Russians cash in on credit (RU)

Retail in Russia is booming. This is creating a huge demand for retail space in a massively undersupplied market. But unlike most of Europe, Russians make the vast majority of their purchases using hard cash rather than credit. But this is changing and Russians are rapidly turning to credit purchases. In 2008 the consumer credit industry is expected to add $110 billion to overall consumer spending, suggesting that the rapid growth seen in the retail sector is set to continue and with it the continued demand for retail space.

The Russian retail market has been growing consistently for the past five years pushed mainly by increasing personal disposable incomes and an overall consumer spending boom. The development of a consumer credit industry is fast emerging as another factor boosting the overall growth of the Russian retail market.

Consumer loans only emerged in Russia in 2002. Previously virtually all payments were made using cash - in 2004 97% of all retail transactions were cash purchases. The Russian Ministry of Finance estimates that in 2005 the consumer credit market was worth 5.5% of Russian GDP, up from 3.8% in 2004. Since 2002 the market has been growing at an annual rate of between 110-130% - and this is set to continue.

One of the reasons the majority of people currently still prefer to use cash is that credit rates are high and terms for obtaining credit are often complicated. To overcome this many retailers have been actively implementing their own loan schemes to simplify the process. This kind of in-store crediting is simpler for consumers, saves time and means purchases can be made right away. This is particularly popular in white and brown goods (consumer household appliances and electronics) and automobile segments where the majority of retailers have been aggressively implementing in-store crediting mechanisms to attract customers. As a result 74% of the credit volume in Russia in 2005 was this type of in-store crediting.

International consumer loans companies have gone even further and have now extended so that credit cards are issued by retailers themselves: including department stores, supermarkets and fashion stores. They provide their customers with limited credit cards with revolving accounts. The benefits for the retailer are that along with increasing the cumulative retail turnover effect, it helps to develop customer loyalty and track consumer behaviour.

Consumer loans are set to add USD 18 billion to retail expenditure in 2005, leading to an increase in operators' retail turnover. The growth of this sector further demonstrates the future stable growth of the retail sector and its increasing demand for real estate from both expanding local retail chains and emerging international operators. We predict that the direct implications for the retail real estate market will be:

As operators' turnovers increase, base rents are to go down on turnover rent implementation

retailers will more actively expand into the regions, thus rebalancing the existing pool of operators and sharing the business-risk of retail.
Russia's burgeoning consumer credit market along with its high population, growing personal incomes and high share of retail expenditures, is positioning itself as potentially the largest retail market in Europe.

Source: Jones Lang LaSalle

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