ICSC INFORM Magazine

Special report on the state of the retail real estate
Vladislav Zabrodin, Managing Partner of Capital Legal Services

Investors continue to see both international and domestic demand for high quality assets in Russia, evidenced by recently closed and soon to be closed transactions. There have been multiple major transactions on the market, including the most well-known acquisitions by Morgan Stanley Real Estate Fund of the Galereya Shopping Center in St. Petersburg  for a price of about 1/1 billion euros.

However, the share of transactions involving foreigners in the Moscow market decreases as local investors (including those who reinvest funds from abroad) continue to dominate. Before the crisis the share of non-residents was twice as much. On the whole, in the second quarter of 2012 investor activity in the Russian real estate investment market increased compared to the first quarter.

The share of street retail makes up about 50% of the retail schemes were opened in Moscow due to delays of projects planned for the period. This is mainly due to suspension of almost all construction projects in 2010-2011 due to the resignation of the old mayor and appointment of Mr Sobyanin. It is expected that most suspended construction projects will revive in 2013, both in Moscow and the regions.

Outlet shopping has arrived in the Moscow regions, with three outlets opened. Two of them, Outlet Village Belaya Dacha and Vnukovo Outlet Village, opened in 2012; the launch of Fashion House Outlet Village located on Leningradskoe Highway, not far from Sheremetevo airport, is planned for 2013. The same format will be moving to other cities in 2013.

Where new development is taken place

During the first half of 2012 investors were mainly interested in high quality core assets in Moscow (91% of the total real estate investment volumes into St. Petersburg and other regional cities` real estate markets comprised 4% and 5% respectively. However, several large retail deals were closed in regional cities, demonstrating continuing investor interest in the regional retail market. New shopping centers were opened in Moscow, St. Petersburg, Balakovo, Ryazan, Nizhniy Novgorod, Rostov, Tver, Krasnodar and Anapa. It is very likely that by the end of 2013 the share stock in smaller  regional cities will increase , with developer interest moving outside Moscow to the regional cities including Saratov, Ulyanovsk, Barnaul, Tyumen, Ryazan, Astrakhan, Sochi, Orel, Surgut and Nyagan.     

Russia`s regional market has high potential

It is impossible to concentrate all business activity in Moscow and St. Petersburg. However, the difference between Moscow, St. Petersburg and other regions is still significant. The number of professional employees who work at regional offices is still limited due to the lower quality of life and local employees lacking relevant experience.

In the case of federal or foreign developers, in spite of clear focus on the regional development, they are still not very interested in cities with population less than 500,000. Return on such investments are lower compared to Moscow and major regional cities` projected yields.

Notwithstanding the fact that the land is much cheaper in the regions and authorities are more co-operative, rents are significantly lower. Hence, the payback period for such projected is long. Such investments are subject to high risks and as the demand in the regions is often hard to foresee.

Currently, most foreign investor prefer to deal with estate located in Moscow and, according to the current market research, Moscow and St. Petersburg are still among of Europe judging by the amount of real estate investment, right behind London and Paris.