Retail trade is one of the most capacious and dynamically developing industries in Ukraine. The largest players on the retail market are actively developing store chains, more and more international brands are appearing in the country, and developers are reclaiming new sites for the construction of shopping centers. What should be expected from the retail real estate market this year and what are the main trends that will affect its development?
Active development of retail chains
The last few years in Ukraine, both local and foreign retail operators have been dynamically scaled. There are Turkish LC Waikiki chain and Polish LPP group, which manages the brands Reserved, House, Mohito, Cropp and SinSay, among the most active international players on the Ukrainian market. There are also Intertop Ukraine company and Vovk fashion brand, Silpo supermarket chain, which is increasingly among the anchor tenants of shopping centers, among Ukrainian players on the market.
The expansion of retailers is not surprising: the growth of the Ukrainian economy and an increase in real incomes of citizens have a positive effect on the revenue of stores. In turn, the growing revenues of retail chains are reinvested in scaling up the business and strengthening market positions.
As an example, we may distinguish the brands EVA and Varus of the Ukrainian businessman Ruslan Shostak. Last year, they grew by 219 and 15 stores, respectively, and their total turnover for the first time exceeded $ 1 billion. In 2020, they will continue active development, as well as other major retail companies.
New retail operators
In recent years, more and more international brands have appeared in the country along with already operating players on the market. In 2018, Swedish department store H&M, Turkish Koton and De Facto, Spanish brand of home furnishings Zara Home and Japanese Usupso entered Ukrainian market directly. In 2019, the pace of new brands entering Ukraine slightly slowed down: only one major international player, French Decathlon, that opened two stores in Kyiv, entered the country directly.
However, the objective interest of world retailers in Ukraine remains and in 2020 the country is waiting for the appearance of one of the most anticipated by Ukrainians brands – Swedish Ikea. In case of stable growth of the Ukrainian economy, other retailers, not represented on the local market yet, may follow Ikea's example.
Shortage of retail space
The retailers' ambitious plans to expand their store chains naturally led to an increase in demand for retail space. As a result, the vacancy rate in the most popular shopping and entertainment centers of Ukraine was at a record low. In particular, the development company Arricano, which manages four shopping centers in Kyiv and regions of the country, announced that it achieved 99.9% occupancy rate of its facilities. Low vacancy rate was also recorded in Kyiv facilities of Dragon Capital investment company: Pyramid shopping center – 0%, Aladdin shopping center – 1%.
Moreover, almost all the largest shopping and entertainment centers in the country have extensive waiting lists. This trend is especially noticeable in the regions of Ukraine, where in recent years practically no new large shopping centers have been opened. In 2020, the shortage of retail space on regional markets will continue, while in Kyiv with the large-scale commissioning of new large shopping and entertainment centers, the situation may change.
Rental rates increase
The shortage of high-quality retail real estate amid increased demand from retailers has enabled Ukrainian developers to increase rental rates. In the most popular shopping centers of Ukraine, rental prices, expressed in dollars, increased by an average of 20-25%. Market conditions enable management companies to impose conditions and quickly fill in vacant locations in case tenants leave or if they do not want to cooperate on new conditions.
Rental rates may continue increasing this year. This is especially true of Ukraine's million-plus cities, where the new supply of retail space will be extremely limited – Lviv, Odessa and the Dnipro. As for Kyiv, here we should expect some stabilization of the average level of rental rates. First of all, due to the large volume of new supply that is being prepared for launch on the market.
Expansion of development
In the terms of an increase in rental income, one can note an intensification of development activity. Over 300 thousand square meters of new retail space were commissioned in Ukraine last year. The largest shopping malls, opened last year, were Kyiv Blockbuster Mall with rental area of about 100 thousand square meters and River Mall with rental area of almost 55 thousand square meters GLA. However, the next two years may bring more launches of new retail facilities.
According to our estimates, if developers comply with the stated commissioning deadlines, in 2020–2021 a record volume of new retail space – more than 700 thousand square meters – may enter Ukrainian market. The largest shopping centers that may open in the coming years are Kyiv shopping centers Respublika (139 thousand sq. m. GLA), Ocean Mall shopping center (84 thousand sq. m. GLA), Retroville shopping center (77 thousand sq. m. GLA) and the second phase of Rive Gauche (55 thousand sq. m. GLA), as well as Kharkiv shopping center Nikolskyi (52 thousand sq. m. GLA) and Zaporizhzhia Alexander Plaza (48 thousand sq. m. GLA).
A reasonable concept and a good pool of tenants will no longer be enough. The entertainment component and food court will play an increasing role in attracting traffic to the mall.
Intensification of competition
The opening of new large shopping centers will naturally lead to intensification of competition on the retail real estate market. Especially in Kyiv, where the largest volume of new supply is expected. The population of the capital and the purchasing power of Kyiv residents are not growing as significantly as the volume of the retail real estate market, so the redistribution of customer flows between operating and new shopping centers is inevitable.
Under such conditions, developers will have to struggle more actively to attract customers and increase marketing budgets. A reasonable concept and a good pool of tenants will no longer be enough. The entertainment component and food court will play an increasing role in attracting traffic to the mall. This trend is already evident on both Ukrainian and other world markets. The share of entertainment and food operators in the tenant structure of the mall will continue to grow in 2020.
Reconceptualization of obsolete objects
The opening of new modern shopping and entertainment centers will reflect the most the operation of obsolete shopping centers opened 10 or more years ago. In order to minimize the outflow of visitors, they will have to invest in updating and reconceptualization of their facilities. Otherwise, they run the risk of leaving tenants and a significant decrease in profitability. However, many market participants understand this and are already taking measures necessary to hold their positions.
So, Dragon Capital has been updating actively the capital's shopping centers Aladdin and Piramida last year, as well as Vinnytsia Sky Park. It is expected that this year the investment company will begin construction of the second phase of Piramida shopping center, which will allow attracting entertainment operators to the shopping center and creating a full-fledged food court. Significant changes in the concept and tenant mix are also taking place in Kyiv Dream Town shopping center. And the metropolitan shopping center Karavan, which was one of the most successful shopping centers in the country at once, was forced to conduct a complete reconceptualization, and to restart its operation in the outlet format at the end of 2019.
As competition grows, updating other retail facilities will be inevitable. Those who cannot meet the new requirements of consumers and market conditions will be forced to leave it.
Source: Taisiya Litovchenko, Director of Retail & Development Advisor