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Ludmila Reva: "In the regions developers treat their projects as favorite children"

Russian developers begin to invest in regional projects. In her interview to “IISP” Ludmila Reva, director of ASTERA, an alliance member of BNP Paribas Real Estate, talks about the prospects of retail development in small towns.

- Did the expansion of investors actually take place in the cities with a population of less than a million people? What is the scope of expansion?
 
- Yes. If foreign investors are interested in high-quality retail complexes or office centers of high class in Moscow and partly in St. Petersburg, the Russian operators, on a contrary, have realized themselves in the "million-plus" cities and now begin to move to the cities with a population of 500 000-700 000 and even 300 000 - 500 000 residents. In particular, TASHIR group of companies develops projects in Yaroslavl, Vologda, Petrozavodsk, Smolensk. REGION Investment Group successfully works for about five years in different regional markets.

Maxi Development Company, Vologda developer, is a different example. It started with wholesale and retail trade. Their shopping and recreation center in Cherepovets won "Golden Brick" in 2013. There is a project in Syktyvkar. Related company "NordCity" starts to work in Novgorod. Thus, the real estate development business, created not in the capital, is also looking for new premises in other regions.

In the regions at the moment we are implementing around 100 000 sq m of leasable spaces in shopping complexes. The majority of premises are concentrated in cities with population of 270,000 to 350,000 people: Petrozavodsk, Smolensk, Ivanovo, Tobolsk, Togliatti, Saratov, Kaliningrad. These are small retail complexes of 5000-20 000 sq.m. I think our competitors have the same scope of work at regional projects.

- What profitability and what period of payback developers expect in the regions?

- Everybody wants to see the capitalization rate to be not less than 10%. For small retail complexes developers often define a payback period of five years (the capitalization rate of approximately 15%). But these figures are rarely justified. Regional developer can reduce the costly part while implementing the project, if the land was purchased earlier. But there is another detail. Local owners often treat their retail complexes as favorite children, and, for example, they make expensive finishes, even if it undermines the economics of the project.

- Are federal networkers willing to rent premises in the cities with less than half a million people?

- In the second quarter of 2013 several national chains have opened stores in towns of smaller size (less than 300,000 inhabitants). "Perekrestok" appeared in Novomoskovsk (Tula region), "Gloria Jeans" - in Yelabuga (Tatarstan) and Beloretsk (Bashkortostan), "Detsky Mir" - in Angarsk (Irkutsk region), New Yorker - Nyagan (Tyumen region). Brand “Collezione decided to start expansion from Krasnodar to the Russian market. This is a rare case for the operator, not mentioning the food networks "Dixie", "Magnit”, Kesko, “Azbuka Vkusa", who are interested in the development in the regions.

The example of "Sportmaster" is very illustrative. Network representatives confirm that in small towns famous for its oil production store turnover may be higher than that of retail outlets in “million-plus” cities. This is logical. In such regions, people have money, but they don’t have anything to spend it on. On the other hand, it is known that, for example, "McDonald's" was offered free rent for a certain period of time, because small town was interested in bringing this retailer. In small towns all the best comes to the first. This applies to the networkers and developers.

Of course, local businesses are not too content with the arrival of national chains, because of some reasons: they take the best retail spaces; they are able to organize business competently and efficiently, displacing the locals. But the appearance of the federal agencies organized local market and brought new technologies. In this case, purchase of franchise and collaborative work with federal network will be the only way for entrepreneurs. In addition, it is impossible to fill shopping complex completely with these networkers. Ideally, in my opinion, there should be 10-15% of the local operators in the shopping center. In practice there can be up to 40 %.

- What is the typical structure of the real estate market in a small Russian town?

- For the cities with population of 350 000-500 000 residents it is typical to have 10-15 nonprofessional objects. Besides them there are three or four former industrial complexes or market that were under reconstruction, with total area of 7,000 sq.m. As a rule, federal networks lease them out. Usually there is also a central department store, and one or two modern shopping complexes with area of 20 000 - 60 000 sq. m. with a certain conception, "anchor" tenants, and sometimes with entertainment area.

A lot depends on city development plan, and the architecture of the city. In historic center, there are trade corridors with numerous built-in facilities. A well-developed format of street retail replaces shopping centers, and modern shopping complexes exist only in residential district.

There are some cities where street retail does not fulfill the tasks and insertions are less marketable. Wide streets are the main reason of this. Along them there are strips of green space, and houses are situated right behind them. Shop windows are not visible even from the opposite sidewalk.

In the regions, the proportion of developers increases gradually. They clearly understand why they need the concept, calculate their financial capacity, and predict the size of rental rates and changes in them. They also evaluate the competitive environment, the existence of retail space, etc.

- Do they sometimes go beyond the standard format of shopping center?

- In small towns the real estate market is seven or eight years younger than ours. Now their goal is to develop high-quality premises for network operators, because consumers are willing to buy their products. Now all “Mega” shopping complexes in the "million-plus" cities work as superregional with coverage area of 300-500 km. From nearby towns people go to "MEGA" for brands. Entertainment component is now next to the last.

As a general rule, All provincial shopping complexes have a food court, and a cinema. It is more complicated with the rest. In places where there is a marketing strategy, shopping complexes attract people by organizing holidays. This does not require additional space; the entrance lobby is quite enough.

But in the regional centers it is possible to meet unexpected projects. For example, this year in Yekaterinburg a version of arcade (shopping street as a single property), which contains only premium class stores was presented. Even in St. Petersburg the shopping streets in luxury segment have not yet been formed.

- Does regional market still have potential for growth? Will it be hurt by the upcoming recession?

- Consumer demand and paying capacity of the population remain high. According to federal networks, recession is not observed. The average annual growth of retail space across Russia since 2008 is 1.2 - 1.7 million sq. m. In the second half of 2013, according to our data, 45 objects will be commissioned with total leasable area of approximately 1.5 million sq. m.

At the same time large cities such as Kazan, Yekaterinburg, Samara are already close to some European capitals on the saturation of retail spaces (300-390 sq. m. per thousand residents). In Smolensk, for example, this number is a little higher than 200 sq. m. I think retail in smaller cities will be actively developing for at least 30 years.

By Natalia Andropova “Saint Petersburg Real Estate and Construction"