Retail Property Market Is Buoyant Despite Official Tinkering

Bureaucratic intervention in the real estate market is at odds with pledges to reduce barriers and create a transparent town-planning regime: Ad hoc charges, new laws and lack of clarity on who is responsible for taking decisions are affecting land plots and owners of existing properties.


Vitaly Mozharowski

Partner Real Estate and Construction,

Goltsblat BLP

Owners of retail property will remember 2013 for the active regulation of the real estate market by the Moscow and Moscow Region authorities. This regulation was felt mostly through extra difficulties being created for developers and their dependence on the authorities' discretion in approving projects.

This spring, Moscow City Hall lobbied for the adoption of a federal law allowing land plots to be withdrawn by a simplified procedure where transport infrastructure is being built on both the "old" and "new" territories of Moscow. Considering that a substantial proportion of retail space lies next to roads, this law will directly affect the owners of retail property and is already doing so.

This federal law also includes a rule allowing the Moscow authorities to impose a charge for changing the permitted use of privately-owned land plots (such a charge for leased land plots has been in place in the capital for a long time). This rule also directly affects developers who privatize land plots such as industrial sites for subsequent redevelopment as retail units.

In 2013, we have observed a situation in which the Moscow authorities are "insistently recommending" retail property owners to transfer money to a special fund, supposedly to be used for road building. It is also suggested that owners of retail property build, at their own expense, additional interchanges and approach roads to their facilities. It is as if the authorities were thus transferring to the retail property owners part of the responsibility for town-planning errors.

Maksim Popov

Associate Director Real Estate and Construction,

Goltsblat BLP

Finally, work has virtually been frozen on the rules for Moscow land use and development, a document that would give the developer a clear and precise understanding of the regime for developing the territory. It is apparently very convenient for the authorities to manage development "by hand", with every significant project having to be agreed by the Town-planning Land Commission.

Another aspect of this "activity" on the part of the city authorities is a bill proposing to increase considerably the property tax on retail (and office) property, which will be calculated on the basis of the relevant cadastral value.

The Moscow Region authorities are keeping up with their colleagues in the capital. At the beginning of 2013, a Moscow Region law came into effect demanding the attachment of investment conditions to land plots for new construction. Such conditions are understood primarily as rental, determined individually on the basis of a market value assessment and construction by the developer of the transport and other infrastructure. At the same time, although the powers to dispose of public land remain with the municipal authorities, these very "investment conditions" must be agreed at the regional level. There are so far no statutory instruments determining the procedure and criteria for doing this.

Apart from providing land plots out of public land for new construction, the Moscow Region authorities have evidently decided to take control of other aspects of land and town-planning relations as well. This autumn, proposals began to be made to the municipal authorities to conclude certain agreements with the Moscow Region for information collaboration. These consist essentially in the local government bodies having to submit draft plans, draft construction and start-up permits, and other town-planning documentation to the regional authorities in order "to receive recommendations". It is noteworthy that no deadline is set for the regional authorities to "issue the recommendations", which evidently means there will be universal violation of the decision-making deadlines envisaged by federal law. Let us also recall that the Moscow Region has a Town-planning Council with functions very similar to Moscow's Town-planning Land Commission: to consider and approve any more or less significant projects on an individual basis.

From the outside, it seems that the many speeches by officials at all levels — "road maps", programs, concepts, etc. — are designed to lower excessive administrative barriers and increase transparency and the predictability of administrative procedures: all this should, theoretically, ultimately improve the investment climate in the Region and in Russia as a whole. Deeds unfortunately diverge somewhat from words.

Even so, as is usually the case in Russia, the retail property sector is continuing to develop dynamically not thanks to but despite the "activity" demonstrated by the authorities. The announced construction of dozens of transport hubs in Moscow provides investors with new opportunities. The city authorities are seriously discussing the possibility of creating new pedestrian areas in the historical part of the city, interest in this being shown primarily, for obvious reasons, by retail and catering. The city authorities are also close to taking a final decision on locating two huge, modern Rungis-type agromarkets on the outskirts of Moscow.

At the same time, the retail property sector itself is currently undergoing qualitative changes as a result of changing consumer behavior. Above all, this relates to a substantial increase in the entertainment component in malls, as well as a marked rise in the proportion of purchases made on-line.

Virtually all major players on the retail property market are announcing large-scale plans for further expansion: Metro Cash & Carry, Auchan, Leroy Merlin, Lenta, X5, Tashir, Okey, TPS, RosEuroDevelopment, Renaissance and many others. Worth noting is the return of old and appearance of new professional players on the market: Globus, Epicentre, Praktika Development. The trend towards further expansion is supported by the plans for an IPO within the next twelve months announced by Lenta and Regions Group and launch of the Seventh Continent property assets consolidation and sale of operations.

All the above, coupled with the low per capita rate compared to even Eastern Europe, as well as the latest major market transactions — sale of Novosibirsk Aura to RosEuroDevelopment, sale of half of Metropolis and so on — illustrates that the retail property market, despite everything, is buoyant and heading for active development.