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. Last Updated: 07/27/2016

Retail Boom Leads the Way

Want to put your best, most stylishly clad foot forward? If Andrei Yaroshenko has his way, you'll do it through Terrey.

Private company Terrey last week jumped on the capital's shopping mall explosion by throwing open the doors of a gigantic 7,500-square-meter shoe center, which general director Yaroshenko claims will satisfy even the pickiest customers. And Muscovites are lining up to gawk at boutiques stocked with row after row after seemingly endless row of footwear - from elite Italian heels to inexpensive valenki, or traditional felt boots.

"A person can come to the mall and find everything he needs, something that he cannot do in a small shop," says Yaroshenko.

Some 200 shops in the two-floor Shoe Center at 4 Masterkova Ulitsa at Avtozavodskaya metro station are already leased out, and all 333 are expected to be taken by June, he says.

In opening its center, Terrey is joining what experts see as the fastest-growing segment of Moscow's dynamic retail real estate market - a segment where activity appears to be flourishing more than the office and industrial sectors combined.

The office market is much less dynamic, especially because a new tax law has convinced most developers to hold off on new projects until next year. However, real estate agents are sayingthat the construction lull is going to create a price-inflating shortage around the end of this year.

Retail Market

Three years ago this city of 10 million or more people boasted just two main shopping centers - GUM and TsUM - and not a single mall. Then along came Turkish retail giant Ramenka, which paved the way for a mall explosion with its two Ramstore shopping centers. Now, 11 major complexes are open, at least three more are in the works, and local and foreign investors are drawing up plans for even more.

"This will be the sector that will grow very rapidly due to great demand in the market," says Natalya Oreshina, retail property consultant at Stiles & Riabokobylko, the local associate of Healey & Baker. "A lot of centers will be built in the next two to three years."

Stiles & Riabokobylko estimates that consumer buying power has grown 13 percent since last spring, giving retailers good cause to sit up and take notice. Plus, demand from local retailers is expected to soar since they are being forced by City Hall to relocate from the popular outdoor markets into shopping centers.

Mayoral Motivation

City Hall's decision, which aims to clean up the cityscape and remove a major source of income for organized crime groups, is the main reason that Terrey decided to opening its shoe superstore, company officials said. The shoe center is the first such complex to have opened in response to the city's decision last year.

"We opened the shopping center because the city government decided that the uncivilized outdoor markets needed to be made civilized," center general director Yaroshenko said. "So this center is a civilized variant."

He said several thousand shoppers a day visit the mall, which opened May 18.

And the Terrey shoe center is just one of several shopping complexes in the works. Ramstore plans to add another mall in southern Moscow in November, adding to its existing two malls - at Molodyozhnaya and Sheremetovskaya ulitsas - and the two supermarkets it opened late last year in the city outskirts.

Meanwhile, the Garden Ring Shopping Center, a 90,000-square-meter complex sidelined by the 1998 financial crisis, is slated to open next year near Kursky Station. Construction of a 35,000-square-meter Turkish trade center near Novokuznetskaya metro station is expected to start later this year, and Swedish furniture giant IKEA is to decide by the end of June when it will start construction of a shopping center near its new superstore in the northern suburb of Khimki.

Mall Bloom

Some 110,000 to 200,000 square meters of new shopping center space is expected to be added next year - representing a massive addition to the existing 210,000 square meters - real estate experts said.

Meanwhile, established retailers are expanding and new companies are looking to get in on the action. Stores such as Seventh Continent, Perekryostok, Office Club, Sportmaster and TJ Collections are branching out with new outlets.

Distributors and international companies that had previously imported stock to the capital to be sold in unaffiliated local stores are also moving to open their own outlets.

"One of the interesting tendencies is the conversion of the so-called distribution companies into retail," Oreshina says. "International companies that supplied goods to Russia through different import companies are now entering the market directly, and that will be the standard for the next few years."

The boom doesn't look set to lead to overcapacity soon, experts say. Moscow still has just 0.2 square meters of retail space per resident, compared to about 1 square meter per person in Western Europe and 2 square meters in the United States, according to Jones Lang LaSalle.

Office Market

While demand is more repressed on the office side of real estate than in retail, it has steadily grown this year, real estate experts say.

Some 70,000 square meters of class A and B office space were leased or sold during the first quarter, a figure that some are hailing as a sign that the market has turned the corner.

"This constitutes more than 50 percent of the total amount of quality space absorbed within 1999," Colliers HIB said in a recent research note.

The biggest deals in the first quarter came from domestic companies: Metals giant Siberian Aluminum leased 4,428 square meters at Forum II at 13 Nikoloyamskaya Ulitsa, Credit Trust rented 1,911 square meters in Paveletskaya II at 2 Paveletskaya Ploshchad, and Soyuzcontract took 1,100 square meters in Japan House at 15 Savvinskaya Ulitsa, according to Colliers HIB. Also, the 8,270-square-meter Northstone Olympia building at 42 Ulitsa Shchepkina was sold to Chaika Plaza.

Western multinationals havn't been sitting on their hands. Philip Morris leased 3,945 square meters at Tverskaya 22b, Gillette took 2,365 square meters in Paveletskaya II and 3M Russia secured 1,461 square meters in Meridian Tower at 24 Smolnaya Ulitsa.

Already in the second quarter, Deloitte & Touche has leased 1,450 square meters at 16 Tverskaya and Renaissance Insurance Group has taken 3,100 square meters at Golutvinsky Dvor.

The resurgence in demand has not revived rents, which are still well below pre-crisis rates. Leasing rates are $450 to $550 for class A space and continue to include fit-out costs and often other landlord concessions. In the first half of 1998, class A space was going for $700 to $1,100 per square meter, and fitting out the space was usually up to the client.

While current prices are at all-time lows for Moscow, the city ranks as one of the 10 most expensive in the world when fees such as property tax and service changes are factored in, according to Healey & Baker. The real estate agency places Moscow in the No. 7 spot, more expensive than Frankfurt and Zurich, but cheaper than Paris or Hong Kong.

Little New Space

Little new space is expected to come onto the market. Many projects with scheduled 2000 completion will not actually come onto the market until 2001, real estate insiders predict. Jones Lang LaSalle says that, of the planned 188,000 square meters of freshly built class A and B office space, 161,000 square meters could easily be delayed. There is a big question mark hanging over the opening of all planned Class A space, which accounts for 53,000 square meters of the scheduled 188,000 square meters.

"The supply is growing now, but not as fast as demand," says Polina Kondratenko, research analyst at Colliers HIB. "We think most of the buildings under construction will not be finished in 2000 but in 2001."

Construction did wrap up at a handful of projects earlier this year, including the NIKoil Plaza on 8 Ulitsa Yefremova and the Plotnikov building in the Arbat area. The NIKoil complex opening in February marked the end of a six-year road toward completion - during which the building changed hands at least once and construction work stopped and started several times. The current owners of the 14-story building have offered 2,900 square meters of its 18,900 square meters for lease, of which local engineering company Sgeo Spectrum has already taken 722 square meters.

About the same time as the NIKoil building was finished, Krest Development unveiled the seven-story Plotnikov building at 39 Sivtsev Vrazhek near the Smolenskaya end of the Arbat. Krest is offering the building's 6,500 square meters with a preference to sell, but has yet to find any takers, according to leasing agent Noble Gibbons.

Buildings scheduled to come on line this year are 4/2 Kursovoi Pereulok, Banking Building at 28 Krasnaya Presnya, Transnafta Building, Front Yard Office Building, Atrium Plaza and 4 Sredny Ovchinnikovsky Pereulok. However, the projects filling out this list are mostly small-scale buildings - which together contain a mere 29,300 square meters of space, according to Jones Lang LaSalle.

Only five projects have kicked off this year, including the 12,000-square-meter Romanov Court II, 40-42 Malaya Ordynka Ulitsa, with 4,000 square meters and the Siberian Aluminum Group Building at 5,000 square meters, according to Jones Lang LaSalle.

No new construction is expected to start up over the rest of this year, largely because of tax amendments passed in January that effectively slash 20 percent off the cost of building for projects as of Jan. 1, 2001. The new rules allow a developer to recover value-added tax from the costs of supplies and materials after the building is put into operation.

The amendments do not specify whether the tax break applies to buildings that are started or completed after Jan. 1, but the tax authorities say only projects started next year can take advantage of the VAT amendments.

Many developers appear to be preferring to hedge their bets by simply putting any plans on hold until next year.