Jason Corcoran in Moscow -
The property arm of Ireland's richest man, Sean Quinn, has forked out an estimated $200m to buy its first shopping centre in the Russian city of Ufa. The deal highlights how Western investors are increasingly turning their attention away from the twin gateways of Moscow and St Petersburg, in favour of Russia's so-called millionniki - million-plus-population cities.
International property agency Jones Lang LaSalle coined the expression to describe the Russian 11 cities that are set to be the next commercial real estate investment hot spots. The retail sector especially is bringing multi-billion-dollar funds shopping on a route taking in Volgorad and Rostov-on-Don in the south-east of the country to Omsk and Novosibirsk in Siberia.
The deciding factor for investors is the high rates of return in Russia, which range from 12-30%. In other European countries, this rate is just 4-8%. Consequently, the return period for shopping complexes in Russia is just 3-5 years, significantly shorter than in Europe.
In September, Quinn Property Management acquired a shopping mall and entertainment complex in Ufa, a city of 1m people situated in the southwest Urals some 730 miles east of Moscow. The group declined to disclose the cost and the seller, but Moscow analysts put the likely cost at a minimum $200m for the shopping mall on its own.
Quinn Property Management is part of school dropout Quinn's privately-owned empire, which spans insurance, construction, glass manufacturing, hotels and pubs.
The new 120,000-square-metre (sqm) Avrora centre is scheduled to open later this year and features a cinema, bowling alley, swimming pool, a climbing wall as well as retail outlets. "This is a combined shopping and leisure centre project that has just started construction. It will take two years to build the project," Brian Bell, a spokesman for the reclusive Irish billionaire, told bne. "The group is also in the process of developing a logistics park in the city and this project complements operations there. All the major Russian and international retailers who are active in Russia have expressed interest in Ufa and in this project in particular."
The anchor tenants in Russia's biggest shopping centre chain Mega Mall include Sweden's IKEA, French hypermarket Auchan and Finnish retailer Stockmann. IKEA, which already has three outlets in Moscow, has plans to build outlets in 12 more Russian cities, including Vologorad, Nizhny Novgorod, Rostov-on-Don, Voronezh and Novosibirsk. Russian retailers, such as X5 Retail Group, Russia's largest grocery retailer with over 1,000 stores and plans for additional 900 stores with a target of $6bn annual sales by 2008, are also driving retail expansion in the regions.
Quinn will be keen to sign up such names for its new mall in Ufa, the industrial hub of Bashkortostan known for its petrochemical and manufacturing industries. The site for the mall is in the centre of the city with an immediate catchment area of more than 300,000 people.
Scouring the region
Quinn has about 40 people involved in scouring for property development opportunities throughout Central and Eastern Europe. The property business, which has a war chest of $5bn to spend in the region over five years, has already acquired shopping malls in Turkey and Ukraine and a string of office blocks, retail stores, logistics centres and hotels in the region. It has completed office projects in Moscow and Kyiv and is also constructing large-scale logistics projects in regional cities Rostov-on-Don and Kazan. The Caspiy Centre, a six-storey business block near Moscow's main airport, is due to open in the middle of next year.
Bell said Quinn's up-and-running assets in Moscow are currently selling for a 9-11% yield, while the regional cities are registering a much higher yield.
Jones Lang LaSalle said the millionniki cities were last year responsible for a third of the total volume of Russian retail investment, with the figure set to jump further in 2007.
Karina Kreja, CEE research manager at Jones Lang LaSalle, reckons that such cities, "will feature increasingly on the radar screen of real estate occupiers, developers and investors. Apart from major retail developers, who can now be found in all the millionniki, these cities are still largely unexplored by the commercial real estate community."
While competition is increasing for a limited number of quality assets, prime yields for the retail market in the regions are approximately 150-200 basis points over prime yields in Moscow. The millionniki still have a considerable advantage over Moscow with yield premium, freehold land tenure and an increasing emphasis on investment incentives from local governments.
Kreja says investors like Quinn and Swiss investment company Eastern Property Holdings were searching for investment opportunities or completing their first purchases in the regional cities.
"There is an increasing diversification of the source of capital on the Russian market, including private money, German funds, Russia-specific funds, investment banks through special situations groups or funds they control as well as managers of private wealth," she says. "The Russian market attract new groups of investors and alongside the well established domestic, CIS and Western European players, we expect new market entrants coming from more distant locations like Singapore, China, South Korea, and Australia."
The investment market in the regional cities first emerged in 2004-05 when Austrian fund Meinl European Land bought its first Park House projects in Volgograd and Yekaterinburg. Meinl owns six completed projects in Russia with 13 other projects under construction. Over the last three years, the company acquired shopping and entertainment centres Park-House in Volgograd, Yekaterinburg and Togliatti from Vremya group and in Kazan from Marta Holding. The company also plans two other shopping centres with an area of 60,000 sqm each in Ryazan and Rostov-on-Don that should be finished by 2009 and worth a combined €150m.
The Austrian property company Immoeast, which last year acquired two Moscow shopping centres with a combined 60,000 sqm space, is now rumoured to be looking at the regions too.
Aberdeen Property Investors, the UK fund manager, recently opened an office in St Petersburg to scout for opportunities for a €1.5bn fund in Russian commercial real estate. Their emphasis will initially be Moscow and St Petersburg, with the regions coming later.
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