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News Release

Active shopping centre development continues, but investors are waiting for stabilization.

Jones Lang LaSalle issues Russian Shopping Centre Report 2009

Moscow, 27 May 2009 - Long period of growth and high commodity prices allowed the Russian economy to delay the effect of the global financial crisis. The Russian consumer remains the key player in the economic development. Real wages in Russia have been growing on average by 15% per annum over the last eight years, while households spent almost three-quarters of their income on purchases. This has lead to rapid retail sector growth.

However, in Q4 2009 Russia was hit by the global crisis. The recent months showed a decline of retail turnover, as many companies reduced wages, and unemployment began to increase. Nevertheless, the retail sector has confirmed its resistance to crises.

The situation varies among retailers working in Russia. Large international operators continue to expand their chains. Russia attracts new foreign retailers, keen to expand their operations. New brands continue entering the market, with GAP (USA) and H&M (Sweden) recently opening stores in Moscow, with Carrefour and potentially Wall-Mart expected to follow. There is also a shift from franchise operations to the direct sales model.

Large Russian operators have been more affected by the credit crunch. Their aggressive expansion programmes financed by short-term loans experienced difficulties when financing disappeared and the consumer demand started to decline.

Gallery retailers also significantly revised their expansion plans. The luxury segment was particularly hurt.
Shopping centre supply continues to grow actively in Moscow. This is mainly due to completion delays for projects initially scheduled for 2008. Last year, 65% of projects announced for delivery were not completed. However, Moscow remains significantly under-supplied with quality retail space. Expected construction slowdown in the next two-three years will keep the situation largely unchanged.

The situation in the regions evolved more significantly: only a few projects continue to be developed. The lack of financing remains the main problem. It negatively affects all market players, including developers and investors. Significant consumer demand correction in the regions amplifies the effect.

Shopping centre rents have stopped growing, and less popular projects experience a correction. In the near term we will likely see a similar trend: well located high quality centres with good foot traffic will attract tenants and will be able to sustain the rental levels. At the same time, lower quality operators will have to reduce rents to retain the tenants.

Concessions to tenants become widespread as an alternative to rental reductions. This brings the market closer to the European standards and increases its transparency. One of the most popular options is the shift from fixed to turnover rents.

For many years retail assets were the most traded real estate class in Russia. However, with the rest of the economy, the retail investment market activity has changed in Q4 2008, experiencing a significant decline.

In the short term we expect the following trends on the market:

• Limited debt availability will restrict transaction volumes in 2009
• Prime assets in Moscow will be the focus of investor demand
• Equity investors will dominate
• Greater transparency
• Developers will look to complete developments under construction
• Change in focus to smaller shopping centre projects
• Yields will stabilize and potentially compress by mid 2010
Despite the current turmoil, Russia is well positioned to recover earlier than most economies in Europe and will again deliver superior performance. The key distinguishing factors are low household debt, an undersupplied consumer as well as active state support of the economy. High currency reserves of the Bank of Russia and savings accumulated in the Stabilization Fund allow the government to utilize various counter-cycle instruments. Recent exchange rate stabilization played an important role, softening the effect of the preceding devaluation.
Vladimir Pantyushin, Head of Economic and Strategic Research Group at Jones Lang LaSalle, commented: “The attention of investment market participants is obviously focused on the macroeconomic performance, anticipating stabilization. The economy will have a direct effect on the consumer. Nevertheless, the development of shopping centres continues. Many retailers, including major global operators and Russian discounters, continue to expand their networks. Less volatile nature of the retail segment relative to other real estate sectors has been confirmed in Russia as well. This feature will serve as an additional attraction for investors when market activity picks up.”
About Jones Lang LaSalle
Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specialising in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2008 global revenue of $2.7 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.3 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with more than $41 billion of assets under management.
In Russia and CIS Jones Lang LaSalle have offices in Moscow, St. Petersburg, Kiev and Almaty. Jones Lang LaSalle, Russia was voted Consultant of the Year in 2004, 2006, 2007, 2008 and 2009 at the Commercial Real Estate Awards (Russia). For further information, please visit our Web site,