Hard Reality of Retail Softness
Shopping centers in Minsk aim for global brands
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.
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.