from 9 percent in 2009 and 13 percent in 2008. Although reduced price rises due to lower inflation may help increase retail purchasing, Russians’ average monthly income in 2009 fell to about 85 percent of its 2008 level, analysts at Jones Lang LaSalle wrote in their Russia retail overview for the fourth quarter. The recovery appears delicate; a balance between a drive to spend and an economic sluggishness restraining consumers. Divided investment

While pre-crisis, many participants in Russia’s retail market were foreign, or local franchises of international firms, most of the recent buzz surrounding the market appears to be domestic. There has been a distinct surge in the number of enquiries for retail space in Moscow, but this rise comes from Russian, rather than international, firms, O’Hara said. “Russians are looking to get into street retail for the first time.”

Many brokerages in Moscow, however, anticipate a surge in retail activity from foreign firms looking to expand. Chains such as H&M entered the market in 2009, but the year also witnessed the unsuccessful attempt by Carrefour, the world’s second largest retailer, to secure a market in Russia. Yet Zakharova termed this an exception, and listed rivals, such as Wal-Mart, Sainsbury’s and Aldi, that are preparing to tackle Russia. Indeed, RBC Daily reported in February that X5, Russia’s largest retailers in terms of sales, had registered the trademark ‘Wal-Rus’ in a pre-emptive move, presumably against the world’s largest retailer and its bid to become a success in Russia.

The commercial real estate recovery that Jagger sees for 2011 will encompass activity from both sides, explained the outgoing head of Jones Lang LaSalle Russia, who spoke exclusively to REQ at length about the position of foreign firms in Russia. “This will become an attractive environment for foreign as well as domestic capital.”

For Jagger, unlike some other brokers, the retail sector did not seem “as glittering as other sectors”, but he saw opportunity across all sectors, with general drivers for demand in place. “However, the wave of tenant expansion is over, and people are taking a cautious outlook now on the amount their business will grow.”

Russia’s commercial real estate market, including retail, could also experience difficulty from a disconnection between the domestic and international investment markets, said David Godchaux, chief executive of NAI Becar in Russia. “Yield expectations of Russian investors... are around 11 percent to 13 percent. Foreign institutional investors will not consider coming back to this market for less than 14 to 16 percent,” he explained.

A principal cause of this potential schism between Russian commercial real estate and the world market is the considerable delay between the economic crisis in Western real estate markets and the start of Russia’s crisis, he explained. Following its delayed entry into the crisis by almost 18 months, Russia suffered a particularly acute drop and, Godchaux said, a situation has arisen that creates the fundamental likelihood of Russia becoming isolated.

Others, such as O’Hara, consider this situation unlikely, given “how foreign investors look at yields in their home countries — look at London’s six percent, for example. To a lot of people Russia is pretty attractive.” However, he felt many impending investments into the retail sector were from Russians, who “get the buy-low-sell-high principle very well.”

Another school of thought being voiced is that the access to funds for investment granted by Western governments in bail-out programs for the financial sector will give an advantage to foreign investors in Russia, said Lee Timmins, senior vice president of Hines in Russia.

There may also be fewer local partners able to take on new brands in Russia than there were prior to the crisis, Slater said. However, he felt the entry of Burger King into the Russian market at the start of the year provided a good example of the contrary. The international fast-food chain sold a franchise for Moscow to local cafe chain, Shokoladnitsa. This comes on the tail of a year during which local businesses have sought to optimize their finances. Formats and locations

With a number of large-scale shopping malls due to come online this year in Russia, the ‘big box’ model for retail has not disappeared. Indeed, one particular example of the format, IKEA, has seen massive success in its expansion in Russia; Forbes recently rated the company top in its evaluation of the leading owners of commercial real estate in the country during the crisis. Another supermarket, Auchan has been expanding “dynamically”, said Vitaly Mozarovsky of law firm Goldsblat BLP.

“Retail is harder to predict, but the market is always going to be characterized by covered malls,” said Jagger, “because, if nothing else, the climatic conditions are such that there will always be a predisposition to getting into a warm car, a covered mall and then browsing the shops in comfort.”

Russia still has not got the type of retail park “power centers” seen in the United States, said Slater, principally because of prohibitively high land prices for developers.

“There is a market for both the big box and the more integrated type of retail construction,” Timmins asserted, in answering how Russia might welcome an integrated shopping precinct, such as Cabot Circus in Bristol, UK. The project, winner of the 2008 British Council of Shopping Centres gold award, combines shopping, entertainment and residential space inside the city center.

Cushman & Wakefield has seen an increase in enquiries about outlet villages. This is “exciting, because the consumer in Russia doesn’t have a huge variety,” Slater said. Fashion House Development, a Poland-based firm, in partnership with GVA Sawyer is developing a new outlet center shopping mall near Sheremetyevo airport to the north of Moscow, covering 40,000 square meters. The outlet will house a number of international fashion and clothing brands, including Adidas, Mexx, Ecco and Lee Cooper, GVA Sawyer said on its web site.

Another new concept, which O’Hara described as ”coincidentally coming online during the crisis,” combines shopping mall and kiosk design to provide a common usable space with a long-term lease agreement. The developers, Retail Profile Russia, are “taking on a lot of risk that otherwise a lot of small kiosk-owners would be taking on,” he said, and will sub-lease the units to these smaller traders, while simultaneously assisting them with trading.

One prohibitive factor for more innovative designs in Russia that O’Hara identified was legal issues: the collaboration between public and private sectors. In Canada and Colorado in the United States, where weather conditions are similar to Russia, there is more collaborative “urban regeneration” with local authorities and investors, he said.

Western Siberian cities such as Yekaterinburg might be new areas for retail expansion in Russia, said Timmins. “Tatarstan is another area that international real estate investors will keep an eye on, thanks to the commodities-rich economy,” he added. “As for Sochi, there is a lot of buzz, but I’m not so confident, as it is a tourist-based economy.”

However, several brokers seemed to agree that Moscow and St. Petersburg will remain the center of activity, with Scandinavians viewed as the most likely foreign investors into the north. Rules on selling

Meanwhile, retail legislation has undergone changes, as a newly implemented law on trade went into force on Feb.1. Brokers were unwilling to discuss the law’s impact on the market until, as one said, it “has really taken effect”, although a number of retailers have spoken out against the law.

Under the law, the government will be permitted to set prices for certain kinds of goods for a period of 90 days, if prices have jumped by more than 30 percent within the previous 30 days. As of July 2010, it will also limit retail chains to a market share of 25 percent in any given region. This market share will be calculated according to the number of stores owned, and not the sales made.

Such a calculation will give an unfair advantage to firms that operate large-format stores, Lev Khasis, chief executive of X5, told The Moscow Times in February. “Retailers will initially open a series of small shops all across the region to get maximum coverage, but when they see that their 25 percent quota is running out, they will set up one big mall to close up the quota and have good sales,” he said.

Sergei Galitsky, head of retailer Magnit, said that he thought that the law would benefit foreign retailers, naming Metro and Auchan as examples, Kommersant reported in February.

By Alexander Teddy

Source : www.themoscowtimes.com, 11 march 2010