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. Last Updated: 07/27/2016

Retailers, Look Before You Lease

By Anna Fomin

In Russia's emerging property market, investors often overlook the retail sector or dismiss it because of negative perceptions about the market in general or the conditions in which retailers must operate.

In making the decision to commence operations in Russia, many Western retailers are drawn to the potential of the Moscow market. Every 16th citizen in Russia lives in Moscow, according to the Moscow Statistics Committee. The city's retail market accounts for one-fifth of the retail turnover in the Russian Federation.

But in spite of the seemingly ready-made market, retailers need to keep in mind a few basic points that can make the difference between success and failure in their retail trade activity:

?Location, location, location. Moscow's retail market has emerged in traditional retail centers, such as GUM and TsUM, and on what can be considered retail corridors, established areas of retail trade such as Kutuzovsky Prospekt and Leninsky Prospekt. These locations are favored due to good metro access, high visibility to foot traffic and proximity to residential areas that have a good distribution of income. But the retailer must be aware of pros and cons of each particular area. Long-haul trucks are not allowed on Kutuzovsky Prospekt, for example, so retailers opening stores there can only receive shipments from small delivery vans. Lack of parking, nearby traffic bottlenecks and distance from metro should all be factored in when choosing a retail site.

?Beyond the choice of location, the retailer must identify who has the legal right to lease or sell the property. After initially inspecting the premises, the retailer should examine the title documents, which often include conditions outlining the legal use of the space. The legal documents may require that the area be used for a specific area of retail activity, often stipulating that a space must be used for its previous function -- for example, as a bread store or housewares shop. The landlord of the site must make additional payments to relevant authorities if the retail tenant wishes to change the use of a store. The process takes time, and the landlord cannot guarantee that tenants are automatically granted a change of use upon signing lease or purchase documents.

?In addition to legal due diligence on the title documents, the retailer should demand to see adequate floor plans and technical specifications. Many former state stores in Moscow suffer from a lack of adequate power. This can affect the retailer's ability to power adequate lighting and HVAC air-conditioning systems. It is not uncommon for retailers to specify in their lease agreements the amount of power they require.

?Store design. The unique way in which goods were displayed and sold in the Soviet era means former state stores are long and thin, with shallow depth despite a long frontage. In addition, the stores often lack adequate loading facilities, which leads to logistics problems for retailers with high levels of turnover. Western retailers tend to favor a box-like floor plan with adequate access to loading facilities and storage, and the lack of adequate retail sites leads many tenants to compromise on these issues and negotiate a reduction in rental in order to compensate for inconveniences.

Regardless of how much research you make into the city, the market, and the particular neighborhood in which you will open your business, no retail opening will be complete without one final step. Advertise you coming presence, so the consumer market will know you have arrived.

Anna Fomin is a retail and industrial property consultant for DTZ Moscow.