Russian Shopping Centre Report 2009

2008 was a year of huge global upheaval. Real estate, like most
other sectors of the economy, has been affected and went through
significant corrections.

The Russian real estate sector is no exception. Although the effects

of the crisis were not felt until Q4 2008, when they were, the effect
was dramatic and occurred almost overnight.

This report looks at the shopping centre market in Russia and

provides a review of 2008, the current situation and likely prospects
for 2009.
On Point • Russian Shopping Centre Report 2009 2

Macroeconomic overview

Economy
Over the last eight years, Russia has shown strong economic
performance, with average GDP growth of around 7% per annum.
Driven primarily by expanding exports and booming domestic
consumption, economic growth accelerated to 8.1% in 2007 and
7.3% YoY in Q1-Q3 2008.
Foreign direct investment into Russia have also been on the rise,
reaching USD 70.3 bn in 2008 compared to USD 55.1 bn in 2007.
This provided significant support to domestic activity, keeping overall
investment growth above 10%.
Although oil and gas are Russia’s largest exports and account for
some 22% of its GDP, the bulk of recent growth has come from non-
resource sectors including construction, wholesale and retail trade,
financial and real estate services – showing increasing diversification
Many sectors, including manufacturing and service industries, have
now sharply slowed their expansion or downsized in anticipation of
weaker demand. Moreover, the reassessment of Russia’s country
specific risk in comparison to more transparent core economies has
led to a change in strategy by many foreign corporations looking to
focus on more risk-averse markets and therefore exiting from the
Russian market.
As a result, in 2009 it is expected that the slowdown in the economy
will continue and is likely to post negative growth of circa 5.0%,
similar to many other major economies across Europe.
Comparative GDP growth dynamics and forecasts (%)
8.5%

in the economic base. 6.5%

4.5%
High currency revenues, strong domestic investment and
2.5%
consumption growth, low consumer debt and limited exposure to the
0.5%
sub-prime and CMBS markets delayed the effect of the global crisis
2002 2003 2004 2005 2006 2007 2008E 2009F 2010F
in Russia until around September 2008. -1.5%

-3.5%
Russian GDP by sector (%) ECE Euro area Russia USA

2008 2003-08 Source: EIU

share CAGR1
Construction 5.6 11.3 Over the last eight years increasing commodity prices have allowed
Wholesale and retail trade; vehicle repair 18.1 11.3 Russia to amass significant currency reserves of USD 500 bn and
Financial services 4.1 10.1 as a result of prudent fiscal measures, a further USD 140 bn as
Real estate services 9.6 9.7 the Stabilisation Fund, set up in recognition that the economy was
Transportation and telecoms 8.2 7.3 sensitive to future oil price movements.
Processing industry 15.2 6.3
Agriculture, hunting and forestry 4.1 4.0 Since H2 2008, declining commodity prices have worsened the
Mineral extraction 8.1 2.1 terms of trade and depressed currency inflows. However, it was
Source: Rosstat, Jones Lang LaSalle the conflict in Georgia that sharpened the pain inflicted by the
unfolding crisis. It had a significant detrimental impact upon investor
However, in Q4 2008, these positive market dynamics were confidence resulting in capital outflows from the economy of some
interrupted by the financial crisis, reducing full-year 2008 GDP USD 130 bn in Q4 2008 and a virtual collapse of the Russian
growth to 5.6%. stock market.

As the situation worsened, the government had to step in and use

the safety reserves accumulated during the time of strong economic
1
Compound annual growth rate. growth to provide stability to the economy.
 3 On Point • Russian Shopping Centre Report 2009

Federal budget balance, international reserves and the

Stabilisation Fund (% of GDP)

40% 10%

30% 8%
6%
20%
4%
10% 2%
0% 0%
2004 2005 2006 2007 2008
-10% -2%
-4%
-20%
-6%
-30% -8%
2009F
-40% -10%
Federal government balance, R axis
International reserves
Stabilisation Fund*

Source: Finanace Ministry, Jones Lang LaSalle * From 2008, the sum of the Reserve
Fund and the National Wellfare Fund

The focus of state initiatives has been to provide liquidity to banks As the global economy starts to pick up, Russia will be able to take
and selected enterprises in key sectors. Around USD 150 bn of the advantage of its relatively low leverage compared to other major
Bank of Russia (CBR) reserves were spent on smoothing the rouble economies that will be slower to recover due to a need to clean up
depreciation. existing balance sheet and debt liabilities.

This year will be marked by a record fiscal stimulus package, and
the federal budget will post a deficit of 8.2% of GDP. Unlike many
European economies, the Russian government can afford such
resolute measures, having posted an average budget surplus of
4% of GDP every year since 2000.
Low debt exposure
One of the key factors that distinguish Russia in the current
environment is the limited exposure to debt at both the government
and consumer levels.
Russia, due to its low household debt level will also allow consumers
to remain active shoppers. The total consumer debt is currently
below 10% of GDP, significantly less than in most European
countries. As a result of the financial crisis, consumer credit in most
European countries is no longer freely available and has become
significantly more expensive, therefore reducing the amount of
disposable funds available for consumption.

Government debt / GDP, 2008 Debt levels in Russia, USA and France (% of GDP)

Italy
140%
120%
Germany
100%
France
80%
UK
60%
Poland
40%
Turkey
20%
Spain
0%
Russia Government Household Financial Corporate

0% 20% 40% 60% 80% 100% 120% Russia USA France

Source: Eurostat, Troika Dialog Source: Bank of Russia, Bloomberg

On Point • Russian Shopping Centre Report 2009 4

The rouble Retail market

The downturn in the economy has lead to the depreciation of the
rouble. The CBR initially reacted slowly to the country’s worsening
external position and orchestrated a gradual rouble devaluation,
letting it end the year only 5.4% weaker against the USD in real terms.
This was done in large part for political reasons, by granting local
companies and households an opportunity to adjust to new realities
and not to repeat the painful experience of 1998.
Real wages in Russia have been growing at an average of 15%
per annum over the last eight years. This has lead to rapid welfare
improvements and a growing middle class that has sparked a
consumer-driven boom. Retail sales have expanded in line with
income growth, and being the top performing sector in the economy
over the last decade, has firmly shifted the emphasis of the economic
growth into the hands of the consumer.

Taking a more resolute stance in January-February 2009, the CBR Additional support to retail sales growth has come from consumer
has let the rouble weaken to around 36.5 per USD and has explicitly lending, although the total debt has remained quite modest.
indicated that this will be the peak of the devaluation for the time
being. In fact, the rouble has bounced back to 33.5 in the recent
weeks. Although the rouble weakening has been quite dramatic, it has
been comparable with many other currencies, as the global financial
flows displayed a shift to US assets, seen to be more stable.

Devaluation of selected currencies vs. USD, Personal income and loans (USD)
1 January 2008-1 April 2009 (%) 25000

Ukrainian hryvnia
Turkish lira 20000
South African rand
British pound
15000
Polish zloty
Russian rouble
New Zealand dollar 10000
Mexican peso
Brazilian real
Australian dollar 5000
Canadian dollar
Norwegian crone 0
Euro 2000 2001 2002 2003 2004 2005 2006 2007 2008
-40% -30% -20% -10% 0% Personal annual income Personal loans
Source: Bloomberg Source: Rosstat, Bank of Russia, Jones Lang LaSalle

We believe that in the absence of external shocks – of which the oil

price is the key – the external trade balance will remain positive and Retail sales in Russia
will support the rouble stability in the medium term. The main internal 600 20%

danger that may force further devaluation is the overall economic 500 15%
performance. If the economy continues to decline and does not 400
10%
stabilise by H2 2009, the CBR will likely use further currency 300
devaluation to prop up the economy through import substitution. 200
5%

100 0%
The rouble
0 -5%
20% 40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F
35 Retail sales, USD bn Real retail growth, YoY
15%
30
10% Source: Rosstat, Jones Lang LaSalle
25
5% 20 As a result of a slowdown in the economy, unemployment has risen
15
0% and many companies have been forced to cut bonuses and wages.
10
-5%
5
The majority of the layoffs occurred in Q4 2008, as companies made
-10% 2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 0 significant redundancies early in order to limit future adjustments.
Real RUB appreciation vs USD Exchange rate (RUB/USD, end-year)

Source: Bank of Russia, Jones Lang LaSalle

 5 On Point • Russian Shopping Centre Report 2009

Unemployment rate (% of labour force) Consumer inflation (YoY, %)

12% 20%
18%
10% 16%
14%
8%
12%
10%
6%
8%

4% 6%
4%
2% 2%
0%
0%

Ja 2

Ja 3

Ja 4

Ja 5

Ja 6

Ja 7

Ja 8
02

M 3

M 04

M 05

M 6

M 7

M 8

09
Se 2

Se 3

Se 4

Se 5

Se 6

Se 7

Se 8
0

0
-0

0
-0

-0

-0

-0

0
-0

0
-0
n-

n-

n-

n-

n-

n-

n-

n-
p-

p-

p-

p-

p-

p-

p-
ay

ay

ay

ay

ay

ay

ay
Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09F Sep-09F

Ja
M
Source: Rosstat, Jones Lang LaSalle Source: Rosstat

The correction imposed by declining incomes and rouble weakening
will have a significant effect on the market and will harm the
consumer spending growth of the last decade. As a result, sales
volumes in Russia are expected to decline by 5.2% in 2009.
However, it is likely that the full effects of negative income and
employment changes will take time to filter down into consumer
spending and retail sales figures. We believe that it will not be until
mid-2009 that the full extent is shown.
Nevertheless, the resilience of the Russian consumer – keeping
retail sales growing in YoY terms until February – indicates that the
downward adjustment will be relatively mild, and recent employer
surveys and PMI reports already show significant improvement in
the sentiment since Q4 2008.
Inflation
The consumer boom has kept prices high, and inflation remains a
prime concern. It deflates welfare gains, particularly affecting the
lower income population.
Since 2007, inflation has increased due to growing global food
prices and loose monetary policy caused by large currency inflows.
Although likely to ease in the near term, inflation is expected to
remain high.
With the average nominal wage growth over last few years at
above 25% per annum, the effects of inflation have been negated.
However, with the recent increase in unemployment and salary
levels frozen – the effects will now be felt more strongly throughout
the country and will reduce consumer spending.
Conclusion
Prolonged economic growth allowed the Russian economy to build
strong fundamentals and to hold up initially against the pressure
from the global financial crisis. However, since Q4 2008, there has
been a significant slowdown in the economy.
Despite the current turmoil, Russia is well positioned to recover
earlier than most and will again deliver superior performance relative
to other major economies in Europe. The key distinguishing factors
are low household debt, an undersupplied consumer as well as in
active state support of the economy.

The consumer will remain the key player in the economic recovery
and currency stability.
On Point • Russian Shopping Centre Report 2009 6

Retailer demand

2008
Despite market fears of a global slowdown, Russia continued to
attract new retailers, keen to expand their international operations.
In 2008 new brands entering the market included GAP (USA), Kiabi
(France), Lindex (Sweden), Starbucks (USA), Principles (UK),
Warehouse (UK) and Fridays Project (Spain) – all of which have
significant expansion plans for the coming years.
For international MSUs (major space users) – Tatum, H&M, Inditex,
etc. – we see a similar situation. However, some MSU retailers
being distributed through franchise agreements are re-considering
their strategy. Recent examples of this are Mango and New Yorker
who took back their franchises in 2008 from Arts Group and RAMO
respectively.

Retailers prefer entering Russia with local partners. We believe this 2) Large Russian operators, MSU and large franchisees.
trend will continue, as it is still a challenging market to enter alone This group of retailers have been most impacted by the credit
due to language and cultural barriers and the complexity of the legal crunch. Over the last five years, they have been using easily
and financial systems. available short-term financing to aid their aggressive expansion
programmes in Russia. From Q4 2008, financing all but dried up. As
According to A.T. Kearney’s Global Retail Development Index, a result many of these retailers have been experiencing short-term
Russia was the 3rd most targeted country by retailers in 2008. cash flow issues – having trouble paying suppliers and covering fit-
out costs in their committed future stores.
2008 Global Retail Development Index
100 Store expansion of top-10 Russian retailers
On retailers radar screen Retailers considering Low priority
90
80 14,000 CAGR 42%
70 Lenta
GRDI Score

12,000
60 M.Video
50 10,000 Tehnosila
Number of stores

40
Dixy Group
30 8,000
20 Kopeika
10 6,000 X5 Retail Group
0 Eldorado
4,000
Saudi Arabia

Macedonia
Philippines

Honduras
Thailand
Indonesia

Guatemala
Argentina
Vietnam

Lithuania
Colombia

Slovenia
Romania
Ukraine
Malaysia

Tunisia
Morocco

Latvia
Mexico

Bulgaria
India

UAE
Algeria

Peru
Brazil
China
Russia

Chile

Turkey
Egypt

Svyaznoy
2,000 Magnit

0 Evroset
Source: A.T. Kearney
2004 2005 2006 2007 2008

Source: Company reports

However, within the last quarter of 2008 the occupational markets
witnessed a change in retailer demand and take-up as a result of
the ongoing global financial crisis. Initially this had been a result of
the retailer’s inability to finance expansion plans – through deposits/
advance rent payments, but more recently retailers began to claim
that a slowdown in sales growth has also impacted upon their
proposed expansion strategies for 2009.
The situation is mixed:
1) Large international retailers.
Most of the occupiers from this category, already present in the
market, will maintain expansion plans throughout Russia in 2009,
and in some cases, are even speeding up the process to take
advantage of the existing opportunities. Brands from the group
Auchan (Auchan, Attac, Decathlon, Leroy Merlin), the Metro Group,
Castorama, OBI, Carrefour and Walmart are all eager to keep to
their expansion programs, through a mixture of leasing, acquisition
of premises and co-investment.
As a result, domestic operators have either dramatically reduced
their expansion plans (X5 Retail Group, Detski Mir) or stopped them
(Sportmaster, Maratex, FDLab, etc.) at least for the first half of 2009.
3) Gallery.
Mid market gallery retailers revised their expansion plans and
reduced the number of stores they initially proposed for 2009.
Maratex (Esprit, SMYK, River Island, Peacocks) recently announced
they will only launch five new stores in 2009, whereas previously
they had plans for over 50 stores. The majority of these retailers
have decided to put on hold any expansion plans and decision
making until Q2 2009.
 7 On Point • Russian Shopping Centre Report 2009

The luxury retail market has been hit hardest. Turnover of the
premium class retailers fell by an average of 30-40% in 2008 in
comparison with 2007. Again, the majority of these groups have
put on hold any expansion plans for 2009 until Q2/Q3 2009. For
example, the Richemont Group (Cartier, Van Cleef) have actually
decided to postpone any new openings and concentrate only on
their existing stores.
2009
In 2009 we expect to see further expansion by new international
brands – with openings in Moscow and to a lesser extent St.
Petersburg, followed by leading regional millionniki cities. Retailers
expected to enter the market this year include amongst others
French Connection (UK), Mamas and Papas (UK), Salomon
(France), Walmart (USA), H&M (Sweden) and River Island (UK).
The French hypermarket operator, Carrefour will also open their first
store in Moscow in 2009 at the Filion shopping centre and
have plans for further expansion in the leading regional cities.
This is due to:
• current financial situation of several domestic franchise companies;
• existing retailers becoming more comfortable in the Russian market;
• concerns over operational efficiency in times of falling;
• consumer expenditure.
Operating the brand directly ensures not only enhanced profitability,
but greater control of the outlet and the brand performance. In 2009,
Hennes & Mauritz (H&M) opened its first store in Metropolis Shopping
Centre in Moscow without a partner; Uniqlo is expected to open
shortly, and both will look to expand directly. We believe this will
be an increasing trend in the market.

At present any slowdown in consumer spending is difficult to assess

as the economy is only just beginning to affect the wider consumer
and retail sales volumes – which were buoyed by the New Year
spending and has continued into 2009. Should there be a significant
growth in the rate of unemployment across Russia in 2009 and
further deterioration in consumer confidence then we expect to see
a significant slowdown in retail, with sales of non-essential items
suffering particularly.

However, retailers consider Russia as a strategic long term market

and have not been put off by a potential downturn in the economy
thus far – in fact as already discussed it is expected that those
able to finance their new expansion will see the current situation as
an opportunity to negotiate better financial conditions and gain a
foothold in the market.

The market is also likely to witness a consolidation of franchise

companies. Those without support of the government and with
immediate short-term liquidity issues are likely to loose distribution
rights with foreign retailers moving towards more financially secure
and experienced companies.

It is also likely that 2009 will see more retailers taking back their
franchise agreements and operating directly.
On Point • Russian Shopping Centre Report 2009 8

Retail supply

Supply
Russia has the largest development pipeline in Europe and over the average construction cycle of at least two years – and around
the last five years the supply of modern retail space increased more four years for large schemes – the pipeline for 2010-2012 will be
than ten fold. drastically reduced.

Shopping centre stock in major Russian cities (‘000 sq m) Moscow shopping centre completions (‘000 sq m)
'000 sq m
6,000 1,200

5,000 1,000

4,000
800
3,000
600
2,000
400
1,000

0 200
2001 2002 2003 2004 2005 2006 2007 2008
Moscow St.Petersburg Millionniki 0
2007 2008 2009F 2010F 2011F
Source: Jones Lang LaSalle Announced completions Adjusted completions

Source: Jones Lang LaSalle

Despite this, the country is significantly underserved in terms of
stock per capita relative to other markets.
Shopping centre stock per 1,000 inhabitants (sq m)
Moscow
As a result, the market will remain significantly under-supplied for
the next 2-3 years. Only then it is likely to see a pick up, firstly in
Moscow and then gradually in St. Petersburg and then in the major
regional cities.

St.Petersburg
The development of the retail market in the Russian regions has
Budapest
lagged behind Moscow and St. Petersburg. These markets started
Berlin
from a position of literally no modern retailing provision. Due to the
Frankfurt

Warsaw
size of these cities and lower per capita incomes their market size is
Prague
significantly smaller than that in Moscow. Despite a recent increase
0 100 200 300 400 500 600 700
in retail provision, they remain considerably underserved. However,
Source: Jones Lang LaSalle the large expected development pipeline has put these cities at risk
of becoming quickly saturated and over-supplied. Most of these
Project delays remain widespread. In 2008, just over 20% of the development projects have now been put on hold. This will provide
announced supply for Russia (5.1 mn sq m) actually reached the for a more sustainable retail environment in the medium term.
market. In Moscow 65% of projects announced for delivery were
not completed, whereas 15% of the forecast supply was cancelled. Quality retail stock dynamics

Pipeline projects, 2009-2010 sq m per 1,000

000' sq m inhabitants
Project financing for new developments has been severely restricted Ex isting stock, 2008
500 Ex isting stock per 1,000 inhabitants, 2008 400
and since October 2008 all but stopped. As a result, only those 450 350
400
projects that are currently under construction and have committed 350
300
300 250
financing will reach completion in 2009 or early 2010. With a number 250 200
of large shopping centre projects due to open in 2009, completion 200
150
150
100
volumes in Moscow for this year will see a slight increase to 2008 100
50
50
levels, at around 0.8 million sq m. 0 0
a
n
d

rm
k

ad

n
k

sk
irs

Uf
ar
za
ro

ur

Do
ins

Om

gr

Pe
go

inb

m
s ib

Ka

ab

n-
lgo
Sa
ov

ter

v-o
vo

ely

Vo
N

No
ka

st o
Ch
ny

Due to the complete lack of available debt, it is unlikely that any new
Ye

Ro
zh
Ni

shopping centre projects will be started until 2010. Taking into account Source: Jones Lang LaSalle
 9 On Point • Russian Shopping Centre Report 2009

Rental levels

Retailers have been stating that a fall in consumer confidence is Current pressure on rents is also due to the weak financial position
affecting turnover. It is clear that the luxury market has been affected of the retailer / franchise groups as a result of their expansion plans.
as consumers have become more price-conscious. However, many Landlords, in order to alleviate the need to tie up cashflow for long
of the top domestic retailers have shown growing sales figures periods, are reviewing the level of deposits and advance payments.
and the official Rosstat statistics show YoY retail sales growth until Traditionally these have been dealt with on a 3 & 3 basis –
February 2009. ie. three months rent deposit with three months advance rent.
However, some landlords are now willing to negotiate accepting one
Despite these positive statistics, most retailers are now looking for month security deposit with one month advance rent with retailers
rent concessions claiming the current economic environment and paying on a monthly rather than quarterly basis.
a slowdown in consumer spending.
With retailer demand slowing against a significant fall in the future
Moscow shopping centre completions (‘000 sq m) supply pipeline, we believe that the market is more likely to see
a stabilisation of rents as opposed to the strong growth rates
Turnover in 2008, Turnover growth
Retail chain Profile USD bn to 2007 level witnessed over the past three to five years. Other commentators
X5 Retail Group Grocery 8.30 57% have predicted falls of circa 30-40% over 2009, however we believe
Euroset Electronics 6.80 22%
Magnit Grocery 5.32 46% that this is from the forecast rents for 2009-2010 that included 20-
Svyaznoy Electronics 2.94 26% 25% YoY growth rather than actually achieved rents current in the
M.Video Electronics 2.73 43%
Lenta Grocery 2.34 50% market. Where new schemes were looking to achieve average rents
Kopeika Grocery 2.10 38% of circa USD1,200-1,400 per sq m per annum we believe these will
O’Key Grocery 2.00 70%
Dixy Grocery 1.94 36% actually remain in 2009 at the current average of circa USD1,000 for
Seventh Continent Grocery 1.76 22%
prime shopping centres in Moscow.
Vester Grocery 0.67 97%
Beliy Veter Electronics 0.38 36%
Rosinter Restaurants Grocery 0.34 28%
Systema Region Mart Grocery 0.33 66%
ABK Grocery 0.11 33% Average prime shopping centre rents in Moscow (USD/sq m/year)
Source: Company reports
1,400

1,200
Retail gallery tenants since the latter part of 2008 have looked to
1,000
renegotiate terms with landlords and seek rental discounts, of in
800
some cases more than 25%. Whilst landlords are attempting to
600
maintain their rental budgets by resisting such requests, they may
become more flexible during the year in order to secure lettings to 400
2002 2003 2004 2005 2006 2007 2008 2009 F 2010 F

the best retailers. Landlords may seek to avoid reducing headline 200 Post crisis rental forecast Pre-crisis rental forecast

rental levels by offering incentives such as rent free periods or Source: Jones Lang LaSalle

capital contributions/enhanced fit outs.

Rental levels for large anchors have remained robust in recent
months as retail performance has been, by and large, sustained,
with a severe deficit of good quality space to house their large
modern retail formats.
However, for secondary schemes in Moscow and for shopping
centres located in the regional cities, in particular those “one
industry” towns that have been subject to significant wage cuts
and unemployment, it is likely that rents will see a 10-20%
decline in 2009.
On Point • Russian Shopping Centre Report 2009 10

Capital markets ― 2008 review

2008 review
Unlike most countries in Europe that have been affected by the There was also relatively good debt availability in H1 2008, with both
global financial crisis since 2007, it was not until September 2008 western and domestic banks providing financing. Although margins
that the effects were felt in Russia. However, when they were, the had moved out from 275 basis points to circa 400-600 basis points for
effects were dramatic and occurred virtually overnight. standing, income producing assets, the dollar swap had significantly
fallen, keeping the overall cost of financing at 2007 levels.
Out of 13 shopping centres that were sold throughout the year, at a
total capital value of circa USD 1.2 bn, only two were traded in the Compared to other markets, LTV and DSCR terms were not hit as
last quarter of the year. much as those in other European countries. In other countries, prior
to the banking crisis LTVs of 80-90% were possible that were brought
The commentary below provides a review of the shopping centre down to 65-70%, significantly increasing investors’ equity exposure
investment market in two distinct phases: Q1 to Q3 2008, in which and negatively impacting on investment returns. Within Russia,
Russia still had a relatively robust investment market and then Q4 these terms remained relatively stable.
2008 in which Russia, like most other countries around the world,
was subject to the financial crisis. The subsequent effects on the USD 5-year SWAP, Bank margin and Interest rate for
shopping centre investment market are analysed along with the standing assets in Russia (%)
12.0
prospects for the investment market in 2009.
11.0
10.0
interest rate
9.0
Q1 to Q3 2008 8.0
7.0
In H1 2008, shopping centre investment volumes increased by 6.0
40% compared to H1 2007. In Western Europe for the same period 5.0
4.0
investment volumes fell by 20%. During this period, Russia was 3.0
2.0
still relatively protected with less direct exposure against the initial 1.0
Jun- Sep- Dec- Mar- Jun- Sep- Dec-
financial downturn. 07 07 07 08 08 08 08
USD 5 year SWAP Bank margin

Retail investment volumes in Russia, USD mn Source: Bloomberg, Jones Lang LaSalle

1,800
1,600
1,400
Retail continued to dominate
1,200
1,000
+40% In 2008, as in previous years, retail was the most traded real estate
800
600
class by number of transactions, accounting for 37% of all investment
400
200
deals. This was in line with the average of 38% over the last three
0
2005 2006 2007 2008 years. In the regions the retail share was circa 80%, as the sector
H2 H1

Source: Jones Lang LaSalle

continued to be the predominant asset class being developed.

Retail investment volumes in Western Europe, USD mn Number of deals by segment, 2008

Mixed Residential
80,000 7%
9% Retail
70,000
60,000
37%
Hotel
50,000 15%
40,000
-20%
30,000
20,000
10,000
0 Warehouse
2005 2006 2007 2008 6%
H2 H1

Source: Jones Lang LaSalle Source: Jones Lang LaSalle Office

30%
 11 On Point • Russian Shopping Centre Report 2009

Russian real estate investment transactions by Yields

number of deals Q1 to Q3 2008 was witness to further yield compression to a
25
prime rate of 8.25 – 8.5%. This was not only due to an increasing
46%
20
confidence in the retail sector but also due to the lack of supply of
prime assets. This benchmark was set by the sale of Filion shopping
33% 47%
15
36% centre in Q1 2008, a 55,000 sq m city-centre shopping mall. Filion
33%
22% 31% 30%
10 has recently signed Carrefour as an anchor (their first store in
22%
Russia).
5

0
2006 2007 2008
Retail Office Other sectors
Shopping centre weighted initial yields in Russia
Source: Jones Lang LaSalle 19% 18.00%
17%
15% 14.58% 14.20%
Moscow focused 13.50%
13%
In 2008 there were significantly fewer transactions within the 11% 10.33%
Russian regions. In 2008 transactions in the regions accounted 9%
9.54%
8.65%

for 25% of the total number compared to 47% in 2007. 7%

2001 2003 2004 2005 2006 2007 2008

Source: Jones Lang LaSalle

Foreign investors accounted for 57% in 2007 but 0% in 2008.
Investors, showing a clear change in focus, concentrated their
attention on the core markets of Moscow and St. Petersburg. This
has been the result of a “flight to prime” but was also a result of more As a result of greater investor focus towards prime assets, 2008 for
product in Moscow and St. Petersburg coming onto the market. the first time witnessed a clear distinction in pricing between primary
and secondary assets. The sale of London & Regional’s “Sun
Regional split by number of retail transactions in 2007 Paradise” portfolio comprising well performing but relatively small
9 neighbourhood schemes, indicated a difference of about 50 – 75
8
7 basis points between prime and secondary assets.
6
5
4
3
2 Moving into 2009, we believe the gap between primary and
1
0 secondary assets will continue to widen as investor demand
Moscow and St. Petersburg Russian Regions
increases for schemes that will dominate their catchments over
Foreign Investors Russian Investors the medium to long term.
Source: Jones Lang LaSalle

Regional split by number of retail transactions in 2008 Vendors

9 As in previous years, domestic developers have continued to
8
7 dominate sales transactions and were accountable for over 90%
6
5
4 of all shopping centre disposals in 2008.
3
2
1
0
Moscow and St. Petersburg Russian Regions

Foreign Investors Russian Investors

Source: Jones Lang LaSalle
On Point • Russian Shopping Centre Report 2009 12

Purchasers
Foreign buyers accounted for 62% of the total acquisition volume
in 2008. The majority of buyers were European-based property
companies and developers.
Although the figures are similar to 2007, the country origin of the
investors was significantly different, highlighting a widening source
of capital and an increased confidence in the Russian market.
Q4 2008
Since Q4 2008 investment activity in Russia significantly slowed,
in line with other real estate investment markets.
In September-October there were still a number of equity investors
looking closely at the Russian market. However by November, due
to continued market uncertainty, anticipation of re-pricing and lack of
access to financing, most investors and nearly all foreign ones put
acquisitions in Russia and across Europe on hold.

Retail investments by investor origin, 2007 Debt financing became more expensive and significantly more
Germany Global
Denmark restricted. Many of the western banks with exposure in Russia
Ireland 2% 1%
10%
6% temporarily suspended new financing. Most were looking to protect
Russia
17%
their internal financial position and to re-capitalise their own balance
Austria
13%
sheets.

The Russian government acted quickly in response to the economic

USA
7% downturn and in December published a list of 295 “key” companies
UK Canada
9% 35%
from different sectors of the economy to whom support would be
Source: Jones Lang LaSalle provided. The state controlled banks (VEB, Gazprombank, VTB and
Sberbank) started to provide certain levels of financing to support,
among others, the real estate and retail sectors. Loans were mainly
Retail investments by investor origin, 2008 provided to companies with greater “social importance” including
Canada
France residential developers PIK and Don-Stroy and a number of major
7%
12%
national retailers looking to refinance short-term debt from their
Luxemburg
29%
ambitious expansion programmes.

Russia
Hungary 38%
5%
Finland
9%
Source: Jones Lang LaSalle

Main shopping centre transactions in 2008

Property name City Vendor Purchaser Deal type Investment volume, USD mn

Filion Moscow Rubin Development Orco Property Group Forward purchase 353

Leto St. Petersburg Sistema Hals Sistema/Apsys Development joint venture 150

Sun Paradise, I & II Moscow L&RP Sponda Russia Investment 109

Mozaika Moscow OST Group Tri Granit Development joint venture 59

Source: Jones Lang LaSalle

 13 On Point • Russian Shopping Centre Report 2009

Loans provided as the government support during October The combination of reduced capital seeking opportunities in Russia
2008-January 2009, USD mn and a considerable increase in retail stock on the market offered by
distressed sellers, led to a very quick and dramatic re-pricing of the
Banking retail investment market.
Natural resources

Construction By the end of Q4 2008 yields moved out by circa 300 basis points,
Retail
approximately 100 – 200 basis points more than in most European
countries.
Car production

Transport
Prime shopping centre yield movement, percentage points
Hi-tech Q3 2007-Q4 2008
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

Source: Jones Lang LaSalle 3.5

3.00
3.0
2.50
2.5

Due to the severely restricted availability of financing, the retail 2.0

1.5 1.50
development pipeline was also drastically affected and essentially 1.25 1.25 1.25
1.0 1.00 1.00
“stopped in its tracks.” Financing almost completely stopped within 0.75
0.5
the Russian regions and was difficult to obtain even in Moscow. As 0.0
Spain

Belgium
Russia

Portugal
Germany

Netherlands
France

Turkey
a consequence, developers were placing projects onto the market
Greece
with the aim of attracting a strong international financial partner who
Source: Jones Lang LaSalle
could provide the development funding required or, through the
reputation of such an international partner, attract some form of The severe outward movement in yields was also exacerbated by
third party financing. a number of other contributing factors:
• The Georgia conflict in August/September reduced the
As another option, developers and retailers were also looking to international business community’s confidence in Russia and its
sell a number of their existing assets to release equity in order to perceived stability and free market principles. With investors re-
re-finance their existing debt commitments (real estate or within evaluating their risk exposure in a fragile global economy, adding
other areas of their holdings), to aid expansion or to complete their another layer of political risk on top resulted in several investors
existing development pipelines. reviewing their short term real estate strategy in Russia, despite
strong economic fundamentals and a robust retail market.
Shopping centre stock available for purchase • Additionally, with a sharp outward movement of yields in the UK
in Moscow ( 000 sq m) and significant re-pricing in continental and central Europe, the
1,000
returns achievable in the core markets became more attractive.
900 Investors used those to benchmark pricing and their required
800
700
returns for Russia taking into account the perceived country
600 specific risk.
500
400
300 Overall, the Russian investment climate was negatively affected by
200
100 geo-political as well as international and domestic economic factors.
0 The resulting market uncertainty put upward pressure
H1 2008 H2 2008
on capitalisation rates that led to a significant re-pricing of assets.
Source: Jones Lang LaSalle
On Point • Russian Shopping Centre Report 2009
Prospects for 2009
Reduced debt availability will restrict transaction volumes
in 2009
• As of today there is still little financing available. The state
controlled banks are continuing to provide loans to a few selected
market participants to support the real estate sector. However,
there are signs that these banks are beginning to get more
active and are expanding their client base to those outside of the
government published list. The western banks have indicated that
they are looking to re-enter the market by mid 2009, although with
significantly reduced budgets.
• Any financing provided will be to high quality institutional grade
assets and to established developers / investors with a strong
Aa
track record or with whom the banks have existing relationships.
In addition to increased margins, any financing provided will be
on much stricter terms including lower LTVs and shorter loan and
amortisation periods.
• The large average investment lot size of assets (USD 150+
mn) in Russia will also restrict the available financing. With the
syndication market completely closed most international banks
are not able to lend over USD 100 mn per asset. Any transaction
involving a large shopping centre will require a pool of several
banks to provide financing as a “club deal”.
Prime assets in Moscow will be the focus of investor demand
Based on current market conditions, investors in 2009 will be looking
to purchase the best and predominantly income producing assets in
Moscow – the most liquid and transparent market in Russia.
• Prime assets are more likely to maintain existing income streams
and have minimal vacancies. They will also provide the best
opportunities to achieve financing from the banks.
• Due to the sharp outward movement in pricing many opportunistic
funds, who over the last few years have focused more on
development projects to achieve their target returns, are now able
to reach these returns with standing income producing assets.
14
Equity investors will dominate
The shopping centre investment market in 2009 will be dominated
by cash-rich buyers. Most likely investors will include a number
of German open ended funds – some of which are now open for
trading, sovereign wealth funds from the Middle East and Asia,
international retail groups and certain pockets of domestic capital
seeking distressed opportunities.
• International retail operators such as Carrefour, Walmart, Auchan
and Ikea have strong expansion plans across the country. In
the Russian regions, where development has virtually stopped,
financing their own expansion pipeline will be the only strategy
available to them to increase market share. Alternatively or in
parallel they will also be looking at opportunities to acquire any of
the larger domestic chains at discounted pricing.
• Russian capital seeking distressed opportunities will focus on
development sites and half completed projects at pricing levels
reflecting a significant discount to cost. Generally, these groups
will be looking more at returns achievable than quality of the asset
and will be targeting IRRs of at least 30%.
Greater transparency
• In order to obtain some form of debt, developers will look more
closely at the quality of their shopping centres. This will include
using established international architects, legal and tax advisors
to make sure their projects have clean and marketable title and
efficient holding structures.
• Russia will continue to be a major focus for retailers due to the
huge market potential and significantly under-supplied market.
The retail market will also be one of “change” and is likely to
witness a consolidation of franchise companies, an increasing
number of international retailers going direct and a potential
move towards an increase in tenant incentives and more turnover
denominated lease agreements.
• Russian developers will continue to focus on attracting
international partners. They will look to take advantage of their
existing relationships with banks to aid financing but also use
their expertise to improve the quality of the developments. Joint
Venture partnerships also suit international investors as the
value of “local expertise” remains high especially at the project
origination and permitting stage of development.
 15
Developers will look to complete under-construction
developments
Developers who are currently mid-construction will look to complete
their projects to maximise the benefits from the low competition as
a result of the supply shortage. Within the retail sector, first mover
advantage plays a key role and often contributes to the success
of shopping centres amid increasing competition. Those who
have already secured financing will proceed as normal and reap
the advantages. However, those without financing and subject to
sudden liquidity pressures will look at all available options in order
to benefit from this “first mover advantage” in a significantly under-
supplied market.
Change in focus to smaller shopping centre
development projects
In 2009 and 2010 we believe developers will look to build smaller
shopping centres with more focus on their target catchment and its
relative purchasing power. With current financing restrictions, the
development of smaller shopping centres will create a more liquid
market and allow developers not only the possibility to construct
but also exit.
This will put less pressure on the existing large regional shopping
centres, as they will benefit from lower future competition and will
see their position strengthen further within the market.
On Point • Russian Shopping Centre Report 2009
Yields to stabilise and potentially compress by mid 2010
Investment activity is likely to remain low during 2009. However,
with such a sharp yield movement in Russia we are of the opinion
that the market is now close to fair value. There will be some high
quality investment grade assets coming to the market at pricing
levels at circa 30-40% discount to H1 2008.
Against a background of an expected pick up in investor activity in
Q2 / Q3 2009, combined with the forecast economic upturn, it is
likely that yield compression will return from mid 2010 onwards.
According to the Urban Land Institute and Price Waterhouse
Coopers “Emerging Trends in Real Estate Europe 2009” survey of
industry experts, Moscow is the most favoured city for investment in
retail amongst the major European cities – showing that investors
are aware of the potential that the retail market offers. However,
the critical issue is getting investor confidence back into the market.
The continued strong economic fundamentals and increasing
transparency in the retail market should help to counteract the
perceived increase in country risk and instability. Those investors
that make the first step in 2009 are likely to gain first mover
advantage and the highest returns.
On Point • Russian Shopping Centre Report 2009 16

Jones Lang LaSalle

Russia & CIS Headquarters
52/3 Kosmodamianskaya Emb.
115054 Moscow, Russia
tel: +7 495 737 8000
fax: +7 495 737 8011

Peter Hensby Vladimir Pantushin

Associate Director National Director
Capital Markets, Russia & CIS Head of Research, Russia & CIS
Moscow Moscow
tel: +7 495 737 8000 tel: +7 495 737 8030
peter.hensby@eu.jll.com vladimir.pantyushin@eu.jll.com

Maxim Karbasnikoff
European Director
Head of Retail Depatment
Moscow
tel: +7 495 737 8000
maxim.karbasnikoff@eu.jll.com

www.joneslanglasalle.ru

COPYRIGHT © JONES LANG LASALLE IP, INC. 2009. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of Jones Lang
LaSalle. It is based on material that we believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors. We
would like to be told of any such errors in order to correct them.