Clare Nuttall in Astana -
Retail has remained the bright spot in Kazakhstani real estate as the sector makes its slow recovery from the crisis, with numerous international brands pouring into the two largest cities Almaty and Astana. Demand for new malls is high, especially in regional capitals, as companies looking to expand are thwarted by a lack of modern retail space.
A lot has changed since five years ago when Kazakhstan was seen as a far-flung frontier market, with rising incomes offset by its remoteness from existing distribution networks, lack of suitable space and customs barriers. This situation changed with the construction of new malls, steadily improving logistics infrastructure and Kazakhstan's entry to the Customs Union alongside Russia and Belarus.
Kazakhstan saw retail trade volumes reach KZT409.7bn ($2.7bn) in July 2013, up 36% compared with July 2011, according to the Agency of Statistics of the Republic of Kazakhstan. Overall, retail trade volumes increased more than five-times between 2001 and 2011. The share of "formal" retail trade - as opposed to trade through bazaars and other informal channels - has also increased. Back in 2001, just 25.7% of trade was formal. In 2011, thanks to a combination of market forces and government pressure, the formal segment finally overtook the informal sector, accounting for 51.5% of total retail trade.
More than any other real estate segment, retail has seen a remarkable rise, with construction projects moving ahead through the crisis years, while those in the residential sector were put on hold. "Across Central Asia, retail is the most exciting area in property investment at present, with many brands keen to come to the region and expand quite aggressively. That includes rollout plans not only for Kazakhstan, but elsewhere in the region which includes Mongolia, to some degree Turkmenistan and the other 'stans, and the Caucasus," says James Palmer, partner at Veritas Brown Cushman & Wakefield.
An important tipping point came in 2010, when franchiser Fawaz Alhokair brought Zara and other Inditex Group brands to Kazakhstan. The following year, Inditex announced that it would buy out the companies operating its brands in Kazakhstan in a strong sign of confidence in the market.
Previously, just a handful of international brands such as Benetton and Mango had been present in Kazakhstan, but the market has gained momentum with the launch of other brands operated by companies including Arts Group - operator of Promod and Parfois - and Kazakhstan's Union Space, which operates Mexx, Motivi, Vero Moda and other chains. More are set to follow, including supermarket chain Tesco's clothing line F&F.
Kazakhstani real estate companies report continuing interest from investors in particular from Russia and the Middle East, looking at both the two capitals, Almaty and Astana, and the potential for regional expansion. However, there are still challenges to investing into Kazakhstan, including the need to find professional local partners. "It can be difficult to enter the market, because unlike in Europe where each brand is established individually, they are brought to Kazakhstan as franchises, and the franchise holders need to find local partners to set up and operate the business. As a result, there's a long lead-in," says Palmer.
Construction of new malls in Kazakhstan's largest city Almaty is forging ahead, with projects including the Dostyk Plaza and the expansion of the existing Mega Center underway. Nursultan Kassenov, managing director of NAI Aristan, warns that, "while the market remains interesting, it may reach its first saturation in the next three to five years."
The rapid rise in Astana's population has sparked the launch of new projects in the new town, where, according to Nursultan Kassenov, managing director of NAI Aristan, "several shopping centres with very similar concepts and similar tenants opened close together on the left bank in 2008-09. Since then there has been an evolution, with each mall trying to distinguish itself by finding a new competitive niche."
Meanwhile, the Soviet-built old town, where the majority of Astana's population lives, is underserved, with no modern shopping centres opening in the last five years, despite a very high level of interest from retailers.
There is a similar problem in other Kazakhstani cities, as retailers look to expand within the country. Relatively high incomes in Kazakhstan's industrial northern cities have made them attractive to retailers. The oil rich west is also of interest, again because of relatively high incomes and the large number of expatriate workers; the downside in the remoteness of the region's main cities. "There had been quite a bit of interest in Aktau and Atyray, where we have had more work in the last 12 months than ever before. Retail is a key driver, as these two markets are the next in line after Almaty and Astana, although with difficulties in establishing the logistical networks," says Palmer. "Kazakhstan as a whole is still very under-subscribed with room for many more retail concept offerings."
Kassenov agrees that, "Almaty and Astana are the first priorities for international retailers. The next is Atyrau, which is a promising location for property developers because the city is rich but the infrastructure is poor, with no professional shopping centres on the market yet."
Meanwhile, despite its large and rapidly growing population, the south of the country has not yet attracted a high level of interest, due to its relatively low incomes compared to other regions. However, as the markets of Kazakhstan's two largest cities become saturated, more retailers are expected to explore the next frontier - regional expansion.
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