BRICKS & MORTAR: Russian regions are central to retail, residential development

By bne IntelliNews June 26, 2008

Denis Sokolov of Cushman & Wakefield -

Over the last few years, we saw significant growth in retailing in Russia. In 2007, this growth slowed as inflation rose, but in the long run the resurgence of retail in Russia is inevitable.

In 2007, nominal retail trade grew by 24% from the year before. Due to the high inflation - 11.9% in 2007 - retail growth in real terms was significantly less. More importantly, in 2007 we experienced a decrease of the growth rate for the first time in last five years. Retail growth has been supported by consumer credit. However, over 2007 we experienced a decrease of the consumer credit growth rate, from 4-5% a month in the first half of the year to 3-4% a month toward the end of the year.

It is very interesting to note, however, that even after a major economy crisis, it only takes retail about two years to recover. This proves the sustainability of the retail sector and its attractiveness for the investment.

Rebound

Over the last few years, retail growth has been driven mainly by development in regions. In 2007, retail trade in Moscow increased only by 12%.

While Moscow and to some extent St Petersburg are similar to European cities in terms of business environment, income and mentality, Russian cities with a population over 1m are about three to five years behind; cities with a population of less than 1m have a long way to go.

This means that experience gained by developers in the biggest markets like Moscow and St Petersburg is useful on the local markets. As a result, the rate of real estate market development in the regions is, and will continue to be, significantly higher than that in major cities.

Some 7% of Russians live in Moscow, but they contribute 20% to the total consumption. The average Muscovite consumes three times more than the average regional citizen. Cities with a population of less than 500 000 account almost for 40% of total population. Such cities are the most interesting for real estate development.

While quality retail supply in Moscow has been growing steadily since 2006, there has also been a significant boost in cities of more than 1m, the so-called "millionki." We expect that in 2009-2010, the major growth will be concentrated in cities of between 100,000 and 500,000.

Retail development is a driving factor for real estate growth in the regions. Modern retailers need class-'A' warehouses because for them storage and distribution efficiency is critical. So just by looking at retail development in a city, one can make a quick judgment about the economy, consumer market and real estate market there.

Residential

Russia is very centralised country. The population is concentrated in the cities with a high density. Most of the people suffer from shortages in residential space, while higher residential prices are restricting people from improving their situation.

Among a few ambitious projects of the Russian government, there's a drive to increase "affordable housing." Quite a few developers have announced plans to build cottage settlements in the outskirts of Russian cities. Recently, President Dimitry Medvedev announced that in a few years there will be up to 1m houses delivered a year. This means that each year, about 3m people will be able to move out of town. This may result in changes of consumption patterns that will definitely affect both retail and office development.

Denis Sokolov is head of research at the Moscow office of Cushman & Wakefield


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