Regional Retail Remains Attractive Despite Large Pipelines And Worsening Economic Trends


Russia is among the top five countries in Europe in terms of private consumption and occupies first position by volume of retail turnover, which currently exceeds 450 billion euros.  Therefore, it is not surprising that Russian market remains very attractive to both developers and retailers.   

Besides well known Moscow and St. Petersburg, Russia also has more than 20 cities with populations in the range of 500,000 to over one million. Consumer spending in each of these cities is more than 5 to 9 billion euros per annum.

Among cities with populations of over one million inhabitants the strongest purchasing power is represented in Novosibirsk, Yekaterinburg, Krasnoyarsk, Nizhniy Novgorod, and Samara.

The total supply of modern retail space in Russian cities with populations over 500 thousand people amounts to 14 million square meters. A lot of successful projects are situated in these regions. Most of them match Moscow and St. Petersburg projects by such criteria as gross leasing area, the presence of international retail chains and footfall.

Examples of the most successful regional projects include SEC Mega (Novosibirsk), SEC Kosmoport (Samara), SEC Planeta (Krasnoyarsk), SEC Grinvich (Yekaterinburg).    

Russia is an unconditional leader in terms of the announced pipeline of retail space to be delivered and holds the first position among European countries. Total volume of modern retail space under construction in Russia with a delivery date between 2013 and 2015 is 6 million square meters or more than 40 percent of the existing stock.

SEC Nebo (Nizhny Novgorod), SEC Galereya Tau (Saratov), SEC Planeta (Ufa) are among the most highly-anticipated regional projects.  The announced date of delivery of all projects is up until the year 2015.

The large delivery pipeline is targeted to saturate the market, which is significantly underpenetrated even in large cities.  In eight out of the 13 largest regional cities the penetration rate is around or below 300 square meters per 1,000 inhabitants, compared to 400 to 500 square meters typical of European cities. As a result, developers are very active: in some cities the existing pipeline might double market stock in just two to three years.

Talking about the existing stock of retail property one should also take into account the fact that very often even a relatively high penetration rate does not mean that the market is saturated. Quite a few regional malls belong to so-called previous generations of shopping centers and are not able to compete with the newest, or third-generation, shopping malls. This situation extends investment opportunities both in terms of new development and re-concept of the existing properties.

Regional markets are attractive for federal and international chain brands. The most popular retail chains in Europe like Zara, H&M, Mango successfully develop in Russia's regions as well. For example, Adidas AG is the most common retail chain in Russia. It has more than 1000 stores not only in cities with populations over 500,000 inhabitants but also in those with just over 100,000.

International brands are entering regional markets based not only on purchasing power. Quite often retailers arrive after the appearance of quality shopping malls, which are able to satisfy top retailers' criteria in terms of space and concept.

Many grocery, fashion and sport retailers prefer entrance into new regions using franchising schemes. The key problems related to the international players' development in the regions are expensive logistics and a deficit of latest-quality retail space.

From 2009 to 2012 the number of franchising agreements among Russian retailers increased by 80 percent, and among foreign, by 40 percent.

Investors' activity in the regions is significantly lower than that of developers. Investments in  regional commercial real estate usually reach barely 10 to 20 percent of the total volume invested in Russian commercial real estate. Moscow and St. Petersburg remain the key recipients of these resources.

Recent large deals include transactions with SEC Aura in Novosibirsk (around $270 million) and Megacenter Horizon in Rostov-on-Don (around $150 million). Transactions with a deal size below $100 million occurred in Kaliningrad, Kaluga, Murmansk, Nizhny Novgorod and Ufa among others.   

There is a bunch of regional retail properties which are potentially interesting for investors, with high attendance, good tenant mix and attractive yields. Nonetheless, the number of investment transactions remains really low. And it is not only due to the higher perceived risks.

Quite often the owners of regional retail properties are completely satisfied with their profitability and either are not ready to sell their objects or ask for quite high prices with an initial expected yield that is not so different from that for quality properties in Moscow.

Worsening macroeconomic trends in the Russian economy may damage existing positive trends in the short term. Nonetheless, fundamentally the regional market will remain very promising for all involved parties: developers, investors and retailers.