Real Estate

The Future of Shopping Centres in Russia?

Guillaume L’Ecuyer, property manager at the Retail Property Management Department at Jones Lang LaSalle, talked to PASSPORT about trends and prospects in the shopping centre segment of the Moscow real estate market.

Q: Can you single out any trends in the shopping centre segment in Moscow and Russia’s other regions?

A: Investors are mostly interested in assets that are already working successfully. Unfortunately, there are a limited number of such shopping centers on the market. If you look at Moscow, there are 80 shopping centres, but few are for sale. Having said that, the shopping centre stock in Russia is to increase by 29 per cent from 10.4 million sq m to 13.4 million sq m by the end of 2012. And trends that we have seen in Europe over the past years are now coming to Russia. We will see both new developments and re-development of existing shopping centres.

If we look at Moscow and St. Petersburg, shopping centres that were built in the past 20 years, are outdated and in need of refurbishment. There is no choice for owners of such property other than reinvest. That’s a really big issue now. And simply doing a façade-lift isn’t going to be enough. The whole retailers’ mix must change to incorporate new brands on the market, otherwise your competitor will get the business.

Another interesting trend is the rise of outlets shopping, which is a new format for Russia. Two new outlets are projected: one in the North of Moscow and one in the South, the outlet village Belaya Dacha and Fashion House Outlet Centre. You might see more of open air or covered streets shopping in the future. Currently, there aren’t so many luxury shopping centers like Vremena Goda or Barvikha luxury village projected, instead, [new] shopping centers will dedicate a gallery or a part of it to luxury brands.

Q: What is the situation in Russia’s regions other than Moscow and St. Petersburg?

A: If you look further east, Kazan is already saturated with twice as many square metres of retail per 1,000 inhabitants than London, the European capital of shopping! While more mature markets in Russia are approaching retail saturation, others are still quite a long way off this point, and shopping center developers see real potential in cities of 500,000 inhabitants and more. Cities like Oryol, Chelyabinsk, Ulyanovsk and Tver are seeing developers’ activity at the moment as well as less populated cities like Tambov and Anapa.

Q: In what way are shopping centres of the “third generation”; those which are being built now, different from those already in operation?

A: Shopping centres are not solely perceived as a purchasing destination but as comfortable places for meeting, spending time with friends and relatives and, incidentally, shopping. You might see more thematic malls anchored by non-standard entertainment facilities being developed soon. Currently in Moscow, 50 per cent of all shopping centers are anchored by a cinema. But cinemas, game zones or bowling alleys alone are no longer such a pull, now you expect to see rollerdromes, aqua-parks, aquariums, night clubs, concert halls, thematic amusement parks, rollercoasters and vertical wind tunnels or artificial ski slopes, like you have in a Dubai shopping centre.

Q: What are the main factors that make Moscow’s shopping centres more attractive or less attractive for customers?

A: Generally, accessibility ranks first. Moscow has one of the finest Metro systems in the world, and if a shopping center has direct access to this network, that will benefit it enormously. If it doesn’t, the management company will have to be more creative to attract the customers. In fact, 45 per cent of quality shopping centers in Moscow are located less than one kilometer away from a Metro station.

A mistake that some developers make is to address public transportation questions last. We recognize adequate public transportation as a winning opportunity that should not be left to hazard. You can always adapt your strategy if a developer failed to build a proper car park or negotiate public transportation with the local transportation company, but you will have a hard time creating value if both questions aren’t solved. Money spent on advertising will never fully compensate for such deficiencies, and Moscow customers will find a new destination that fills their needs among other shopping centers that are in town.

After good accessibility and the right retailers, services come next on top of the list. Services can differentiate a shopping centre from the competition and since “there’s nothing like a free lunch”— all services are expected to be free! From a personal shopper to VIP rest rooms or well decorated mothercare feeding room to an animated kindergarten, gift wrapping kiosk and educational activities for children, the sky’s the limit to what you can do for customers.

Q: What are shorter-term prospects?

A: Over the next year, you could see an increase of about 11 per cent in rental rates. Generally, we will see more quality retailers in the market—because customers are become pickier.

Q: In what way (if at all) has the situation changed since the new mayor of Moscow took office?

A: There seems to be willingness to take a pause and take the right decisions from an urban planning point of view, which is positive. We do know and acknowledge that a successful shopping centre’s arrival can worsen the traffic situation, and that won’t help the neighbourhood. Some of Moscow’s malls attract over 50 million visits a month: twice as many as Istanbul’s Grand Bazaar! The right location and concept need to be identified and public transportation routes and frequency adapted accordingly.

Although it is beneficial to redevelop some projects in the city center to parking or residential, large retail properties in the suburbs are important to people living and working in those districts.

The main implications of the current city planning changes are limitation of new supply and thus higher rental rates for commercial properties. Official documents from City Hall are expected to be published in June and we’ll be able to evaluate the final impact of the changes then.

While new concepts and locations are being discussed at the moment, public transportation solutions should not be left behind. Shopping centres can bring a lot to the community, creating working places, promoting local talents and culture.

Q: From a customer’s side, in what way is a typical Russian shopping centre going to be different in a few years’ time?

A: In Moscow and St. Petersburg, the quality will be the same as in any of the world’s capitals. If we talk about the country’s other regions, too much design exuberance means that we won’t see much difference from the properties that are being built at the moment. We already see third-generation shopping malls being constructed in the regions. In terms of quality, you may see more thematic projects coming. A great example from Canada I could refer to is West Edmonton Mall, which for 30 years was the biggest shopping center and attraction complex in Americas thanks to its aqua-park. This is something you might see here, as well.