COMMERCIAL REAL ESTATE MARKET - Knight Frank

2009
Commercial
real estate market
Moscow
Demand for space in the office segment from
end–users remains weak. For instance, if before
the crisis at the moment of commissioning office
objects in Moscow had already been filled by
tenants at a rate of 30–60%, then, at the current
stage, the acquisition of spaces takes no less
than 6–12 months after object commissioning.
The process of lease contract reconsiderations is
currently at an active phase, which is encouraged
by a high vacancy rate – more then 20%. That
is why during most of 2010 we do not expect
any significant activity and or growth in prices
on the office real estate market. Buyer demand
will primarily be focused on operating objects
with good location, clear ownership structure,
and correctly constituted contracts for long–
term real estate lease. All these could provide,
in current conditions, the highest possible
predictability of cash flows.
Warehouse real estate has received rapid
development in last two years before the crisis.
Most projects of new warehouse complexes were
under construction on western analogues. They
were oriented towards large logistical operators
and were built taking into account a growth
in cargo transportation predicted by these
operators. However, before the crisis the market
of professional logistical operators services in
Russia had only started to rise and a situational
destabilization in the economy has rejected this
process on long–term prospects. At the given
stage a considerable part of the market is still
occupied by small companies, which prefer to
supervise all logistics processes independently,
which explains the demand for small warehouse
areas. Thus, the modern warehouse complexes
that appeared on the market during the past
years are not enough to correspond to existing
demand, due to their structure. Moreover, the
high level of construction costs in 2006–2008
and the necessity to pay off creditors as soon
Prime yields
Office Real Estate 10.0 – 12.0%
Retail Real Estate 11.0 – 13.0%
Warehouse Real Estate 12.0 – 15.0%
* Estimation
Source: Knight Frank Research, 2010
as possible do not allow owners to essentially
reduce rental rates and, thereby, to involve
new tenants. As a result, at the given stage of
market development, warehouse real estate is
not very interesting to institutional investors.
At the same time, it is necessary to note that, in
the long–run, the Russian warehouse segment
has very high potential – provisional levels of
modern warehouses in our country is tens times
lower than in western markets.
Moscow’s retail real estate market has suffered
less under the negative influence of the
crisis compared to office and warehouse
objects. Rental rates have decreased 20–40%
compared to peak values of 2008, depending
on the tenant’s profile and the amount of space
occupied by it. Generally, the level of vacant
premises in the market makes up approximately
5–7%. Therefore, owners do not sell successful
shopping centres in practice, these being sources
of the stable income.
The regional market situation is much more
difficult. In some cities vacancy rates reach
15–20%, time exposure is more than 6 months.
So, retail real estate objects on these markets are
not so interesting for investors.
In the pre–crisis years, in comparison with other
segments, the hotel real estate market developed
in a relatively less productive aspect, which
was due to both a number of specific features
(long–term payback periods, high demands
for infrastructure, departments and location),
and the presence of broad opportunities for
alternative investments. To this day, the number
of modern hotels of investment quality in
Moscow is very small, especially mid–range
facilities. Lack of suitable land and high cost
projects hinder development of the market in
the midscale segment. The level of competition
can be regarded as low, and, as a result, the hotel
accommodation prices in Moscow compared to
other capitals of the world remain high. With
the economic stabilization and the expansion of
credit markets, this segment will continuously
gain popularity amongst large investors who in
current conditions prefer relatively more simple
and liquid assets.
Thus, in 2010 we do not expect considerable
growth in investments in the real estate market.
Assuming the preservation of positive dynamics
in the economy and a renewal of business
activity growth, it is possible to count on a
gradual activization of institutional investors by
the end of 2010.
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