Active shopping center development continues in Russia, but investors are waiting for stabilization

A long period of growth and high commodity prices allowed the Russian economy to delay the effect of the global financial crisis. The Russian consumer remains the key player in the economic development.

Real wages in Russia have been growing on average by 15% per annum over the last eight years, while households spent almost three-quarters of their income on purchases. This has lead to rapid retail sector growth according to Jones Lang LaSalle's Russian Shopping Center Report 2009.

However, in Q4 2009 Russia was hit by the global crisis. The recent months showed a decline of retail turnover, as many companies reduced wages, and unemployment began to increase. Nevertheless, the retail sector has confirmed its resistance to crises.

The situation varies among retailers working in Russia. Large international operators continue to expand their chains. Russia attracts new foreign retailers, keen to expand their operations. New brands continue entering the market, with GAP (USA) and H&M (Sweden) recently opening stores in Moscow, with Carrefour and potentially Wall-Mart expected to follow. There is also a shift from franchise operations to the direct sales model.

Large Russian operators have been more affected by the credit crunch. Their aggressive expansion programs financed by short-term loans experienced difficulties when financing disappeared and the consumer demand started to decline.

Gallery retailers also significantly revised their expansion plans. The luxury segment was particularly hurt.

Shopping center supply continues to grow actively in Moscow. This is mainly due to completion delays for projects initially scheduled for 2008. Last year, 65% of projects announced for delivery were not completed. However, Moscow remains significantly under-supplied with quality retail space. Expected construction slowdown in the next two to three years will keep the situation largely unchanged.

The situation in the regions evolved more significantly: only a few projects continue to be developed. The lack of financing remains the main problem. It negatively affects all market players, including developers and investors. Significant consumer demand correction in the regions amplifies the effect.

Shopping center rents have stopped growing, and less popular projects experience a correction. In the near term we will likely see a similar trend: well located high quality centers with good foot traffic will attract tenants and will be able to sustain the rental levels. At the same time, lower quality operators will have to reduce rents to retain the tenants.
Concessions to tenants become widespread as an alternative to rental reductions. This brings the market closer to the European standards and increases its transparency. One of the most popular options is the shift from fixed to turnover rents.

For many years retail assets were the most traded real estate class in Russia. However, with the rest of the economy, the retail investment market activity has changed in Q4 2008, experiencing a significant decline.

In the short term Jones Lang LaSalle expects the following trends on the market:

• Limited debt availability will restrict transaction volumes in 2009
• Prime assets in Moscow will be the focus of investor demand
• Equity investors will dominate
• Greater transparency
• Developers will look to complete developments under construction
• Change in focus to smaller shopping center projects
• Yields will stabilize and potentially compress by mid 2010

Despite the current turmoil, Russia is well positioned to recover earlier than most economies in Europe and will again deliver superior performance. The key distinguishing factors are low household debt, an undersupplied consumer as well as active state support of the economy. High currency reserves of the Bank of Russia and savings accumulated in the Stabilization Fund allow the government to utilize various counter-cycle instruments. Recent exchange rate stabilization played an important role, softening the effect of the preceding devaluation.

Vladimir Pantyushin, Head of Economic and Strategic Research Group at Jones Lang LaSalle, commented: “The attention of investment market participants is obviously focused on the macroeconomic performance, anticipating stabilization. The economy will have a direct effect on the consumer. Nevertheless, the development of shopping centers continues. Many retailers, including major global operators and Russian discounters, continue to expand their networks. Less volatile nature of the retail segment relative to other real estate sectors has been confirmed in Russia as well. This feature will serve as an additional attraction for investors when market activity picks up.”

Source: Jones Lang LaSalle