Hard Re­al­ity of Re­tail Soft­ness

Shop­ping cen­ters in Minsk aim for global brands

Economy of Belarus - - FRONT PAGE -

Minsk is be­com­ing a mod­ern cap­i­tal of shop­ping. Three new gi­ant malls and some smaller shop­ping fa­cil­i­ties will be com­mis­sioned in the Be­laru­sian cap­i­tal be­fore the end of the year. How­ever, breath­ing a life into them is a more dif­fi­cult chal­lenge than build­ing them: lo­cal re­tail­ers will not be able to put to use even half of the va­cant space. To avoid empti­ness in re­tail out­lets, real es­tate de­vel­op­ers have started to at­tract in­ter­na­tional brands into the coun­try. Horn of Plenty

Sup­ply on the re­tail mar­ket is grow­ing by leaps and bounds. This year is go­ing to be es­pe­cially abun­dant in Minsk. Tvoya Stolitsa Group of Com­pa­nies projects that some 147,000m2 of new re­tail space will be com­mis­sioned be­fore the end of the year, while the Be­laru­sian of­fice of Col­liers In­ter­na­tional ex­pects about 250,000m2. Given this pace of con­struc­tion, the re­tail mar­ket will pass the psy­cho­log­i­cal mark of 1 mil­lion m2 by the yearend. This may her­ald ei­ther the ar­rival of new fash­ion brands for cus­tomers or empti­ness and debts for prop­erty own­ers.

The prob­lem is that the re­tail­ers in Be­larus are be­com­ing less ac­tive. Re­tail chains have re­viewed their de­vel­op­ment pro­grams: they car­ried out op­ti­miza­tion pro­grams, put on hold risky projects and closed un­prof­itable stores.

“Re­tail­ers have be­come more se­lec­tive. They opt for shop­ping cen­ters that ei­ther al­ready en­joy heavy foot traf­fic or have good chances at it. This usu­ally ap­plies to large shop­ping cen­ters in a good lo­ca­tion and with a mod­ern lay­out,” said Dmitry Droby­shev, the head of the com­mer­cial real es­tate sec­tor at Tvoya Stolitsa.

Be­cause of the short­age of ten­ants the pace of sat­u­ra­tion of new re­tail out­lets has slowed down. Malls in Minsk now have more empty store­fronts as com­pared to a cou­ple of years ago when the av­er­age va­cancy rate at the time of open­ing was about 20%. De­vel­op­ers are chang­ing ap­proaches. Now they launch a fa­cil­ity with sev­eral key re­tail­ers un­der the belt and at­tract more re­tail­ers af­ter­wards. At the end of last year, the shop­ping malls MoMo and Outleto opened one af­ter an­other in Minsk but nei­ther had high oc­cu­pancy rates.

Re­tail­ers are cur­tail­ing their ac­tiv­i­ties off the back of weak re­tail de­mand. The flow of cus­tomers and “the av­er­age pur­chase bill” are now more im­por­tant for them than the rental rates. Re­tail­ers

act very care­fully. They tend to fo­cus on open­ing one store (or clos­ing it in case of soft­en­ing de­mand) and then move to an­other. Some of them have taken a wai­t­and-see at­ti­tude: they want to see how a shop­ping cen­ter fares in the first few months and then de­cide whether to rent space there or not.

At the same time, food re­tail­ers con­tinue to ex­pand their pres­ence. In­creased com­pe­ti­tion in this seg­ment makes own­ers of re­tail chains to look for promis­ing sites in the yet-un­cov­ered ar­eas of Minsk. Ac­tive are ma­jor sell­ers of chil­dren’s goods and fast­food op­er­a­tors. So are fur­ni­ture net­works, most of which open new stores in spe­cialty shop­ping cen­ters. How­ever, ma­jor fash­ion brands and man­u­fac­tur­ers of sport­ing goods are poorly rep­re­sented in Minsk and in Be­larus in gen­eral.

Clash of Ti­tans

Big malls will be worst af­fected by the lack of ten­ants. In Minsk the con­struc­tion of three malls is near­ing com­ple­tion, namely Gal­le­ria (36,000m2 of gross leased area), Dana Mall (47,000m2) and Green City (40,000m2). The malls have been de­signed to Euro­pean stan­dards. They in­clude spa­cious atri­ums, space for large shops, panoramic el­e­va­tors and food courts. But it is un­likely they will be able to es­cape the im­pact of the re­duced ten­ant de­mand. Tvoya Stolitsa be­lieves they will open with the oc­cu­pancy rate hov­er­ing around 40-50%.

Global brands that have been eye­ing the Be­laru­sian mar­ket may help rec­tify the sit­u­a­tion. They, how­ever, are in no rush to en­ter the mar­ket. They are study­ing sites, ne­go­ti­at­ing terms, and as­sess­ing prospects. The big­gest hopes are on the ar­rival of new brands from Rus­sia, Turkey and the EU coun­tries.

Ac­cord­ing to ex­perts, this year Minsk may wel­come LPP Group brands such as Re­served, Cropp Town, Mo­hito, House and Sin­say. In the fu­ture they can be joined by global giants H&M and In­di­tex Group which owns the trade­marks Zara, Pull&Bear, Mas­simo Dutti, Ber­shka, Stradi­var­ius and Oysho.

These brands may come to Be­larus in 2017 at the ear­li­est.

While some in­ter­na­tional re­tail­ers are ready to work in Be­larus in­de­pen­dently, oth­ers pre­fer part­ners, in­clud­ing fran­chises. Be­laru­sian busi­ness­men fa­vor such co­op­er­a­tion. A fa­mous brand lures crowds and does not re­quire ad­di­tional brand­ing and pro­mo­tional mar­ket­ing ef­forts. A big num­ber of fast-food chains (Burger King, KFC, Papa Johns, Domino’s, Sbarro, Baskin Rob­bins and some oth­ers) have en­tered the mar­ket of the Be­laru­sian cap­i­tal in this very man­ner. This mar­ket seg­ment seems to be grow­ing this year.

Mall own­ers are ready to at­tract fran­chises of global fash­ion brands. Start­ing a re­tail busi­ness is a forced but timely step for a de­vel­oper. First of all, this may con­trib­ute to the bet­ter oc­cu­pancy of the fa­cil­ity. An an­chor re­tailer lures other ten­ants. This may also help track the shop­pers’ be­hav­ior and the sta­tus of re­tail­ers. For ex­am­ple, the mall owner oc­cu­py­ing about 10% of the re­tail space is a com­mon prac­tice abroad.

An­a­lysts say Minsk has enough premises that meet in­ter­na­tional re­tail stan­dards. De­vel­op­ers, how­ever, some­times lack a clear-cut con­cept and ne­go­ti­at­ing strat­egy.

“The de­ci­sion of a for­eign re­tailer de­pends on many fac­tors: from in­ter­na­tional stan­dards to macroe­co­nomic indices. De­vel­op­ers can stim­u­late the in­ter­est of brand chains, in­clud­ing through a flex­i­ble rent­ing pol­icy. An orig­i­nal shop­ping cen­ter con­cept and a cus­tomer ac­qui­si­tion strat­egy are equally im­por­tant,” Dmitry Droby­shev stressed.

Growth Lim­its

Minsk has al­ready reached the Euro­pean level in re­tail space per capita. Ac­cord­ing to the Trade Min­istry, there is nearly 600m2 of re­tail area per 1,000 Minsk res­i­dents. How­ever, the

Minsk has al­ready reached the Euro­pean level in re­tail space per capita. Ac­cord­ing to the Trade Min­istry, there is nearly 600m2 of re­tail area per 1,000 Minsk res­i­dents

bulk of the area is oc­cu­pied by stores, in­clud­ing the street re­tail seg­ment, lo­cated on the ground floor of build­ings. At the same time Minsk is lag­ging be­hind Euro­pean cities in the num­ber of shop­ping cen­ters. The Be­laru­sian cap­i­tal has nearly 180m2 of mod­ern shop­ping space per 1,000 res­i­dents while Paris, War­saw, and Prague have three times more.

This means that new shop­ping cen­ters will not be out of place in Minsk. The cap­i­tal has re­cently fo­cused on the con­struc­tion of three types of fa­cil­i­ties, specif­i­cally week­end malls, re­gional shop­ping cen­ters and themed fa­cil­i­ties. In­vestors are grad­u­ally los­ing their in­ter­est in the con­struc­tion of big shop­ping and leisure cen­ters. To­day they are more ea­ger to in­vest in the de­vel­op­ment of “bed­room com­mu­nity” fa­cil­i­ties which thanks to their rel­a­tively small sizes en­joy bet­ter ten­ant oc­cu­pancy.

Shop­ping cen­ters are mainly built in­de­pen­dently. The sha­ree­quity con­struc­tion mar­ket has al­most van­ished. The scheme has lost its rel­e­vance for both the sides. Small in­vestors an­tic­i­pate prob­lems with at­tract­ing ten­ants while mall de­vel­op­ers fear dif­fi­cul­ties with main­tain­ing and pro­mot­ing the fa­cil­ity. One-owner com­mer­cial prop­erty is be­com­ing the golden rule in the pro­fes­sional mall de­vel­op­ment sec­tor.

To­day de­vel­op­ers show spe­cial in­ter­est in Lenin­sky and Ok­tyabrsky Dis­tricts of Minsk. There is a de­mand for new shop­ping cen­ters in the neigh­bor­hoods Kurasovshchina, Chizhovka, and Sere­bryanka.

How­ever, many de­vel­op­ers have de­cided to take a pause. The num­ber of projects at the ini­tial im­ple­men­ta­tion stage is shrink­ing, which may lead to a short­age of re­tail space within some three to four years. It has be­come more dif­fi­cult for in­vestors to cal­cu­late ex­pected re­turns while risks have in­creased sharply. The sit­u­a­tion may change for the bet­ter if in­ter­est rates on loans fall. In West­ern Europe, for in­stance, de­vel­op­ers are of­fered loans at 1-2% in­ter­est which gives them rea­son to ex­pect a long-term re­turn on their in­vest­ments.

Shop­ping cen­ters with small in­di­vid­ual ven­dor’s booths are in de­cline in Minsk. Such old-type cen­ters orig­i­nally de­signed for small re­tail­ers are now los­ing both cus­tomers and oc­cu­pants. Re­brand­ing is a way out for the own­ers of such com­mer­cial prop­er­ties. They may ex­pand the pas­sages, open up space by tak­ing down un­nec­es­sary walls and choose a spe­cialty for the cen­ter.

The abun­dance of re­tail space on of­fer and the de­cline in de­mand are forc­ing de­vel­op­ers to cut rents. Af­ter last year’s 40% slump, the av­er­age mall rent in Minsk con­tin­ued to down­trend to fi­nally drop be­low € 20 per one square me­ter. Ex­perts say that the rent will dip by an­other 10 to 15% by the end of 2016. Own­ers of newly built re­tail prop­er­ties usu­ally of­fer the most at­trac­tive leas­ing terms since they need to fill the free

space as fast as pos­si­ble. Old­timers of the com­mer­cial re­tail es­tate mar­ket, how­ever, also start mak­ing con­ces­sions as they fear an out­flow of ten­ants.

And this is un­der­stand­able con­sid­er­ing that there is a big chance of ten­ant mi­gra­tion be­tween shop­ping cen­ters in Minsk. Re­tail­ers may leave the out­dated prop­er­ties which are los­ing cus­tomer traf­fic and open shops in new lo­ca­tions. Though ten­ant ro­ta­tion still re­mains in the nor­mal range, the open­ing of a big num­ber of high-qual­ity shop­ping cen­ters with rea­son­able rents is likely to spur a wave of mi­gra­tion.

More­over, com­mer­cial real es­tate de­vel­op­ers have started of­fer­ing all sorts of bonuses such as flex­i­ble rent pay­ment sched­ules and rent va­ca­tions, a short pe­riod dur­ing which the ten­ant is ex­empt from pay­ing for the prop­erty. Some re­tail­ers man­age to con­vince the land­lord to peg the rent to the shop’s turnover. This prac­tice is most com­mon at the traf­fic-build­ing stage when prop­erty own­ers seek to fill the space and draw con­sumers into the shop­ping cen­ter.

The abun­dance of re­tail space in Minsk forces de­vel­op­ers and large re­tail chains to look for promis­ing lo­ca­tions in the re­gions. To­day there is one big shop­ping mall in each of the re­gional cap­i­tals, specif­i­cally OldCity in Grodno, Gallery Grand in Brest, Marko City in Vitebsk, Se­cret in Gomel, and Park City in Mogilev. In­vestors see this as a be­gin­ning. For ex­am­ple, a project to build one of the coun­try’s largest shop­ping and en­ter­tain­ment cen­ters Triniti is cur­rently un­der­way in Grodno. The cen­ter is de­signed to sprawl 64,000m2.

Dis­trict cap­i­tals are of no less in­ter­est to in­vestors as there are few shop­ping cen­ters and hy­per­mar­kets there so far. Low com­pe­ti­tion al­lows them to ex­pect a rapid oc­cu­pa­tion of the re­tail space. Many well-known re­tail­ers plan to ex­pand out­side the cap­i­tal city pro­vided there are mod­ern shop­ping lo­ca­tions in the re­gions. Cus­tomers are also ready for the change. If there is a wide as­sort­ment of goods on of­fer and low prices, it is likely that shop­ping tours to Poland and Lithua­nia will be­come a thing of the past. There­fore, to­day re­gional and dis­trict cap­i­tals are of no less in­ter­est to in­vestors than Minsk.

Era of Ten­ants’ Rule

The mar­ket of com­mer­cial real es­tate is go­ing through the era of ten­ants’ rule. De­vel­op­ers now lis­ten ea­gerly to the needs and re­quests of re­tail­ers who choose from a wide va­ri­ety of rental op­tions of­fered at rea­son­able rents. This can even­tu­ally prompt man­u­fac­tur­ers to stop us­ing the ser­vices of dis­trib­u­tors and de­velop re­tail net­works of their own thereby in­creas­ing sales.

In the cur­rent sit­u­a­tion de­vel­op­ers have to change ap­proaches. It is not enough to erect a build­ing now. Lo­ca­tion and lay­out are equally im­por­tant. Ac­cord­ing to Col­liers, it is time to fo­cus on the con­cept and qual­ity.

Tvoya Stolitsa also be­lieves that it makes no sense to erect stan­dard re­tail cen­ters far from the crowd and traf­fic. Minsk needs new orig­i­nal fa­cil­i­ties.

Qual­ity stan­dards in the con­struc­tion of trade cen­ters have be­come more strin­gent in re­cent years. De­vel­op­ers erect mod­ern spa­cious malls with high ceil­ings and artis­tic ar­chi­tec­tural de­signs in­stead of hangars for su­per­mar­kets and or­di­nary build­ings with small re­tail spaces. Wide cor­ri­dors, es­ca­la­tors, and panoramic el­e­va­tors make shop­ping cen­ters more at­trac­tive. Own­ers should also think about the or­ga­ni­za­tion of the shop­ping area in the mall.

Thanks to proper in­te­rior zon­ing of a shop­ping cen­ter, re­tail­ers can en­joy the ben­e­fits of a good neigh­bor­hood. Var­i­ous cloth­ing and footwear stores can be lo­cated on one floor, chil­dren’s brands on an­other. All this re­sem­bles prod­uct pre­sen­ta­tion in a su­per­mar­ket where sim­i­lar prod­ucts are grouped to­gether to of­fer a wider range of choices to con­sumers and stim­u­late pur­chases. The most pop­u­lar goods are placed far from the en­trance. The zon­ing of a shop­ping cen­ter also helps en­hance the com­pet­i­tive edge of the fa­cil­ity and raise the rev­enues of re­tail­ers with the same tar­get au­di­ence.

To draw ten­ants, a re­tail cen­ter should be equipped with such ameni­ties as strong ven­ti­la­tion and con­di­tion­ing sys­tems, soft and steady il­lu­mi­na­tion. The fa­cil­ity also needs an ad­min­is­tra­tor who will be in charge of its main­te­nance and pro­mo­tion. Some­times it is not easy to run a re­tail cen­ter owned by a num­ber of con­flict­ing par­ties.

An­other im­por­tant goal for a de­vel­oper is to keep con­sumers in­ter­ested. For this pur­pose, re­tail fa­cil­i­ties have a well-de­vel­oped en­ter­tain­ment in­fra­struc­ture com­pris­ing fam­ily fun fa­cil­i­ties, food courts, bowl­ing al­leys, cin­ema halls, ex­hi­bi­tion zones, in­ter­ac­tive zoos, skat­ing rinks, and climb­ing walls. De­vel­op­ers are now ready to al­lo­cate 10-20% of the space for en­ter­tain­ment fa­cil­i­ties.

A mall is no longer a purely shop­ping area. Now it is a pop­u­lar place where peo­ple can spend their free time. For this pur­pose, there are benches, ice cream kiosks, foun­tains, photo zones, and even tree al­leys in cor­ri­dors and atri­ums. Such care for con­sumers is new for Minsk, while in other coun­tries these things be­came an in­dis­pens­able part of a mall long ago. Apart from that, such an ap­proach has a prag­matic side be­cause bright and user­friendly in­te­ri­ors can stim­u­late im­pulse buy­ing for the ben­e­fit of ten­ants.

De­vel­op­ers have also be­gun to take an ac­tive part in the op­er­a­tion of malls. To­gether with ten­ants, they hold var­i­ous pro­mo­tion cam­paigns and shows. Nu­mer­ous dis­count sales stim­u­late con­sumer spend­ing. Sev­eral shop­ping cen­ters, such as Ti­tan, Galileo, Tryum, and oth­ers have started hold­ing Black Fri­day sales at the end of Novem­ber. “De­vel­op­ers do not only seek to drive traf­fic to a lo­ca­tion. They also do their best to im­prove the im­age of a mall and at­tract more cus­tomers,” Dmitry Droby­shev said.

Or­di­nary cus­tomers will def­i­nitely ben­e­fit from this “shop­ping fever”. Malls will at­tract new brands to the coun­try and of­fer more re­cre­ation and en­ter­tain­ment op­por­tu­ni­ties. Apart from that, higher com­pe­ti­tion in the re­tail seg­ment will en­cour­age re­tail­ers to do more sales and dis­counts. In fact, cur­rent dif­fi­cul­ties make both de­vel­op­ers and ten­ants cater more for the needs of shop­pers. Af­ter all, it is the cus­tomers who shape the de­mand.

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