1 February 2011
Commercial Real Estate publishes commentary by Ekaterina Medeyko and Yuri Nadezhin on the peculiarities of shopping centers lease agreement

Moscow Shopping Centers

Lyudmila Bokina

Out of 280 shopping centers in Moscow, only 78 meet all the requirements for a modern shopping mall. Considering the shortage of quality areas and no new facilities being commissioned in the capital city, the owners of older shopping centers will be forced to redevelop their commercial facilities, or at least create new concepts for them. The main criteria for success of shopping centers today are not limited to their owner's competent marketing policy; these are also a clear concept, strong positioning, as well as accountability and responsibility to the tenants.

As of today, there are about 280 shopping centers in Moscow. According to the RRG Company, the total leasable area in high-quality and low-quality retail facilities is 4.4 million sqm. Given the Moscow population, experts are estimating that there are from 380 to 440 sqm of retail space in the capital per 1000 inhabitants. They believe that this is not enough to meet the growing demand, especially given the fact that there is also a significant deficit of high-quality shopping centers in the capital. For comparison, according to the Knight Frank Company, Barcelona boasts about 800 sqm of retail areas per 1000 residents, Paris and New York - close to 900 sqm, Milan -about 920 sqm, while London has more than 1,000 sqm per 1,000 inhabitants. Of course, the living standard sand income levels in major European nations are substantially higher than those in Moscow Moscow. For example, consumer spending in Ql of 2009 in the French capital reached 5.88 million EUR, in London it was 6.17 million EUR, and in Moscow - 4 million EUR. Given that the 2.5 million people residing in Fciris, 7.3 million in London, and about 11.5 million in Moscow, we can see how Moscow lags behind. To make matters worse, there have not been any studies carried out in Russia, to find out how much and what kind of retail space is needed in Moscow, to meet the requirements of various target audiences.

What is meant by quality? According to Praedium Oncor International, vacancy rate levels in shopping centers were 7% by the end of 2010. However, we still have a large number of shopping centers on the market with weak concepts or poor locations, and the vacancy rates of these reached 30 -40% in 2010.

The recession exposed all the mistakes developers made, exacerbating the existing problems of some facilities, which remained unclaimed on the market We should note that new shopping centers, which are meeting high consumer demands, are forcing the owners of the already operating SCs to implement new concepts for their properties. "Due to the lack of visitors, at least 20% of all high-quality shopping centers in the capital city market now require at least a partial re-conception. If we look at all the shopping centers, including non-professional ones, than we can say that over 30% of them need re-conception," says Alexander Bolotnikov, real estate expert at RRG. "One such striking example is the re-conception of Okhotny Ryad, where revising the pool of tenants helped to better position this mall on the market and increased its attraction," adds Olesya Cherdantseva, director of retail and investment market analysis at Jones Lang LaSalle. In addition, two other shopping centers in Moscow will be redeveloped in the near future - Waymartand Auchan City Kuntsevo.

Thus, we see that the emergence of new retail and entertainment formats in 2010 made real estate market players to realize the need for a retail space assessment system. Leading consulting companies like CB Richard Ellis, Colliers International, Cushman & Wakefield and Jones Lang LaSalle have developed a list of criteria which modern shopping centers should satisfy. They have formulated 10 criteria, and if a given shopping mall meets at least seven of these, it can be considered a modern facility.

In accordance with the evaluation parameters, JLL experts believe that by December 2010 Moscow had 78 modern shopping centers, with high-quality sales areas totaling 3,080,000 sqm, or 70% of the total market.

Among the fully successful facilities, based on these criteria, are the Mega, Evropeisky, Metropolis and Atrium malls.

Supply

According to the RRG Company, which calculated the number of shopping centers, in Moscow, there are 31.4% community centers with retail space in excess of 25,000 sqm, 29.4% local centers with GLA of 5,000 sqm,and 24.5% neighborhood centers with the typical size of 14,000 sqm. Then there are 8.8% super-regional shopping centers, with leasable areas of over 50,000 sqm and 5.9% regional centers, with retail areas over 40,000 sqm. Retailers admit that they prefer shopping centers with large retail areas, where consumers are provided with the widest amount and range of goods and services. However, it should be noted that the recession has forced some retailers to search for new opportunities, and to attract these retailers, some shopping centers have successfully reshaped themselves into specialty centers. As a rule, these specialized facilities have areas of up to 20,000 sqm. "Household goods and furniture formats became especially popular. Creation of specialty centers makes good sense. They can be located even in the places with lower population densities, because people travel to them on purpose," says Galina Maliborskaya, director of commercial real estate at Colliers International.

As for the location of the shopping centers, according to experts of Magazin Magazinov in association with CB Richard Ellis, these are distributed almost uniformly in all districts of the capital city. However, there are a few exceptions - 18% are concentrated in the southern district of the capital, the least amount of retail space (4.3%) is found in the east; northwest has 6.5%.

Rental rates

The location of a shopping center makes a difference as far as the rental rates are concerned, since it determines the intensity of the consumer traffic flow. However, market experts could not provide a definite answer, as to what attendance would be considered satisfactory by the tenants and owners of shopping malls. Ekaterina Prigoda, development director of the Melon Fashion Group, says that "Considering an offer from a new shopping center, we assess its category by measuring the traffic flow of our target audience, and then we make our decision about the given complex. For existing shopping centers, we request information from representatives of the shopping center, but we still do our own research, in order to understand the future sales turnover potential." It turns out that at this stage it is important to select high-quality methods and tools to measure the consumer traffic flow. "Salestumover in a retail section of 300 sqm should be around $4,000 per sqm, and depending on the average purchase size, the attendance of particular stores will vary," adds Margarita Trofimova, director of consulting and appraisal at NAI Becar. Thus, the maximum rental payment that any retail operator is willing to make does not exceed 20% of its total sales turnover.

In one of his reports, Denis Sokolov, partner and head of strategic consulting and research at Cushman & Wakefield, listed the following data - purchasing an item in a shopping center, a buyer in Moscow, on average, pays 26% for the import, 7 to 9 % of customs duties, 14 to 16% of rental rates, 12% of H R costs, 3% of marketing costs, 2% for the outfit and 7% for overheads. However, sometimes the rental amount will vary, depending on the kind of items the buyer is purchasing. That is to say, for retail operators the leasing rate depends on the tenant's profile. For example, in Moscow, a grocery retailer pays about $100 - $130 per sqm for an area of 5 000 sqm, while a home appliances retailer pays $200 per sqm. According to Magazin Magazinov in association with CB Richard Ellis, the location of the retail section in a shopping center usually does not affect the rate; if it is a good shopping center then it has no deadlock zones. For example, in checkout lobbies overcrowded with shoppers and abounding in small sections, the rate cannot be the same as in the gallery. The zones can be divided into checkout lobbies and the intersection of malls - the rates at these sites are higher by 15%, at the entrance to the mall in the retail gallery - tenants pay an average rate, and the higher the floor, the lower the rate -the difference can reach 15%.

Location of a retail facility often determines the price segment in which the owner of the shopping center plans to operate. According to RRG, currently the structure of high-quality shopping centers, by price segment can be broken down as follows: middle-class shopping centers - 65.5%, upper middle - 29.3%, and premium class - 5.2%. The classification of shopping centers by price segment is determined by predominance of the respective price segments in retail galleries represented by a tenant mix (40%), and does not take into account the prices of goods offered by anchor tenants. This means that the operator of a retail gallery, working in the medium price segment sells goods priced in the range of 1 - 3 thousand rubles per item, the operator of the upper middle segment at 3 - 5 thousand rubles per item, the operator of high-price segment at 5-10 thousand rubles, and the operator of the premium class segment at more than 10 thousand rubles per item. For example, the Atrium mall operates primarily in the "upper middle" segment since retail operators working in those galleries have 48% of their goods sold in the 3-5 thousand ruble range. The RIO mall is in the middle class (72% of operators belong to the medium price segment), and the Seasons mall belongs to the "premium" class, as 85% of its operators fall under this class.

Demand

Currently, many Moscow shopping centers mix tenants representing absolutely different price ranges. This factor affects the status of the shopping center and the loyalty of its customers. Dmitry Kondrakhin, head of development at the Carlo Pazolini Group, says, "Significant variations in the price segment are undesirable, since this blurs the positioning of the shopping mall. The optimal ratios of clothing and footwear operators, food courts, entertainment zones, and anchors for the shopping center as a whole, are also very important."

Retailers now have the following requirements for shopping centers (prioritized highest to lowest): the location, which is one of the most important criteria for the placement of stores; retail space which should be at least 25-30 thousand sqm; a strong management company which can select qualified tenants; and the marketing policy of the shopping center at large. Of course, depending on the tenant positioning on the market the priority requirements may slightly vary. Thus for some clothing chains the degree of recognition of their brand within the shopping center is not so important compared to such parameters as having a professional management company and a good marketing policy. For anchor tenants, these criteria take on a different priority. Thus, for a home appliances and electronics network like M.video, it is important that marketing promotions of the Shopping Center are active and effective. This concerns advertising inside the shopping center, outdoor advertising, internal navigation, grand openings, special events, as well as "external" marketing - advertising in urban traffic areas, in the catchments area of the shopping center, advertising in mass media, specialized magazines, Internet and television. "Given two similar shopping centers, the more successful wi 11 be the one that invests into marketing pro motion, and therefore such details are always discussed at the contract signing stage. Indeed, the marketing promotion of many shopping centers, after their opening, does not always match the promised plans," says Pavel Breev,vice president and development director of M.Video.

We should note that according to the RRG Company, tenants marketing costs, on average, are around $25 - 30 thousand per square meter per year. That is, a shopping center with a leasable area of 30,000 sqm annually receives from its tenants up to $7 50,000 for these purposes. It is obvious that under such a scenario, it would be logical for the management of the shopping complex to provide a report on the use of these funds, since all the money allocated to advertising and marketing activities should be aimed at maintaining and increasing the traffic flow to the shopping center. "Indeed these are the key performance indicators for any shopping center, which the tenants look at very closely. It is obvious that it is the management company (or the owner) which should maintain the level of popularity and traffic flows to the center. In reality, however, the leasing agreements do not contain any terms and conditions designed to stimulate the owner to take steps in terms of maintaining the desired attendance level," says Yuri Nadezhin, expert on real estate at the Egorov, Puginsky, Afanasiev and Partners Law Firm. However, it appears that in perspective, due to the proliferation of attendance accounting systems, a provision that the owner's duty is to maintain the footfall at a specific level will soon become the norm. For the proper performance of this duty, stimulating conditions in the leasing agreement must be introduced. In particular, should the attendance rate decrease for any reason, and the owner takes no action, or the actions are insufficient then the rents become subject to reduction, says Ekaterina Medeyko, senior lawyer and head of real estate at the Egorov, Puginsky, Afanasiev and Partners Law Firm.

"If the management company provides the services for promoting the shopping center, the contract should outline its components - organization of events, reporting on the effectiveness of advertising campaigns, and so forth. However, not all PM companies provide these services, they usually hire a contractor, which in turn is specified in the contract" adds Irina Sokolova, director of property management at NAI Becar. For example, Alexei Vanchugov, managing partner of CityMarketing, reports on a similar experience with tenants, "In our operational marketing agreements, we stipulate the final goals - attendance, average purchase size, user satisfaction based on a customer survey. Failure to meet any set targets by more than 10% entails a penalty of 30% from our profits on the project."

Nevertheless, a professional PM company can make a commitment on all management issues, allowing owners to focus on their core business, say the experts. "In Russia, the majority of owners and developers of retail buildings are trying to manage their facilities on their own, hi ring contractors only to provide technical maintenance, cleaning and security. Several owners have attracted technical staff in order to save money and started in-house management companies. With this approach, the management of commercial facilities is more an administrative function than real management" says Elena Kislitsyna, senior director of real estate at Jones Lang LaSalle. According to the CityMarketing Company, only 5% of all shopping centers are operating on the professional property management scheme - attracting an independent management company. Shopping centers in Moscow are managed by such companies as NAI Becar, CB Richard Ellis, Colliers International FM, Cushman & Wakefield, Property Management Company, My House,and Fragra.
In conclusion, it should be noted that the marketing policy and the skilled management of a shopping center, as well as other important criteria influencing the retailers' choice of shopping centers have become secondary to the most favorable ratio of rental payments to sales turnover. "It should be taken into account that in Moscow, in the new shopping centers boasting good location and favorable competitive environment there are still an alarmingly large number of vacancies - so maybe this is due not only to the shortcomings of marketing support. Ratherthe problem lies in inadequate letting policies of the owner or incompetence of the structure responsible for the rental of premises. It is also possible that the center was built on credit and the rental rates are now dictated by the bank," says Olga Zbrueva, head of customer service at Astera Moscow in an alliance with BNP Paribas Real Estate.

Thus, even at the lowest rental rates, the dead zones, as well as the best traffic areas will remain vacant if the retail operator receives low profitability.

 

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