RETAIL MARKET REPORT GEORGIA | 2015 Galleria Tbilisi Contents Executive summary 3 Georgia Country Profile 4 Retail Market Fundamentals 6 Georgia Retail Market Overview 7 Tbilisi Retail Market Overview 8 Batumi Retail Market Overview 13 Kutaisi Retail Market Overview 17 Conclusions and Outlook 22 Appendix 1 - Success Story 23 Appendix 2 - property registration and construction permits 25 Appendix 3 - Primary Information Sources, Data Used for the Study, Definition and Assumptions 27 Disclaimer 29 Project Team 30 Colliers Global Stats at a Glance 31 Team Georgia at a Glance 32 2 Retail Market Report | Georgia | 2015 Executive summary Retail trade represents one of the largest contributing sectors to The estimated prime retail yield in Tbilisi is 13% for shopping centres Georgia’s GDP. and 12% for street retail, which exceeds average CEE figures (8.6% and Retail trade is one of the largest sector in Georgian economy, providing 9.1%) significantly. 9.4% of country’s GDP in 2015 (preliminary data). The average y-o-y growth rate of the sector was 11% during 2009-2015. Together with Tbilisi’s retail spaces experienced significant occupier activity in wholesale trade, the entire sector creates around 15% of GDP and 2015. employs approximately 19% (143,187 persons in the fourth quarter of In 2015, there was a notable increase in Georgia’s retail stock. Almost 2015) of total employed persons in Georgia. 150 new stores were opened in East Point, including Carrefour (10,105 2 2 2 Along with the retail trade sector’s expansion, annual per capita retail m ), Zara (2,224 m ) and Elit Electronics (2,222 m ), which accounted expenditure has risen over the last decade. Per capita retail spending for a significant proportion of the leased space. After the opening of increased by 1.95 times from GEL 675 in 2006 to GEL 1,322 (around the new 5-screen, 740-seat cinema in Tbilisi, Cavea then added another USD 581) in 2015. This is low in comparison to the international market cinema in East Point, offering 10 screens and 1,580 seats and equipped and is reflected in its structure. For example, overall food expenditure with IMAX technology. remains very high (60% in 2015), although there is clear evidence that Among new entrants should be mentioned the first DIY hypermarket this percentage is decreasing (69% in 2006). Domino (11,114 m2) and the Lebowski Bowling Club (1,500 m2, 12 professional lanes). Both of them started operations in East Point. The Tbilisi remains Georgia’s top contributor to the growing retail space Spanish fashion brand Mango changed franchisee partners and re- supply of three main cities (Tbilisi, Batumi and Kutaisi). entered the market in 2015, opening two Tbilisi-based stores. Snap In 2015, Georgia’s supply of retail space (in Tbilisi, Batumi and Kutaisi) Fitness opened the first branch in Shopping @ Axis and has expansion 2 increased by 11%, exceeding 1,230,000 m . Despite the fact that the plans in 2016. Hard Rock Café also announced to enter the market next country’s retail landscape is still dominated by older, Soviet-era style year. stock, the total supply of modern shopping centre space increased from 16% to 25% last year and continues to rise. At 71,780 m2, the majority Opposite to Tbilisi, occupier demand Batumi and Kutaisi remains at the of this new space came from East Point, Georgia’s largest shopping very low level the mentioned fact causes the extremely high vacancy mall which opened in Tbilisi in the second half of 2015. rates of recently opened shopping centres in regional cities. According to announced future plans of retailers the tendency will be changed At 77%, the bulk of the supply is concentrated in Tbilisi, followed then during next two years. by Batumi (12%) and Kutaisi (11%). There are virtually no modern shopping centres outside of these cities and it is clear that Tbilisi will The highest rental rates were achieved in Tbilisi’s high streets. remain the major source of new supply over the next few years. The weighted average rent in high streets of Tbilisi equals USD 36 /m2, According to announced future projects, Georgia’s retail supply will rise exceeding the same figure in modern shopping centres and secondary by 166,432 m2 in 2016 and by 24,500 m2 in 2017. Hualing Mall (110,000 streets 2.25 and 1.7 times respectively. In 2015, the weighted average m2), Galleria Tbilisi (24,500 m2) and Gldani Central (22,452 m2) are the rent in Tbilisi decreased by 6.2% in secondary streets when compared largest announced projects in Tbilisi. Metro Atlas Georgia LLC will to 2014 and did not change significantly in high streets and modern launch the largest shopping centre in Batumi with 14,000 m2 of GLA in shopping centres. H2 2016. The average vacancy rate is higher in modern shopping centres (17%) Despite a robust development pipeline, Tbilisi remains far behind when compared to street retail locations (7%-8%). It is worth noting the CEE average for modern shopping centre space. that recently opened shopping centres are experiencing low vacancy The development pipeline suggests that Tbilisi’s shopping centre rates due to active leasing campaigns that start one to one and a half supply will almost double during the next four years - which will years before the opening date. When compared to 2014 figures, we see increase shopping centre stock per thousand inhabitants and exceed an improving picture, with vacancy rates decreasing in shopping the same level in Sofia. This new supply must be supported by centres and high streets by 5% and 4% respectively. economic growth and higher consumer spending to avoid declining Shopping centres in Kutaisi and Batumi are struggling with rents and increasing vacancy rates. extremely high vacancy rates. Prime rents in Tbilisi stand below the CEE average, while yields In 2015, the shopping centre supply in Kutaisi and Batumi increased by exceed average CEE figures significantly. 1.7 and 2.3 times (respectively) when compared to the same figures in The prime high street rent in Tbilisi is USD 56 /m2, which exceeds 2014. However, this increase was not followed by occupier demand, several Eastern European cities (Tallinn, Riga, Bratislava, Sofia, and and vacancy rates climbed to their peaks, hitting 48% in Kutaisi and Vilnius), but is 36% less than the average CEE figure. 51% in Batumi. In contrast, street retail vacancies remained low, and stood at 5% in Kutaisi and 9% in Batumi. The prime shopping centre rent in Tbilisi exceeds only Zagreb and equals USD 33 /m2, which is around half of the CEE average. The weighted average rents experienced little change in 2015, and ranged between USD 13-16 /m2 in Batumi and USD 11-13 /m2 in Kutaisi. 3 Retail Market Report | Georgia | 2015 Georgia – Country Profile Gudauri Introduction 14.8% average seen last decade. It is worth noting that a large percentage Located at the crossroads of Europe and Asia, the country of Georgia of employed population are self-employed. Currently, 15.4% of the borders Turkey, Armenia, Azerbaijan and Russia. Georgia occupies an area working population are employed by Public sector, while 84.6% work in the of 69,700 square kilometres and is home to a population of 3.7 million non-public sector. In 2015, the three industrial sectors that employed the people. The country’s land borders run a length of 1,839 kilometres, while largest share of people were wholesale and retail trade, industry, and Black Sea coastline is 315 kilometres. There are two autonomous republics construction. and 71 municipalities (including 12 self-governing cities) in Georgia. Since emerging from the Soviet Union as an independent country in 1991, Economy Georgia has implemented large-scale reforms, leading to the country’s Focused on improving efficiency and overcoming expected difficulties, political and economic transformation. These changes have made clear the Georgia’s economy is structured to improve efficiency and overcome country’s choice to strengthen democracy and further their relationship difficulties, thus allowing the private sector to maintain inclusive growth. with the EU. The process of economic liberalization, backed by evident pro-Western Georgia has made business development within the country a top priority, leanings, has greatly improved the country’s competiveness for both through encouraging entrepreneurship and devising methods to attract export and investment opportunities. Georgia’s main trade partners include private investments to shifting tax incentives and making the country more Turkey, Russia, Azerbaijan, and China. attractive to the international business world. With its unique cultural Following institutional reforms designed to encourage and support heritage, highly diverse nature, and exuberant hospitality, Georgia’s entrepreneurship initiatives, Georgia’s economy has taken a giant leap tourism industry continues to grow and thrive, further bolstering economic forward in attracting new business. Over the past decade, the per capita growth. GDP increased by 2.45 times from $1,530 in 2005 to $3,743 in 2015 (at current prices). The estimated real GDP average growth equaled 2.3% for Government Q1 2016 and is forecasted to reach 3% by the end of the year. The ‘Ongoing The Georgian government shifted from a presidential to a parliamentary Country Partnership Strategy for Georgia’, developed through a republic after the October 2012 parliamentary elections. The president, collaborative effort by the World Bank Group, has further evolved to Giorgi Margvelashvili, is the head of state and supreme commander-in- ensure the effective use of public resources and increase income chief. Georgia’s parliament is located in Kutaisi City and acts as the opportunities. representative body of the country, exercising legislative power, and determining the principal directions of domestic and foreign policy.