"Democrats" Grab Retail Space Market
The retail real estate segment is most saturated in St. Petersburg real estate market and will remain such for many years to come. In 2009 experts fixed a remarkable drop of rental rates and warned developers against launching new projects. The existing players are forced to accommodate for the new conditions and migrate to more democratic formats.
According to Colliers Int., 148 large retail properties exist in St. Petersburg market with the cumulative GBA of 3.8 mil-Lion sq m and GLA of 2.4 million sq m. The segment of shopping centers still dominates the market: 72 shopping malls have the GBA of 2.5 million sq m and the GLA of 1.66 million sq m. Jones Lang LaSalle estimates the quality rentable sales area in Saint Petersburg at 1.27 million sq m in 39 conceptual shopping malls. Such is the margin inherited by the market from the period of stormy growth. Only three retail properties were put into operation in 2009: the 29,000-sqm SC Cruise developed by Nevsky Alliance, 10,800-sqm SC Rybatsky developed by LLC Krom and the second phase of SC Felicita-Pionerskaya. Four others were also announced: SC Aura, SC Smile, mixed-use Nevsky Plaza and SC Horoshaya zhizn (the total floor area of these projects is 62,000 sq m).
Sinking turnovers
The existing players had to get adapted to the new conditions. All retailers have experienced shrinking turnover but stores in shopping centers with Lame concepts sagged more than others. "Many closed down unprofitable stores and plenty of space was vacated in uncompetitive malls. At the same time malls with professional conceptual development suffered less: rotation or replacement of tenants is the only hassle they face," says Anna Nikandrova, Consultant with Retail Areas Department, JLL. For example, the Grand Canyon mall could swiftly replace the anchor tenant (Nash hypermarket) that exited from the market with another player from the same segment - O`key hypermarket.
Manager of IB Group Yuri Borisov points out that grocery retail was much less impacted by the crisis than the non-food segment. "While the situation in grocery retail is relatively stable (in the ruble equivalent), nonfood retail was dealt a serious blow. While St. Petersburg retail claims about 50% of the average dweller`s budget and it has sagged by 17%, according to Goscomstat, the slump in the nonfood segment was as deep as 34%," says the expert. In the words of Anna Nikandrova, democratic entertainments were Least affected by sinking demand: the market sagged insignificantly here and movie theatres proved to be the only entertainment segment that was not impacted by the crisis at all.
"The premium segment suffered more than others and some shops were closed; yet the malls were not absolutely deserted as expensive stores were replaced by more democratic formats," notes Nikandrova. "Everything depends on each particular project -its location, concept, management quality and other parameters. St. Petersburg is still ahead of Moscow and other Russian cities in terms of saturation with quality shop floors. Some neighborhoods are oversaturated and the future of some shopping centers is obscure. On the other hand, there are waiting lists among potential tenants seeking space in such shopping malls as Grand Canyon, both Mega malls, Raduga and some others," adds Evgeniya Vasilyeva, Deputy Director of Consulting Department, Colliers International SPb. She notes that a number of St. Petersburg neighborhoods are undersupplied. Kalininsky, Frunzensky, Krasnogvardeisky and Vasileostrovsky districts where most projects were frozen are such potential areas of keen demand. "By comparison with office and industrial real estate the retail sector looks more stable, -opines Senior Analyst with Research Department, Jones Lang LaSalle, Veronika Lezhneva. - The reason should be sought in the fundamental difference between retail, office and warehouse segments. While the latter two cater to business (B2B), retail is geared towards the end consumer (B2C) who is slower to respond to mac-roeconomic changes than business. The consumer demand determines the state of the retail market and while we can observe this demand certain types of retail tenants occupying surfaces in shopping malls will continue their development."
Rates reduced
"At the turn of the year there was bulky supply in the market of standalone premises. They remained vacant during several months, but the landlords did not lower the rental rates till April 2009. Then a slow process of market stabilization commenced as it dawned upon the landlords that the declared rates were out of tune with the state of the market and they corrected them," says Veronika Lezhneva. Experts point out that the reduction of rates range from 5% to 50%. "Even the same merchandise group behaves differently in different pricing segments. In particular the proceeds of shops at the discount center Rumba grew by 5% in the ruble equivalent. Given that the rental rate is a derivative of general proceeds, it`s clear that the approach to negotiations with tenants varied throughout the year. One thing is certain: there were more speculations on the theme of rent drops in this year than the justified reduction of rental rates," believes Yuri Borisov.
Since September the market awakening has been going on and the rates have grown against their summer Level. Director of Business Development at ASTERA St. Petersburg, Ludmila Reva, estimates the current level of rental rates in shopping centers for the clothes and shoes gallery at 30,000 rubles/ sqm/year including VAT for anchor tenants, 4,000-10,000 rubles/sqm/ year for entertainment operators, and 10,000-15,000 rubles/sqm/year for grocery chains. "At new facilities the rates are closer to the lower limit of the said range because the new centers cannot provide tenants with data on the average daily attendance. However everything is individual here and depends on a specific property. Thus if a new complex has a competent concept, a though-out pool of tenants and good location, it will be in demand among the tenants and will be able to charge a decent rent," she explains.
The prices dropped more radically in the street retail segment - by 35-50% in the first quarter (against the third quarter of 2008). Yet by autumn the rates have stabilized and even grown at some premises. "For example, the rental rates ranged from 5,000 to 6,000 rubles/sqm/ month on Nevsky and now they vary between 4,000 and 8,000 rubles/sqm/month. The upper limit was raised due to higher rent for most liquid premises in high demand," says Ludmila Reva.
Stabilization of prices encouraged many tenants who hasten to improve the locus of their outlets, especially in street retail where properties strung out along major routes are gradually filled with democratic brands. "Several categories of tenants are rapidly expanding at present: clothing and shoes, including stock and off-price shops (non-chain brands lease premises below 200 sq m, chain retailers - 600-1,000 sq m)), inexpensive restaurants and fast food as well as bookshops. The most popular format is 50-300 sq m though there are also requests for larger premises above 3,000 sq m," notes Reva. Evgeniya Vasilyeva agrees that democratic formats - discounters, promising fast food and free-flow formats in public catering-are in high demand. The DIYformat is also undergoing changes: while some time ago its average area was 12,000 sq m (about 50,000 labels), now it varies between 1,000 and 5,000 sq m (8,000-15,000 labels). In her opinion, there are no grounds for further reduction or growth of rental rates in 2010-they can only be slightly corrected under the influence of inflation.
Five-year stock
The analysts of JLL add that regional and super-regional projects with professional concepts proved most efficient in times of crisis. The occupancy of 70-80% is now considered a very good performance. In 2009 such projects as Galeria, Stockmann and Leto currently under construction reported on prelease agreements with enviable permanence. "Leto boasts prelease agreements to 70% of the leasable areas. This occupancy rate vividly demonstrates that high quality projects with an effective concept fortunate location and an excellent mix of brands remain attractive in any situation," rejoices Teymuraz Shengelia, Commercial Real Estate Director at Sistema-Hals.
Yet developers are not going to commission any other large conceptual projects apart from these three in 2010. As reported by Astera, the following shopping-entertainment and mixed-use projects were frozen in 2009: a 26,000-sqm project on Dumskaya Street developed by PAN, 200,000-sqm Apraksin Dvor developed by Glavstroy, 250,000-sqm Nevsky Coliseium developed by Margheri, 85,000-sqm Mandarin developed by Arsenal, 50,000-sqm Skipersky Mall developed by SiB, and all projects by RTM Development. Adamant put off the realization of its projects, Makromir goes on with a single project on Dolgoozernaya Street. Colliers estimates the frozen volumes at more than 1 million sq m, of which 300,000 sq m were already at the stage of construction at the time of their conservation. "Therefore during the next five years the St. Petersburg market will be growing at a slow pace due to the delivery of those projects which are now at the finalconstruction stage,"says Ludmila Reva.
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One of the trends that gathered momentum in the wake of the crisis is switching from the fixed rent to a floating turnover percentage. These terms are generally put forward by large anchor tenants (grocery chains in the first place) playing the role of magnets and human traffic generators whose presence is very important for the owner. Furthermore European brands prefer this floating rental scheme which is widespread in Europe. Anchor tenants usually offer the owners 2-7% of their turnover as rent while clothing and shoes operators - from 10% to 15%. Other possible preferential terms claimed by tenants include the rent payment by installments, repeal of security deposits, the lack of the rate escalation in the contract of lease etc.
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Ludmila Reva,
Business Development Director, ASTERA St. Petersburg:
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The year 2010 will be rather significant for the retail real estate market. First of all, big super-regional projects will enter the market along with a new pool of international tenants. Secondly, the year 2009 graphically demonstrated that quality retail properties are still in demand among the retail operators and this is a clear message for the developers who will be entering the market in the future to carefully elaborate on their projects, starting from Location and structural characteristics and ending with efficient pooling of tenants and a though-out marketing policy. The division of retail properties into quality projects that evaded a considerable reduction of the rates and an increase in vacant areas and lower quality projects which experience a dearth of tenants and lower their rates for their attraction will continue.
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Veronika Lezhneva,
Senior Analyst with Research Department Jones Lang LaSalie:
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Compared to the beginning of the year, the situation in retail has change for the better. A large number of vacated premises, especially on Nevsky Prospekt, find new tenants and the exposure time is shortening. In many cases the places of chain retailers are taken by private entrepreneurs and this is one of the trends. The market was so crammed prior to the crisis that little-known brands found it difficult to obtain a favorably positioned quality premise for an acceptable price. The private entrepreneur also faced problems with looking for good places of business. However the rapid expansion of the chains was boosted by bulky borrowed capital which later became a major impediment. Now those who possess their own funds for business development, even if modest, may enter the market and gain a firm foothold thereon.
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Evgeniya Vasilyeva,
Deputy Director of Consulting Department, Colliers International:
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The developers announced the delivery of about 900,000 sq m of Leasable area for 2009. Since the beginning of the year 65,000 sq m of quality retail space has actually been commissioned and until the year`s end another 35,000 sq m can be put to use. The largest projects originally scheduled for inauguration in 3-4Q of 2009 were postponed till 2010; among them is Leto mall, SC Stockmann, Galeria and others. These shopping malls will Likely be completed in 2010, though projects of lesser scale will hardly be finished off. New projects won`t be announced and those which were announced but stuck atthe design stage will probably be frozen. As estimated by GVA Sawyer, new GLA to be injected into the local market in 2010 will amount to about 220,000-250,000sq m.
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Vladislav Fadeev,
Leading Expert Analyst GVA Sawyer SPb:
Автор: Natalia Kozyreva
Commercial Real Estate North-West №12-1 (27), December 2009 - January 2010
