Mikhail Merkulov: tectonic changes occur in real estate
Mikhail Merkulov, CEO of Arricano Real Estate Plc, took part in the CIS BANKERS T10 Forum: Banking, Finances, Investments, Real Estate, which took place on March 3, 2017. For the first time the CISB Real Estate: Business Development 2020 panel was presented at the Forum, where the attention of the business elite of Ukraine was attracted by the aspects of the industry development, which have formed new challenges and opportunities for investment in real estate. Panel speakers, Mikhail Merkulov, Arricano; Sergey Zukov, Blackshield Capital AG; Ofer Kerzner, City Capital Group, and Sergei Budkin, FinPoint, updated the issues related to the investment real estate attractiveness for bankers and investors, told about the changes in the industry, the experience of using sectoral changes to develop business models and areas of interest for developers and investors.
Mikhail Merkulov drew the attention of the Forum participants to the fact that the shopping malls' business model, which worked for about 2 thousand years - «built-leased-receiving rental income», - has not been working for the past few years: serious changes have started in the industry, which Mikhail called tectonic. Changes in real estate led to the fact that for many banks, real estate financing has got into the red zone. You need to understand and use changes to manage them. The changing real estate business model entails another model for assessing investment attractiveness.
CEO of Arricano said: «In the market, where stagnation is occurring, Arricano for the second year in a row shows an increase in operating profit in dollars by more than 20% due to the fact that we take into account changes in the industry and choose the right points for the application of the efforts of the management team».
Mikhail Merkulov drew attention of the Forum participants to the following significant changes in the industry, which should be taken into account while developing business models.
«In the entire industry - both in Ukraine and in the world - a margin compression is being held: Ukraine was affected by the economic situation, a drop in consumer's demand, devaluation. The following fact is more clearly shown in the world: products' physical distribution, which occurs through shopping malls, has ceased to be the only distribution network. Nowadays it is possible to make a purchase using the Internet and gadgets, for example, a smartphone, a game console. The physical off-line shop has become a media channel, where the buyer can get a brand experience and product experience. Physically you can buy anywhere. The facts say that e-commerce is growing by 25% per year; global commerce is showing an increase of 5% per year.
Another aspect that has to be considered is personalization. This is the format of communication with the buyer, which provides margin at the expense of customer experience, due to improved service, through the understanding of its client. Here the margin is higher, but the volume is smaller. Showrooms instead of large warehouses (and mass-market stores are nothing more than warehouses) appear in western shopping malls. Showroom's analogue in Ukraine is a brand store, for example, a hardware store where you can look at the gadget, try out the functional, and have a consultation. The same is in fashion retail: you are greeted with champagne, seated in an armchair, and the atmosphere is created. Showroom is an element of the customer experience, which is created by the retailer. It is time-consuming, but it works.
Digital Divide is the hottest topic today, which the off-line shop has yet to learn how to work with. The buyer is spoiled by speed, services, and quality of purchases. The buyer expects the same speed and quality from the off-line shop, as on the Internet. Modern shopping malls' visitor is a representative of the middle class, he is socialized, gadgetized, time is more expensive for him than money. Therefore, the service segment in shopping malls is an aspect for development.
The indicators of commercial real estate object development, traditional for business model analysis, such as rental rates and traffic are no longer so unambiguous for object success assessment. Traffic can be misleading. At all our objects of the group in 2016 the traffic has remained at the same level as in 2015, but the rental income has increased, and the lessee's turnover has grown.
The conclusion is simple - to assess the retail real estate object's success it is necessary to take into account changes in the industry, to study more deeply the rentier business model, the indicators' changes in dynamics, the object's development strategy, the management team's quality, the ability to develop business, and ensure achievement of planned indicators».