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Sedmoy Kontinent retailer assists in the birth of a shopping mall in Rostov

27 Jun '08
Earlier this week Marchmont reported an unusual situation that is taking shape in Rostov real estate. A developer and owner of the five-storey, 78,000 sq. m. Shokolad trade and recreation center is lagging too far (app. a year) behind construction schedule, which has caused a principal leaser, one of Russia’s leading retailers, Sedmoy Kontinent, to buy out Shokolad from the owner way ahead of projected time. From now on the firm will itself be constructing the trade complex at a much greater pace.

Sedmoy Kontinent first announced construction of the Shokolad trade and recreation center two years ago as its management posted the prospective opening of the Nash Gipermarket shopping mall on its floors. To ensure that, the retailer leased 12,500 sq. m. from the builder that owned the construction site, OOO MIS. Furthermore, eyeing its expansion in Rostov’s retail market, Sedmoy Kontinent secured its exclusive right to buy out Shokolad from MIS upon construction completion. Originally construction was to have been completed in early 2009.

But something went very wrong at the developer, and the scheduled pace of work slackened dramatically. MIS spokespeople now have to admit that in all likelihood, in the current circumstances construction will hardly be over until the first half of 2010. Less than 50 percent of the project has been completed so far. As the trouble revealed itself some time ago, this was going to undoubtedly undermine all the plans Sedmoy Kontinent had unveiled. The retailer management did not sound content with the quality of work done by that time either. A decision was made to boost up construction to stick to original commissioning dates and in so doing improve quality. Sedmoy Kontinent entered talks with OOO MIS, which have resulted in a 100 percent buyout of Shokolad. Information agencies report that MIS CEO Vadim Laptev, owner of 95 percent of MIS, has confirmed the deal but declined to provide any deeper comments whatsoever. As mutually agreed, the cost of the transaction is not to be disclosed either. Analyst Vladislav Isaev from the Finam investment company estimates it at around $65m.

The retailer’s press service informs the trade center is to be commissioned in 2009. A total of $150m will be invested in construction completion. The news has raised some eyebrows as original estimates suggested no more than $70m in investment. Of course, in a force-majeure kind of developments that we are witnessing in Rostov heavier costs may occur, but Sedmoy Kontinent has refrained from disclosing a true reason.

Sedmoy Kontinent is already in control of the Kruiz trade and recreation center in Ryazan and is also opening another 25,000 sq. m. Shokolad in Perm later this year. A company spokesperson has emphasized that the Nash Gipermarket shopping mall, also planned there, will take up half of the building.

Reflecting upon the reason why Sedmoy Kontinent has decided to start so heavily – and so hastily – investing in what was originally a place to lease, Penny Lane Realty’s Alexei Mogila says that over the past few years retailers have faced an acute deficit of areas for their shopping malls. Owners of trade centers generally tend to deny malls areas in their buildings because the more square meters a retailer rents, the lower a price per square meter should be. This most recent buyout seems a forced step – but by no means disadvantageous. Taking into account Rostov’s average lease rates for centers as big and classy as Shokolad, currently hovering between $1,000 and $2,500 per square meter, an observer can rightly predict that Shokolad is expected to bring Sedmoy Kontinent as much as $140m in profit each year.
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