A dearth of retail developments lead vacancy rates in Moscow to hit 6.2% in 2017, as investors start to build stores again after a two year hiatus, reports JJL.
That is better than the 10.2% vacancy rate in third quarter of last year, the bowl of the crisis in the retail segment of the retail segment of the real estate sector. All-in-all the sector has begun to recover as investment is also picking up, reaching $4.6bn in 2017.
Retail developments crashed between 2013 and 2015 as economic growth came to an abrupt halt and the market ended up over supplied. It takes about three years to build a large shopping mall from start to finish so as the economy slowed the momentum built up in the previous years lead to an oversupply of space coming to market just as economic growth fell to zero from 2013 onwards.
Following two years of “silent crisis” in Russia that has dominated business since, that has seen both incomes and retail turnover fall, the market has now passed bottom says real estate consultants JJL. The lack of new space and the slow recovery in retail spending is starting to make itself felt on vacancy rates in the Russian capital.
Retail sales also started to grow in the second quarter for the first time since 2014, with both non-food and food sales positive. "Together, these trends point to a gradual operating environment improvement for retail and consumer goods companies," Fitch said in a report in December. Consumers are expected to remain "very price conscious," with increasing expected to be concentrated in the mass-market, and recovery in premium segments remaining limited.
Projects picking up
Only three shopping centres entered the Moscow market in 2017, according to JLL: Vegas Kuntsevo (113,400sqm), Vidnoe Park (24,000sqm), and the retail part of Fili Grad multifunctional complex (12,000sqm).
“The resulting annual figure of 150,000sqm was the lowest in the past five years. It is worth mentioning that there were no deliveries during the first half of 2017,” JJL said in a report.
Now the market is picking up, albeit modestly, there are several projects in the works, reports JJL, although the slower than expected economic recovery means completions of most has been pushed back into 2018.
Among the mooted projects named by JJL are: the Arena Plaza (20,000sqm), Milya (19,000sqm), Galeon (14,000sqm) and Petrovskiy (8,500sqm) were among projects expected in 2017 but rescheduled for 2018. The total volume of new retail supply in 2018 is expected at 306,000sqm, including such large projects as SC on Kashirskoe Highway (71,000sqm) and Dream Island (65,000sqm).
“Declining completions is the main result of low developer activity due to the economic downturn in 2014-2016,” said Ekaterina Zemskaya, Regional Director, Head of Retail Group, JLL, Russia & CIS, in a research note. “A lack of debt financing in 2015-2016 and adjustments of expansion strategies by a majority of retailers affected developers. The list of 2017 projects has shortened also due to postponed deliveries. Nevertheless, we expect that the real estate market will enter the new cycle next year, and developer activity will start to pick up.”
Low retail completions in 2017 mainly had an impact on the vacancy rate, which declined from 7.5% to 6.2% over the course of the year. The vacancy rate in prime shopping centres, those with high footfall and conversion rate, remained close to zero throughout the year.
“Taking into account a conservative completions forecast for 2018, we expect retailers to keep focusing on new operational shopping centres. As a result, the vacancy rate will not change significantly next year and remain close to 6.0%. However, new retail supply may increase to 567,000sqm in 2019 and lead to an increase of the vacancy rate to 7.6%. This will happen if the three largest projects (Garden Mall SEC, multifunctional complex on Aminyevskoe Highway, and Salaris SEC), which may add 322,000sqm to the market, are delivered," notes Oksana Kopylova, Head of Retail and Warehouse Research, JLL, Russia & CIS.
Small is beautiful
JJL also identifies the changing nature of retail in Moscow and the other large cities, which are increasingly feeling the distributive effect of the booming e-commerce. The mega-developments of huge mall complexes are slowly giving way to smaller more local shopping centres that have a greater emphasis on leisure and entertainment and less of a focus on stores. This is a trend that suits Russia as retail has traditionally been smaller and more local, Fitch said in a report in December.
“While Moscow is running short of attractive construction sites for developers, the structure of new retail supply is changing. During the next two years, a large part will be represented by small local projects, retail space in multifunctional complexes or transport hubs, as well as next phases of existing projects.” comments Polina Zhilkina, National Director, Head of Retail Advisory, JLL, Russia & CIS. “Nevertheless, neighbourhood projects are as attractive for retail operators as large-format shopping centres: they provide retailers an opportunity to locate closer to their customers, increase the frequency of purchases and boost brand awareness. Moreover, even large retail chains are becoming more flexible by optimizing occupied premises and developing small-format stores. Several grocery chains have already launched such concepts (Perekrestok, Azbuka vkusa, Auchan), and other large retailers have announced openings (Decathlon, Leroy Merlin, OBI, M.Video, IKEA).”
Foreign retailers returning to Russia
The international retailer activity in Russia in 2017 was comparable to the level of 2016, with 49 and 47 newcomers respectively. Moreover, some brands, which previously exited the market, are contemplating a return. The American bags and accessories brand Coach, the French makeup brand Sephora, the German fashion-retailer Orsay, as well as several other European and Middle Eastern fashion-retailers unveiled their expansion strategies for 2018.
“Most 2017 newcomers have been luxury (18%) and premium brands (37%). It is notable that the share of luxury brands has doubled compared to 2016,” adds Kopylova.
The vast majority of foreign retailers enter the market by finding local partners. Among the key Russian retail groups are Mercury, Bosco di Ciliegi, Crocus Group, JamilCo, Aizel Group, BNS Group, Kashemir & Shelk.
Most of market entrants have opened their first stores in Moscow, while seven have chosen to enter the market through a regional city, primarily with the assistance of regional partners where costs are a lot lower but the local market can be sizable. Three new international brand stores have opened in St. Petersburg, two retailers have appeared in Voronezh, with one store each in Belgorod and Samara,” reports JJL.
“Among the most notable 2017 debuts are the first European opening of the Italian cosmetics boutique Giorgio Armani Beauty, the Italian marketplace Eataly, the French jewellery retailer Mauboussin, the American media corporation Disney toys store, and the American sports brand Under Armour,” says Kopylova.
Meanwhile, nine international retailers have left the market in 2017: Accessorize, C&A, Debenhams, Finlayson, Kipling, LeEco, Mamas&Papas, Mexx, Takko Fashion. Decisions to close down monobrand stores have been predominantly caused by business restructuring rather than by a decline in sales.