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News Release

​Moscow

Moscow is no longer in the Top 3 most expensive high street retail markets in Europe

​The Moscow street retail market might switch to rouble denominated rents completely


​​​​Moscow, 24 February, 2015 – JLL presents its Moscow street retail market overview. According to JLL, in 2014 Moscow fell to fourth place in the list of top high street retail corridors in terms of prime rental levels*. In Q4 the prime rental rate for the main corridors averaged USD4,500/sq m/year** or 212,9 roubles/sq m/year (Q4 average RUB/$ exchange rate of 47.3), reflecting a 25% decline compared to the previous year.

Maria Shpakova, Retail Analyst, JLL, Russia & CIS, comments: “Based on our estimations, in 2007 for the first time ever Moscow became one of the most expensive street retail markets in Europe. Due to the global financial crisis, the Russian capital has lost its position in the Top 3. However, in 2012 Moscow recovered its third place position and maintained it until Q4 2014. Currently, the prime rents on the main retail streets are behind those in Paris (21,780 USD/sq m/year), London (16,550 USD/sq m/year), and Munich (5,230 USD/sq m/year) respectively.”

European Prime Street Retail Rents

European Prime Street Retail Rents_24022015.png
 

Source: JLL

The rental rate for secondary corridors in Moscow (for example, Myasnitskaya, Pokrovka, etc.) has fallen to USD2,500/sq m/year, or 118,200 roubles/sq m/year (Q4 average RUB/$ exchange rate of 47.3), which reflects approximately a 30% YoY change. It should be mentioned that the new 2014 deals and renegotiations were closed in roubles. This trend is set to continue in 2015. JLL analysts claim that the street retail market may move away completely from dollar rents.

According to Svetlana Yarova, Head of Street Retail Department, JLL, Russia & CIS, during 2014 the budgets of the street retail tenants have been revised downwards. “Rouble devaluation and higher inflation has led to a consumer purchasing power decline and consumer demand change. Furthermore, the tenants have adjusted their priorities to basic needs, favouring quality at reasonable price and showing moderation in selecting stores and services. This situation has caused a retail turnover decrease and a margin squeeze for street retail tenants. As a result, retailers expect to spend about 25% less on rent compared to the beginning of 2014,” − Svetlana Yarova notes. – “Namely, the rental budget of banks for premises of 100-500 sq m has decreased by 40% to 600k roubles per month, whereas catering segment has reduced its budget by 34% to 2m roubles for the premises of more than 600 sq m. The budget of grocery stores has not been corrected significantly, being equal to 900k roubles for 1,000 sq m monthly.”

Tenants' rental budget dynamics

 

Tenants rental budget dynamics_24022015.png 

Source: JLL

By the end of 2014, efficiency had become the key factor in defining the amount of retail space. The major difference between the current economic climate and the 2008-2009 crisis lies in the faster reaction of landlords towards new market conditions and their readiness to provide terms which satisfy both parties. “From autumn 2014 prolonged rent-free periods, fixed exchange rate band for a certain period of time, rents in rouble terms have become the new tendency. Some of them are novelties for the Moscow street retail market. The combination of a flat rental rate and a turnover percentage suggested by a landlord depend on seasonal fluctuations of retailers’ income as well,” − Svetlana Yarova notes.− “Going forward, the most attractive offers are going to the companies with the best business reputation and those using equity capital for their development or already have a partnership with a landlord.”

Landlords with foreign currency obligations are the most vulnerable. According to JLL, by the end of  2014 a third of high quality street retail premises’ owners were unprepared to switch to the long-term rouble contracts asked for by the tenants, even those ones that were about to agree to the currency contracts, particularly foreign fashion operators, luxury brands, and large banks.

The demand for street retail premises in Moscow in the last quarter was mostly driven by the grocery segment with 45%. The previously active catering segment had 20% of total demand. In the previous quarter, the change in the tenant formats within the segment was observed. For instance, in the supermarket segment the greatest demand comprised special convenience stores and small supermarkets (less than 1,100 sq m), although the large supermarkets with a variety of goods used to dominate the market before. In the catering segment small bakeries and canteens were mainly in demand in Q4 instead of the formerly active cafe chains and chef restaurants.

Demand breakdown by retailer profile

Demand breakdown by retailer profile_24022015.png
 

Source: JLL

“Some sectors will grow this year, despite the weaker market.” − Svetlana Yarova notes. – “As people are moving to supply their basic needs, we believe grocery supermarkets, quality home cafes, restaurant chains with loyal customers, pharmacies and family goods stores are better positioned. Companies that have experienced pressure on sales and market share will look to street retail premises as an opportunity to position their brand and to boost brand recognition.”

In 2014 a lot of pedestrian zones and walking trails were introduced, shifting the main demand to these locations. According to JLL forecasts, they will hold their relative popularity in 2015. The most well-known are Kuznetsky Most, Nikolskaya, Pyatnitskaya, Maroseyka and Pokrovka streets. JLL experts also expect that demand for secondary corridors in dormitory areas will be stable, as supermarket and discounter chains plan active expansion in these areas for 2015. They tend to make up a substantial share of the total demand (20-40%).

Tenants' expansion strategies in H2 2014

Tenants expansion strategies in H2 2014_24022015.png
 

*** estimation based on the tenants’ requests and executed deals

Source: JLL

The vacancy rates continued to grow due to active rotation by tenants. On the main corridors of Moscow, this indicator reached 9% by the end of 2014, an increase of 4 ppt YoY. On the secondary corridors, the vacancy rate had risen by 10 ppt and reached 20%. These are not expected to change significantly by the end of 2015, provided landlords are ready to offer incentives. According to JLL, the vacancy rate in premium corridors, such as Stoleshnikov Lane and Petrovka Street, is not expected to go up noticeably, as luxury brands will preserve top locations in order to keep their audience, and landlords are ready to offer a new range of concessions to reliable tenants in order to maintain a long-term relationship. Restaurant streets, such as Pyatnitskaya, Maroseyka and Pokrovka should be able to support their tenants and keep vacancy rates under control assuming owners adjust to restaurateurs’ new expectation.

“Considering the fact that retail companies started to optimize their business closing stores, a number of banks were divested of licenses, other street retail market players used their chance to rent vacant premises for discounted price. As a result, we observed a high level of rotation on the primary and secondary corridors.” − Svetlana Yarova comments. – “About 60% of premises are put into the market while still being occupied. This, therefore, assumes landlords had foreseen the potential demand for their premises and had offered their existing tenants revised terms. On the other hand, there have been cases when tenants have lost good locations because of their insistent demand for the prices which are below even market levels.”

* Hereinafter rents are given for rectangular form premises of 100 sq m with a separate entrance and a showcase on the first floor. For multi storey buildings and larger premises rents might be revised downwards.

 
**  As a prime rent in Moscow we took the maximum rent of the street with the highest level in the market as at the survey date (excluding Stoleshnikov Lane because it’s a specific luxury location with historically much higher rents than other primary corridors).

 


 


 

About JLL

JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual fee revenue of $4.7 billion and gross revenue of $5.4 billion, JLL has more than 230 corporate offices, operates in 80 countries and has a global workforce of approximately 58,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.4 billion square feet, or 316.0 million square meters, and completed $118 billion in sales, acquisitions and finance transactions in 2014. Its investment management business, LaSalle Investment Management, has $53.6 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated.

In Russia and CIS JLL has offices in Moscow, St. Petersburg and Kiev. JLL, Russia & CIS was voted Consultant of the Year in 2004, 2006, 2007, 2008, 2009, 2010, 2011, 2012 , 2013 and 2014 at the Commercial Real Estate Awards, Moscow; Consultant of the Year at the Commercial Real Estate Awards 2009, St. Petersburg and The Best Real Estate Consultancy in Ukraine at the Ukrainian Property Awards in 2013.

For further information, visit www.jll.ru