COMMERCIAL REAL ESTATE MARKET - Knight Frank

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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. 6
www.knightfrank.ru Moscow. Office real estate market Key Figures Class А Premium** Class А Class В+ Class B– Total volume of quality premises, mln sq m 10.2 including, mln sq m 1.8 5.6 2.8 Commissioned in 2009, mln sq m 1.37 including, mln sq m 0.40 0.58 0.39 Vacancy rate, % 19.5 21.7 20.4 Base rental rate*, $ per sq m per annum 650–1,100 450–750 250–450 150–300 OPEX, $ per sq m per annum 80–200 70–100 50–70 Sale price, $ per sq m 5,000–7,000 3,500–6,000 2,500–4,500 2,000–3,500 * Excluding operating expenses and VAT (18%) **Upper bound of rental rates and sale price for the premises with top–quality furnishing Source: Knight Frank Research, 2010 • The total stock of Class A and Class B office premises surpassed 10 mln sq m. • Over the course of 2009 rental rates decreased 30% and 40% for Class A and Class B, respectively. The overall decrease totalled 55–60% against the summer of 2008. • The vacancy rate reached 20% in the second quarter of 2009 and remained stable. • Absorption declined four–fold in comparison with 2008. • Companies that concluded agreements at the market’s peak are now rejecting plans for relocation and are trying to find the most attractive properties with competitive conditions. TNK–BP, which had signed an agreement with Western Gate business centre for 45.4 thous sq m in 2008 gave up this plan. At the end of 2009 it reportedly decided to lease 40 thous sq m in Nordstar Tower business centre. Highlights • At the year end, the tension in the market of high–quality office premises gradually eased and investor interest in large–scale projects began to perk up as financially stable development companies announced new projects in order to enter the market during the next surge in economic growth. Citer Invest Company reached an agreement with Belgian export agency and Belgian–Turkish Bank for funding in the amount of $350 mln to build a transport terminal in MIBC Moscow–City. Top managers from N–Trans are considering joining the construction project of the Multifunctional Complex for the Government of Moscow on the 15th plot of MIBC Moscow–City. Capital Group Company announced the start of construction for the Multifunctional Complex on the 16 th plot of MIBC Moscow–City, which includes a Class A business centre, residential apartments, and a 15–storey parking structure. • The vast bulk of sale and purchase deals for high–quality business centres fell during Q2–Q3 2009. Key players seeking opportunities during the market’s crisis acquired properties at discount prices. • Improvement was seen in the macroeconomic situation and thus the most high–quality properties were removed from the market. Horus Capital sold its business centres Vympel, Burevestnik, Diapazon, and Lootch; AFI Development divested Espace; Legion Development sold business centre Legion II; and Rosnano acquired premises in Principal Plaza business centre. Business centre Diamond Hall 12/16 Olimpiiskiy Ave Supply In 2009 the volume of high–quality office premises exceeded the milestone of 10 mln sq m. Current availability of office space in Moscow is 0.97 sq m per inhabitant, which is 4 or 5 times below the average in the European capitals. 7
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COMMERCIAL REAL ESTATE MARKET - Knight Frank

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