Retail Real Estate in Kazakhstan: Waiting to Seal the Deal
The liquidity deficit currently affecting Kazakhstan’s financial sector has had a significant impact on the country’s real estate market, with the retail sector particularly affected. Investors have begun exiting the developing market, while rating agencies are lowering the country’s sovereign and corporate credit ratings.
Ice Age
It is no wonder that the current level of financing available for various industries in Kazakhstan has sharply decreased; the country’s government will most likely reconsider their forecasts for GDP growth, which was originally set at 9.9% in 2007. As noted by market experts, most major construction companies have frozen 50% of projects announced in 2006-2007. The current state of affairs may continue until March 2008, when, according to financial experts, the situation on the global market may change and take a turn for the better. “However, at the current time, speaking about change for the better is, unfortunately, extremely difficult,” notes Bakhytbek Katen, managing partner of the company Aristan Property Adviser. “If alternative sources of financing are not found, then we will face a regression in construction in the country’s main cities as early as winter of this year.”
As noted by Mr. Katen’s colleague, Nursultan Kasenov, the director of the department of retail real estate at Aristan Property Advisers, the rise in the price of construction projects naturally reflects the pace of development of the retail real estate market. “On one hand, the appeal of the overvalued assets is falling, but on the other hand, international strategic and institutional investors have the opportunity to support Kazakhstani market players through co-financing projects or purchasing them,” he notes.A similar opinion is shared by Askar Mukashev, general director of UMEX Realty, who turned to the example of residential market players, who are working to substantially optimize the process for property sales.
Since most construction companies do not possess the necessary material resources to independently complete construction, the market will receive an influx of offers for partially developed future projects in which investors can receive a share. In the opinion of Mukashev, the sale of projects and the exit from the market of weak players will lead to a significant consolidation of current business. These shifting dynamics will mainly concern small firms, which are experiencing a serious deficit of financing. As the noted by the general director of Team Broker, Turgun Masenova, a large number of construction companies across the country are already closing, with construction suspended and building sites left vacant. Merger and acquisition transactions may change the face of the market. Askar Mukashev suggests that the expected influx of investment will allow the market in Almaty to reach a more stable phase by December 2007, while by the second or third quarter of 2008, the price and demand for real estate will go up.
The Potential of Purchasing Power
Until recently, the market for retail centers in Kazakhstan was developing rather slowly. However, the improvement of the socio-economic situation of the citizens and the growth in the population of Almaty encouraged businessmen to create new retail and entertainment centers. According to UMEX Realty, there are currently more than 9,000 retail premises and around 3 million sqm of retail spaces of various sizes and uses functioning in the city. This market segment is mainly distinguished by the construction of major retail centers with new formats. Overall, Kazakhstan is undergoing widespread reconstruction, but the acceleration of the country’s retail real estate market is still largely hindered by the fact that the country as a whole is still in the early stages of development. “In several cities, the development of the retail real estate market has reached a high level, but there is still much more potential for long-term development,” believes Mr. Mukashev. “The country’s purchasing power has increased t
wo-fold, which has led to the high demand for more retail networks.”
Reconsidering Retail
Consultants on the retail real estate market have reconsidered their forecasts from 2007, as they did not initially expect such a jump in the presense of medium and large-sized businesses and subsequent demand for class A office space. Now, after readjusting their calculations, experts predict that the demand will continue to surpass supply into 2009, even if capital market trends are positive. At the current time, the market rent rates for retail space is stably growing. However, Nursultan Kasenov notes, “In this segment of the market, a lot depends on a retail premise’s effective format and concept, the presence of strong anchors, and other features that can attract a strong consumer flow. It is for this reason that rent rates can be notably higher in, shall we say, traditionally existing retail premises, including places of unorganized trade. New modern retail centers often suffer from poorly-designed concepts and thereby drive away customers, who prefer to continue shopping at more familiar places.”
On average, rent rates for retail gallery space in existing well-designed retail center, according to data from Aristan Property Advisers, now reach $1300-2000/sqm/year. According to Mr. Katen, the number of people breaking into the retail real estate business has grown since 2005. The inflation of rates and the demand for retail space has stimulated such investors to increase rent rates.
Ready for Take-off
Once again we note that the existing retail centers in Kazakhstan by and large do not yet exhibit a high enough standard of professionalism and organization. General director of UMEX Realty, Askar Mukashev, believes that many errors are committed during the planning and construction process, while in most cases, the tenants of retail centers are private entrepreneurs, rather than professional retail operators. Furthermore, many premises fall short of being considered legitimate retail centers due to the absence of anchor tenants. However, as was earlier noted, one has to bear in mind that Kazakhstan’s retail real estate market is still in the initial stages of development. As a result, the modern retail centers can be found only in Almaty and Astana. In the rest of the country, local operators still dominate the market. Some chain operators exist, but they are markedly few.
However, this January, yet another competitor will enter the market – a new modern retail center in Astana, built by the company Capital Partners. Next year, the company will launch another project – Esentai Park. “Esentai will be one of the best multi-functional retail centers in the whole country, even when compared with planned future projects,” argues Charles Raether, head of Jones Lang LaSalle Kazakhstan. “And still another developer, Oriental Real Estate, is planning to open two modern retail centers in Almaty and one in Astana, which may be ranked in the international class.” According to the experts at Jones Lang LaSalle, the project Mamyr, now under construction by TS Engineering in the rapidly developing western district of Almaty, also promises to be attractive not only for tenants, but also for consumers. Furthermore, BI Estate (part of the BI Group) is actively working to enter the retail real estate market in Astana with several large projects.
In the home appliance retail segment, the Sulapk chain (in collaboration with the Russian chain Eldorado) and the Tekhnodom chain are developing dynamically. These companies are actively entering regional cities with a population of over 100 thousand. In the supermarket sector, which is still far from saturation, the most developed retailers are IKEA, Gros, Ramstor, SM Market and others, which are also actively developing into the regions. The DIY chain (Maxi, JYSK) and the pharmaceutical chain Amity are also gathering speed. International chains and trademark brands are practically non-existent, but, “in the next 2-3 years, Russian and international brands will start to enter the market,” argues Nursultan Kasenov, director of the department of retail real estate at Aristan Property Advisers. “This sector is extremely attractive, and together with the continued growth of the market, arrival of international operators and increased professionalism in network management, we believe that the process of mergers and acquisitions is imminent.