Alexander Fialka is one of the leading experts in the Ukrainian retail and commercial real estate market. His career in the industry began more than 15 years ago at MTI. Since then, Alexander has worked in the largest retail companies in the country, held executive positions in the local division of the German group Adidas and one of the leaders of the Ukrainian fashion retail - MD Group. In 2013, he became one of the founders of the Association of Retailers of Ukraine, as well as a partner of the consulting company Retail & Development Advisor. Among the customers of the latter - the leaders of Ukrainian retail - trading networks Metro, CCC, Adidas, Collin's, LC Waikiki, Vodafone, Justin, Yves Rocher and many others. In an interview with RAU, Alexander spoke about the resumption of the retail and retail real estate market in Ukraine, the prospects and impact on the new metropolitan megamol industry, as well as world trends in the development and future of Ukrainian shopping centers.
- How is the commercial real estate market in Ukraine developing in recent years? Can we talk about market recovery after the 2014-15 crisis?
Undoubtedly, in 2017-18, the situation in Ukraine has stabilized, consumer sentiment began to improve, and retail turnover began to increase. In these circumstances, many retailers have reverted to business scaling, intensifying their development. Given the relatively low supply of new retail space in the country, this has led to an increase in occupancy of existing properties. In turn, developers took advantage of the situation and began to increase rental rates. Only in 2017, the cost of renting in high-quality shopping malls in Kyiv has increased by more than 20%. This is a year of high growth rates. Increase in the cost of rent, and accordingly, rental income of the mall, was observed in 2018-19.
It can be said that since 2017, the time has come for developers, which is still ongoing. In most cases, it is shopping centers that dictate their terms to retailers.
There are no prerequisites for a dramatic change in the situation. There is still a shortage of quality retail space in Ukraine, especially in the regions of the country. Many retailers have large-scale expansion plans.
- At the same time, in 2019-20 years, a record volume of new retail real estate supply may be brought to the Kyiv market. How will this affect the market?
Indeed, in this and the following year, a number of large shopping centers were declared before commissioning. The River Mall has a 64,000-square-foot shopping center on the Left Bank. m, the first turn of the Blockbuster Mall is just around the corner for the launch of the Retroville Mall on Vineyard. Talk about opening other major malls (Ocean Mall, Respublika and others) is too early. However, even the three projects mentioned above will increase the total supply of retail space by more than 200,000 square meters. m. On the one hand, it is a colossal figure. But I am sure that these areas will be absorbed by the market without any problems. The launch of the Kyiv megamolks will not lead to market supersaturation.
- What is the reason for such optimism?
This is not optimism, but objective reality. Demand for quality retail space is still very high and in the coming years will be supported by active population growth, and thus - by the number of consumers. Profile experts predict that by 2025, Kyiv agglomeration will take from 7.5 million to 9.5 million inhabitants, taking into account the surrounding settlements. Given that too many people living within 50 km of Kyiv are employed in the capital, the city operates as one big hub. In addition, the saturation of Kyiv's retail space remains relatively low so far.
According to international research companies, less than 500 square meters per 1,000 inhabitants of the capital. m of retail space.
By this indicator, Kyiv is far behind other Eastern European capitals - Budapest, Warsaw, Riga and even Minsk. For example, the saturation of the markets of Bratislava and Vilnius is almost three times higher than the Kyiv indicator (data from Colliers International).
- With this in mind, can we expect the revitalization of shopping centers in Kyiv and the regions of the country?
Much will depend on the future of Ukraine as a whole. Development is a complex business with a long project life and return on investment.
It is possible to step up investment in the industry when stability, available capital, transparent rules of the game and an independent judiciary emerge in the country.
In the meantime, protection of property rights in Ukraine leaves much to be desired, and interest rates on loans are too high. In conditions of instability, investors prefer "fast" money.
New needs
- Despite this, in recent years the expansion of international brands has intensified in Ukraine. From your point of view, will international companies be able to gain a foothold in the market?
There is no doubt in H&M's success - it is a systematic international player with a professional approach. So it is not surprising that all their Ukrainian stores have been profitable since day one. Therefore, the retailer is ready to scale the network in Kyiv and go to the regions.
I think in the first half of next year H&M will open a few more stores in the capital.
Of the long-standing players in the market, it is worth noting the Polish fashion holding LPP, which owns the brands Reserved, Cropp, Mohito, House and SinSay. Over the last three years, the company has almost tripled the total area of its stores in Ukraine. It is especially pleasing that it is a publicly traded company. Their investment and dynamic development in the country shows that international equity trusts in Ukraine.
- Turkish fashion retailers such as LC Waikiki, Koton, DeFacto and others are also actively developing in the country. What is the reason for their expansion and what makes Turkish retail so successful in Ukraine?
Turkish companies are motivated by the difficult situation in their home region. Turkey has seen a devaluation of its national currency, forcing them to look for ways to diversify. At the same time, the European market is very competitive, and Ukraine is empty - here it is still possible to expect significant growth and great prospects. This confirms the success of LC Waikiki, which has grown significantly in recent years, expanding its network to 32 stores in the country and becoming well established in the market.
Other major Turkish retailers, such as Koton and DeFacto, were late in entering Ukraine.
Back in 2015-16, it would be much easier for them to scale the network. Right now, they have only opened a few stores and are still analyzing their performance, without deciding on further expansion.
- There are virtually no international developers in Ukraine, but domestic investors remain willing to invest in shopping malls. The same Vagif Aliyev plans to build a network of megamolks in the capital after the Lavina Mall. The closest one is Blockbuster Mall. How do you think these projects will be successful?
Only time will tell. By far, Vagif Aliyev has the best locations in the city, including the Blockbuster Mall. He is a large-scale businessman who not for nothing won the prestigious Retail & Development Business Awards 2019 in the "Person of the Year in Development" nomination. Aliyev was recognized as the best by the market itself, everyone understands that his projects dramatically change the face of commercial real estate in Kyiv.
- From your point of view, how can existing malls be kept afloat as competition grows?
It all depends on how relevant they can be when compared to new projects. Shopping malls built ten years ago or earlier will have to change dramatically in one way or another. The old formats are no longer working, so developers are already rethinking their objects and reconfiguring them. Examples of such changes can be observed in the Kyiv mall Dream Town, Caravan and some regional projects.
But everyone needs to understand that the most important resource in a dynamic rhythm of life is time, and many consumers are simply not ready to spend it on shopping.
Therefore, developers are facing new challenges. How can a potential customer spend as much time in their space as possible? And what is the most important thing to do to ensure that visitor time is converted into sales as efficiently as possible?
- What are developers already doing to stay relevant to the next generation of buyers?
In the West, many management companies are dynamically updating their stores to attract more visitors. They alter the interior design, making it ECO-style, use more wood elements, plant trees directly in the mall, sell full-fledged walkways.
Another noticeable trend is the increase in the share of food courts, in some shopping centers in Europe, it accounts for an incredible 22% of the facility's lease space.
Entertainment also plays an important role in modern shopping malls. However, the reduction of the area allocated for the shopping gallery, forcing developers to seek answers to questions about new ways to make money. Popular theories now are that in the future, the mall will make more money on advertising. Large international airports have long been converting passenger traffic into advertising revenue. It is possible that in the future, shopping malls with more visitors will be able to receive more money from advertising in their facilities.
Ukrainian realities
- Are there any global trends in Ukraine? How do Ukrainian malls change in line with the change in consumer preferences?
Unfortunately, the changes in Ukraine are not so fast. The main reason for this is the low level of competition. The undeveloped market allows the mall to remain relatively inert. But there are exceptions. Individual system and professional players are changing the concept of their assets in line with new trends. For example, Retroville, which is being built by a Lithuanian investor in Kyiv, changed the concept, significantly increasing the area of the food court, and also replacing the ice rink with a full-fledged "city square", which will be located in the atrium of the mall. The concept of the future shopping mall Lukianovka also changed the developer Arricano. The company is relying on the multifunctionality of the facility, planning to implement a large co-trading space within the complex.
At the same time, many build shopping centers without any development strategy, considering development as a way of capitalization, not as a systematic business. However, without professional management, such facilities are doomed in the next 5-10 years.
- From your point of view, which of the existing and new Ukrainian shopping malls can be successful in the long run? Can you identify the best projects on the market?
Of the new malls should be highlighted mall River Mall, the success of which can not be doubted. Overall, the best Ukrainian shopping malls named the market itself during the Retail & Develoment Business Awards 2019.
Unconditional # 1 among large objects is the Kyiv Ocean Plaza shopping mall.
For the first time, the object is recognized as the best mall for the first time: the turnover that retailers receive here from the square meter, is outstanding not only within Ukraine but also within the CIS.
- Online commerce is actively developing around the world. In Ukraine, its share in the total turnover is still not large. Why?
Indeed, the share of e-commerce in the country's retail turnover does not exceed 3%, but this market is developing very dynamically. According to various estimates, online commerce is growing by 30-40% per year. Large international players are entering the market, which are stepping up the development of the industry. The same Glovo and Uber Eats have strongly influenced the product delivery market.
With the current growth rate in the next 5-10 years, e-commerce can significantly affect the development of retail and commercial real estate.
At the same time, the industry could develop much more dynamically in the presence of modern infrastructure. Unfortunately, the transport infrastructure in Ukraine is, to say the least, very underdeveloped. Roads from Kyiv to the regions are in a deplorable state, which greatly slows down and complicates the process of goods delivery. If the state can change the situation and attract investments in the industry, ensure stable rules of the game and guarantee ownership, then e-commerce, retail and the country as a whole will be able to develop much faster.
