Commercial real estate market

Supply at the commercial real estate market
Development of commercial real estate market depends on the factors that are obvious.These factors are the population of the city, their average income, local legislature and the policy of the city authorities.

Fig.5. Structure of supply at the commercial real estate market in Kharkov

Increase of volume of retail business is a result of positive influence of these factors and, as a consequence, development of own store chain and appearance of professional retail-operators in the city. And first of all, chain of foodstuffs and household appliances department stores.

Market experts are unanimous in their opinion that the market of trade facilities in Kharkov is of potential interest for both national and for foreign investors. At the same time a low quality of investment product is observed.

According to forecasts the basic active progress trends of commercial real estate in Kharkov will stay for the next few years. While big changes can be expected in 2010-2011. Presently there are 12 shopping centers under construction in Kharkov with total rental space about 300 000 sq.m.

In spite of constantly growing volumes of construction, the supply of high-quality commercial space in Kharkov is limited.
During 2007 the volume of supply of commercial space at the market in Kharkov increased by 160.0 thousand sq.m. due to putting in operation of shopping centers of micro district and district importance.

 

Name	Address	Format of facility	Total space sq.m.
Shopping centers
Construction materials and furniture hypermarkets, supermarket of electronic equipment	7, Geroev Truda, st.	Trading-and-entertaining center (TEC)“Caravan”	39 000
Equator	99/101, Gvardeitsev Shironintsev, st.	Trade Center	16 500
Equator	256 b, Moscow av.	Trade Center	16 000
“Furniture labyrinth”, supermarket of electronic equipment "Shock"	9, Geroev Truda, st.	Trading-and-entertaining center "Dafi"	10 000
Class	136/8, Geroev Stalingrada st.	Trade Center	10 000
Atrium	102, Sumskaya st.	Trading-and-office center	4 000
Velta-city	2/144, Marshal Zhukov av.	Trade Center	3 000
Atlas	150, Poltava shlyakh st.	Trading-and-office center	2 500
Aesthete	26 а, Krasnoshkolnaya nab. st.	Trade Center	1 600
Super and Hypermarkets
Epicenter	348, Gagarin av.	Hypermarket of construction materials	30 000
Moscow	197 б, Moscow av.	Mega market of electronic equipment	8 660
Megamax	165, Gagarin av.	Hypermarket of electronic equipment	5 200
Budmax	13 б, Morosov  st.	Storehouse of construction materials	5 000
Rome	327, Shevchenko st.	Hypermarket of construction materials	4 000
Mars	159, Klochkovskaya st.	Supermarket of electronic equipment	2 000
Foxtrot	56, Poltava shlyakh st.	Supermarket of electronic equipment	2 000
АБВ-equipment	43/2,Gagarin av.	Supermarket of electronic equipment	1 500
Nash Krai	5, Mira st.	Supermarket of food stuff	1 500
Foxtrot	7/8, Sq. of Vosstaniya,	Supermarket of electronic equipment	1 000
Nash Krai	6, Kamskaya st.	Supermarket of food stuff	1 170

 

Fig.6. Dynamics of changes in volume of supply of professional trade space Total area of Trade Centers (TC) and Trading-and-Entertaining Centers (TEC), th. sq.m. Specific index of floor spaces in TC and TEC, sq.m. per 1000 people

Due to the commissioned structures the level of provision of Kharkov residents with professional commercial spaces increased by 56% and amounted to 196 sq.m. per 1000 people. In Donetsk this index is 120 sq.m., in Lvov - near 160 sq.m. and in Kiev near 280 sq.m.

 

 

 

 

 

 

 

 

 

New projects and new formats will appear during 2009 – 2011 and the area of new shopping centers will substantially increase. In addition, new types of shopping centers such as regional, power centers and large specialized centers will appear.

Trade facilities under construction

Name	Address	Total space, sq.m.
Dafi	7, Geroev Stalingrada st	75 000
French boulevard	Academician Pavlov st.	40 000
Magelan	Ludvig Svobody st./ Circular road	90 000
Global UA	199, Moscow av.	5 200
Joker	14, Geroev Truda st	5 700
Olympic	Moscow av.	18 000
Rost-3	Shevchenko st.	8 000
Shopping center at Kharkov tractor factory	Moscow av.	4 100
Shopping center at Klochkovskaya st.	Klochkovskaya st./corner of Romen Rolan sq.	5 000
Shopping center at Klochkovskaya st.	101, Klochkovskaya st.	10 000
Shopping center “MKC”	2, Donets-Zakharzhevskyi st.	6 000
Shopping center “Knizhnyi mir”	Classic lane	3 000

Except for this, 5 more construction projects of large-size commercial objects with total area of about 400 000 sq.m. are currently at the stage of conceptual development. The probability of their realization by 2011 is big enough.

But, in spite of all this, lowering of rental rates and increase of level of availability of commercial space is not predicted. It is conditioned by a high level of uncovered demand for this segment at the real estate market in the city.

 

Demand at the commercial real estate market

Active development of retail business, steady growth of population income and retail commodity turnover lead increase of demand on trade facilities and growth of price indexes.
During 2007 the retail commodity turnover in Kharkov increased by 27% as compared to 2006 and made 10.05 billion UAH.
The average monthly wages of Kharkov residents increased by 35% during last year, and according to the Main Regional Statistics Board, made 1 400 UAH in the 4-th quarter of 2007.
Actively developing network operators are the main users of high-quality trade networks.
Distribution of demand for formats of high-quality commercial spaces is determined, first of all, by the type of the trade operator. Thus, operators specialized in furniture, building and finishing materials, domestic appliances and electronics develop in a format of super/hypermarkets and operators of clothes, shoes and perfumery develop in a format of specialized shops and showrooms.

 

Fig.7. Pattern of demand by formats at the market of trade facilities in Kharkov Total area of Trade Centers (TC) and Trading-and-Entertaining Centers (TEC), th. sq.m. Specific index of floor spaces in TC and TEC, sq.m. per 1000 people Supermarkets and Hypermarkets Department shops “near the house” Specialized shops

Consolidated value of demand at the commercial  real estate market in Kharkov in 2008-2010 is estimated at the level of 1 460 -1 480th sq.m., preserving at same time the established tendency of population income growth at least by 20 - 25% each year and annual inflation no more than 12%.
Maximum importance in the pattern of distribution of consolidated demand on commercial space is associated with the specialized shops segment that is conditioned by the changes in the buying pattern of Kharkov residents.

 

 

 

 

 

 

 

 

Thus, during the last years the share of expenses of Kharkov residents grows in commodities of non foodstuffs group, namely: clothes, shoes, domestic devices, articles of interior and others    

Fig 8. Pattern of demand on trade  premises depending on specialization In 2006

 

Fig 9. Pattern of demand on trade  premises depending on specialization In 2007

Fig.10. Pattern of demand at the commercial real esate market in Kharkov depending on location

Because of limited supply and high price indexes of real estate in the center of Kharkov brand operators of middle price category more and more frequently pay attention to shopping centers located at highways and in residential areas with a high level of passenger traffic. While choosing commercial space network operators of durable commodities (furniture, household appliances and electronics) give preferences to good transport approaches, therefore, they are located mainly at highways of city importance and at road interchange.

 

 

 

 

 

Foodstuffs networks in the format of hyper/supermarket are also located at the main streets of city or district importance and in densely populated residential areas. Smaller operators, in terms of space, (shops “near the house”, discount shops) are located mainly at transport routes of district importance and in residential areas.
In spite of enormous potential, out of the worldwide known international operators only a few of them are operating in Kharkov, and many brands, especially in the non-foodstuffs trade, are represented on franchising conditions by local players. Foreign retail-operators mostly are not yet ready to enter so dynamically developing market of retail business. One of the principal reasons of the existing situation can be viewed as the deficit of professional trade space.

 

Price indexes at the commercial real estate market

Appearing of new network operators at the market and considerable gap between supply of high-quality commercial space and demand are lead stable growth of rental rates and prices on trade premises in Kharkov. In spite of price indexes increase, the level of availability makes about 3-5%, and in most cases it has a temporary character due to rotation of leasers.
Price indexes at the market of trade facilities during 2007 continued to grow steadily. It can be explained by a number of reasons:

1. absence of a broad supply of high-quality floor spaces at the commercial real estate market;
2. growth of retail commodities turnover;
3. coming of foreign network trade operators to Ukraine;
4. expansion of national trade operators.

During 2007 the average values of rental rates at the commercial real estate market  grew by 48%, the value of cost at the market increased on the average by 69%.

Fig 11. Dynamics of average market value of rental rate at the commercial real estate market

Fig 12. Dynamics of average market price value at the commercial real estate market

 

Showrooms or boutique appears to be the most expensive format of commercial real estate, the lease of such a premises amounts to US $ 50-150 per sq.m., and the cost is — US $ 4-6 thousand per sq.m., the second by the level of rental payments come sections in shopping centers: their lease is US $ 30-120 per sq.m., at the cost of 2.5 - 4.5 thousand per sq.m.

Format  of commercial real estate	Range of average rental rates in US $ per sq.m.	Range of average prices in US $ per sq.m.
Trade and Entertainment Centers, TL	30-120	3500- 4500
Hypermarkets, supermarkets	15-25	1500- 3000
Shops of everyday necessities	18-40	2300-4000
Saloon-shops	50-150	4000-6000

As of January 1, 2008 the rate of capitalization at the market of trade facilities is noted at level of 20%.

Trends of development of commercial real estate market

• emerging of shopping centers with professional conceptions;
• emerging of new formats of commercial real estate (for example, a town-center is a trade campus with its bright features for which a cluster structure is typical with a row of buildings with common galleries, links and parking.)
• aspiration of local authorities to improve trade infrastructure of the city (“green corridor” for shopping centers;)
• increase of payback period of trade facilities, because of retain competitiveness new objects must differ by their uniqueness in architecture, by filling and by management of the building, that require higher expenses;
• in view of strengthening of struggle for the client in future the operators of TC will increase their expenses to attract clients through traditional supermarkets and food-courts, movie theaters and sports-and-entertainment centers and new kinds of “anchors”;
• Participation of trade operators in the projects as one of investors.
• Availability of sufficient number of trade operators, high rental rates and deficit of commercial spaces leads to increase of investment attractiveness for realization of construction projects as shopping centers and by indexes it reaches the values of alternative investments.
• expansion of trade networks of capital cities (foodstuffs, household appliances, public catering and clothes)
• expansion of international networks (DIY, furniture, supermarkets)
• appearance of interregional development companies networks.