Recent Market Developments in Russia and Ukraine
The Moscow market saw robust continued consumption with a total of 18 new international brands entering the Russian market, including Michael Kors, Juicy Couture, Hamleys, Mamas & Papas, Debenhams, Bath & Body Works.
Demand for retail space remained moderate in the Ukraine. Combined with growth in new completions, this led to a temporary increase in the vacancy rate to 3%.
Central & Eastern Europe
The retail market of the Czech Republic continued to face a challenging business environment as consumer spending fell in 2012, in line with a contraction in GDP/capita. On a positive note, only a few multi-national retailers were forced to close operations. This was especially the case in Prague where the luxury retailing sector remained active, with exclusive retail brands such as Louis Vuitton, DKNY and Jimmy Choo all seeking to open new stores.
In Budapest, only the best locations and centres maintained rates and operational performance. Food retailers, including discounters, remained most active but concentrated on smaller, more centrally located concepts like Tesco Express. A further difficult retail climate is expected with no increase in spending power foreseen for 2013.
In Romania, the main fashion retailers such as Inditex, H&M, C&A, New Yorker, Takko or Deichmann opened less stores than in 2011. This was mainly due to the lack of new options for them and not because of a lack of appetite. The more cautious, major food players continued to expand in 2012 securing new locations
In Bulgaria, several international fashion brands opened their first monobrand stores in shopping centers in Sofia - Liu Jo, Fornarina, Napapijri, Emporio Armani. International discount operators in fashion, DIY and the sporting goods plan to expand in Bulgaria. Food retailers will continue expansion via convenience formats in key locations.
In Croatia, the Zagreb market witnessed the opening of one new shopping centre which brought 50,000 m² to the market. The timing of this opening has been far from ideal, as falls in private consumption strongly (negatively) impacted retailer’s trading performance. The result has been a softening of prime shopping centre yields to 8.5%.
Impact on Rents
Seven of the thirteen major markets saw a change in rental market performance during 2012, in terms of headline prime in-line shopping rents. The Russian markets of Moscow and St Petersburg saw rental increases, as did Warsaw, in response to strong demand and robust economic growth.
In Kiev, however, headline rents fell in response to an increase in the vacancy rate. In Serbia, the Belgrade market saw no change in supply yet rents in shopping centers slightly decreased over the year in response to an economic contraction. There were falls in headline rents recorded in Bratislava, Bucharest and Sofia, as each market reached an interim level of saturation.
In Greece, although no drop in headline rents was recorded, retailers have been demanding “turn-key” delivery conditions on new properties and will be paying only turnover rent.
Forecast Demand Growth
The positive news story for all markets across the region, is that all countries are expected to post strong GDP/capita growth over the next three years, according to recent IMF statistics.
The markets with the biggest growth ‘potential’ include the large markets of Russia, Romania and Ukraine, each of which are forecast to see GDP/capita grow by over 50%. Bulgaria and Serbia are set to post very high growth of over 40% in the next 3 years. Hungary is set to see growth of just over 30% as it puts some of its worst years behind it. Poland, Slovakia and Croatia are next in line with growth forecast to be around 25-30%, whilst the Czech Republic, Albania and Greece lower down the pecking order. It will clearly take some time for Greece to get back from it’s current position, whilst the Czech Republic growth curve will be much flatter for the foreseeable future given the already mature nature of the market – which has the highest GDP/capita rate of it’s Eastern European peer group. Interestingly, this rise in demand is being quite well matched by increasing levels of retail space capacity
New Development Activity
In Moscow, more than 20 shopping centres with a total GLA of 686,000 m² are scheduled to open in 2013 but, as is usually the case, some openings will be delayed resulting in around 455,000 m² being delivered.
The Kiev market will see a considerable increase of about 520,000 m² over the next two years. With moderate demand expectations rental values will face downward pressure, backed by increased vacancy.
In Romania, six large projects comprising up to 164,000 m² are announced to be delivered by the end of 2013 throughout the country. For most of the projects, construction has started and all schemes are very active on the leasing side. Four shopping centres comprising 187,000 m² are planned to break ground in Bucharest alone.
In Belgrade, the delivery of several new projects has been announced, which will be delivered over the next two years. Until these projects come to market, rental levels in traditional shopping centers and prime high street areas should remain stable.
In Poland, nearly 800,000 m² of retail space is currently under construction, the majority of which should be completed in 2013. It is estimated that new supply will reach 550,000 – 600,000 m² in the year ahead, while rental levels should be relatively stable in most markets.
In Sofia, the announcement to open two new shopping centers will intensify developer competition for retailers, with location, tenant mix and convenience of the project becoming ever more critical in determining the success of one shopping centre project over another.
In Zagreb, one shopping centre is in the development pipeline for 2013, meaning the saturation point for Zagreb shopping centre stock will be reached with the completion of this project. Consequently, rents in shopping centres and on high streets are expected to come under downward pressure due to increasing vacancy in the year ahead.
Multi channel retailing
Whilst on-line retail is barely scratching the surface of the Eastern European market - it only represents around 3.5% of sales in the more mature market of Poland, relative to around 10% in the UK and Germany - on-line retail will continue to grow significantly impacting the demand for retail space.