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. Last Updated: 07/27/2016

Touted French Galleries Falls Victim to Crisis

Build it and they will come!

That was the boast from SBS-Agro last May when it opened the French Galleries, a $12 million luxury mall behind Red Square that was then the latest f and, as it turned out, the last f in a long line of extravagant Moscow up-market retail developments.

Adorned with a 22-meter scale replica of the Eiffel Tower, the mall was touted as an exclusive shopping and tourism masterpiece that would attract up to 250,000 visitors a day.

Today, the center is as empty as the coffers of SBS-Agro. No retailer there has managed to sell even a single item of men's luxury clothing, said an official at Toriss, the company that built and manages the French Galleries.

Tenants are fleeing the complex even as Toriss drastically reduces rents.

Stung by the drop in revenues from its flagship up-market mall, Toriss is pinning its hopes on a more downscale project f a home accessories and construction materials megamarket called Gvozd, or The Nail.

However, the Gvozd store has stalled over financing woes, so Toriss is trying to recoup some of the money it poured into the French Galleries by selling a 30 percent stake of the mall for $8 million.

Construction at the planned 16,000-square-meter Gvozd store has been frozen since December, when Toriss was unable to continue servicing its debt obligations to SBS-Agro. The bank's own dire straits made it unable to roll over the loans to Toriss, which still needs some $8 million to complete the hardware megamart.

The company is hoping to kickstart the Gvozd project in order to get some cash flow happening again after SBS-Agro loans dried up.

Just like most of the city's large retail complexes f such as Gallery Aktyor on Pushkin Square, the Manezh Square in the very center of Moscow and Ramstore-2 at Sheremetyevskaya Ulitsa f the French Galleries has lowered rents 30 percent to 40 percent, said Michel Pascalis, director general at Jones Lang Wootton, a major leasing agent in Moscow. While these retail centers should also be moving more downmarket, trying to attract higher volume mid-range stores, they are all still fighting one another for the vanishing New Russian dollar.

The malls have little choice. Their tenants are suffering from a massive drop in revenues, according to Sergei Gipsh, retail director with HIB real estate, another major retail letting agent. Sales have dropped by 50 percent to 80 percent since August, leading many stores to keep their Christmas sales f with discounts of up to 70 percent f going through February.

With sales shrinking or even vanishing all together, several major tenants have left the French Galleries, bringing its occupancy rate down from 80 percent before the financial crisis to 60 percent. Tenants left even after Toriss lowered rents, dropping the highest rents from $2,500 per square meter per year to $1,800.

"We are suffering huge losses," said a top manager at Toriss, who spoke on condition of anonymity.

Those huge losses, tied to the general woes of the luxury mall end of the market, have Moscow real estate experts extremely skeptical that Toriss will be able to sell any stake in the French Galleries.

"I think this project was not a good idea at all," said one Moscow realtor, speaking on condition of anonymity. "The store has an atrium but there is no connection between its sides in the middle. And it is not well located f it is not clearly visible behind the GUM store. Even those who do find the store have nowhere to park their cars."