Commercial real estate is recovering in Moscow with three large projects currently under construction that will triple the amount of new space coming on the market this year, according to a report by real estate consultant JJL.

“Three outlet centres are currently under construction in the Russia’s capital. Two of them with a total area of 61,000 sqm will enter the market this year. As a result, the Moscow outlets market will grow by 72% reaching 145,000 sqm by the end of 2019. Development of this format is stimulated by more balanced and conscious consumer behaviour,” JLL said in a note.

Retail spending has been constrained by the growth of debt amongst the population. Real incomes have been stagnant for six years now and declined again in the first quarter by 2.3%, while consumer debt has been growing steadily as Russians try to maintain their lifestyles by borrowing. Nominal income growth is currently running at 7.6% in May whereas consumer debt is growing by about 25%, according to the Central Bank of Russia (CBR) which is moving to cool retail loans.

JLL argues that the pressure on income is changing the way Russians shop as they put more effort into bargain hunting and spend more time in discount stores. The new developments in Moscow are aimed at better servicing these niches. Nominal wages were up 8.4% in May to RUB48,510 per month. That is equivalent to an increase in real wages of 2.8%, but the all important real disposable income was down again by 2.3%, leaving the average Russian feeling poorer. 

Russian retail sales growth slowed down to 1.4% y/y (1.7% y/y for 5m 2019) in May from 1.6% y/y in April. Fundamentally, consumer demand remains weak as there are no plans for wage indexation for public sector employees (which make up about half of Russia's employees) and the mandatory payments on loans are increasing. These factors will not allow the retail sales to accelerate much higher than 2% y/y, say analysts.

“No wonder that in such conditions customers prefer discount stores, the share of FMCG discounters rises, new outlet centres are being actively built and existing ones demonstrate good operating results,” says Olesya Dzuba, head of research, JLL, Russia & CIS.

The tougher market conditions are also seeing a shift towards an increase in the share of Russian companies in the retail sector as foreign brands pull in their horns and few new companies are arriving.

On the back of restrained consumer behaviour the number of new international retailers declined sharply in the first half of this year with only seven brands entering the Russian market versus 15 in in the same period a year earlier, reports JLL.

“That includes three brands that debuted in the second quarter against five a year earlier. Over the past three months British premium men clothes retailer Hackett London opened its first store in Metropolis SC, premium sports clothes brand EA7 Emporio Armani appeared in MEGA Teply Stan SEC and luxury men clothes brand Off-White entered the market as a corner in TSUM,” JLL said.

At the same time five international brands pulled out of the Russian market in the first of this year versus four that left in the same period a year earlier.

“The Russian market in general and primarily Moscow remain interesting for international brands. Yet considering careful consumer behaviour and lack of quality retail space for store openings new international retailers study the market for a long time and carefully choose the location for their first store. In most cases retailers are not ready to invest directly, therefore they engage local partners to eliminate logistic and operating difficulties,” says Nadezhda Martynova, head of retail tenant representation, JLL, Russia & CIS.

However, after a barren last few years there is a lack of quality retail space in the Russian capital and that has been pushing vacancy rates down in Moscow shopping centres, which declined by 0.2 ppt q/q to 4.1% in the second quarter of this year.

The decrease was caused by a vacancy decline in shopping centres opened before 2014 (the vacancy rate is 3.8%, 0.3 ppt lower q/q) as well as in newer schemes introduced after 2016 (the vacancy is 6.4%, 0.3 ppt lower q/q), reports JLL.

Only one new retail project opened in Moscow in the second quarter of this year: the Salaris mall with 105,000 sqm of space. However, deliveries of new space in the second half of the year are expected to double with 256,000 sqm of space slated to be completed after the summer, bringing the total of new space on the market to 361,000 sqm – three times more than opened in 2018.

“Among the announced schemes, 25% of GLA is occupied by Ostrov Mechty SC (65,000 sqm), 24% – by outlet centres Novaya Riga Outlet Village (38,000 sqm) and The Outlet (23,000 sqm). In addition, MFC on Aminyevskoye Highway (46,000 sqm), Skazka SC (19,000 sqm), the second phase of Smolensky Passage MFC and several neighbourhood shopping centres are expected to open in H2 2019,” reports JLL.