Review of Belarus and its capital Minsk
A shopping centre development boom is sweeping the Belarusian capital. This has led the government, quite rightly, to limit further projects inside the main ring road.
Gary Burrows, Head of Property & Asset Management for Dana Property Management Services Minsk is the major international capital city of Belarus, which borders the EU to the west, Russia to the east, Lithuania to the north and Ukraine to the south. Whilst being in such a central geographical location, it was not, until very recently, on the international retail radar as an area for expansion and growth opportunity. In fact many international brands had absolutely no interest in Minsk or Belarus as a whole, however, that is gradually changing.
With its population of just over two million, Minsk is the third-largest city in the Commonwealth of Independent States (CIS) behind Moscow, with eleven million, and St. Petersburg with four and a half million. Minsk has a 99 percent employment rate and an average monthly income for the whole of Belarus of $600, which increases in the capital to $1,000. Minsk has a solid disposable income that exceeds that of Bulgaria, Romania, Hungary, and many other EU countries that are mature retail markets.
Belarus has a population of nine million, but its commercial powerhouse is the capital, Minsk, which produces 40 percent of the country’s GDP. Consumer spending growth has been in double-digit figures for the past three years and the aspirational residents of Minsk have some of the best qualifications of any EU country. Many Belarusians, especially city dwellers of less than 30 years, have at least one degree, if not two.
Belarus is an IT powerhouse, with most of the big gaming companies outsourcing the development of new games to local companies. Titles like the World of Tanks and many others are attributed to Minsk. The VOIP telecom system called Viber, which provide free calls and messaging is a Belarusian company, and was recently bought out by Japanese telecom giant Rakuten for $900 million. Therefore far from being a backwoods country, it is a vibrant, creative and emerging market that is pushing its way forward to greater international recognition.
Suffering from retail tourism
As the economy grows and more disposable income is generated, the people of Minsk are becoming more both brand aware, with an insatiable appetite for international brands. However, due to the current lack of fashion brand representation locally, Minsk suffers from retail tourism. Its demanding and mobile residents travel to more advanced retail destinations, such as Warsaw, Vilnius, and Moscow. Recent research has shown that the population of Minsk spends over €170 million in Vilnius alone on branded fashion products. With an estimated €400 million gross being leaked out of the economy of Minsk each year, specifically on fashion goods. There are three main reasons for this. The first is the lack of high-quality shopping center stock in Minsk, the second is a lack of choice for fashion brands, and the third is that goods are much cheaper in EU countries.
A basic analysis of supply and demand shows that Minsk has clear and quantifiable demand for - but a relatively poor supply of - brands. Several reasons for this exist, including the lack of quality retail space, an untested and little-known market, and concerns over political stability, currency fluctuation (though the currency is actually strictly controlled since a major devaluation in 2010). Despite these concerns, Minsk is currently experiencing a boom in shopping center development that has led the government, to limit further development inside the main ring road.
Retail development in Minsk began in 1951 with the opening of GUM in the city center and has since followed a path of small schemes, averaging less than 10,000 sqm GLA, right up to the 1990s and 2000s. These were typically anchored by a hypermarket, but layouts and designs were poor, and little or no thought was given to sight-lines, zoning, leisure, or entertainment. With low ceilings, narrow malls, and no pedestrian flow dynamics, they have since been superseded by second-generation malls.
The insatiable demand for better quality malls, with more international brands, with a leisure and quality F&B provision, is going on unabated. As families have an ever increasing experiential expectation and a diverse offer, with a destinational attitude that parallels mature market behaviours. The retail spending year-on-year growth from 2011-12 was 17 percent and 2012 – 13 was 18 percent, therefore nobody can refute the growth potential of the market.
380,000 sqm of shopping center stock in the capital
These second-generation malls include Zamok (55,000 sqm GLA), Arena (22,000 sqm GLA), Expobel, a 30,000 sqm GLA out-of-town scheme, Scala (18,500 sqm GLA), Europa (20,000 sqm GLA) and Galileo (20,000 sqm GLA) in a difficult location next to the bus and train station. While both customers and tenants are migrating to these newer, higher quality, better-designed malls, it is nevertheless still fair to say that design mistakes continue to plague even these latest shopping centers. As one scheme has a net-to-gross ratio of 30 percent to 70 percent, it seems hard to understand how this is commercially viable. Another example is why developers thought it necessary to build over four floors when land is available to build on two floors. In my experience customers get a “nose bleed” above the third floor, which always puts the fourth floor at a disadvantage. This seems to be a universal truth, even for mega schemes such as Dubai Mall. Having said that, these seem to be successful schemes, with heavy footfall at weekends and reasonable evening trade.
While the demand exists, the desire to continue building shopping centres to meet current and future demand is driven by favourable conditions for external investors, a will to enhance and modernise the city, and an entrepreneurial spirit that is very capitalist in nature. Minsk’s existing shopping centre stock of over 380,000 sqm, excluding street retail and downtown pedestrianized areas, is extremely low per capita for a city of two million people. We must also consider, however, that at least 40 percent of this existing stock is first generation and of low quality compared to international standards. There is therefore only around 204,000 sqm of good quality retail GLA for the population of Minsk, which is a solid basis for further development and enhancement of the shopping centre market.
290,000 sqm under construction
Since my arrival in Minsk, in November 2013, I have been astonished by the level of construction, which, based on the number of cranes, reminds me of my time in Dubai. Trying to get accurate numbers is difficult, however. The Chinese are building over 1.5 million sqm of high-end residential GLA and investments are coming in from Qatar, the UK, Russia, and several other EU countries. The result is that at least 50,000 new residential units are being built. This supports Belarus’s new identity and ideology – it was not long ago that owning your own home was an unattainable dream for many locals. The level of investment in hotels is keeping pace with all other construction: Ten or more new hotels are currently being built in Minsk, including at least two Hilton’s and the Kempinski, which is due to open in November.
There are seven new shopping centre developments currently under construction totaling 290,000 sqm. This includes a number of third-generation shopping centres, which are due to open within the next two years. These third-generation schemes have employed international teams to develop them to international standards, specifications, designs, and layouts, which will attract the international retail brands that currently do not exist in Minsk. This is a paradigm shift for a market that, up until the late 1990s, had an aging stock of poor-quality schemes.
New schemes include leisure, entertainment, and food & beverage
From a location perspective, at least 60 percent of this new development is being carried out on or around Pritytskogo St. or the junction with Kaĺvaryjskaja St., which is the road to Vilnius. With so many schemes opening within such a small area, it is hard to understand how the market share will be divided and what will be sustainable in the medium to long term. The remaining 40 percent is split between an out of town location in a scheme called Titan, a few smaller specialist city center locations, such as Galleria and two large schemes on the other side of the city on the airport road (Independence Avenue). These are Magnit, at 40,000 sqm of GLA, and Dana Mall, at 52,000 sqm of GLA, on track to open September 2015.
The quality of the new stock will invariably be far superior than the first-generation schemes and naturally more advanced, from a technical and design perspective, than the second-generation schemes. While a significant proportion of leisure, entertainment, and food & beverage (F&B) is included in the new builds, this is still an emerging and relatively alien concept in Minsk. The main aim of these schemes seems to be pitched at a mid to value target audience, with a few high-end galleries in the downtown locations. There is nothing akin to a Westfield, where you have high-quality spaces that cater to aspirational and high-end customers alike include leisure, entertainment, and high-quality F&B. This type of destination scheme has yet to be delivered in Minsk. When it is, however, it is fairly certain to be a category killer and dominate the market. The concept for Dana Mall, which is located on the opposite side of the city from the Vilnius road, was designed by the UK architect Benoy and promises to deliver a game-changing scheme for the city. A recent article from the Middle Eastern Council of shopping centres supported this view point, suggesting that customers visit shopping centres for leisure and entertainment more than ever before.
Lack of secure payment methods
As the rest of Europe is pushing forward with multi-level retailing, e-Commerce is still a futuristic concept in Minsk, as only 1.4 percent of retail spending is conducted online in Belarus, compared to the European average of 10 - 11 percent. Even this is far behind the online sales in the UK, which peaked last Christmas at 19 percent for the first time in history. One of the reasons for this is the lack of e-commerce banking systems and secure payment methods, such as PayPal. Banks in Belarus are catching up with this opportunity and have confirmed that they will be up to speed with European standards within the next 18 months. This comes at an ideal time for the new generation shopping centres in Minsk, as they will be able to grasp this opportunity with both hands and learn from the mistakes of the past. The use of click-and-collect and home delivery should be a natural process for all new schemes, as multi-level retailing is embraced as a concept and “clicks and mortar” becomes the norm. As Darwin might have advised, however, it is only those who adapt and evolve that will not only survive, but flourish, in an environment primed for a retail explosion.
This would advance much more quickly if import duties were relaxed, or special treatment were found for Western goods that seem so desirable in Belarus. As a CIS member, Belarus finds that the most efficient way to open well-known international fashion brands is via Russian franchise partners, such as BNS (part of MH Alshaya), Fashion House, GreenHill, or Green-market. As there is no import duty from Russia, manufacturing goods in Russia, or importing them into Russia from counties with which Russia has trade agreements, is very beneficial to Belarus. However the political tensions between Russia and the EU clearly pave the way for Belarus to blaze its own trail and establish direct trade deals, that allow Western goods to be retailed at sustainable prices that further establish the strength of Belarus as an emerging retail market.
However, further work needs to be done with regard to stopping retail tourism and reverse the existing trend, which in turn would increase tax revenues. This is a government-level issue, which can only be addressed when a critical mass of quality shopping centres is achieved, and a lobbying platform is established, such as the Belarusian council of shopping centres. It would work alongside retailers, owners, and the government to find solutions at all levels. As an industry, it is critical that we learn from the mistakes of countries like Bulgaria, Romania, and Latvia, where the furor of shopping center development allowed rents to spike and operators fell over themselves to sign leases with average monthly rents in excess €100 per sqm, in schemes that were less than premier. The unsustainability was obvious in that case and similar leases in Belorussia today are in the €30 – 60 range. However, prime rents in Minsk are now achieving upwards of €80 -90, which is proving sustainable, where a range of rents meets market expectation and quality of space. While I cannot see such mistakes being repeated in Belarus, it is important to be aware of the past when considering the future.
Looking outside Minsk, the opportunities only get better. The second-largest city, Gomel, has a population of 513,000 and virtually no shopping centres to speak of. The groundswell of residents’ appetite for brands sees them driving for six hours and waiting over four hours at the border just to purchase branded goods. It is amazing to behold and clearly demonstrates the passion and desire that the people of Belarus have for fashion.
In summary it can be seen that the green shoots of retail development in Belarus are emerging from the soil of Minsk far more rapidly than most EU countries. As an emerging retail economy, Belarus needs to avoid the gold-rush syndrome and the success of this growth will be dependent upon sensible, sustainable rents, international quality retail space, with leisure/entertainment as standard and taxation changes to make the retail landscape attractive for both the brand hungry consumer and the international brands seeking a new emerging territory.
The author of this article is an international retail property consultant with 25 years’ experience in the retail property sector. With a career history starting in retail with Debenhams, moving into shopping centres with Cushman & Wakefield, before working with names such as Westfield, CBRE, Doughty Hanson and DTZ in the UK. Burrows then moved into the CEE regions working with Tesco, TriGranit and Balmain across sixteen countries, and latterly spent time in the Middle East with Al Futtaim. Burrows is currently with Dana Holdings in Minsk as Head of Property & Asset Management for Dana PM Services in Minsk.
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