Russia has dislodged France as Europe’s largest shopping center market, even as a deep economic crisis is leaving many of its gleaming new centers standing partially empty.
The world’s largest country (by area) accounted for more than half of all shopping center space added to the market in the second half of 2014, according to real estate adviser Cushman & Wakefield’s latest European Shopping Center Development report.
However, the delivery of new retail space has coincided with sharp fluctuations in the Russian ruble and oil prices, in addition to geopolitical tensions between Russia and neighboring Ukraine, which have led to European Union trade sanctions.
That resulted in a panicked round of rent renegotiations in the fourth quarter of 2014 and a rise in vacancies, especially in fairly new shopping centers, said Maxim Karbasnikoff, head of retail services at Cushman & Wakefield in Russia. However, he said recent activity suggests Russia has avoided a complete collapse of its retail market.
“The strengthening of the ruble and stabilization in oil prices have led to renewed activity from occupiers, which gives us the impression the market is showing signs of resilience,” he said. “Because, simply put, we felt in the last quarter that we were flirting with disaster. Now it appears the disaster has been averted.”
Russia’s total shopping center space rose to more than 190 million square feet at the end of last year, narrowly overtaking France and ending its 43-year dominance of the European market, Cushman & Wakefield said. The U.K. was Europe’s third-largest market with 184.1 million square feet.
Karbasnikoff said it was important to view that figure in context: Unlike France, which had a similar market size before the devaluation of the ruble, Russia has virtually no street retail, with most stores housed in shopping centers.
Nonetheless, in Moscow alone, 14 shopping centers opened in 2014, equivalent to 20 percent of the existing supply. This included Aviapark, Europe’s largest shopping center with an area of almost 2.5 million square feet, which has struggled to draw shoppers despite attractions including a 75-foot-tall aquarium.
The vacancy rate of new Moscow malls is around 30 percent, but outside the Russian capital, it can rise to more than 70 percent, Cushman & Wakefield said in its MarketBeat research report for the first quarter. “The leasing process of new shopping malls might take up to two years after delivery,” it added. The average vacancy rate in Moscow, including established malls, is around 7 to 8 percent and is set to grow at least until mid-2015, the company added.
“For retailers who reduced their investment plans, there are glimmers of hope, but until now it was complicated, because there was no visibility on the ruble and no visibility on sales. Those that are opening stores are favoring the best shopping centers, which are established and offer good prospects,” said Karbasnikoff.
He cited the example of Uniqlo, which in April opened a store in the underground Okhotny Ryad shopping center close to Moscow’s Red Square.
“There is no massive wave of closures. On the contrary, we are seeing that where there is an opportunity, retailers who are doing well — like H&M and Uniqlo — are opening stores,” he noted.
The outlook for rents is not clear.
“A panic situation has prevailed since the fourth quarter of 2014,” reported Karbasnikoff, noting that owners have offered rents at fixed ruble rates that are up to half the official exchange rate against the dollar, for periods ranging from three months to six months.
“These discounts will expire at the end of June,” he remarked. “These exceptional discounts could be extended until the end of the year, in my opinion. Spring has been average, and the weather in March and April wasn’t great, so sales — especially of clothing — should be impacted.”
The Russian economy grew 0.6 percent in 2014, its lowest rate since 2009, according to the Federal State Statistics Office. It is set to decline by 2.8 percent this year, economy minister Alexei Ulyukayev was reported as saying recently.
Accordingly, Russian consumer spending is set to remain sluggish for the remainder of the year. “With the expected recovery rate in 2016 to 2018, it will take up to four years to get back to 2014 sales,” Cushman & Wakefield said in its report.
At the same time, Russian bank financing has dried up. With interest rates persistently high, many developers are expected to halt construction on upcoming projects, with Karbasnikoff forecasting that the last of the current glut of shopping centers will be delivered in 2016.
“I think it will be at least a year or a year-and-a-half before we go back to interest rates that are acceptable to real estate promoters and we have a little more visibility on the retailer side,” he predicted.
There is a silver lining to the crisis, however.
“Before, it was an owner-driven market and now, we are gradually moving toward a rebalancing of relations between tenants and owners, which is ultimately a good thing,” said the executive.
He expects retailers to take advantage of the more favorable conditions and more recent shopping centers to begin filling up in the second half. Karbasnikoff is confident the Russian market still has legs.
“This market remains relatively underdeveloped,” he said, “especially considering there will be no fresh supply in 2017 and 2018.”