RUSSIAN RETAIL PROPERTY MARKET REPORT H1 2013 HIGHLIGHTS Retail Property Market Report by MAGAZIN MAGAZINOV H1 2013

The most significant event in the retail property market was the launch of outlet centers, Fashion House Moscow Outlet Centre and Vnukovo Outlet Village. Three outlet projects announced to be carried out in the capital have started actively competing for customers. Within the next year this segment is unlikely to see any new names.

The first half of 2013 can be considered as a relatively stable period for shopping centers in Moscow. The largest projects announced for 2013 are expected to be opened only by the end of the year, the vacancy rates have slightly decreased while average rental rates have experienced certain growth similar to the last year’s dynamics.

Developers in Moscow are actively trying out small formats: most of the retail schemes opened or those to be opened in 2013 are community centers.

In early June paid parking was introduced in the center of Moscow. In our opinion, this may lead to a short-term decrease in the popularity of some central retail corridors among tenants.

Development of street retail is expected to be enhanced in the long term with the construction of car-free zones in Moscow. Twenty pedestrian zones are expected to be completed by late 2013.

The most active participants in the street retail market remain restaurants and cafes, banks and food chains. International premium brands show their growing interest in Moscow high-streets .

The vector of development of the Russian retail property market keeps shifting towards smaller cities. A significant number of shopping centers announced to be opened in 2013 are located in cities or towns with the population of below 500,000 people.

This year may become record-breaking for Russia in terms of commissioned retail spaces as part of quality shopping centers – provided that all the announced objects are opened by the end of the year.

In the first half of 2013 Russian retail property market saw landmark investment transactions – with Metropolis in Moscow and Aura in Novosibirsk sold. SHOPPING CENTERS | MOSCOW SHOPPING CENTERS | MOSCOW Retail Property Market Report by MAGAZIN MAGAZINOV H1 2013 SUPPLY During the first half of 2013 the capital’s retail property market acquired four DYNAMICS OF LEASABLE SPACES COMMISSIONING IN MOSCOW SHOPPING CENTERS new up-to-date objects with the total leasable area of 77,800 sq m. The centers 2006-2013 that underwent commissioning were Tropa and RIO, as well as the first phases of Vnukovo Outlet Village and Fashion House Moscow Outlet Centre. Tropa’s GBA is 7,800 sq m, GLA is 5,500 sq m. The shopping center is located within a walking distance from Akademicheskaya and Profsoyuznaya subway stations. Tropa has three shopping levels and includes a surface parking lot for 117 cars. Among the center’s anchors are Perekrestok and Sportmaster. RIO’s GBA is 75,000 sq m, while GLA is 40,000 sq m. It is located at Leninsky Avenue 109. The technical commissioning took place on June 21, while the official commissioning will be in August. RIO includes 5 levels, and the parking lot provides enough space for 800 cars. The project developer is Tashir Group. Undoubtedly, among the landmark events that happened in the first half of 2013 is the appearance in the market of two new outlet centers. Vnukovo Outlet Village opened in May. It is located in Kievskoye Highway, the first phase has GBA of 29,700 sq m and GLA of 16,600 sq m. Fashion House Moscow Outlet Centre opened on June 27. It is located on Leningradskoye Highway, the first phase has GBA of 22,300 sq m and GLA of 15,700 sq m.

The total supply of leasable spaces in the capital’s modern shopping centers, BREAKDOWN OF LEASABLE SPACES AT MODERN SHOPPING CENTERS PER ADMINISTRATIVE as of early July 2013, is 4.068 mln sq m (127 operating objects). The market DISTRICTS OF MOSCOW saturation rate for residents of Moscow (considering modern retail space) has reached 340 sq m GLA per 1,000 inhabitants. The commissioning of new objects in mid 2013 has made slight changes to the breakdown of leasable spaces at shopping centers by Moscow Administrative Districts. As we can see, the biggest amount of useful spaces in modern shopping centers is still located in the Southern, North-Eastern and Northern Administrative Districts (16.7%, 13.5% and 12.1%, respectively). The smallest amount of useful spaces is located in the Eastern, Troitsky and Novomoskovsky Districts (New Moscow) and in (3.8%, 3.2% and 0.2% respectively). SHOPPING CENTERS | MOSCOW Retail Property Market Report by MAGAZIN MAGAZINOV H1 2013 DEMAND

During the first half of 2013 the capital’s market saw high demand on the part of INTERNATIONAL BRANDS WHO OPENED THEIR FIRST STORES IN MOSCOW potential tenants – federal and international retail chains. Russia still remains one of the top-priority markets for international retailers. It Brand Segment Location is customary for these players to open first Russian stores in Moscow. For The North Face Clothes Mega Belaya Dacha example, from January to June 2013 a number of stores like The North Face, Lavazza Espression, Takko Fashion, Trollbeads, Marugame Seimen, Johnny Lavazza espression Dining Pokrovka St. Rockets, Brook Brothers, REDValentino, Boardriders and Herve Leger opened Takko Fashion Clothes Zolotoy Vavilon Rostokino in the capital. Besides, among the landmark entries to the market we can name the opening of a Tiffany boutique at GUM by the brand’s owners, without the Trollbeads Accessories (Jewellery) Atrium participation of Russian partners. Marugame Seimen Dining Pyatnitskaya St. Among the entries anticipated in the second half of 2013 – early 2014 are REDValentino Clothes GUM Agnona, Paule Ka, Krispi Crème, By Malene Birger, SFIZIO, Heavenly Yogurt, Brooks Brothers Clothes GUM WFSmith, Forever 21, Shake Snack, Penty, Collezione, Defacto (will start Kapitoliy in Vernadskogo expanding from the south of the country) and others, about 20 new international Johnny Rockets Dining brands in total. Avenue Herve Leger Clothes Kuznetsky Most St.

In the first six months of 2013 there was a decrease in average vacancy rates Boardriders Clothes Mega Belaya Dacha at shopping centers. As of June 2013, vacancy rates reached 2.5% (-0.5% YoY). At present, in Moscow retail property market, the overall demand on the part of potential tenants is higher than the new supply growth rate. VACANCY RATE DYNAMICS

INVESTMENT TRANSACTIONS In the first half of 2013 the largest investment transaction in the history of Russian commercial property market was closed. Morgan Stanley Real Estate Investing purchased Metropolis shopping and entertainment center in Moscow from Capital Partners. The asset GBA is 205,000 sq m and GLA is 82,000 sq m. The transaction volume totaled USD 1.2 bln. This spring shopping and entertainment center Shchuka (GBA 100,000 sq m, GLA 42,000 sq m) was once again put up for sale. The asset's approximate price is USD 450 mln, and the current owner is DS Development. SHOPPING CENTERS | MOSCOW Retail Property Market Report by MAGAZIN MAGAZINOV H1 2013 RENTS AVERAGE RENTAL RATES AT SHOPPING CENTERS IN MOSCOW In the first half of 2013 rental rates at shopping centers in Moscow grew YoY 7– 10% on the average. Average rates, USD/sq m/year (excl. VAT and At present, rental rates for anchor tenants vary from USD 170 to USD 600 per operating cost) sq m/year (VAT and operating cost-exclusive), depending on the unit size, Type of Tenant Space, sq.m profile and other criteria. Lease contracts are signed for 10 to 25 years. July 2012 July 2013 Maintenance payments for larger anchors average USD40 to 60 per sq m/year before VAT. For smaller anchor tenants, it is USD80 to 120 before VAT. Food Hypermarket >8,000 150 – 250 170 – 300

The rental rates growth was noted in a number of segments like food Food Hypermarket (City 4,000 – 8,000 200 – 280 250 – 350 hypermarkets (in July 2013 rates made USD170 to 300 per sq m/year), city Format) food hypermarkets (USD250 to 350 per sq m/year), food supermarkets DIY >10,000 180 – 250 180 – 250 (USD400 to 600 per sq m/year), kids’ goods stores (USD350 to 600 per sq m/year) and multiplex cinemas (USD180 to 270 per sq m/year). Food Supermarket 1,000 – 4,000 300 – 500 400 – 600 Rental rates for larger clothes stores range from USD300 to 500 per sq m/year. Electronics and Home 1,500 – 4,500 300 – 600 300 – 600 Average rates for fashion gallery tenants, however, remained stable. Rates vary Appliance Store from USD2,200–3,200 for smaller (under 50 sq m) shops to USD600–800 for larger (500–1,200 sq m) stores. Contracts with fashion galley tenants are Sports Goods 4,000 – 6,000 250 – 350 250 – 350 typically concluded for lease periods of 3 to 5 years. Maintenance costs for these tenants usually range from USD150 to 200 per sq m/year before VAT. Sports Goods 1,200 – 2,500 350 – 550 350 – 550

Lease rates average USD700 to 900 per sq m/year for restaurants, USD1,200 Kids' Goods 1,000 – 2,500 300 – 500 350 – 600 to 1,800 for cafés, and USD1,800 to 2,300 for food court eateries. These tenants normally sign contracts for five years with maintenance costs ranging Clothes 1,500 – 2,500 280 – 500 300 – 500 from USD170 to 220 per sq m/year before VAT. Multiplex Cinema 2,500 – 4,000 150 – 220 180 – 270

500 – 1,200 600 – 800 600 – 800

250 – 500 800 – 1,200 800 – 1,200 Fashion Gallery 100 – 250 1,200 – 1,700 1,200 – 1,700

50 – 100 1,700 – 2,300 1,700 – 2,500

<50 2,200 – 3,200 2,200 – 3,200

Restaurant 300 – 600 600 – 800 700 – 900

Coffee Shop 150 – 300 1,000 – 1,500 1,200 – 1,800

Food Court 50 – 100 1,700 – 2,000 1,800 – 2,500 SHOPPING CENTERS | MOSCOW Retail Property Market Report by MAGAZIN MAGAZINOV H1 2013 FORECAST

In the first half of 2013 the volume of new retail space supply in Moscow is SHOPPING CENTERS TO BE COMMISSIONED IN 2013 22.5% of the annual volume forecasted. Most new, advanced shopping centers are expected to be commissioned in the second half of the year: these are 8 GBA, GLA, Name Address Developer sites having the total leasable area of 268,000 sq m. The largest projects sq m sq m announced are Vegas (GLA 112,500 sq m) at Crocus City, and GoodZone Vegas at Crocus Moscow Ring 283,000 112,500 Crocus Group (GLA 56,000 sq m). City Road, 66 km One distinctive trend in 2013 is the intensive development of relatively small- Kashirskoe size retail schemes. A major part of shopping centers recently commissioned or GoodZone Highway, bld. 120,000 56 ,00 Immofinanz Group 12 to be commissioned soon are community-level developments (Tropa, Sheremetyevs Raykin Plaza 70,000 35,000 Tashir Moskvorechie, Izmailovsky, etc.) kaya Street, 8 Still, things may easily change in two years as a lot of large-scale projects are 24 Kashirskoe to enter the market, to include: Vegas-Kuntsevo (GLA 113,400 sq m), Aviapark Moskvorechie Highway, bld. 30,000 19,500 Garant-Invest 12 (GLA 252,000 sq m), Columbus (GLA 140,000 sq m), Mozaika (GLA 68,000 sq 4-ya m), Butovo Mall (GLA 65,000 sq m), and others. Izmailovsky Parkovaya 16 ,700 12,300 Don-Story Invest St., 16 36 Miklukho- MС 15 ,700 12,400 N/A Maklaya St. Pyatnitskoe Otrada, phase 3 Highway, bld. - 11,200 Elt 2

Alfavit Polyany St. 14,000 9 ,100 Christina NVN

VEGAS AT CROCUS CITY SHOPPING CENTERS | MOSCOW Retail Property Market Report by MAGAZIN MAGAZINOV H1 2013 STREET RETAIL | MOSCOW STREET RETAIL | MOSCOW Retail Property Market Report by MAGAZIN MAGAZINOV H1 2013 SUPPLY

MAGAZIN MAGAZINOV considers 17 key shopping corridors, mostly located in the city center. The total leasable area in Moscow's key shopping corridors is about 250,000 sq m. None of the assets commissioned in the first half of 2013 could greatly affect the level of space supply in the street retail segment.

DEMAND Retailers' demand in the first half of 2013 was steady and high. The vacancy rate ranged from 3 to 4%. Catering, clothes and footwear chains, food operators, and banks rank first in the structure of demand for street retail spaces (over 60% of all requests that the company received within the first half of the year). Catering companies are still the most active street retail market players: the demand by both full-fledged restaurants and fast food eateries has remained DYNAMICS OF DEMAND FOR STREET RETAIL SPACE steady and high for a third year in a row. Retail operators also opt for larger leasable areas. A noticeable trend in the first half of the year is a significant rise in the food chains demand for street retail space. This is true both for the key market players, and the second-rank companies. The banks' demand for street retail has been growing steadily. Their share of requests has been increasing every year. This year the average requested area indicator stabilized. On the average a bank branch needs 150 sq m which is 1.5–2 times less than compared to 2010–2011. Our experts have emphasized the continuing reduction of demand on behalf of clothes and footwear stores. The share of requests from these customers has been steadily dropping for the last 4 years. A significant part of such requests is for flagship stores of international brand chains. Since the end of 2012 we have been witnessing international premium brands showing greater interest in the streets of Moscow which is partly due to the proactive marketing policy for Metropol Hotel's retail space.

Note. In 2013 our experts refined the tenants classification parameters. For this reason the absolute figures have been adjusted with regard to those listed in the previous reviews. STREET RETAIL | MOSCOW Retail Property Market Report by MAGAZIN MAGAZINOV H1 2013

Small (50 to 150 sq m) lots are still the preferred option for most tenants. Large THE STRUCTURE OF DEMAND FOR STREET RETAIL SPACE spaces (over 1,000 sq m) are also scarce because of the rising demand from retailers (including food stores), and limited supply. A number of bright openings was to be seen in 2013. For instance, The Budha bar opened in Tsvetnoy Boulevard at Legendy Tsvetnogo Business Center, following the one in . Lavazza Espression came to Moscow with ambitious expansion plans. The company opened its first branded coffee shop in Pokrovka Street. Some exciting openings are expected in the street retail segment in H2, 2013. Among them are Krispi Creme shops, Agnona boutique as well as flagship stores by Hundai, Tommy Hilfiger, and one well-known international premium brand. We should emphasize Kuznetsky Most Street, where a substantial fraction of the tenants rotated in the first half of the year. Among the newcomers are catering retailers, and premium brands that generally fit the established local concept further supported by converting the street's bigger part into a pedestrian-only area.

An important event for the Moscow street retail segment is the City initiatives related to introducing pedestrian-only areas and new parking regulations in the downtown. Both initiatives will affect the segment both in near, and distant future. We are forecasting different short-term, and long-term effects. In the short-term outlook, the tenants will most probably be upset with retail performance at the locations affected by the initiatives, and some may even leave the location. The consumers' inability to quickly adapt to the new parking and traffic (pedestrian- only areas) regulations, and the beautification works in progress may adversely affect the traffic. However, in the long run, these initiatives will boost the street retail segment. People will get used to the proper way of parking, and the improved downtown with its pedestrian-only areas will certainly attract the citizens of Moscow and tourists. STREET RETAIL | MOSCOW Retail Property Market Report by MAGAZIN MAGAZINOV H1 2013

RENTAL RATES RENTAL RATES IN MOSCOW'S KEY SHOPPING CORRIDORS Rates vary greatly depending on the location and the property purpose AS OF JULY 2013 (format). Some examples are shown below. Average rental rates (150–200 sq m Lease contracts are typically signed for 3 to 5 years. The rents are adjusted lot) USD/1 sq m/year (VAT-exclusive) by 5 to 10% annually. Shopping Corridor July 2012 July 2013

Bolshaya Dorogomilovskaya Street 2,000 – 3,000 2,000 – 3,000

Kuznetsky Most Street 3,000 – 4,000 3,000 – 4,000 Kutuzovsky Avenue (from the city center to the 2,000 – 3,000 2,000 – 3,000 Third ) Leninsky Avenue (from the city center to the 2,000 – 3,000 2,000 – 3,000 )

Maroseyka Street 2,500 – 3,000 2,800 – 3,200

AVERAGE STREET RETAIL RENTAL RATES Myasnitskaya Street (from the city center to VS. THE PURPOSE AS OF JULY 2013 1,500 – 2,000 1,800 – 2,200 Chistoprudny Boulevard)

Average rental rates in Nikolskaya Street 2,000 – 2,500 2,500 – 3,000 Purpose Area, sq m July, 2013 *USD/sq m/year (VAT-exclusive) Novy Arbat Street (from the city center to 2,000 – 3,000 2,500 – 3,000 Novinsky Boulevard) Banks 100 – 300 1,500 – 2,500 < 100 2,000 – 3,000 Petrovka Street 3,500 – 4,500 3,500 – 4,500

Restaurants 100 – 300 1,300 – 2,000 Mira Avenue (from the city center to the Third 1,500 – 2,000 1,500 – 2,000 Ring Road) 300 – 1,000 700 – 1,000 Pokrovka Street (from the city center to Clothes and Footwear < 200 1,200 – 2,000 1,500 – 2,000 1,500 – 2,000 Chistoprudny Boulevard) Food 1,000 – 3,000 400 – 700 Stary Arbat Street 2,000 – 3,000 2,500 – 3,000 Furniture and Home 150 – 500 700 – 1,500 Decoration Stoleshnikov Lane 4,000 – 6,000 4,000 – 6,000 Services 40 – 100 2,000 – 3,500 Electronics and Home Street (even numbers – from 100 – 1,000 800 – 2,000 5,000 – 7,000 5,000 – 7,000 Appliances Okhotny Ryad to Pushkinskaya Square) Cosmetics and (odd numbers – from 200 – 400 1,500 – 2,500 3,000 – 4,500 3,000 – 4,500 Perfumery Okhotny Ryad to Pushkinskaya Square) Kids' Goods 500 – 1,700 400 – 600 Tverskaya Street (even numbers – from Pushkinskaya Square to Mayakovskaya 3,000 – 4,500 3,000 – 4,500 * Note. The average rental rates are indicated for street retail schemes facing the streets within the Third Ring Road. subway station) SHOPPING CENTERS | REGIONS SHOPPING CENTERS | REGIONS Retail Property Market Report by MAGAZIN MAGAZINOV H1 2013 SUPPLY DYNAMICS OF LEASABLE SPACE IN MODERN SHOPPING CENTERS IN RUSSIA (2008–2013) According to MAGAZIN MAGAZINOV, the total capacity of high-quality retail property market in Russia (total leasable area in modern shopping centers) as of July 1st, 2013, is about 13.8 mln sq m. Since 2008 the number has grown 2.3-fold. The average annual growth rate for available high-quality retail space is 1.2 to 1.7 mln sq m. The record-breaking growth rate was in 2008, and then the market slowed down due to the crisis. In 2012 the market growth rate was restoring which affected the final volume of new space supply (GLA of approx. 1.7 mln sq m). In early 2009 Moscow's share in the Russian retail property market was 35%, while by mid-2013 it dropped to 30%. In recent years the capital's new supply share has been shrinking: the regions are getting more attractive for retail property developers. In the first half of 2013 in Russia (excluding Moscow) 6 modern shopping centers were commissioned: Aquarel in Volgograd (GLA 90,900 sq m), Continent in Bucharestskaya St. in St. Petersburg (GLA 52,300 sq m), phase 2 of Continent in Zvyozdnaya St. in St. Petersburg (GLA 40,000 sq m), Mega GriNN in Belgorod (GLA 32,500 sq m), Europa in Kursk (GLA 20,400 sq m), and Festival in Angarsk (GLA 14,200 sq m). The most telling one, in our opinion, is Aquarel (by Immochan). It is the largest TOTAL LEASABLE PROPERTY SURPLUS AT MODERN SHOPPING CENTERS IN RUSSIA (2008– shopping and entertainment center in Volgograd and it houses the city's first 2012) Auchan, Leroy Merlin, and Decathlon hypermarkets. (MOSCOW VS. REGIONS) The Russian retail property market development is uneven. The city size, that is, its consumer market capacity is one of the most important appealing factors. As a rule, the larger the city, the better its retail property market is developed as expressed in the total retail property volume available at high-quality shopping centers. SHOPPING CENTERS | REGIONS Retail Property Market Report by MAGAZIN MAGAZINOV H1 2013

The total leasable retail area at modern shopping centers in Moscow is 4.07 TOTAL LEASABLE AREA AT MODERN SHOPPING CENTERS (BY CITY GROUPS) AS OF JULY mln sq m (340 sq m per 1,000 citizens), in St. Petersburg it is 1.96 mln sq m 2013 (395 sq m per 1,000 citizens), in cities with the population of over 1 mln people it is 3.84 mln sq m (258 sq m per 1,000 citizens on the average), in cities with the population of 500,000 to 1 mln people it is 1.89 mln sq m (151 sq m per 1,000 citizens on the average), in cities with the population of 300,000 to 500,000 people it is 1.18 mln sq m (118 sq m per 1,000 citizens on the average).

INVESTMENT TRANSACTIONS In the first half of 2013 the investment transaction over Aura, one of the largest shopping and entertainment centers in Novosibirsk, was closed. The seller was Renaissance Construction, and the purchaser was Rosevrodevelopment. Aura Shopping Center was opened in 2011. Its total area is 150,000 sq m (GLA of 62,000 sq m). The anchor tenants are О’Key, Media Markt, Kronverk Cinema, Cosmik. The new owner is going to continue with the second phase.

LEASABLE AREA SHARES AT MODERN SHOPPING CENTERS (BOTH EXISTING AND TO BE COMMISSIONED IN 2013) BY CITY GROUPS AS OF JULY, 2013 FORECAST As the retail property market is getting saturated in metropolitan cities, the focus is shifted to smaller cities. A major part of projects to be commissioned in 2013 is located in relatively small cities. A total of 45 shopping centers having GLA of 1.53 mln sq m will appear in Russia in the second half of 2013. Should all of them be commissioned, the total annual new supply will be 1.86 mln sq m (a record figure over the recent years). CONTACTS

HEAD OF RESEARCH AND CONSULTING STREET RETAIL DEPARTMENT Andrey Vasyutkin Marina Markova [email protected] [email protected]

HEAD OF GEOMARKETING RESEARCH SHOPPING CENTERS DEPARTMENT Aleksei Nikiforov Diana Zaznobina [email protected] [email protected] Narmina Gorina [email protected]

MANAGING DIRECTOR Dmitry Burlov [email protected] BUSINESS DEVELOPMENT Maksim Mankevich [email protected] 40/2 Prechistenka street HEAD OF PR Moscow 119034 Russia Julia Mosolova Т: +7 (495) 790 00 00 [email protected] Ф: +7 (495) 725 26 65 [email protected]