BRICKS & MORTAR: Where now, Art Property?

By bne IntelliNews September 11, 2008

Ben Aris in Berlin -

Building a huge shopping mall in Moscow used to guarantee a developer equally large profits. Now, competition amongst the closely packed malls, a near-monopoly over the luxury brands and even the vestiges of World War II are forcing developers to get creative with their thinking.

Natalia Oreshina has been in the retail end of Russia real estate business since the start. Her pioneering work on IKEA's first true mall, built in 1998, revolutionised the way retailers thought about stores and since then she has overseen more than 35 major developments. Oreshina has been a major player in creating Russia's modern retail sector.

"Russia was a developing market in the late 1990s. Russian developers had the money, but not the knowledge. So I travelled extensively in Europe and the US to get an idea of how it was done elsewhere and brought these ideas back to Moscow," says Oreshina who founded her own company earlier this year called Art Properties.

The IKEA project near the Teply Stan metro station in southern Moscow was what started the ball rolling. This followed on from the (more famous) flagship store in Khimki, on the road to Sheremetyevo airport, but the Teply Stan project was the more significant of the two stores for the impact it had on the market. The difference is that the Khimki store was a stand-alone project and other shops have drifted to the location over time, attracted by IKEA's customers. The Teply Stan project was designed as an integrated mall from the start and had space for a gallery of other shops, which had to be filled from the off. In this sense, it was Russia's first true mall.

"The Khimki project was a store, but this was the first integrated mall. The original idea was to copy developments elsewhere in Eastern Europe, but in the end we went for a different format," says Oreshina. "This was to be a big mall with IKEA as the anchor tenant, but a much bigger gallery for other shops. It was difficult to lease at first - we had to persuade retailers to work in a new way - but after six months it was best shopping centre in terms of the number of visitors."

The overnight success of the IKEA mall was a revolution for Moscow retailers. Almost immediately there was an explosion of big space malls and hypermarkets to the point now where developers grab any big space in the city and put up a mall. "The competition has been growing over the last three years and most have followed a cut and paste plan of big developments. However, it is now starting to get harder to carry off as developers have been taking spaces next to each other. Moscow city government was trying to earn as much as it could from its main asset - land. But there wasn't much planning. These malls are so close to each other than not all of them are going to work," says Oreshina.

The market has reached a point where simply putting up a big mall will not ensure profits, Oreshina says. This is where Art Properties comes in, which Oreshina set up earlier this year as boutique that provides sophisticated real estate solutions for retailers and developers. "If the concept is not strong and you build a simple building now, you will not succeed. Some developers are already realizing this and trying to sell plots with planning permission or half-finished buildings. You need a strong design and an interesting fit out, otherwise you end up with an expensive refurbishment to improve the concept. The alternative is to go down the discount road to maintain the traffic," Oreshina says.

Still, despite the frenzy of building Moscow remains undersupplied with retail space. What's changed is that as Moscow's traffic continues to get worse the demand has shifted from massive stores in the centre of larger local stories in the suburbs, as shoppers are more and more reluctant to travel.

Developers are also feeling the pressure from the stranglehold the three big luxury-brand distributors have on the market. To build a successful mall, you need a strong anchor tenant that will bring in the clients. Obviously, the richer the punters are the better, so the high-end luxury brands are obvious anchor tenants. Trouble is, all the best brands like Dolce & Gabbana, Armani and the like are controlled by just three companies: Bosco, Mercury Trading and the Crocus Group. "These companies have divided up the brands between themselves and decide who is going to represent what on the market. They also decide where to offer these brands and in what department stores. Everyone who wants a prime shopping space has to have one of these brands, but you can't play them off against each other. So if you build a prime facility with a luxury anchor, the profits are limited," says Oreshina.

The top-end brands could go it alone on the Russian market, and some companies like Chanel have already started operating directly, but most can't be bothered and leave it to their Russian partners.

Crocus also develops its own stores and also operates on the mass market - such as its Crocus City development on Moscow's outer ring road - but both Bosco and Mercury have left the construction of shopping centres to others. Art Properties works with Crocus, but only its mass-market projects, where there is open competition and a different set of problems. Amongst the company's latest projects is for the X5 supermarket chain, which recently decided to keep the Carousel brand and use it for all its hypermarkets, after taking the chain over in June. With this kind of development, regional cities, not Moscow, are at the frontline and Art Properties has a mandate to redevelop a store at Kievskaya station in Moscow and another in Tolyatti in the regions, where the Lada is made. "Retail is going very fast. Less than two years ago no one would look at a city with less than half a million people and now they are moving into cities with less than 200,000 people," says Oreshina.

Size isn't everything in retail and while developers and retailers went for the biggest cities first, Oreshina says Russia's cities can have very different characters, which can materially impact the bottom line. "For example, St Petersburg is the second-biggest city in the country and the second-biggest in Europe. You would have thought that it is a natural destination for retailers," says Oreshina. "However, those that set up there were disappointed with the results. The culture of the city is save, not spend. I am convinced that it is because during the war, three-quarters of the population starved to death [during the siege of Leningrad, as it was called then] and the idea of thrift has been passed down from generation to generation since then."

Oreshina says the attitude of the recent local regional government is also important on the shopping culture of a regional city. Many local authorities closed their doors to both domestic and foreign retailers, only allowing the locals to operate. Now the door has been pushed ajar, retailers are finding they have to do a lot more work to educate the locals to the benefits of things like hypermarkets. On the other hand, in some cities in southern Russia the locals have travelled widely on holiday and are already au fait with more sophisticated western shopping ideas. "It is an ongoing process and nowhere is unaffected by the changes now," says Oreshina. "The development of retail runs in parallel with the rising incomes of the people. For most Russians at the moment, more money in the pocket means more shopping."

Send comments to The Editor

BRICKS & MORTAR: Where now, Art Property?

Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.