Money Growing: Traders Meet Halfway

Falling prices

The majority of tenants are now rather cautious when it comes to making decisions about renting additional areas in operating shopping centers. They bargain, don’t have insurance deposits, and play for time when it concerns new projects. And some proprietors will compromise because they need to survive, Ilya Shkop, director of Sobstbennik real estate agency, is assured.

Other market participants say that the process of revising the conditions of contracts is already happening. "Tenants of retail areas are turning to owners with the suggestion of decreasing current rates. And, from the responses, some of them have been successful in coming to an agreement," says Irina Zadorozhko, a leading consultant at Magazin Magazinov. However, the size of the discount is not disclosed.

Rates have started to decrease for grocery supermarkets that are anchor tenants in shopping centers, says Omar Gadzhiev, managing partner at Panorama Estate. Discounts for large-format premises (500 sq.m and more), which are rented by large chains, in Shkop’s opinion, will soon be 30% in comparison with summer 2008 rates. According to Gadzhiev, the Perekryostok and Pyatyorochka chains have already begun negotiations with landlords about decreasing their rental rates.

The most significant discount can currently be received for retail premises that are street retail format. For example, at the beginning of the year retail premises on Taganskaya ulitsa, according to Panorama Estate, rented for $1,200-$1,500 per sq.m, and now for $800 per sq.m a year, Gadzhiev gives as an example. In shopping centers with an unsuccessful concept and high rotation of tenants, according to his data, it is possible to receive a discount up to 20-30%.

Shops, the rental rate for which rate is calculated according to the prestige of a place, for example on the Garden Ring and other expensive retail streets, can now only find new tenants at a price 25-35% lower than the “summer market," Shkop is assured. Therefore the proprietors of such premises may decrease rates up to 20% for operating tenants, he sums up.

In the regions the rental rate has fallen 10-15%, considers Mark Afraimovich, managing partner of Ross Group holding. But the reduction in price does not apply to all valid contracts, but only those from three to six months, he is assured.

Some market participants have a different opinion. Brokers are not reducing the rates announced in concepts, Afraimovich is convinced. However during brokering, rates may be corrected, he considers. Tenants are fighting for a decrease in rates in operating premises, but in the Moscow region they still remain at the former level, the expert assures.

Investors and developers have certain expectations on the recoupment and profitability of a project; they are not prepared to lower the rental rate, explains Evgeny Semenov, director of investments at Knight Frank explains. The rate for anchor tenants was and remains low, and it is easy enough for tenants of small and medium-sized areas to find replacements even now.

Landlords "feel out" the situation in search of the possibility to keep profit, says Evgeny Grikhanov, general director of management company IQ Property Management. The loss of tenants is probable for shopping centers that did not initially differentiate themselves with a successful location or find mass buyers, he considers. The winners will be owners of multipurpose complexes that have a synergy effect.

The signing of rental contracts for complexes under construction has been postponed till spring of next year. In Zadorozhko’s opinion, in February 2009 there may be a mass revision of rates. In December sales peak, but after New Year the situation will become more difficult, she explains.

In Shkop’s opinion, demand for large-format premises in new shopping complexes in the near future will be zero - large areas assume long-term rental contracts and usually the mechanism of the indexation of rental rates in them is registered for 5-10 years. For medium (from 150 to 500 sq.m) and small (less than 150 sq.m) not-rented shops the discount by the end of the year may already be 10%.

A slump in demand

Because of a slump in consumer activity the profitability of retail chains is decreasing. Retailers are extremely reluctant to comment on the situation. Of the companies questioned by Vedomosti, the following refused to comment: Rendezvous (a chain of shoe shops), Maratex (represents various brands of clothes and shoes in the Russian market including Aldo, Companys, Orsay, Esprit), Inditex (rights to the brands Zara, Bershka, Pull and Bear, Massimo Dutti, Stradivarius, Oysho, Zara Home, Uterque), etc.

Their unwillingness to talk about the problems is explainable - already now it is possible to observe a redistribution of consumer streams. According to monitoring companies Comcon and Romir-monitoring, buyers have started to travel greater distances to shop. As Irina Kanunnikova, director of the Union of Russian Independent Chains, explains, consumers are prepared to go where the prices are right for them. Buyers have also started to visit lots of shops, choosing the one that is best for them.

According to Comcon, consumers have begun to save money on meat products (41% of those surveyed), fish and seafood (49%), and also on ready and semi-finished frozen items (35%). Furthermore 4% of those surveyed have started to buy products for the future. Kanunnikova considers such statistics "more than disturbing". In the regions, in her opinion, effects of the crisis are not so noticeable as in Moscow and St. Petersburg, where inhabitants have experienced firsthand the consequences of closing banks, falling stock markets, etc

"The population has funds. But buyers are now starting to save them and also switch to cheaper goods and shops. Although there are no real factors for such behaviour – it is just emotions," Kanunnikova is assured. The expert approves that for any retail point an instant reaction to the expectations of the buyer is now important. For example, the products on the shelves in shops should precisely correspond to the desires of the consumer.

She considers the cancellation of payments for manufacturers or put their goods on the shelves of supermarkets as an anti-recessionary measure. In her opinion, this will further constrain any rise in prices for the end buyer.

The government is also participating in the rescue of the market. According to data from the middle of November, the largest Russian retail chains had started to receive credit promised to them by the state: VTB has approved the allocation credit lines to Magnit and Sedmoi Kontinent worth 2.5 billion rubles, and just recently it became known about the allocation of credit worth 7 billion rubles to X5 Retail Group NV, which controls the chains Pyatyorochka, Perekryostok and Karusel (information from RIA Novosti). VTB has earlier stated that it is also considering applications for financing from the Dixi, Lenta, Holiday, Liniya, Kopeika, Paterson, O’kei, Mosmart, and Viktoriya chains. In November the volume of applications for credit from retail enterprises at VTB totalled almost 30 billion rubles.

Unfortunately, not everyone gets state support. Despite the fact that the government tries to help retailers - both small and large – the authorities and banks very often play safe by not taking responsibility for decisions made, for example extending the period for considering applications, says Kanunnikova. Real support, she says has only been given to large players, small fish still don’t get it.

She says: “The government has a good “airbag,” - experience and decent professionals."

How to pay

Tenants who currently don’t have cash funds are proposing to landlords to use security payments, managing partner at London Consulting Management Company Dmitry Zolin says. (A security payment is usually paid as a deposit when the rental contract is signed and its amount is usually equal to one or two month’s rent.)

When entering a new project the tenant may agree with the landlord to pay a percentage of its turnover rather than a fixed sum. This system is widespread in foreign markets, argues Zolin, and can become a real anti-recessionary measure as it is directed at decreasing the risks and minimizing the expenditures of retailers. Some tenants have secured themselves by having concluded rental contracts not at a fixed rate, but for a percentage of the turnover, sums up Semenov. As a rule, for large grocery anchors, such as Perekryostok, this figure will be up to 4-5%, for clothes retailers, such as Snezhnaya Koroleva, will be 6-7%, and for small but well-known chain operators may be up to 10-15%, adds Zolin

Harmless crisis

For some people the crisis is a good thing. For example, according to Kanunnikova, Magnit grocery chain has announced that in regional shops the average bill has grown and the consumer base has increased. The retailer does not disclose any figures.

Yaroslav Grekov, head of PR at Dixi group, which owns a chain of grocery stores under the same name, also says that a recession in consumer activity has not been noticed as "its audience is loyal to the shops of the company." And independent market experts say that the difference is in the format. A displacement of consumer streams to discounters is being observed.

According to the results of Metro group in the first 9 months of 2008 sales were up 7.1% to 47.8 billion euros in comparison with the same period last year (Interfax). One of the highest growth rates was for its Eastern European division. Here its sales increased 19.3% to 12.9 billion euros.

Business is also not bad for owners of concept stores. For example, the founder of the UK Style and Kix Box projects Andrei Kovalev opened another project - Magazin Zing – in October this year, which is located near to UK Style and Traffic (25 Nikitsky Bulvar).

Roza Kamenev, owner of the Cara Co concept store says that she is seeing a rise in her business. A possible recession, she considers, is connected with the artificially overestimated prices in the Russian retail sector: "And people have learned to buy tickets to Milan and Paris." Especially during the sales season.

The Russian public has always bought and always will buy, Kamenev is assured. She thinks: there will be enough buyers if we operate with normal prices and "not play with artificial prices and artificial discounts."

She is sure that Cara Co has done nothing in particular in regards to attracting additional consumers and will not be doing anything. We have a 10% discount for VIP clients that you get after spending 100,000 rubles in one purchase at the store. Also for such clients, we hold Fashion Mondays: a few times a month we close our doors to all other customers and professional stylists serve out VIP clients, who at the same time can taste Australian wine.

At the beginning of November this year the official opening of Shiseido Corner in GUM took place. This Japanese brand represents luxury class cosmetics and perfumery. The occasion marked the independent entrance of the brand to the Russian market. Now the company has the Shiseido Rus division, which operates in the market without intermediaries. According to an employee of the company, the brand also remains on the shelves of perfumery-cosmetic chain stores L’Etoile and Il de Beaute.

To the bottom and back

The majority of experts agree: the situation will become most serious in February 2009. For now companies are spending the rest of their budgets planned for the beginning of this year.

The majority of large national chains have rejected regional expansion. For example, supermarket chain Vester is closing stores in some regions. Kopeika, X5 Retail Group and Vester have announced changes to their investment programs. Many tenants have taken a time-out up until the end of this year and are not concluding any new contracts.

Smaller chains simply do not have the funds for development, and they cannot and do not want to take credit at a rate of up to 20%. Owners of shopping centers will have to reduce rates by at least 15-20% to attract new tenants, Zolin is sure.

In Grekov’s opinion, after the peak of the crisis this winter, consolidation in the retail sector will be renewed with even greater speed.

During a crisis situation the construction of many projects is frozen and after a certain time interval when all under construction projects will be put into operation, there will be a deficit of quality retail areas, Semenov argues. A deficit of areas can be expected in approximately 2-3 years – the standard period for the construction of a premises.