Managing Company MLP Participated in BestLunch, Organized by BestGroup as Part of MAPIC 2016

On November 16, 2016, as part of the MAPIC International Exhibition for Commercial Real Estate and Retail in Cannes, chief executives and directors of retail and real estate development companies attended the BestLunch business dinner. The event was organized by the BestGroup Managing Company and Arendator.ru, supported by Reed MIDEM (a MAPIC organizer) and the online portal Retail.ru.

Among the businessmen at the dinner were: Eriskhan Kurazov, General Director of MLP, and Gleb Belavin, Deputy Director General for Cooperation with Tenants, who said the following on his participation in this event: “For the past few years, retailers have already become the main consumers of grade A storage facilities in the Moscow region, where 80% of our business is centered. Today, retailers compromise 31% of MLP’s renters, and we understand that in the upcoming future they will continue to generate demand on the capital’s market for quality real estate; therefore, we want to understand the major trends in this business and where it’s going… Actually, that’s why we participated in the MAPIC International Exhibition for Commercial Real Estate and Retail and BestLunch’s business dinner at MAPIC 2016. Participating in this event has been interesting and informative for us.”

The meeting’s participants informally shared their plans and strategies for developing business, analyzed how consumer preferences are changing based on examples from their networks, and discussed how they are reacting to these changes, modernizing business with this in mind, as well as what is expected from commercial real estate developers.

The following participants took active part in the event: Andrei Lushnikov, Chairman of  BestGroup’s Board of Directors; Natalia Tischendorf, CEO of AVICA; Vladislav Ivanov, owner of Amrest; Yury Losev, Director of Development for Azbuka Vkusa (The Alphabet of Taste); Alexander and Vladimir Bondyashov, owners of Dochki-Synochki (Daughters and Sons); Nikolai Antonov, General Director of the Management Company MTL; Yulia Gorosсhenya, Director of Development for DECATHLON RUSSIA; Elena Bakunina, Director of Development for Concept Club; Nikolai Moskovkin, Commercial Director of Ekonika; Valery Simanov, Director of Development for MVideo; Boris Katz, Network Development Director for Leonardo; Anna Krechetova, Director of Development for OODJI; Anders Liljenstolpe, Deputy Regional Director of SRV; Igor Maltinsky, Director of Development for MELON FASHION GROUP; Maria Karamysheva, Director of Development for Kidburg; Anton Kokin, Director of Development for Respect Shoe Company; as well as other executives of retail companies, real estate development, and investment structures.

An analytical review of the development of retail and commercial real estate in Russia, prepared by BestGroup, is provided below.

Retail business is one of the sectors most sensitive to changes in the overall economic situation, both in the country as well as in particular regions.  This business’ success and development are directly related to the population’s purchasing power, which in turn is dependent on the state of macroeconomic developments.

Statistical data on major indicators of economic development in Russia make it possible to state that the country is still in a crisis. The economy’s decline slowed in 2016, but major indicators, such as Gross Domestic Product (GDP), investment in fixed assets, and the amount of construction work, still show a negative trend. The index of industrial production had a positive value mainly due to two sectors: agriculture and mining (see chart below).

Trends in population growth in the past 5-6 years are positive. The average residential population in the Russian Federation increases annually by 250,000 to 300,000 people. However, it should be noted that only 28 of Russia’s 85 territories are reporting positive trends. Moreover, natural population growth due to births is practically nonexistent; the driving force of growth is migration.

The main migration flow is into the two capitals and the regions near them, the Moscow and Leningrad regions (even despite the fact that the migration flow into St. Petersburg has decreased threefold in the past three years), as well as the Krasnodar region and the Tyumen region—the major oil-producing region in the Russian Federation.

However, for retail development, what’s important is not simply the population, but the population with income and purchasing power. But Russian citizens’ incomes have fallen in the past three years. In the first nine months of 2016, the population’s disposable income fell by 5.3 percentage points, despite positive trends in take-home pay.

The current economic situation has very seriously affected spending and consumer activity. There have been two major trends:

Firstly, economizing, which contributes to a decrease in consumption volume as well as a transition to cheaper segments.

Secondly, a focus on savings. According to statistics, only 76% of disposable income is spent on consumerism; in other words, people do not expect the situation to improve.

Currently, significant changes are occurring in consumer behavior (see chart below).

According to data from Russian Federal State Statistics Service, turnover in retail trade in Russia for the first nine months of the current year consisted of 20.3 trillion rubles. During the whole of 2015, 27.6 trillion rubles of goods were sold.

The slide below shows that the decline is continuing, although it is somewhat slowed in comparison to last year (see diagram below).

The leading regions in amount of retail sales are Moscow, the Moscow region, and St Petersburg. But in per capita terms, the leaders, other than Moscow and St. Petersburg, are the Sakhalin region, the Sverdlovsk region, the Tyumen region, and Krasnodar Territory. The average resident of the Russian Federation buys 193,000 rubles worth of goods per year (see diagram below).

The ratio of retail goods of foodstuffs to nonfoods is 48% to 52%. This ratio has changed over the course of the crisis, but not significantly, by 2-3 tenths of a percentage point.

In general, changes are occurring within these groups. For example, in terms of nonfoods, sales have decreased in passenger cars, household appliances and electronics, clothing, and footwear. Pharmaceutical products and goods for children remain the most stable (see diagram below).

The deteriorating situation in retail has directly affected real estate property development. The trends in commissioning retail facilities overall in the Russian Federation has been negative since 2014. This situation will most likely continue over the next 2-3 years (see diagram below).

According to data from Russian Federal State Statistics Service, at the end of September of this year, the average distribution of quality, modern retail space in the Russian Federation is 199.8 square m. per 1,000 residents. The leaders in this indicator are Moscow, the Moscow region, Chelyabinsk, and Kazan.

According to data from BestGroup, the distribution of quality, modern retail space in St. Petersburg is 1,140 square m. per 1,000 residents (see diagram below).

Among the main problems for retail development in Russia, event participants noted a decrease in consumer activity, as well as changes in consumer behavior. In terms of positive trends, experts noted, above all, willingness towards constructive negotiations between retail center owners and renters, developing new types of retail centers and life-style concepts, as well as effective interactions between off-line and on-line transactions.