Prepared by GVA Sawyer © 2009

1

Moscow’s retail and entertainment real estate market, Q3 of 2009

Prepared by GVA Sawyer © 2009

2

Moscow’s retail and entertainment real estate market, Q3 of 2009

Retail Real Estate Market

Table 1. Major indicators of Moscow’s retail and entertainment

real estate market

Major indicators 2009 2008 (09/08,%)

Retail trade turnover in Jan. – Aug., billion rubles

1595.6 1690.3 (94.4% in actual prices)

Volume of premises in quality shopping centers as of the end

of Q3 of 2009, k sq m GLA1

3 050 2 634 (116%)

Commissioned, 1st half of 2009, k sq m GLA

219.6 101.2 (217%)

Announced for commissioning, 2nd half of 2009, k sq m GLA

566 247.7 (229%)

Source: GVA Sawyer’s research,

the Federal State Statistics Service

Chart 1. Retail trade in Moscow, January-August, 2009

Source: GVA Sawyer’s research,

the Moscow City consumer market and services Department

1 GLA - Gross leasable area

Over 3rd quarter of 2009, the retail market of Moscow continued its trend of reducing the level of turnover with preceding lack of positive changes in the economic situation in the country on the whole.

Retail trade turnover in January-August of 2009 has dropped down to 1595,6 billion rub, if compared to the corresponding time period of 2008. Index of actual volume (IAV) amounts to 94,4%. Retail trade turnover dynamics in nominal value shows positive trend, just as according to the results of 1st and 2nd quarters of 2009. Due to consumer price rises (8,1% at the mean around Russia) increase rate 104,6%.

According to the official statistic data, during the Q3 of 2009 the share of food items in the structure of retail turnover continues to grow. As of the end of August 2009, the share of food products retail trade turnover items was 50.6% (while at the same period of 2008 it was 47,5%).

Retail sale via stalls and markets also continues to grow. The share of unapproved trade in Moscow sale structure has increased by 3% over the last 12 months and now states to 21,4%.

Public catering turnover in Moscow tends to decrease but at a slower pace rather than retail trade turnover. Over the period of January-August public catering turnover has come to 75,1 billion rub which is 0,8% lower than last year figures in comparable prices. As per GVA Sawyer forecasts, next year it is likely to expect less significant gap between indicators of market development of the last and current year. Implicitly some better change in the situation is evident according to Federal State Statistics Service data on Russian consumer confidence index – on the basis of 3rd quarter of 2009 results the index has grown upto 7%.

Prepared by GVA Sawyer © 2009

3

Moscow’s retail and entertainment real estate market, Q3 of 2009

1. Supply

Chart 1. Volume of quality supply (GLA)

Chart 2. Provision of Moscow’s residents by retail premises in shopping centers

Chart 3. Provision of residents of Moscow’s districts by retail premises in shopping centers (sq.m GLA/1000 inhabitants), as of the beginning of the year

0

200

400

600

800

1000CAD

NAD

NEAD

EAD

SEADSAD

SWAD

WAD

NWAD2006

2007

2008

2010 F

Source: GVA Sawyer’s research

The aggregate supply of premises in quality shopping centers (SC)1 in the Moscow’s market2 as of the end of the Q3 of 2009 amounted to 3 050. 000 sq. m (GLA).

Provision of Moscow’s residents with premises in quality shopping centers was 290 sq. m GLA per 1 000 people. During the period from January to September 2009 464.000 sq. m GLA of shopping centers premises were launched (219.600 sq. m GLA). Over 3rd quarter of 2009 no retail property premises of quality have been commissioned. In recent years, the current quarter presents the sole case when no quality SC was open.

SC “Darya”, Stroginskoy blvd. (12 400 sq. m GBA/4 500 sq. m GLA) was opened in Q3 2009, but it haven't been classified by GVA Sawyer as quality SC.

1 According to GVA Sawyer’s definition - a quality shopping center is a set of properties dealing in the sale of universal range of goods and services (with GLA over 5,000 sq m), located on a certain territory, designed, built and managed as a whole and providing a sufficient parking area within its territory. 2 Moscow’s retail and entertainment real estate market includes quality retail properties on the territory of Moscow as well as large properties outside its boundaries, which are mostly oriented towards Moscow’s residents.

Prepared by GVA Sawyer © 2009

4

Moscow’s retail and entertainment real estate market, Q3 of 2009

2. Financial terms

During the Q3 2009, tenants and owners of shopping centers were trying to reach a compromise in terms of rent rates which would be acceptable for both parties. Last quarter, deals were equally well struck both on ready to be commissioned SC and vacant premises elimination in already open SC. Also certain cases on tenants relocation took place.

The signs of transition from the “seller’s market” to the “buyer’s market” have appeared in the retail real estate market. This can be confirmed by the following facts:

- lease agreements are signed primarily with the minimal deposit;

- in selection of premises for lease the preference is given to the operating shopping & entertainment centers or to the centers ready for commissioning;

- there are possibilities of applying rent free terms and grace periods;

- the scheme of rent payments (fully or partially) as a percentage of the retail turnover becomes widespread;

- owners have begun to agree to abolishing security deposits more often now, and the deposits are replaced by the bank guarantee for some groups of tenants;

- in some cases owners began to agree to carry out the finishing work at their own expenses.

The peak of lease agreements terms review took place in Q1 2009. According to GVA Sawyer data many large chain companies have managed to achieve the reduction of rent rates and change to the rent rates based on the percentage of the turnover on individual basis. Many tenants are negotiating on transition to the rent rate based on the percentage of the turnover, as this scheme minimizes retailers’ risks. Considering the fact that now it is more difficult to find a tenant than before crisis and the premises are often

tenantless, the owners of shopping centers are forced to agree to such conditions.

Over the quarter the average level of SC lease rates hasn’t changed. Easing of rent conditions can be particularly noticed in less quality properties that are seriously struggling over occupancy reduction. However, the rates were less adjusted concerning the most demanded shopping centers. The maximum rent rates were observed in mid 2008. From then onward, the average level of rent rates mentioned in newly signed agreements has decreased by 15 - 30% in absolute amount.

As for the currency of payments, the owners increasingly agree to the rent rates in rubles.

Table 2. Average value of the turnover percentage, charged as a rent rate in shopping centers.

Tenants’ category % of the turnover

Hypermarkets (food) 2-3%

Supermarkets (food) 5-7%

Home appliances and electronics 4-6%

Hypermarkets (DIY) 4-6%

Clothes stores (lower, medium price segment)

8-12%

Sports goods 10%

Cinema 7-10%

Bowling 7 - 10%

Food-court operators 10-12%

Mobile/electronics Up to 20%

Jewelry Up to 20%

Source: GVA Sawyer ‘s research

Prepared by GVA Sawyer © 2009

5

3. Demand

According to the results of Q3 2009, the vacancy rate level in SC has decreased. As per GVA Sawyer research, the vacancy rate level in most popular SC with good location and concept characteristics as well as oriented towards average consumers (e.g. Evropeisky – shopping & entertainment center, SC Okhotny ryad, etc.), have remained at a low level (up to 0.5-1%) during last period. SC newly commissioned in 2008 and in the beginning of 2009 managed to get better results in fillability but still these SCs are still notorious for their rather high rate of vacant areas (15%). On average, the vacancy rate in quality premises stands about 3.5%.

Chart 4. Customers’ activity index. Moscow

Индекс ВАТКОМ , Москва, 2007-2009

200

400

600

800

1000

1200

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 5

2007 2008 2009

8 марта

1 мая 9 мая

23 февраля

Source: Watcom

Using the data on attendance of Moscow’s shopping centers (the data is provided by “Watcom” company1) we can note the following changes over the past quarter:

− Activity decay which is so common for summer time was less significant in 2009 than in 2008.

− On the whole, according to the results of the Q3 2009, the level of SC attendance has dropped by 2% as compared to the last year.

1 Customers’ activity index WATCOM is a system of market indicators that reflect the consumers’ activity dynamics. Indicators are built on the base of information about real estate objects’ people traffic

According to the results of Q3 2009, the main factors influencing the volume and structure of tenants demand for premises in shopping centers were as follows:

− decision taken by American shoes chain Payless to enter the Russian market through Alshaya Group represented in Russia by subsidiary LLC Monex Trading;

− revival of German discount stores chain Aldi in Russia;

− F.D.Lab Company has decided to develop their own chain selling goods for children without British Hamleys Company share;

− tenants rotation in retail & entertainment chain Mega – first GK Mercury TSUM Stock Outlet opening, lease agreement signing with Moscow first Strellson Sportswear store, interior design store Habitat, show-room Oriflame;

− lease agreement signing between St.-Petersburg stores chain selling goods for pregnant women “Budu Mamoy” and shopping & entertainment center Oblaka (first center opening is scheduled for November in Moscow).

Over Q3, along with new Moscow stores opening notice, the bankruptcy process is in full swing and retailers and retail projects tend to exit from the market:

− Make up Store cosmetics and perfumery chain closing in Russia;

− monobrend Mustang stores closing in Russia; − YAX! clothing brand outlets closing; − Closing of Bookberry chain; − “Eto” Project closing – premium

hypermarket chain under Eldorado Company brand

Prepared by GVA Sawyer © 2009

6

4. Forecast

Table 3. Shopping centers planned for commissioning in Q4 2009.

Name Address Total/ leasable area, sq m

Markos-Mall 70, Altuf’yevskoye highway

36 200 /

15 000

Tryapka 25, Leningradskoye highway

25 000 /

20 000

Vegas MKAD, 24th km

210 300 /

120 000

Mosfil’movsky 2. Pyr’yeva st.

14 760 /

8 780

Mall of Russia Krasnopresnenskaya emb., plots 6, 7, 8Б

179 400 /

114 000

Rechnoy, 1st phase

Festivalnaya st., Rechnoi vokzal metro station

26 000 /

18 140

Golden Babylon Rostokino Mira highway, 211

241 000 /

170 000

Gorod Entuziastov highway

240 000/

100 000*

Total 972 660 / 566 000

*approximate

Source: GVA Sawyer’s research

The total gross leasable area of SCs announced for commissioning in 2009 is around 566 k sq. m, which is almost more than 2.5 times more than in the 1st half of 2009 and the 4Q 2008. According to GVA Sawyer data some of the 8

shopping centers planned for commissioning till new year can be put off till 2010 and some others may even be only partly open. Correspondingly, the actual increase of premises for this forecast period shall be lower.

Thus, SC “Gorod” is planned to be commissioned December 2009 but the major part of leasable area shall be taken only in 2010. Commissioning of SC “Markos-Mall” has been postponed a few times starting the year of 2007 and most likely it is not to be open this year as well. This year SC “Vegas” is not going to make use of all its leasable area either.

According to GVA Sawyer forecast, during the Q4 2009 Moscow’s retail real estate market shall develop in accordance with the following trends:

― increase in the volume of supply of quality retail premises in the market due to commissioning of new properties;

― growth of the average level of vacant premises due to new retail properties entering the market;

- despite a big volume of the commissioned premises, by the end of Q4 2009 and beginning of 2010, the rent rates of the newly signed agreements shall fall slower than in Q1,2 2009. The increase in disproportion of the rent rates’ level shall be observed in shopping centers of different level and class;

― further consolidation of retail trade market, increase in the share of large chain companies within the total retail turnover (probably, the entire mechanism will change once the Law on Trade is issued);

― the tendency for exit of the significant share of small and medium sized Russian chains (which have been actively developing lately due to the credit means) from the market shall remain.

Подготовлено GVA Sawyer © 2009

7