Georgia is the 8th most attractive developing country for retail expansion in 2013, according to AT Kearney. The rising number of active businesses and higher purchasing power in recent years are correlated with the development of retail real estate in Georgia. Currently, open-air markets and bazaars hold the largest share of Tbilisi retail space at 47% (c.386,000m2), but based on the experience of other developing markets, the popularity of shopping centers will begin weeding them out. In our view, the completion of new trade centers outside Tbilisi city center will boost supply by an estimated 61% by 2017 to over 1.3mn m2. We expect average rents in shopping centers to decline by 4.9% in total until 2017 to US$ 28.6/m2 due to significant new supply. At the same time, we expect average rents for open markets to remain stable and for street retail to rise by 17.5% over 2013-2017.
Demand for quality office space has been increasing as a result of improvements in the investment climate. The recent decline in Tbilisi vacancy rates and the extremely low per-capita office space (0.2 in Tbilisi vs. 1.8 in Budapest and 0.5 in Kyiv) points to a significant supply-side opportunity. Class D (43%) and Class B+ (31%) office space account for the majority of supply, while we expect the Class A segment to grow fastest in the coming years due to extensive pipeline which would put pressure on rents. Class A offices rent for US$ 31/m2 on average versus US$ 18/m2 for B+ and US$ 9/m2 for B and C. We believe that B+ offices offer the best development opportunity, as they are attractive in terms of location, quality and price to most businesses in Georgia which are SMEs with a lower budget for office rentals.
Increased household spending has driven higher demand for retail space in Tbilisi over the last several years. Modern DIY stores and entertainment facilities are still few and far between. Despite the growing presence of international brands, vacancy rates at shopping centers are still elevated on the back of low consumer demand. This is partly a reflection of still low average incomes. Tbilisi’s retail space density of only 153m2 per 1,000 inhabitants is low compared to Sofia’s 269m2, Moscow’s 374m2, and Bratislava’s 1,095m2 that offer development opportunities as the levels of disposable income rise.
The growth in disposable incomes in Georgia will drive demand for higher quality retail infrastructure, in our view. Based on the experience of other developing markets and the growth in retail trade, the popularity of shopping centers will begin weeding out open-air markets (47% of all retail space), in our view. Moreover, as tourists from neighboring countries are starting to come to Georgia to shop, organized retail is likely to become more popular. The number of visitors traveling to Georgia for shopping has increased around 3x-4x between 2009-2013 on our estimates. These international visitors (e.g. from Azerbaijan) shop in retail outlets in Georgia to take advantage of price differences and product availability.
The growth in shopping mall numbers will drive the prices down while street retail may become more expensive. Unlike in many European cities, commercial rent is lower on the street than in shopping centers because most of Tbilisi’s malls are located in the city center. However, the gap in rents between shopping centers and street retail has narrowed from US$ 22.9/m2 in 1H10 to US$ 1.6/m2 in 2H13. The completion of new trade centers outside the center will boost supply by an estimated 61% by 2017 to over 1.3mn m2. This is likely to drive the shopping mall rental costs down as more shopping centers are built on the outskirts while street retail will remain relatively concentrated and limited.
Demand for quality office space has been increasing as a result of improvements in the investment climate. The strong GDP growth in recent years has increased the number of companies in Tbilisi by over 2.3x since 2005. Class D (43%) and Class B+ (31%) office space account for the majority of supply, while we expect the Class A segment to grow fastest in the coming years due to extensive pipeline which would put pressure on rents. Class A offices rent for US$ 31/m2 on average versus US$ 18/m2 for B+ and US$ 9/m2 for B and C.
We believe B+ space offers the best development opportunity. The recent decline in Tbilisi vacancy rates and the extremely low per-capita office space (0.2 in Tbilisi vs. 1.8 in Budapest and 0.5 in Kyiv) points to a significant supply-side opportunity. However, we believe that B+ offices are the most attractive in terms of location, quality and price trade-off. Most businesses in Georgia are still small- and medium-sized enterprises with a lower budget for office rentals. They represent a broader range of organizations that might be interested in B+ space compared to the few that can afford the high prices of class A offices.
