Tim Gosling in Moscow -
No sector of the Russian economy suffered as much as real estate during the global economic crisis, with construction of new projects virtually coming to a halt. Now with the economy recovering, those stalled building sites are dragging on retailers' expansion plans. And it's only going to get worse.
Retailers are once more greedily eyeing the rising levels of personal income and consumer loans in Russia, with many announcing aggressive expansion plans for 2011 and beyond in a bid to grab a larger slice of a fragmented retail market, in which less than half of the country's yearly retail turnover (around $550bn in 2010) goes through modern chains.
The overleveraged real estate sector hit a brick wall when lending dried up in 2008, with 65% of retail projects failing to deliver that year, and is still struggling to get going again. A trickle of stalled malls and hypermarkets are due through 2011, but the two-year hiatus on new projects signals very few deliveries in 2012-13.
Cushman & Wakefield already sees vacancy in top Moscow malls below 1% (across Europe, around 5% is considered the optimum for a market at the top of its game) and rental prices heading back towards pre-crisis highs of over $2,500 per square metre (sqm) a year. "The opportune moment for retailers to expand has now passed," says Charles Slater, head of retail at Cushman & Wakefield.
Reflecting that, Ivan Nikolaev of investment bank Aton suggests that the expansion plans of retailers are likely to slow down over the next couple of years, "with the development of new retail space set to slow to 300,000 sqm this year, and by another 50% in 2012."
At the same time, international retailers who have been scouting for space in top-class malls over the last 12 months or so in order to enter Russia are already struggling. "The lack of space has held back their entry," Slater asserts, "maybe only 30-40% have managed it so far."
Pushing out the competition
However, with the Russian grocery market forecast to become the world's fourth biggest with turnover in excess of $400bn per year by 2015, the major hypermarket players such as X5 (which plans to open 500 discounters, 15 hypermarkets and 20 supermarkets in 2011, according to Alexandra Melnikova of Alfa Bank) should push through to hit growth targets by out-muscling smaller competitors on the cost of leases, or by building their own stores. "Everybody below the top six will struggle," reckons Nikolaev. "Access to the capital markets to finance their own development programmes will be key."
As will the real estate strategy and format of retailers, says Natasha Zagvozdina of Renaissance Capital. "Magnit doesn't care, as it builds its own stores generally - if there is to be a winner in the next two or three years, it will be them," she predicts. "X5 can expand its footprint through its discounter stores, which don't need special space. However, O'key only operates hypermarkets, and tends to lease - so the risk to their expansion targets is much greater."
A lack of experience in building its own stores could also put electronics chain M.Video's plan to open up to 70 new stores by the end of 2012 at risk, but for now the company is leveraging its name to take space away from competitors, Zagvozdina says.
That's also a leading edge in Svaznoi's strategy to open 750 new outlets by 2013, according to CFO Michael Tuch, although the mobile phone retailer's readiness to take "alternative" frontage in residential buildings and kiosks is also important. "Fights over space have intensified since the start of the year," he says,. "It's certainly much harder to get into top malls, with leasing prices rising as retailers look to outbid one another."
Zagvozdina says that according to anecdotal evidence, the shortage faced by retailers that need space in shopping malls will force them to alter their expansion plans for 2012. Tuch agrees, noting that the volume of modern retail space per 1,000 people (approximately 270 sqm, according to Jones Lang LaSalle) is still well below European averages.
Nikolaev expects leasing prices to rise by as much as 15% in 2011, and that acceleration is only likely to increase as the real estate logjam solidifies through 2013. That of course is not going unnoticed in the real estate sector, which may even provoke a reversal two years or so down the line. As Slater notes, "we're already seeing a big acceleration in development this year."
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