The FINANCIAL — Cushman & Wakefield | Veritas Brown foresee an oversupply of retail space in the Georgian market over the next 18-24 months, with around 180,000 m2 of retail space due to come online within this timeframe.
Steve Brown, Managing Partner at Cushman & Wakefield | Veritas Brown, said the market in 2014 saw several exits of previously well-established retailers and benefited from new entrants. In his words the year was deemed a success for the food and beverage and supermarket sectors. As for the retail market Brown advised that several new projects are forecast to complete in 2015 and 2016. However, he assumes this sector will gradually become less interesting for investors considering the risk of oversupply.
“With occupier demand on hold due to the depreciation of the Lari [Georgia’s national currency] and the economic instability in the region, there is little evidence of new brands entering the market. The notable additions to the Tbilisi retail market include: Defacto. In general this year is projected to be slower in terms of retail entries and expansions compared to previous years,” Brown said.
Q. In last year’s interview you said that there was a clear deficit of international-standard office space in Georgia. What has changed in this respect in Georgia during the past year and what are your expectations for the future?
A. The first quarter of 2015 saw little change in Tbilisi’s office market, underpinned by a weak economic outlook. The one notable factor still affecting the market is the almost complete lack of development pipeline due to be completed during 2015 (except for the speculative Tiflis Group business center on Belinski St.), which is not only increasing competition for available space but also pushing occupiers into making quicker decisions on lease acquisitions. Headline rents remained largely stable during Q1 2015.
Q. How would you summarize the Georgian retail market in 2014? What were the positive and negative changes that affected the market? How has 2015 started?
A. During the first half of 2014 occupier activity was generally stable, with prime rents unchanged year-on-year. Furthermore, there was strong demand for central locations in Tbilisi, with a number of brands expanding.
For example, in 2014 Turkish fashion retailer Koton opened stores on the popular high street location Pekini Street, as well as Tbilisi Mall (3,200m2). This trend was expected to exert some upward pressure on prime rental values, as the availability in prime high street destinations became limited, with few opportunities for large retailers and a shortage of opportunities for smaller operators.
However, in the second half of 2014 the geopolitical unrest in the region, combined with falling oil prices, have had a negative impact on the retail sector. The currency instability and ongoing devaluation of the Georgian Lari has put significant pressure on retailers that sell international brands, eroding margins and heightening uncertainty.
Despite fashion retailers generally still remaining cautious with regards to expansion, a number of international and local brands have increased their presence over the last three months of 2014. Notable new store openings involved the likes of LC WAIKIKI, Polaris, Biblus and Voulez-Vous among others, all opening in the recently delivered Gldani Mall (19,000 m2). However, faced with increased competition, Spanish retail giant MANGO withdrew from the Georgian market (expected to return operated by a different franchisee).
2014 in total saw several market exits of previously well-established retailers, such as Debenhams, River Island, Tom Taylor and 123.
On the other hand the year was deemed a success for the F&B and supermarket sectors, with the Smart chain of convenience stores expanding aggressively and Fresco opening three new convenience stores (up to 9,000 m2). Wendy’s increased their presence by a further 3 outlets and KFC, Dunkin Donuts and Domino’s Pizza all entered the market. The trend of international fast food chain expansions is expected to be maintained over the course of 2015.
On the supply side, the significant additions to the retail stock of Tbilisi market included the aforementioned Gldani Mall (19,000 m2) and IRAO (7,000 m2). Delivery of East Point Shopping Center (70,000 m2) has shifted to later this year, pre-leasing of which has been largely successful, however, with lower rents and highly incentivised lease agreements. Another project scheduled to flood the market with the additional retail space is the Hualing Group’s Tbilisi Sea Plaza, with a projected GLA of 100,000 m2.
The investment market remained subdued in the first quarter of the year, with the Georgian Co-investment Fund being the only party pushing investment towards retail trade centers. According to Bakur Kighuradze of mixed-use development “Niba Delisi”, they are concluding the due diligence process and expecting to be financed by the fund. The GCF has also finalized negotiations with Doryphore Investment BV for the purchase of the former “Tbilisi Univermaghi” building on Freedom Square.
With the large number of retail projects forecast to come to the market in 2015 and 2016, we assume that this sector will gradually become less interesting for investors considering the risk of oversupply.
Q. How favourable is Georgia for international brands taking into account the small market? And how do you convince them to enter Georgia?
A. We have access to all the regional retail groups, most of who operate out of the Middle East. At the moment the Al Hokair Group hold a monopoly on the retail market in terms of their financial strength and access to well-known brands – they took a bold step and entered the region first and now enjoy “first to market” benefits, prime locations, favourable rent conditions etc, Until the market grows, through increases to consumer spending, it will be difficult to entice other large retail groups under these circumstances.
Q. What will be the main challenge for the Georgian real estate sector this year?
A. Maintaining the momentum acheived through the investment provided by the national wealth funds during 2014 against the regional economic and geopolitical uncertainty.
Q. Which innovative steps should we expect from your company?
A. It is important for companies like ours to focus on recurring revenue streams, as transactional revenue in a volatile market can be unpredictable, so we are putting great emphasis on our property management services. The recent news that TPG, an American based investment firm, bought Cushman & Wakefield for $2 billion and subsequently merged it with another global firm DTZ, will give us access to an even greater number of clients across the region. Additionally Cushman & Wakefield hierarchy has given us permission to expand our footprint across the region and, where it makes commercial sense, to open new offices.
Q. You are a real estate advisor company across the Caucasus and CIS regions. How would you characterize these markets and how different is Georgia from them? What are the particular advices for Georgia?
A. We have two well-established offices in Kazakhstan (Almaty and Astana); these offices have been providing professional services throughout Central Asia for around 7 years. Kazakhstan offers huge potential, and has a very strong economy compared to other CIS countries, due to the wealth of natural resources and relative political stability. We have seen evidence of Kazakh money coming into the market, we have access to these funds due to our extensive, long established, relationships with Kazakh investors.
Q. Which city of Georgia was more active in terms of activities in real estate and commercial sector, where are being implemented the majority of the projects and which market is the most demanded in Georgia?
A. Tbilisi, as Capital city, is always commercially active but we have seen an increase in activity in Batumi, especially in the Hospitality and retail sectors. Our key project there is the mixed-use Batumi Hilton project, which opened recently, encompassing a 5 star hotel, luxury retail podium and over 100 premium apartments.
Q. What should we expect from you in 2015? What will be in your company’s focus this year?
A. We have increased our personnel resource in Capital Markets (Investor Services), and Property Management services. The Hospitality sector remains an exciting and promising prospect, which we intend to capitalize on further.