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RetailRetail

GENERAL TRENDS

Year 2007 has brought Ukraine the fifth place in the world’s most attractive retail estate investment rating according to A.T. Kearney. The official statistics states that country retail turnover in 2007 amounted 317.8 billion UAH. Evident contribution to the overall Ukrainian retail turnover belonged to Kharkiv which ranked place after Kyiv.

The internal market capacity increase and consumer activity recently occurring in Kharkiv are observed due to favorable conditions on the retail real estate market and overall economy growth. We believe the persistent development of retail market to remain in 2008 as being the consequence of population household income growth which continues its pace and exacting preferences of consumers willing to buy quality goods in a civilized way.

The development of Kharkiv retail market with its inherent distinguishing features shows the following trends:

1. The evolution of shopping culture changes the preferences of consumers making them gradually refuse from purchasing goods at spontaneous marketplaces.

2. The existing unsatisfied demand for quality professional retail premises both from the tenants’ and consumers’ sides due to scarcity of shopping centers which meet modern requirements set for professional retail property.

3. Although Kkarkiv downtown is still of the first-priority for the developers operating on retail market, more and more of them, as well as tenants and buyers, are willing to enter adjacent districts of the city or even to accommodate in highly populated districts in close proximity to transport hubs. The key factor for this trend from the developers’ point of view is the difficulty with obtaining of suitable land plots in the city center due to rough scarcity of sites and high prices for the city land plots. The other important reasons are time-consuming process of receiving development permissions. Under such circumstances new tendency in retail centers location is observed in Kharkiv. Thus, projects of new format, such as regional retail centers are becoming popular among developers. Moreover, the gradual rezoning of industrial areas is observed due to active development of commercial projects. Old factories and industrial buildings give way to modern shopping centers.

4. The postponing of pipelined projects commissioning is a common practice in Ukraine and Kharkiv in particular which results in delaying of market saturation.

5. Under conditions of retail premises lack the rental rates continue to increase both in shopping centers and on the main high streets while the vacancy rates remain critically low (1-3%).

6. The number of international brands entering Kharkiv retail market experiences active growth which endorses the local retail market attractiveness for foreign investors.

7. The active expansion of international entertainment chain operators is also observed in Ukraine with high concentration in Kharkiv.

8. A great number of modern shopping centers are altered: redirection on large scale retail schemes with significant floorspaces becomes more and more attractive for numerous developers operating or willing to operate on the Kharkiv market.

9. The majority of retail newcomers include an entertainment component.

Another important trait of Kharkiv market is an active popularization of franchising schemes which arouse expectation of entering the market by international operators from diverse commodity groups. A positive effect of such expansion will become apparent in diversity of brands, reinforcement of the competition, markettransparency and subsiding of the main brand franchise holders’ monopoly.

DEMAND FOR THE PREMISES

The increasing activity of the Kharkiv retail market development is caused by the demand growth provoked, in turn, by scarcity of high quality commercial real estate.
The reason for considerable unsatisfied demand is the lack of shopping centers which
meet modern requirements set for professional retail property. The considerable part
of retail premises are old reconstructed department stores of Soviet-type or newly built retail premises with significant number of drawbacks which do not allow considering them competitive.

A rough misbalance between demand and supply levels keeps vacancy rates in shopping centers critically low (3-5%). The relevance of retail space is also proved by 90% occupancy of the new schemes as early as of commissioning date. Besides not only the amount but also the quality of tenant mix endures positive changes. The interest in Kharkiv retail market is detected from famous western brands such as: Praktiker, Real, Delta Maxi, Aushan, BauMax and others. O`key and Marks&Spenser are to enter market this year.

Demand for quality retail premises can be considered from both sides: customers’ demand for professional retail space and retailers’ demand for premises (tenants’ demand). The correlation of demand types is obvious since tenants’ interest in retail space depends on the solvent demand of end buyers. Moreover the ensemble results in growing attractiveness of the retail market for investors and developers.

Since customers’ preferences experience dynamic changes the developers are to follow the market trends and need to meet new requirements in order to stay competitive. That is the reason for large scale professional retail premises to increase unit weight in the total structure of Kharkiv supply. So the most highly demanded area of the land plots for development is about of 5-20 ha.

The major demand is observed for land plots which are located in the Kharkiv CBD or closely adjacent to it and for those located near main transport hubs of the city. Convenient accessibility and good visibility of the project are the issues of first priority as providing significant foot-falls and increasing the estate profitability.

Another substantial affair influencing the level of demand greatly is persistent increase in household income of the population and retail turnover growth as a result. These complementary trends guarantee the internal market capacity increase and intensify the consumer activity in the retail segment.

The willingness to invest into retail property development in Kharkiv is also urged by the profitability of the projects. A shorter payback period can be explained by the dynamics of market development where rental rates are increasing with enviable permanency. Moreover the development of retail real estate requires lower construction costs then, for instance, office development due to utilization of preengineered stillwork for the majority of the projects.

At the same time, success of the project is also a matter of the property size and its capacity. The majority of city shopping centers are usually positioned as “for weekend” ones. The attendance during working days is usually lower, so the significant part of profits belongs to the “weekend” gains. It raises the importance of a quality concept, an excellent tenant mix and the entertainment part in the project which can attract visitors for spending their leisure time.

Demand for shopping centers space is also supported by the development of largescaled shopping centers, international chains of supermarkets and appearing of new hypermarkets which need large space for operating.

SUPPLY

The volumes of new supply and number of retail projects commissioned make Kharkiv one the leaders on the Ukrainian real estate market. The existing supply of retail space in Kharkiv can be conventionally divided into three types depending on the quality and concept of the building:

  • Non-professional low-quality retail schemes (predominately department stores of Soviet era with inefficient architectural concept and tenants of bazaar type; such retail schemes enjoy popularity only due to location in the city center and customer loyalty);
  • Semi-professional shopping centers (newly-constructed small in size retail schemes with anchor supermarket and undersized gallery occupied by nonchain retailers);
  • High-quality professional retail projects (shopping centers with modern concept, convenient floor plans, quality tenant mix of branded chain operators).

The type of retail space which should be mentioned separately is spontaneous market
places which are still popular among consumers and have considerable unit weight
in the structure of total retail supply. The most famous and the largest market place
not only in Kharkiv but in Ukraine is Barabashovo. Occupying dozens of hectares and
being located close to the city center it attracts considerable footfalls and makes a
significant contribution to the total retail turnover. Moreover developers operating on
the Kharkiv market keep an eye on the market place due to its favorable location,
tremendous territory of the land plot (600,000 sqm) and great potential of
prospective professional retail scheme.

New supply on the market is formed by means of modern shopping centers development as well as reconstruction of industrial premises or transformation of old department stores into retail schemes of new format by changing their concepts. However the advantages of newly-built projects are evident. The highest concentration of retail premises is observed mainly in downtown and densely populated regions: Saltivka, Oleksiivka, Pavlove Pole, Poltavskyy Shlyakh, Gagarina and Moskovskyy Avenues.

The majority of premises in the projects delivered to the market are offered for rent while selling transactions occur quite seldom. There are several reasons standing

behind this trend. First of all one of the main criteria determining retail scheme
professionalism is availability of centralized management. While several different
owners of space within one project make this process impossible. Another important
issue forcing even non-professional landlords to offer premises only for rent is high
profitability of business in terms of persistently increasing demand.

Taking into account the average rates of annual supply increase and demand growth we may assume that the first phase market saturation is not likely to ensue even in the middle and long-run perspective.

RENTAL RATES

The trend of stipulating rental rates for retail premises in dollars remains generally
accepted in spite of foreign currency fluctuation. Typical lease terms are 3–10 years
for non-anchor tenants and 10–20 years for anchor tenants, both of which are
subject to rent reviews.

The insufficient gradual increase of professional retail space which is brought to Kharkiv market year after year provokes a persistent growth of rental rates and prices for square meters of quality premises with landlord’s market prevalence. Stable increase of 20-30% yearly is not deterrent for the majority of potential tenants and keeps vacancy rates critically low (close to zero). Another important factor strengthening this growth was an active development of retail operators willing to enter the market or currently existing in retail segment. The level of rental rates depends greatly on the location and quality of retail scheme, the foot-fall and presence of eminent tenants capable to attract additional visitors.

The location, quality and format of retail scheme influence the rental rate ranges greatly making them fluctuate from $15 to over $100 per sqm per month whereas the sale prices vary from $1,000 to more than $5,000.

The most expensive retail premises are street retail shops and boutiques located on the red lines of central city streets with great pedestrian flows. Street retail gains attention of retailers due to lack of high-quality premises within existing shopping centers. The most prestigious street retail locations are Sumska and Pushkinska Streets, Konstytutsii Square and Poltavskyy Shlyakh where prime rental rates reach up to $100-$120 per sqm per month. The rental rates on other street retail locations can reach $70-$90 per sqm per month while out of center retail premises are rented for $10-$40 per sqm per month.

Average rental rates for semi-professional retail schemes lie within the range of $20-$50 per sqm month. Quality shopping centers charge twice as much and have average rates of $40-$80 per sqm per month.

More detailed information on rental rates in modern professional shopping centers is shown in the table below:

Type of tenantsAverage Rental Rates
($/sqm /month)

 
Anchor tenants8-20
Complementary tenants (food
courts, house appliances)
 
12-25
Gallery tenants40-80



 

 

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