Retail Fuels Investment in the Regions

MTShoppers passing by a clothing store in the new Mega shopping center at Khimki, one of many such developments.
Investment in Russian commercial property may rise 20 percent this year as consumption rises on the back of economic growth, fueling demand for shopping malls and warehouses, real estate broker DTZ Holdings said.

Projects such as the Rodeo Drive shopping mall in St. Petersburg and Park House in Samara will attract about $6 billion from investors by year's end, the largest inflow for any Central or East European country, said Nicolas Spiro, head of research for the region at London-based DTZ. Investors may bring in about the same amount in 2008, although that could decline "a little" if there is concern about global economic growth, he added.

"The improving macroeconomic climate is increasing spending power tremendously and bringing strong demand for shopping centers," Spiro said last week at a news conference in Moscow. Russian cities "will continue to offer significantly higher yields than other European cities."

The country's economy will expand by about 6 percent annually in the next years, fueled by private consumption and growth in retail trade, telecommunications and services, said Natasha Zagvozdina, deputy head of research at investment bank Renaissance Capital. Russia still trails other European states in shopping space per capita, she said.

The city increased the amount of space in its malls almost fourfold since 2002 and its market is still big enough to absorb many kinds of property products in the next years, said Stefano Carosi, head of Russian investment at DTZ.

"We are very positive on Russia," said George Schoenberg, co-chairman of the Russia Empire property fund. "We are going into higher-risk cities, but with higher returns because of lower competition and lower construction costs. Due diligence is key."

Yields on Moscow prime office and retail space may slide to 7 percent to 8 percent next year, still more than other Central and East European countries, Spiro said in an interview.

Moscow yields now are at 8 percent to 9 percent, giving a premium of 250 to 300 basis points above the rates in Central Europe, he added. The yields in other Russian cities range from 10 percent to 11 percent, he said.

Russia Empire next month will close a $150 million private equity investment into eight shopping malls in cities including Novosibirsk and Yekaterinburg, a residential project and a hotel, Schoenberg said in an interview. The fund plans to invest as much as $500 million annually in Russia and plans to raise about $300 million in an initial public offering on the London Stock Exchange's alternative market in June, he said.

St. Petersburg and Samara will be the most attractive cities for investment in Russian retail property until 2009, with Samara and Rostov-on-Don surpassing St. Petersburg as the most lucrative markets afterward, Spiro said.

Samara will boost its retail space fivefold by 2009, and Rostov-on-Don will nearly double, according to DTZ. Novosibirsk will increase its shopping space tenfold over the same time and will still have a low amount of space per capita, the broker's research shows.

The country's $318 billion retail sector will expand by an average of 22 percent annually through 2011 and may increase 27 percent this year, as disposable income rises an average 10 percent per year, Zagvozdina said in a recent presentation. Consumer loans will fuel further spending and may rise 56 percent to $122 billion this year, increasing a further 50 percent in 2008.