The commercial real estate of the capital became an example of stability in the conditions of war. From the damage and destruction of objects to the full provision of energy autonomy and support of the population – this is the experience that became the basis for the gradual growth of the market in the first half of 2023. Will this trend continue until the end of the current year?

The commercial real estate and retail sectors of Kyiv, like all of Ukraine, entered 2023 struggling with the consequences of the war. This is the mass migration of the population inside the country and abroad, the decline in the well-being of citizens, consumer attitudes and purchasing power, massive rocket attacks on energy facilities, which caused rolling blackouts or emergency power outages. However, despite the difficulties that occurred at the beginning of the current year and the first half of the year in general, Kyiv shopping centers and retailers were able not only to stabilize their work, but also to demonstrate positive dynamics.

Despite the destruction and damage of many commercial facilities, most of them are being rebuilt and are resuming their activities. New projects are also emerging, although not as intensively as before the full-scale war. According to the data of the UTG consulting company, LAKE PLAZA MFC, HLYBOCHYTSKY TOK and Epicenter shopping center were opened in Kyiv during the war. Another shopping center “Epicentr” is under construction (on the site of a DIY hypermarket “Nova Liniya”) and MFC KYЇVPROEKT City Space, the structure of which includes retail premises.

According to the Ukrainian Council of Shopping Centers (UCSC), the Retail Well-Being Index (RWBI) for the entire first half of 2023 in Kyiv was the lowest in January with an indicator of 28.5 points. December is usually the busiest month for retail. Accordingly, January is always inferior to him in its indicators. Nowadays, to seasonal special factors caused by the war are added to the blight of retail activity. In Kyiv, the factors that put pressure on RWBI, the UCSC calls the decrease of the capital’s population, problems with employment, as well as the unwillingness of consumers to spend money on things that are not essential. The work of shopping centers and power outages, which have lasted with varying intensity since the fall of 2022, had a negative impact. “However, we can say that in January, almost all SCs/SECs, which had such an intention, purchased generators. Since February 11, the energy system of Ukraine has been stabilized, schedules of power outages remained in the past,” – says Dmytro Topolskov, head of the research group of the Ukrainian Council of Trade Centers, head of the research company Ukrainian Research Bureau (URB). Therefore, RWBI continued to grow in the first half of the year. This suggests that both shopping centers and retail operators are gradually recovering: most of them are already went through the process of adaptation and optimization and began the path of recovery, which, however, is gradual and varies depending on the object and product category.

“Trade has endured and transformed, despite significant challenges,” – says Evgenia Loktionova, director of the UTG company.

 

So what did we have as of June 2023?

The stores of almost all foreign chains have resumed work in Ukraine, the UTG company notes. The exception is retail outlets of Inditex, H&M**, IKEA. As if only three operators, but these are significant tenants for shopping centers. For example, Inditex develops several fashionable clothing brands (Zara, Bershka, Stradivarius and others), which occupy considerable space and generate flows of visitors. Many retailers, as Hanna Koryagina noted, the CEO of Nhood Ukraine focused on operating stores and closed unprofitable locations, reassessed their needs and gave up excess space. But there are also those that significantly accelerated development.

The first six months of work in 2023 are characterized as difficult, but at the same time successful, thanks to the signing of new agreements, negotiations on the resumption of the work of European company networks, and the reduction of vacancies.

There was an adjustment of the tenant pool with an emphasis on brands that quickly recovered and continue active development.

Nhood Ukraine also worked on attracting new operators. The company considers the opening of the Fly Kids children’s entertainment center with an area of approximately 3,000 sq.m in the Rive Gauche SEC in Kyiv to be an important event. “Nhood Ukraine”, in particular, deals with management and brokerage, its portfolio currently includes 11 SCs/SECs and other facilities in various cities of Ukraine, six of them in the capital. “If we talk about projects in management, we can record some positive trends,” – Hanna Koryagina continues. – “For example, we try to gradually revise the commercial conditions, but we do this exclusively after a detailed analysis of the financial condition of the tenants.”

So, another trend in general in the market is the gradual reduction of discounts on rent payments.

In turn, the Arricano company (it has four SECs in Ukraine, two of them – “RajON” and “Prospekt” – in Kyiv) tentatively divided the first half of 2023 into two periods: January-February and March-June. During the first two months, the buying mood of visitors was reduced, and the dynamics of recovery of tenant sales is slow. “However, the situation improved in March. Sales of retailers began to grow, demand for space increased, and accordingly, rental rates stabilized.

According to the results of the first half of the year, the results exceeded our expectations,” – says Anna Chubotina, CEO of Arricano. Among the trends of the first half of 2023 BFC Gulliver highlights the activation of offline events. For example, fan meetings with artists, lectures on various topics, exhibitions, children’s entertainment and educational events were organized in the SEC included in this complex. Especially successful, according to the words

Iryna Kruppa, general director of BFC Gulliver, became a joint project of the science museum of the Small Academy of Sciences. In total, over 16,000 people visited the interactive space in three months (April-June). In addition to the social component, regular and stable traffic was ensured in this way. “Despite constant challenges, including regular shelling and tiring nightly worries, Ukrainian business continues to work, adapt internal processes and invest in development,” – says Iryna Kruppa.

 

RETURN TRAFFIC

At the end of March, an event occurred that contributed to trade in the city – the curfew was shortened. Therefore, the Gulliver SEC returned to its traditional work schedule – from 10:00 to 22:00, Silpo supermarket – from 7:00 to 24:00. “Given the central location of our complex, the proximity to a number of hospitals and administrative buildings, the extension of working hours was a necessity,” – says Iryna Kruppa. At the same time, she emphasizes that the increase in the number of stores was gradual, because it took time for people to get used to the new schedule and planning a visit to the SEC at a later time. In general, in the first half of 2023, the SEC saw the return of pre-war seasonal dynamics: a positive increase in traffic in the spring and a moderate decline in attendance with the beginning of summer.

Due to the extension of the work schedule, since March, an increase in the number of visitors in the evening hours has been observed in Arricano SECs in Kyiv. “Extending the working day allows our buyers to plan to visit the centers in the evening after work or to stay longer on the weekend, and therefore it has a positive effect on the sales of tenants,” – notes Anna Chubotina.

According to Dmytro Topolskov, the increase in traffic stimulated the owners of some SCs/SECs to revise the rental rates for certain vacant lots upwards. At first, after evaluating the intensity of attendance indicators by hours, the DREAM SEC decided to leave the work schedule unchanged, that is, until 9:00 p.m., and not 10:00 p.m., as it was before the start of a full-scale war. At the same time, control over the working hours of tenants has been strengthened in the facility.

“In other words, we used to be loyal to the need to close outlets 15 minutes before the closing of the SEC, as the employees did not have time for transport. Currently, there is no such problem, and everyone works according to the rules of the SEC, i.e. until 9:00 p.m. (some tenants work longer on their own schedule),” – said Nadiya Linska, former marketing director of the DREAM SEC (at the time of writing the article, it became known that Nadiya Linska had left this position – ed.). According to her, such a solution is also more effective from the point of view of technical support and the image of the SEC, since visitors do not walk through a half-empty facility. Even with reduced hours of operation by an hour, attendance at DREAM in June returned to pre-war 2021 levels. However, later on, the SEC still decided to update the schedule – from mid-August, it is open until 10:00 p.m.

The gradual recovery of attendance is also evidenced by UTG analytics data: on average, in the second quarter of 2023, this indicator was 364 people/1000 sq.m GLA against 343 people/1000 sq.m GLA in the fourth quarter of 2022. In half a year, the growth seems insignificant, but some SECs even record the return of pre-war traffic volumes. Like the DREAM SEC.

The trend of increasing traffic in the first half of the year was also observed in all Arricano company’s shopping facilities, and in its Kyiv SEC “RaiON”, starting from March, the number of visitors reached pre-war volumes. “We expect further positive dynamics if external factors contribute, such as improved purchasing expectations due to successes at the front and the return of families with children to big cities before the new school season,” – says Anna Chubotina.

 

REDUCTION OF VACANCIES

As of January 2023, according to UTG experts, the vacancy rate in SCs/SECs of Kyiv reached 21.5% (taking into account stores of international brands that did not work). This indicator is comparable in most regions of Ukraine, except for the western ones. Many international operators have resumed work, and other retailers have occupied the retail space freed from the closure of Russian chains (relocation/expansion within the SC/SEC, new tenants for the gallery, change of owners in the founding documents to citizens of Ukraine/other countries). So, as of July 2023, the vacancy rate has decreased, although the market average is still quite high: 18.9%.

However, the situation in each individual object may differ significantly. On average, for the period from January to June 2023, Nhood Ukraine managed to reduce the vacancy rate in its facilities to 7%. At the end of the first half of 2023, the vacancy rate in Arricano’s Kyiv facilities – “RaiON” and “Prospekt” – was 0% and less than 1%, respectively. As Anna Chubotina explained, the high level of occupancy is facilitated by the involvement of tenants in the active marketing activities of the SEC, the adaptation of the population to the challenges of wartime and, as a result, the restoration of attendance and the growth of conversion, which ensures sales to retailers.

“Working ahead of time also helped us. Constantly analyzing the efficiency of tenants in our malls, we quickly rotate stores that do not meet the needs of the target audience or have difficulties with operational activities, which does not allow such operators to achieve the level of sales acceptable for their product category,” – said Anna Chubotina. A total of 36 rental contracts were signed in six months with an area of more than 4000 sq.m.

At the beginning of 2023, the DREAM SEC was already approaching the pre-war vacancy level, and within six months it reached this mark in DREAM berry and even crossed it in DREAM yellow.

 

INCREASE RATE

Since the start of martial law, many commercial property owners have provided retailers with discounts and flexible lease terms. However, in view of the gradual adaptation to a new state and a certain stabilization of the situation in Kyiv, there is a gradual process of increasing rates and their return to the pre-war level, and the flexibility of conditions is decreasing. As Hanna Koryagina explains, it depends on a number of factors, including the segment of the tenant’s business, its sustainability, general market demand, quality and location of the real estate object itself.

So, according to UTG, approximately 60% of tenants already pay rent in full, about 30% pay at a fixed rate (26 UAH/$), and almost 10% have individual discounts. Most management companies are phasing out fixed rates and individual terms and moving operators to full payment. However, UTG estimates that the average rate cut for July 2023 was still -15% from February 2022.

Every month, Arricano analyzes the %OCR (Occupational Cost Ratio) of tenant sales to find their breakeven point. The rates are adjusted according to the dynamics of sales, the recovery of attendance, and the level of occupancy of SECs. The exception is anchor operators, with whom the company works according to an individual approach. Also, since the beginning of this year, Arricano has initiated a number of rotations, and this is not only to strengthen the pool of tenants, but also to bring the rates to market.

DREAM SEC has already returned or is in the process of returning to contractual terms with all tenants. There are groups of operators with whom the mall has signed agreements until the end of the year and even longer. There is a clear correlation between the product segment in which the retailer operates, demand and lease conditions. Yes, as Nadiya Linska said, more the “electronics” product group quickly returned the level of sales and thus made it possible to maintain the level of rates.

In turn, the “furniture” group, despite the period of high demand and price increases, is still in a state of low profitability, so rates are growing less intensively.

However, this market is becoming more active.

At the same time, due to a decrease in demand, the premium segment in the “furniture and décor” product group was reduced in the DREAM SEC, instead, the “medium” price category expanded and “medium+”. Entertainment and product groups of the “childhood” segment are steadily growing and recovering, but not as dynamically as other product categories. The impact is felt churn and target audience changes. But further growth is expected due to seasonality (end of August – beginning of September).

However, despite the noticeable stabilization, neither retailers nor shopping centers are yet ready to completely move away from the discount policy, as Hanna Koryagina noted. Although the company Nhood Ukraine itself is also moving in the direction of reviewing rental rates. Most of the shopping centers with which it works have indexed payments, but there is still a different approach to the formation of rates for operators from different segments. At the same time, the return to the level of 2021 does not apply to those categories that have significantly lost demand from buyers.

 

HARDENING BUSINESS

As a representative of international business, Nhood Ukraine is obliged to prepare five-year forecasts. And in Ukrainian realities, this becomes a special challenge. Currently, the company is developing several options for the development of events, Hanna Koryagina said. “Unfortunately, now we always have to be prepared for negative scenarios,” – she says. But the difficult autumn-winter period of 2022/2023 hardened and taught the trade sphere to work in extremely difficult conditions, and therefore possible difficulties in the next season are no longer frightening. “The generators are available, the hubs are still functioning, the schemes have been worked out,” – commented Nadiya Linska. “We are ready for new challenges, because the team has shown itself to be as efficient as possible and is ready to work in extreme conditions. Ukrainian business is hardened and quickly adapts to realities. We will not be intimidated by a repeated blackout,” – added Iryna Kruppa.

The Arricano company, managing shopping centers, continues to implement a new project – the Lukyanivka SEC in Kyiv. The work is expected to be completed by the end of 2023 from the arrangement of engineering networks, the restoration of the architectural monument located on the territory of the SEC, and its integration into the overall concept of the project. Developer

also continues to work on its improvement. As for active construction on the site, Arricano is ready to renew it “immediately after the victory”.

According to UCSC, the basic scenario of the development of the commercial real estate market until the end of 2023 is gradual growth. The return of such giants as Inditex and H&M can significantly revive the market and send a message to other retailers that the benefits of developing networks in Ukraine are greater than the risks.

At the same time, Hanna Koryagina notes that even now Ukraine does not disappear from the development plans of long-awaited retailers. “Talking with international operators, we understand that the launch of new brands is a matter of security and time,” – she says.