Retail Real Estate in Kazakhstan - Prospects and Opportunities

analysis

Retail Real Estate in Kazakhstan - Prospects and Opportunities

By SRI ⋅ April 24, 2008 ⋅

Against the backdrop of the ongoing uncertainties in Kazakh residential real estate market, the potential of the commercial real estate sector looks quite attractive.

While the overall impact of the slowdown of economic growth in Kazakhstan is yet to be fully understood, as is its effect on the commercial property market, the development of retail centers in Kazakhstan remains an attractive proposition.

With total population of 15.5 million people, most retail activity is concentrated in two cities - Almaty and Astana. According to Jones Lang LaSalle, a real estate manager with significant operations in the CIS states, the total area of existing retail space in Almaty and Astana is nearly 250,000 square meters. However, only three shopping malls with a total area of about 79,000 square meters more or less correspond to the international standards.

In Almaty, on average, there are 41 square meters of modern shelf space for 1,000 people. In Warsaw, this number is 550 square meters, in Krakow - 337 square meters, and in Moscow - 150 square meters.

As of today, retail space can be divided into three types. In Kazakhstan, the majority of big retail centers belong to the first generation of trading centers. As a rule, they are located in the center of the city but lack space, well-designed development model, and strong tenant pool.

In the last two years, new second-generation shopping malls like the “Mega-Centers” in Almaty, Astana and Shymkent, or “Sary-Arka” in Astana have come to Kazakhstan. Their distinguishing features have been improved management, improved design, a thought-out strategy to attract and retain tenants, as well as well designed transporting and parking scheme.

During 2008-2011, big local developers are planning to open seven more second generation malls in Almaty with a total shelf space area of 278,000 square meters. According to Jones Lang LaSalle, there will be nearly 460,000 square meters of shelf space available in 2011, most of which will be second generation shelf space. Of course, everything will depend on the conditions of the real estate market.

Additionally, sooner or later, the arrival of the new retailers and the growing purchasing power of the population will bring third generation shopping malls to Kazakhstan. These projects will be characterized by high-quality construction, professionally developed design concept, a large number of products and brands, smaller share of grocery and clothing operations and, simultaneously, a greater share of service providers.

It is possible that third generation shopping malls will start appearing on the domestic market soon after 2009, and the total area of those centers will be up to 50,000 - 100,000 square meters and more. The increase in purchasing power of the population, along with development of upscale shopping malls will encourage foreign retailers to enter the local market. Some foreign operators, ready to act independently without a franchise agreement with local retailers have already appeared.
The cost of shopping mall space leases depend on location, size of the leased area and retail commodity turnover. Obviously, central urban areas where the most business activity is concentrated command the highest leases. For example, the cost of lease on the central streets of Moscow is close to the prices in London - up to 5,000 Euros for one square meter per year. One square meter in the center of Paris costs nearly 6,000 Euros.

In Almaty, the average lease in a shopping mall like the Mega-Center is approximately $880 USD for one square meter per year. In other shopping malls like the Promenade, leases average about $700 USD.

In Astana, leases in modern shopping malls are, on the average, $200 USD lower than in Almaty. As far as other regions are concerned, an increase of income level of the population and an increase in consumer demand will contribute to the development of the market for retail real estate and, correspondingly, to the increase of the lease rates.

On the whole, with the appearance of new shopping malls, the lease rates will stabilize. The old malls, which will not be reconstructed, will face a necessary fall in lease rates. At the same time, the price to lease retail space in the modern, high-quality shopping malls will increase. The appearance of international and domestic retailers able to compete for prime retail space will contribute to the rate increase.

First international developer on the local market was the Turkish company Migros Turk, which opened the first Ramstore together with the local developer “Butya” in 1999 in Almaty. In the next few years, the company has opened a network of Ramstore stores in other regions of Kazakhstan as well. Currently, local developers who are the main players on the retail real estate market occupy the major part of this segment. These are companies like Interfood, Silk Way Construction, TS Engineering, Astana Group, Capital Partners. Foreign retailers tend to enter the local market through franchise agreements.

Generally, the markets in downtown urban areas are developed first, and then business expands further into the regions. For example, the retail network of apparel stores “Esprit” has first entered the Moscow market through a franchise agreement, and then, in parallel with the development in the regions of Russia, opened a store in one of shopping malls in Almaty.

Recently, there has been increased activity of foreign operators who open their representations in Kazakhstan without local middlemen. German “Adidas” has opened its store without a franchise agreement. Swedish “IKEA”, which tends to go alone, is also on its way to Kazakhstan where it plans to open two stores in Almaty and Astana. In the CIS, IKEA is so far present only in Russia, where it arrived in 2000. First, it opened its stores in Moscow and other big Russian cities, but then it also began to develop its network in cities with a population of less than one million people.

According to the forecasts of Jones Lang LaSalle, the number of new foreign retailers entering the Kazakh market will increase significantly in the next few years. To a large extent, this is connected to the fact that the consumer market of Kazakhstan is among the most attractive in the CIS. Currently, more than 500 international brands are represented in Kazakhstan, mostly occupying the higher-quality segment of the market. However, more than a third of Kazakh retailers are not official representatives of these brands.

One must also mention the rapidly developing local companies. The overwhelming majority of them sell products from countries. Those retailers are companies like Gros, Silkway, Interfood (supermarkets), Sulpak, Tekhnodom (household appliances); Star Cinema, Babylon (entertainment); The Planet of Beauty, MonAmie, Beautymania (cosmetics) and others.

The potential of Kazakhstan retail market is enormous as the increase in population’s income stimulates consumer demand. According to official data, about 80 percent of consumer expenditures in Kazakhstan relate to foods and consumer items. Of those, 40 percent are spent on foods and the remaining 60 percent on nonfoods consumer items.

The retail boom and the peg of the tenge to the dollar will lead to an increased demand for western goods in almost all sectors, except for food. Higher incomes have allowed people to spend money not only on foods and everyday goods, but also on entertainment and quality designer clothing. Consequently, smart pricing and branding will be the keys to a successful development of franchises in the apparel sector. In the last few years, low-quality apparel has already lost a portion of the market the market share higher-quality brand marks.

Kazakhstan’s entry into the WTO will also play an important role in the development of domestic retail market. It will contribute to the appearance of new high-quality goods and services, expansion of foreign retailers and introduction of international quality standards. In the end, the consumer should be able to get an access to a wide assortment of products at lower prices.

Exclusive (April 2008 issue)