ANALYSIS: Lack of quality retail space in Kazakhstan helps spur on new development

analysis

ANALYSIS: Lack of quality retail space in Kazakhstan helps spur on new development

By SRI ⋅ June 29, 2009 ⋅

(SRI) - Despite the economic crisis, the lack of quality retail space in Kazakhstan will lead to the development of new, high-quality shopping centers, analysts believe.

On August 21, Almaty will witness the opening of the country’s newest and biggest shopping mall, Aport, developed by the Kazakh-Hungarian Eurasia Real Estate Development Company (Eurasia RED). Total retail space in the new mall will be 111,000 square meters (sqm). Mega Alma-Ata, currently the largest mall, has retail space of 80,000 (sqm).

Eurasia RED claims that despite the ongoing economic crisis, the company has secured a sufficient number of tenants. The two anchor stores will be Ramstore and Kazmart, each with 10,000 sqm of retail space. The remainder of the prospective tenant list is mostly made up of major global franchise brands.

Eurasia RED also already announced plans to open a second shopping mall in Almaty by the end of next year with retail space of over 100,000 sqm.

Aport, as the largest project, grabbed most headlines, but Eurasia RED is not the only developer keen to establish a strong market position in today’s market. Almaty-based Zhuldyz Zholy opened the Sputnik shopping mall with retail space of 38,900 sqm in the western part of Almaty earlier this year.

Economic crisis

The ongoing economic crisis has caused a number of projects to be suspended or cancelled altogether.

“Because of the global economic crisis, many retailers are weighing whether or not to enter the Kazakh market,” according to analysts of the real estate consulting company DTZ. “As a result, developers are unable to get lease commitments from potential tenants, and the opening dates are being postponed.”

Nonetheless, some developers like Zhuldys Zholy or Eurasia RED press ahead with their projects and plan further expansion.

Because of the lack of retail space in major Kazakh cities, expanding may be the right strategy. According to Eurasia RED, which had secured a $25-million loan from the International Financial Corporation, Almaty is already experiencing lack of retail space in existing shopping centers. Astana and other regional centers will find themselves in similar situation by 2011.

Kazakhstan’s shopping centers are almost exclusively located in Almaty and Astana. Even though only about two million people live in the two cities (of a population of 16 million), the retail turnover in Almaty and Astana is about 50 percent of the national number. Retail sales in Almaty accounted for over $7.2 billion in 2008, in Astana for more than $1.3 billion. For this reason, these two cities have attracted the vast majority of retail development in Kazakhstan.

In theory, the amount of retail space in Almaty and Astana should be sufficient. As of February, Almaty had 13 shopping centers with gross leasable area (GLA) of 160,000 sqm. Overall GLA of Astana’s retail centers meanwhile amounts to 300,000 sqm.

However, the majority of those shopping centers are so-called first-generation shopping centers. The only second-generation mall in Almaty is Mega Alma-Ata with overall GLA of 38,000 sqm. Astana has three second-generation malls - Mega Astana, Sary Arka, and Keruen - with overall GLA of 80,000 sqm.

“First-generation shopping centers are generally located in downtown areas but suffer from lack of parking, poor design, undeveloped leasing plans and overall lack of planning. On average, the retail space per one tenant is 20-100 sqm. Retailers in such complexes usually are not among the sophisticated market participants,” DTZ analysts say. As such, the first-generation shopping centers are rather like organized markets than modern shopping malls.

Second-generation shopping centers distinguish themselves by improved management and design, a thought-out strategy to attract and retain tenants, as well as well designed transporting and parking scheme.

According to analysts, most retail turnover still comes from various forms of street markets and first-generation shopping centers. Street vendors, mainly concentrated within vicinity of downtown areas, still dominate Kazakhstan’s retail business.

Unsaturated market

According to DTZ, Almaty has approximately 200 sqm of retail space per 1000 residents, and only 30 sqm are modern (second-generation) shopping centers. Astana has 315 sqm per 1000 residents, of which approximately 84 sqm are modern in shopping malls. In comparison, Moscow has about 150 sqm of modern retail space per 1000 residents while the number in Warsaw is approximately 550 sqm.

For this reason, demand for class-A retail space remains as high as ever. “In Almaty, there is a queue of companies wanting to lease space in the Mega shopping mall. A number of them represent attractive global brands, but because of lack of empty space, we have to put them on a waiting list,” Zarina Samigullina, deputy general director and leasing director of Mega Alma-Ata, said in an interview with Expert Kazakhstan, a business weekly.

Major global brands entering new markets look for high-quality retail space: well-designed and well-managed shopping malls with modern amenities, security systems, custodial services, parking and strong marketing, Samigullina says. Tenant mix is also an important concept, largely ignored by older retail complexes.

Nonetheless, despite the deficit of quality retail space in Almaty, finding tenants for new shopping centers has not been easy for the newcomers. “The main reason is the systemic overhaul of business models employed by franchisers who had been active in Kazakhstan the last three to five years. If in the past, the return on investment of a store used to be two to two and a half years, now it is three to three and a half years,” Dmitrii Revin, director of finance and business development at Eurasia RED told Expert Kazakhstan.

However, Revin estimates that only about 20 percent of global mid-segment brands are currently represented in Kazakhstan, promising growth opportunities when the country’s economic fortunes reverse.

High prices

Contributing to the absence of brands in Kazakhstan is the high price of retail space. According to DTZ, price per sqm in modern shopping malls in Almaty and Astana ranges from $600 to $1300 a year. In first-generation shopping centers, the price averages around $700. And leases for projects currently under construction range from $660 to $1300 per sqm a year.

“Almaty prices for leasing retail space are on average 200 to 300 percent higher than in the rest of Europe. Tenants are forced to pay such prices because there are no alternatives,” according to Arman Dospambetov, the director of sales of Castro, an Israeli fashion retailer.

Yet the situation in Kazakhstan’s two capitals is far from uniform. “The retail real estate market in Astana has begun to differentiate itself by saturation in the second quarter of 2009. Newly constructed shopping centers, and those still under construction, are experiencing considerable difficulties in attracting tenants. Some of them have reported capacity of less than 50 percent,” Expert Kazakhstan quoted Managing Partner of Scott Holland CBRE Evgenii Dolbilin.

“The problem is that in Astana all shopping centers are concentrated in one area. And if you opened a store in the Mega mall, then you won’t open another one in the Sary-Arka mall because they are literally ten steps apart. Therefore, prices [in Astana] have been falling,” one retailer said.

Facing increasing competition in Almaty and Astana, developers are increasing looking at Kazakhstan’s regional centers. Mega has already begun a foray outside the capitals by opening a shopping mall in Shymkent in southern Kazakhstan.

“In the fall, we are opening a Mega mall in Aktobe. That will be the biggest regional shopping center in Kazakhstan. There are also plans to open a shopping center in Ust-Kamenogorsk and, possibly, a second Mega mall in Almaty,” Mega’s Samigullina told Expert Kazakhstan.