Commercial Real Estate

Although it was predicted in the last century that cinema as an art form would disappear and be supplanted by television, it is now possible to confidently state that despite the advancement of home entertainment technology, going to the movies still remains a popular pastime. As such, it is no surprise that the construction of multiplexes, as both individually standing structures and those included inside retail-entertainment complexes, continues at a fast pace. However, market experts note that in recent years, the growth rate in the number of movie theaters is noticeably higher than that of movie-goers. Although this trend does not threaten to ruin the entire industry, it may result in serious losses for the less competitive enterprises in the business.

Overview

The first modern movie theaters began to appear in Moscow in 1996, when the Kodak movie theater opened in the nation’s capital (m. Pushkinskaya, Nastasinskiy pereulok, 2, 570-seat theater.) The Kodak, equipped with a Dolby stereo system, became the first movie theater in Russia to sell popcorn. This event heralded the end of the “coma” period, when the Russian cinema market struggled in the wake of perestroika and many movie theaters in the nation’s capital were closed or used for other purposes.

Since then, the number of modern cinemas has grown exponentially, with theaters appearing as both individually-standing buildings as well as multiplexes incorporated within the structure of retail centers. The first movie theater to share a roof with a retail center appeared in Moscow in 2000, when the company Formula Kino opened a four-screen movie complex in the Ramstore in Marinaya Rosha. Today, the majority of major retail center projects include a multiplex, a strategy which is, as one might expect, very profitable for both the retail center and the movie theater operator. Movie-goers are tempted to browse the stores, while tired shoppers are tempted to unwind at a movie.

As for Soviet-era movie theaters, market players estimate that the cost of reconstructing and reequiping such relics can surpass the cost of constructing a theater from scratch. According to Formula Kino, common obstacles with the old theaters include inadequate amounts of space, limited technical features, insufficient power supply, outdated ventilation systems, etc. Thus, since it is usually very difficult to install modern equipment into the old Soviet buildings and bring them up to par with modern standards, it is necessary to strike a comprise between what is desirable and what is possible.

However, the situation is not completely bleak; the old theaters often are located in convenient and easily-accessible places, which can be attractive to developers. And one should not forget that it is not just a question of profit, as such places are culturally significant to the majority of Muscovites and present developers with an opportunity to revive some of the capital’s cultural landmarks. A prime example of this is the Oktyabr Cinema on New Arbat, whose long-awaited opening took place in fall of 2005 after 8 years of reconstruction. Today, the Oktyabr, which is owned by the Formula Kino chain, is an 11-screen multiplex, able to accommodate more than three thousand movie-goers at one time. Other reconstruction projects include the Illusion Theater on Kotelnicheskaya Embankment, Ladoga in Medvedkogo and Ekran in Marino. All of these opened two or more years ago, which shows that developers have very little interest now in cinema reconstruction projects.

There are several main players on Moscow’s movie theater market, with the undisputed leaders being Karo Film and Formula Kino, which, respectively, run 73 and 55 screens in Moscow. Other major networks include Cinema Park, Lyuksor, Paradise, Kinomax and others. According to data from Cushman & Wakefield Stiles & Riabokobylko, Moscow currently has around 50 independently-standing movie theaters that do not operate as part of a network.

In recent times, a new trend has appeared among Moscow’s movie theaters: the introduction of digital projection equipment, which today, according to data from Nevafilm, can be found in 9 of Moscow‘s projection rooms, of which three are owned by the Cinema Park chain, two are under the Karo Film and Luxor chains each, while the companies Kronverk Cinema and Formula Kino have one each (see Table 1.) By the end of November 2007, the number of digital projection rooms in all of Russia totaled 25, of which 22 are capable of showing Digital 3D films. Experts note that digital projection rooms present more opportunities than do traditional rooms, in part because the film can be received via satellite, which reduces the costs of having a film reel. Introducing digital equipment can also raise the sound and picture quality.

Market analysts note that the cinema owner’s profit depends not only on the theater’s characteristics, such as location, number of projection rooms and selection of additional services, but also on the selection of films offered to viewers. For this reason, the profitability in this segment is largely dependent on whether the cinema’s choice of movie hits is capable of filling the theater for a period of 2-3 weeks. If a theater has several screening rooms, then its operator can choose a line-up of films that will target the interests of a broader range of audiences and attract the maximum number of people. And of course, since weekends and holidays are the most popular times to catch a film, many operators chose to have a flexible price policy in hopes of attracting customers during the less popular hours.

Supply

The specialists at Nevafilm report that it is global industry practice to classify movie theaters by the number of screens they have: one-screen, miniplexes (2-7 screens,) multiplexes (8-15 screens) and megaplexes (16 and more.) At the current time, this latter format has not yet developed in Russia; in Moscow, the only 16-screen megaplex is the Titantic-Cinema, part of the BayPark retail complex on kilometer 71 of the MKAD. Other major movie theaters include Kinostar DeLuxe (11 screens, 3,100 seats,) Kinostar Khimki (12 screens, 3,500 seats,) Formula Kino 1 near Auchan-Marfino (12 screens, 2,106 seats) and others.

According to data from Nevafilm, by the end of the first half of 2007, there were 97 movie theaters, with a total of 358 screens, operating in the capital city. Colliers International, on the other hand, estimates that there are more than 110 movie theaters, of which more than 40 are single-screened, 20 are double-screened and around 50 have multiple screens. The company also reports that 27 of these theaters are located within modern retail-entertainment centers, which means 45% of Moscow retail centers have cinemas. In fact, the number of cinemas located within retail centers has significantly increased in recent times: according to Nevafilm, while at the end of 2003, less than one third of cinemas were inside retail centers (50 out of 154 screens,) by mid-2007, this figure was at 60% (214 out of 358 modern screens.) It is remarkable that during this time, the number of cinemas grew by 43% (from 68 at the end of 2003 to 97 by mid-2007,) while the number of screens more than doubled (from 154 to 358 screens.) This jump can be attributed to the increasing appearance of multiplexes that have a large number of screens, as well as to the closing or reconstruction of a significant number of single-screen cinemas.

Colliers International notes that practically all retail center developers consider the possibility of incorporating a multiplex into their project. This format is not only profitable to the complex’s owner, but it also attracts from 3 to 10 thousand visitors yearly (depending on the number of screen, the competition, location, and other factors.) In addition, developers often locate a food court near the multiplex, which helps to increase profits for food operators and, subsequently, raise lease rates.

Specialists at Jones Lang LaSalle highlight that the process of attracting a movie theater operator to a retail centers ought to get underway at the beginning of construction, when it is still possible to make allowances for all the operator’s specific requirements, such as carrying capacity, column width, ceiling height, etc.

Out of the new cinemas that opened in Moscow in the first half of 2007 and are owned by network operators, all are located in retail-entertainment centers. Among the theaters that have opened since the beginning of 2007 are Cinema Park in the Global City complex (8 screens, 1,504 seats,) the Karo Film movie theaters (10 screens in the Schuka retail center, 8 in Ramstor Kapitoliy, 6 in Ramstor on Sevastopolskiy Prospekt,) Cinema Star in Yerevan Plaza at the Tulskaya station and others.

Demand

Although considered to be approaching saturation by some estimates, Moscow’s movie theater market is highly attractive, and serious conflict and competition has inflamed over the real estate in this segment. For the most part, the controversy has focused on the municipal theaters: when Moscow authorities underwent the painful process of repossessing all movie theaters belonging to the city, which was completed by the beginning of 2007, reports about various scandals and legal conflicts regularly appeared in the press

Furthermore, since the beginning of 2007, several Moscow movie theaters have changed ownership. For example, as a result of a business division, the Soyuz investment group took control over the Titanic-Cinema and the Romanov-Cinema from the group Ekaterinburg-Ars. Likewise, the 4-screen theater MDM-Kino II was bought by Petersburg chain Kronverk Cinema, which itself was obtained by the company A1 (an investment division of Alfa-Group) in 2006. As a result of buying the Moscow cinema, Kronverk Cinema was able to enter the capital’s market and carry out of its plan to develop the federal multiplex network. At the end of last year, the holding Karo became the sole owner of the Pushkin movie theater after having bought the famous landmark from the mayor of Moscow.

In Moscow today, no more than one-third of the population frequents the cinema, which is considerably less than the same figure in many European countries as well as in the US, where around 70% of citizens are active movie-goers. By various estimates, the average annual attendance at Moscow theaters is around 25-30%. Though, during weekends and holidays, the attendance at well-situated movie theaters showing blockbuster films can reach 100%. According to data from Nevafilm, the figures for 2006 show that the attendance level at Russian cinemas grew substantially less than did total box-office takings, i.e. new viewers are going the movies less often. However, that’s not to say that the potential is not there. Simply, in order to increase the numbers of active movie-goers, it is necessary to get people into the habit of going to the movies and ensure that a diverse and quality repertoire of films is offered. For some one who is not used to the big screen, one trip to see a blockbuster movie is often enough to convert them into regular movie-goers.

Trends

• There is considerable growth in the number of screens, while the number of viewers is growing slowly. This is leading to a reconfiguration of audiences and an intensification of competition between theaters;
• The percentage of individually-standing movie theaters is shrinking as the number of theaters incorporated under the roof of retail centers is increasing. This latter format can be mutually profitable for both the retail center owner and the multiplex operator;
• There is a tendency to increase the number of screens within one theater, which can increase profitability by allowing several films to be shown at the same time, thereby reaching a wider target audience;
• The growth of market competition in the capital is forcing cinema operators to tap into the regional markets, including both cities of one million and cities with populations of 500,000 and under. Along the same lines, major Russian chains are also planning to enter the markets of the CIS countries – Ukraine, Kazakhstan and others;
• Retail centers developers are beginning to independently develop their own entertainment companies within their businesses. Among them are Tashir (the Cinema Star multiplex chain,) DVI-group (DVI-cinema) and the company Regions (June Cinema within a multi-functional complex in St. Petersburg;)
• After the opening of several multiplexes outside the MKAD, movie theater operators are refusing to further develop their networks in the suburbs, as not all movie-goers have their own cars to drive to far-off theaters. The most effective locations for theaters are places within the city limits that can be easily accessed by public transportation.

Forecast
On account of the expected future saturation of the movie theater market in the capital, we can expect a decrease in the number of theaters opening each year. Market experts do not expect movie theater attendance to decrease in the next 2 years, though the number of new movie goers will in all likelihood remain low. Therefore, considering that sociologists predict an impending decrease in the number of citizens aged 14-25, who are the most active target audience for the entertainment industry, it is possible that cinema attendance will decrease in the near future. On the other hand, the continued growth in the population’s spending power, in combination with a good and diverse selection of movies, may be enough to compensate for the lost targeted audience. The number of movie-goers may also be increased by opening theaters with lower-priced admission tickets in the city’s commuter neighborhoods.