Commercial Real Estate in Moscow: business possibilities (market

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					Commercial Real Estate
in Moscow:
business possibilities
(market review)




              March, 2011
Commercial Real Estate in Moscow: business possibilities (market review)




This review is aimed to cover commercial real estate market situation in Moscow for
2010, and also provide forecast of its development for the near-term perspective. In
order to provide comprehensive understanding of trends and problems the review is
divided into several segments: offices, retail and hospitality. Alongside with this the
analysis is supplemented with macroeconomic description of the Russian Federation as
well as research of investments market during this period. Brief conclusions are given
in the final part of the review.



       Contents

                  1. Economy

                  2. Capital markets

                  3. Offices

                  4. Retail

                  5. Hospitality

                  6. Conclusions and forecasts




                                                                                      2
Commercial Real Estate in Moscow: business possibilities (market review)


              1.     Economy

       The trends of changes in commercial real estate market take place due to

the improvement of the macroeconomic situation in general. Particularly

recovery after the crisis consequences in this sphere was accompanied by the

gradual rise of the Russian stock market which was supported by higher

prices for oil as well as revival of labor market and improvement of financial

climate. At this the largest impact on the market of commercial real estate is

rendered by investment activities.

       According to the data provided by the Russian Ministry for Economic

Development and Trade in 2010 the growth of investments in the basic capital

outpaced the growth of economy in general and amounted 6% to the level of

2009. At the same time this rate of investment activities recovery does not

cover the decline (as of 2009 the decline in investments amounted 15.7%)

brought by the economic crisis of 2008-2009.



       Dynamics of gross capital formation (in % of the corresponding period

of the previous year)

                                                  2007        2008         2009   2010
GDP                                               108.5       105.2        92.2   104.0
Gross capital formation                           122.0       110.4        59.0   124.3
Gross fixed capital formation                     121.0       110.6        85.6   103.5
       including:
       investment in fixed capital                122.7       109.9        84.3   106.0




                                                                                          3
Commercial Real Estate in Moscow: business possibilities (market review)


         Regarding the results of 2010 one can notice irregularity in the monthly

investment trend. So, if in the beginning of the year the rate of investment

didn't exceed that of 2009 (the results of the first quarter 2010 showed

reduction of investments by 4.8% compared with the first quarter of 2010), but

starting with March 2010 the situation changed and monthly investment

volumes exceeded those for the corresponding months of 2009 (but in July

there was a slight decline of 0.5%), and since August 2010 investments volume

didn't go below 7% (compared with the corresponding period of the previous

year).

         This principle is fully relevant to the commercial real estate market as

investments in buildings (except for residential ones) and structures amount

(as shown in the chart "Composition of Investments in Fixed Capital by Kinds

of Main Assets") the biggest part (almost 55%) of the total volume of

investments.

                  Composition of Investments in Fixed Capital by Kinds of
                                     Main Assets, %
          100%
                   7.6         7.2        7.4         6.8
           90%
           80%                                                    Others
                   34.8       33.8        32.2       32.9
           70%
           60%                                                    Machines, equipment, vehicles
           50%
           40%                                                    Buildings (except for residential
           30%     50.1       51.5        53.8       54.5         property) and structures
           20%                                                    Residential property
           10%
            0%     7.5         7.5        6.6         5.8
                  2007        2008        2009       2010




                                                                                                      4
Commercial Real Estate in Moscow: business possibilities (market review)


          Comments to the chart: Data presented in the chart do not include small

  business entities and volumes of investments which are not covered by the direct

  statistical methods.

        In 2010 due to the fact that part of projects got frozen and the number of

new projects decreased compared to the period before to the crisis, 0.6%

decline was observed for the Construction businesses compared with 2009.

        At the same time while the share of investments in residential buildings

fell by 0.8%, the share of investments in buildings and constructions rose by

0.7%.

        Composition of Investments in Fixed Capital by Financing Sources, %

                                          2007          2008         2009   2010
Investments in           the     Fixed 100              100          100    100
Capital
proprietary funds                         40.4          39.5         37.1   41.2
             among them:
             profit                       19.4          18.5         16.0   14.7
             depreciation                 17.6          17.3         18.2   20.5
raised funds                              59.6          60.5         62.9   58.8
             among them:
           budget funds                   21.5          20.9         21.9   19.4
           bank credits                   10.4          11.8         10.3   8.7
        Recovery of investments activities was mostly promoted by the growth

of proprietary funds (profit) of companies and enterprises (rapid increase of

investments for the account of proprietary funds started in the third quarter of

2010), which partially compensated the lack of borrowed assets.

        2010 year-end profit of companies and enterprises rose by 40.9%.

Favorable foreign economic environment was one of the factors that promoted
                                                                                   5
Commercial Real Estate in Moscow: business possibilities (market review)


this growth (prices for raw commodities of Russian export reached a

"comfortable level"). At the same time inflation rate at the end of the year and

as a result increase of manufacturers' costs adversely affected the financial

state of companies.

       As of the recent data for January-February 2011 the rate of attracting

investments volumes in the fixed capital decreased in relation to 2010 by 2.8%

and amounted 807.5 billion rubles. However it should be noted that in

January-February 2011 the volume of works in the Construction business

decreased far less - by 0.3% as to the corresponding period of the previous

year (381.9 billion rubles).

       Main macroeconomic figures are given in the table below.

                                        2008               2009       2010    2011F
GDP Growth, %                           105.2              92.1       103.8   104.2
Investments in the Fixed Capital, 8,782                    7,930      9,116   10,756
billion rubles
Unemployment         Rate,    %      of 6.5                8.6        7.6     7.3
economically active population*
Prices for Urals oil brand (global), 94.4                  61.1       77.5    81
US$/barrel
Dollar exchange rate (average 24.9                         31.7       30.4    31.3
annual), rubles / US$
      *Economically active population




                                                                                       6
Commercial Real Estate in Moscow: business possibilities (market review)


              2.         Capital market

        Total volume of investments in commercial real estate of Moscow and

Moscow region amounted 3,861 billion USD - 93% (according to the estimate

of Praedium Oncor International) of the total volume of investments in

Russian commercial real estate in 2010, and as is shown in the Volume of

Investments in Commercial Real Estate of Moscow and Moscow Region chart,

65% of total investments volume account for the fourth quarter of 2010.

           Volume of Investment in Commercial Real Estate of Moscow and
                            Moscow region, mln. USD
 3000

 2500
                                                                            2511
 2000

 1500

 1000

  500
                                          632
                   425                                      293
    0
               1Q 2010                2Q 2010             3Q 2010          4Q 2010


        In 2010 the general volume of transactions on the commercial real estate

market was registered in the office real estate segment (68%). Industrial and

warehousing real estate took 15% of the total volume, and 11% were presented

by transactions with multi-purpose complexes. Transactions in trade and hotel

real estate amounted 3%. The chart below shows this distribution.




                                                                                     7
Commercial Real Estate in Moscow: business possibilities (market review)



          Composition of Investment in Commercial Real Estate of Moscow
                            and Moscow Region in 2010
                                                                     Office
                       0.11   0.03 0.03
           0.15                                                      Warehouse&Industrial
                                              0.68                   Multifunctional

                                                                     Retail

                                                                     Hotel


       Herewith domestic investments accounted for the major part of

investments: Russian investors account for almost 87% of the total commercial

real estate market assets.

       The beginning of 2011 has somewhat changed the situation on this

market segment.

       Firstly, the volumes of investments increased. Only n the first quarter of

2011 the investments amounted 563.2 mln. USD (data for Moscow and

Moscow region), i.e. the rate increased by 50% compared with 2010. This gives

the experts grounds to predict the 2011 end-year market growth by 18%.

       Secondly, the structure of investments on the real estate objects has also

been changing: office real estate has been losing its leading positions

regarding the volume of capital investments. As shown in the chart below, the

major part of investments of 28.7% in the 1st quarter 2011 went to the trade

real estate, while office segment investments accounted only for 25.6%.

          Structure of Investment in Commercial Real Estate of Moscow and
                     Moscow Region for the First Quarter of 2011
                         16.00%                                       Office
                                                25.60%
                                                                      Warehouse&Industrial
                    28.70%
                                                                      Multifunctional

                                                      16.90%          Retail

                                             12.90%                   Hotel


                                                                                             8
Commercial Real Estate in Moscow: business possibilities (market review)


       At the same time office real estate becomes the main object of capital

investments. So, only 7.9% was purchased for own occupation.

       Market activization is observed irrespective of interest rate changes,

which remained at the level of 2010 for the most high quality objects of real

estate. Interest rate range is shown in the chart below.

           Commercial Real Estate Capitalization rates in the First Quarter of
  15
                                 2011 in Moscow, %

  10                                                                 12.25   12.75
                             10          10.25    10.75
              9.5
                                                                                     min
   5
                                                                                     max

   0
                    Office                   Retail                   Warehouse


        The most important transactions at the market of commercial real estate closed

                                  in the first quarter of 2011.

       The largest transaction in commercial real estate was the purchase of the

shopping center "Kaluzhsky" by BIN bank for 150 million US dollars.

        South Gate Warehouse Complex from the Canadian developer Giffels.

The overall amount of this transaction amounts almost 100 million US dollars.

       Central Properties company transaction of sales of the second stage of

business center "Pavlovsky" became the largest in the segment of office real

estate. The transaction amount is estimated about 80 million US dollars.

       In hotel real estate segment "Sistema-Hals" (subsidiary company of VTB

bank) closed the buying transaction of the hotel "Beijing" which, according to

the developer's idea, is to become a five-star hotel after the end of the

reconstruction.


                                                                                           9
Commercial Real Estate in Moscow: business possibilities (market review)


       In the segment of multi-purpose real estate the main event was the

Nomos bank's purchase of the share of 32.5% in the "Park City" project for 76

million US dollars from the PIK group of companies. This project presupposes

construction of residential and commercial real estate on the territory of

Badaevsky brewing plant and the Sakko and Vancettii Pencil factory in the

center of Moscow.

       The government plans concerning changing of the real estate taxation

impacts the future of investments in the commercial real estate market. The

new tax, which is likely to be introduced approximately on January 1, 2013 is

supposed to be paid by the individuals owning buildings, constructions,

structures, residential and non-residential premises on the basis of a right of

ownership. The tax rate hasn't been settled yet, but it has already become

obvious that it won't be considerable for commercial real estate owners. The

final amount will be determined on the basis of differentiated approach

regarding the premises area.

       According to the experts' estimates the new tax will decrease

attractiveness of commercial real estate from the investments point of view.

On the other hand, this factor alongside with others will result in reduction of

prices for real estate.




                                                                              10
Commercial Real Estate in Moscow: business possibilities (market review)


   3. Offices

        In spite of decline in investments, office real estate segment is of primary

importance for Moscow and Moscow region. Market development in this

segment was rather diverse in 2010. On the one hand general economy

recovery trend promoted commissioning of new office buildings due to

"unfreezing" of objects, construction of which was suspended during the crisis

time, and also contributed to reduction of the room vacancy rate due to the

increase of business activities of organizations. On the other hand the initiative

of the new city authorities to prohibit construction of office buildings in the

central part of the city, which increases the deficit of supply in this segment of

commercial real estate, alongside with increase of demand, lead to the growth

of prices and lease rates for high-class office real estate.

        According to the consulting company S.A.Ricci/King Sturge in the first

quarter of 2011 the volume of office real estate area exceed that of 2010 by 16%

and amounted 170 thousand square meters.

        In spite of the considerable growth, according to the experts' estimate

the segment of office real estate won't meet the pre-crisis pace. The chart

below shows the market dynamic since 2003, which allows to say that realistic

prediction suggests only meeting (or slight exceeding) the level of 2006.

                         Increase of Office Premises, thousand sq.m
 2000

 1500

 1000                                                                               Class B
                                                                                    Class A
  500

    0
          2003    2004     2005    2006    2007     2008     2009    2010   2011F


                                                                                              11
Commercial Real Estate in Moscow: business possibilities (market review)


         Supply on the office real estate market (after commissioning of 98.499

thousand square meters in the first quarter of 2011) in Moscow and Moscow

region provides, according to the analysts' data, 10.9 mln square meters of

high-quality office buildings (total area in classes А, В+ and В-). Supply rate is

shown on the chart, at the same time it could be said that due to the share of

new space being inconsiderable the crisis influence on total offer is not

obvious.


                  Dynamics of Total Supply in Quality Office Buildings
 12
 10
  8
  6
  4                                                                        Total supply, mln sq.m
  2
  0
       Q1   Q2   Q3   Q4   Q1   Q2   Q3   Q4   Q1   Q2   Q3   Q4
      2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010


         Share of vacant space, on the opposite is affected by the market

environment. According to the Praedium Oncor International estimate, in 2009

share of vacant space decreases from 18% to 15-16% n average on the market.

At the same time share of high-quality real estate with comprehensive concept

and economically advantageous location (mostly in the city center) was equal

to 0% (or nearly) an the end of the year.

         Main Objects, commissioned in the first quarter 2010:
Object                                  Office space Class Address
                                        in    square
                                        meters
Diamond Hall business center            37,000         А       Olimpiysky prospect, 12/16
Trio business center                    27,000         А       8 Marta Street, 1

                                                                                                    12
Commercial Real Estate in Moscow: business possibilities (market review)


Unicon Business center                  23,500         В+      Plekhanov street, section
                                                               4.
Culture Park House business 5,900                      А       Zubovsky boulevard, 13
center
Novaya Riga business center 5,099                      В+      Strogino


        The experts predict growth of demand for high-class offices (class A and

B+), which is formed by the financial institutes, raw material companies,

industrial enterprises, state corporate organizations, monopolies, and some

international giants both due to the company and listing expanding and the

lessees' desire to improve facilities (particularly to change classes C and B for

B+ and A).

2010 demand for office real estate exceeded the 2009 rate by 24%. Experts

explain this trend by the realization of deferred demand, provoked by

unfulfilled due to the crisis plans to extend and improve facilities.

        Besides provided quantitative changes in office real estate segment there

are quality changes as well. The chart below shows registered in January 2011

distribution of demand regarding total area of premises.

                   Demand Structure for Office Real Estate by Area
 120%

 100%
                        28%                                  34%
  80%
                                                                               <200

  60%                   31%                                                    201-500
                                                             34%
                                                                               501-1500
  40%
                        25%                                                    >1500
  20%                                                        23%

                        16%
   0%                                                        9%
                        Sales                               Rent



                                                                                          13
Commercial Real Estate in Moscow: business possibilities (market review)


        Overcoming of the crisis is traced in the negative for small-scale

companies fact that lessors often refuse petty sharing of premises. If in 2009

this was done due to the low demand for large blocks, now this "favor" from

the part of developers is almost impossible as it increases operation costs,

oncosts and reduces market positions.

        Estimating the demand structure for office real estate regarding classes,

one can say that in both buying and leasing most companies are aimed at the

Class B- (64% and 65% correspondingly). At the same time Class A is more

popular with lessees than with possible buyers (share 18% to 13%). And Class

B+ on the opposite is preferred by buyers (24%) nut lessees (17%).

                        Structure of Demand for Office Real Estate by Classes
 120%
 100%
                         64%                                    65%
  80%
                                                                                Class B-
  60%
                                                                                Class B+
  40%
                                                                                Class A
  20%                    24%                                    17%

                         13%                                    18%
   0%
                         Sales                                  Rent


        Future market conditions can be estimated regarding structure if in

commissioned office real estate objects. At the end of 2011 most part of them

was is still being projected (38%) and 18% is frozen. But once again we can say

that 2010 was marked by the unfreezing of some objects and as a result 44% of

office real estate objects is being constructed on different stages.




                                                                                      14
Commercial Real Estate in Moscow: business possibilities (market review)



             Structure of Non-Commissioned Office Objects by the Level of
                                    Readiness
                             16%                                                       Project
                                                 38%
                  14%                                                                  Suspended
                                                                                       Construction started
                       14%
                                     18%                                               Construction
                                                                                       End stage of construction



        Prices for office facilities in the first quarter 2011 followed the trend of

2010. Analysts say that this trend is provoked by the increased activity on the

office real estate market: steady growth in demand for high-quality office

facilities, especially the Garden Ring Road and Boulevard Ring districts,

increased rates on average by 6% for A and B+ Class offices in this areas.

        Price fluctuating within one class is primarily determined by the object

location. Average rates for office facilities of А and В+ Class the Garden Ring

Road and Boulevard Ring area are higher than in Third transport ring zone -

from 28% to 40%.

        Average weighted leasing rates for А, В+ и В- Classes are provided on

the chart below.

                              Lease Rates, USD per 1sq.m. per year
 1000
  900
  800      880
  700            760
  600                              706
                                         602                                                            Class A
  500
                       520                               520                                            Class B+
  400
                                               430             431              428
  300                                                                                 366               Class B-
  200
                                                                     230
  100                                                                                       190
    0
           Boulevard Ring          Garden Ring         Third transport ring   Moscow Ring Motor
                                                                                    Road


                                                                                                                  15
Commercial Real Estate in Moscow: business possibilities (market review)


                              We should note that the leasing rates growth is a trend characteristic of

office real estate markets all over the world. According to the Cushman &

Wakefield's estimate, 2010 showed growth in the majority of business centers

(see the chart below), but nevertheless Moscow still takes the 7th place in the

list of the cities with the most expensive offices.

                                    Dynamics of the Price of Offices in the Most Expensive Cities of
                                                              the World
                             250%
   thousand USD per 1 sq.m




                             200%               2.3
                             150%                              1.7           1.6
                             100%
                             50%                                                            1.0         1.0
                                     50.80%                          22.80%        9.50%          47.00%               Dynamics
                              0%
                                                      -1.20%                                                           Price
                             -50%
                                                          Tokyo




                                                                         London
                                         Hong Kong




                                                                                      New-York




                                                                                                      Rio-de-Janeiro




                                                                                                                               16
Commercial Real Estate in Moscow: business possibilities (market review)


   4. Retail

        In 2010 trade real estate segment recovered with the fastest pace

compared to other segments of commercial real estate. According to the

Cushman & Wakefield's data, in 2010 there were constructed 10 shopping

centers with the rentable area of 380,000 square meters; 2011-2012 plans

include 18 more objects with total area of 670,000 square meters. In the first

quarter of 2011 194.2 thousand square meters were commissioned and taking

into consideration average commissioning pace of the main part of objects in

the fourth quarter, experts predict that in 2011 growth will amount 1.3 million

square meters with preservation of positive growth trend after 2009, which is

presented on the "Commissioned Trade Real Estate Areas" chart.

                               Commissioned Trade Real Estate Areas
 1400
 1200
 1000
  800
  600
                                                                               Total area, thousand sq.m
  400
  200
    0
          2003


                 2004


                        2005


                                  2006


                                         2007


                                                2008


                                                       2009


                                                              2010


                                                                     1Q 2011




        Considering returned to service objects, total area of high-quality trade

real estate in Moscow at the end of 2010 amounted 5.5 million square meters,

among them 2.9 million square meters were covered by the leased facilities.

According to the Astera company experts in 2011 this figure will reach the

level of 6 million sq. m. regarding high-quality real estate and will exceed 3

million sq. m. regarding leased one.
                                                                                                       17
Commercial Real Estate in Moscow: business possibilities (market review)


       The growth will be provided by the commissioning a number of large

objects, data thereof is presented in the Planning Commissioning, 2011 table.

Object                       Type                                          GLA, square
                                                                           meters
River Mall                   Shopping and entertainment                                  90000
                             mall
Aviapark                     Shopping and entertainment                              180000
                             mall
Kaleidoscope                 Shopping and leisure center                             41000
Belaya Dacha                 Outlet                                                  38000
Kursky                       Shopping center                                        no data
Fashion house                Outlet                                                  28800
Favorite                     Shopping center                                         24000
Parus                        Shopping center                                         25800
Severnoye Siyaniye           Shopping and leisure center                             12000
Moscow Gallery               Shopping center                                         18100
Severnoye                    Shopping and leisure center                             20000
Chertanovo
Moscvorechye                 Shopping center                                             19800
EGO Mall                     Shopping center                                              7800


       Market stabilization is indicated not only by the quantity growth of

supply but also by the decrease of vacancy rate. Undoubtedly, share of vacant

areas is mainly connected with quality of real estate: In conveniently located

shopping centers of high-quality with comprehensive concept the percentage

of vacant spaces does not exceed 5-7, while in new commissioned objects,

which haven't acquired the constant customers pool vacancy rate is

considerably higher.




                                                                                            18
Commercial Real Estate in Moscow: business possibilities (market review)


       In general the trend is positive. If in 2009 the occupancy rate of leased

high-quality shopping centers didn't exceed 40-60%, 2010 end-year figure

reached 60-80%.

       In spite of commissioning of new retail facilities, the share of vacant real

estate keeps on decreasing due to the growth of demand. According to the

expert, trade real estate market in Moscow is still lean and the deficit of

facilities is going to aggravate.

       On average this happens due to the growth in demand provided by the

high rollers. In 2010 many chain companies claimed the resumption of the

market expansion

       According to the data provided by the Astera company, lessee's demand

has increased. Such retailers as H&M, Henderson, Sela, Familia, Finn Flare,

POMPA, Zara, Baon, Lady&Gentleman City, Glace, Centro, Melon Fashion

Group (develops brands Zarina, BeFree and Love Republic) are planning to

lease new facilities using attractive market possibilities.

       Retailers has began to widen the range of goods, some of them have

begun to introduce new lines of men and children clothes. Gloria Jeans is

planning to increase the market share opening 15-20 shops monthly and

putting on the market line of goods for children.

       The OGGI company is also going to develop line of men and children

clothes. On the opposite Econica is planning to give up men footwear and

concentrate on women footwear.

       Melon Fashion Group (Zarina, BeFree, Love republic) also on the basis

of franchise develops such makes as Springfield,                      Women’s secret and


                                                                                      19
Commercial Real Estate in Moscow: business possibilities (market review)


Co&Beauty. However more and more retailers prefer opening own shops to

franchising.

       Among them are Mustang, Nike, Geox, Levi’s,                     Diesel, Guess, New

Yorker, S’Oliver, Ecco, Mango, Promod and The North Face. Some retailers,

such as Rikki-Tikki и Eurostyle (develops brand Normann - according to

gdeetotdom.ru brand Normann is owned by Unistyle, LLC ) employ both

opening own shops and franchising.

       In 2010 such companies as Uniqlo, Uterqüe, Six, QUIZ, Burger King,

Saturn,     Converse,      Teophile&Patachou,          Kurt     Geiger,    Ann   Christine,

Papabubble, Red Espresso Bar, Chili’s, Coffeeshop company, AGATHA,

Thomas Sabo, Cool club, Home&You and Payless Shoesource entered Russian

market.

       Also companies Lotte cinema, Victoria’s Secret, Bath & Body Works,

Tempe, French Connection, Abercrombie&Fitch (Abercrombie & Fitch,

Abercrombie Kids, Gilly Hicks, Hollister brands), Banana Republic, LC

Waikiki, Petit Patapon, All Saints are planning to enter Russian market.

       Reiss VF Corporation can open own shops Vans and The North Face.

       Discounters and hypermarkets continue developing on the market, what

corresponds to the consolidation of the industry and high demand for the

goods of low and medium price bracket and medium-term prospective.

Purchase of Mosmart by Sed'moi Kontinent is a next step to further

consolidating of the retail sector after the purchase of supermarkets Kopeika

by the market leader X5 Retail Group.




                                                                                         20
Commercial Real Estate in Moscow: business possibilities (market review)


       Diksi is planning to develop a new for the company shop format, while

Magnit has opened first non-food stores.

       The company X5 Retail Group has launched two first supermarkets

Pyatyorochka Maxi with cash&carry approach. All these companies register

growth of customer traffic and are planning to increase investment in their

outlet chains in 2011.

       In general grocery chains continue developing on the market. Metro

Group has introduced new shop types: small-scale hypermarkets ECO (about

3,000-3500 sq m) and Metro Punkt (about 1500 sq. m). Aushan has been

developing a chain of discounters Atack in Russia. Okey, Lenta, Vester, Spar,

Real, Azbuka Vkusa and Olivye are planning to increase considerably the

number of their shops next year.

       Carrefour is considering the possibility of returning to the Russian

market vie purchasing one of the market players. Closing Russian rep office

the company Wal-Mart (USA) claims that it continues considering variants of

entering the market.

       In 2010 there were some features showing leveling off of the DIY market,

and also of the household appliances ans electronics markets. Almost all

companies, including such DIY retailing chains as Castorama OBI, Home

Centre, Metrika, Kesko (chain DIY K-Rauta), Uyutterra, and also household

appliances and electronics chains Media Markt, Saturn, M Video, Eldorado

and Positronika announced their plans to develop their business in major

Russian regions.




                                                                             21
Commercial Real Estate in Moscow: business possibilities (market review)


       Chains retailing goods for children have been developing in Moscow.

Companies reported the demand stabilizing and growth of customers traffic

in 2010.

       Distribution chains Detsky Mir, Deti, Zdorovy Malysh, Budu mamoy,

Du Pareil au Meme, Tape а L'oeil, Kids Garten and a new chain Detmart have

been increasing the number of their stores in Moscow.

       The catering market has been rapidly recovering and can reach the pre-

crisis level by the end of 2011. Customer traffic has increased in both

restaurant and in fast food cafes. *Compared with the previous year the profit

of Rosinter and G.M.P rose significantly in 2010.

       McDonald's, Burger King, Coffee House, Starbucks, Subway, Red

Espresso Bar and Yaposha are planning to increase their market share, while

Dunkin’ Donuts has resumed its operating on Russian market. Wendy's, main

competitor of McDonald's and Burger King , and also such brands as Mr.

Sandy, Johnny Rockets и Country Chicken announced their entering Russian

market.

       Positive growth in the luxury segment, registered in 2010, according to

the experts' opinion, will continue in 2010.

       For example, Prada Group is planning to open boutiques Prada and Miu

Miu in the first quarter of 2011, while Chanel and Christian Dior have already

been operating in Russia. Perfume and make-up retailer Rive Gauche has

acquired share of Russian market that belonged to German chain Douglas

Rivoli. Since 2011 the LVMH company is planning to develop its own brand

Sephora as a multi-brand store instead of shop-in-shop format. In general,


                                                                            22
Commercial Real Estate in Moscow: business possibilities (market review)


demand for high-quality shopping centers and beneficially located facilities of

street retail format from having the possibilities to develop and planning to

enter Russian market retailers is still high. However, they will probably be

more careful, than in previous years.

       Development of trade real estate is closely connected with consumer

demand, which could be analyzed only using some data concerning the

purchasing ability of population. The provided by the Federal State Statistics

Service data indicates the growth of real disposable income Particularly, in

the first quarter of 2010 compared with the same period of 2009 growth

amounted 12.5%, but in the fourth quarter of 2010 growth amounted not more

than 4.4% due to the growth of the inflation rate (it should be noted that the

cost of the minimum consumer goods basket increased by 22.7% since the

beginning of 2010)

       In general, according to Watcom Data Consulting, during 2010 shopping

centers consumer traffic per 1 sq m decreased on average by 11.63%.

Estimating consumer traffic into consideration was taken data provided by 60

Moscow shopping centers with area not less than 5,000 sq m (which makes up

60%), the data were collected by means of counting customers by the installed

at the entrance equipment.

       First fall of the consumer traffic in shopping centers Watcom Data

Consulting registered in 2009 and the reason was the crisis. In 2010 consumer

traffic went down due to the growth of supply.

       Another trend, alongside with decline of the customers' number per 1 sq

m, is redistribution of the customer traffic among the shopping centers,


                                                                             23
Commercial Real Estate in Moscow: business possibilities (market review)


consider the experts of the Investing company TP (the company specializes in

shopping centers management).

       So, the number of customers of Moscow shopping centers Mega and

IKEA has been growing steadily: 'In 2010 financial year this figure amounted

212 mln. people', says representative of IKEA Oxana Belaychuk. According to

some projections, 3 more IKEA shops are to be opened in Moscow. On

average customers traffic per 1 sq m decreases at the expense of less successful

shopping centers with weak concept and unreasonable choice of lessees.

       Structure of demand for trade real estate still shows (see               the chart

below), that the most called-for are the less than 50 sq m blocks (59% of clients

are aimed at them). Typically the second in volume segment (taking 9% of the

market) is the facilities of more than 1000 sq m. Lack of the "happy medium"

is a peculiarity of Russian reality, which is also characteristic of demand

structure.

             Demand Structure by the Area of Premises in Trade Centers, the
                                  First Quarter 2011

                                          9%          5%
                                                                           From 1000 sq.m.
                                                       8%
                                                                           500-1000 sq.m.
                                                           7%              250-500 sq.m.
                     59%                                                   100-250 sq.m.
                                                                           50-100 sq.m.
                                                                1%
                                                                           Less than 50 sq.m.




                                                                                             24
Commercial Real Estate in Moscow: business possibilities (market review)


       One of the trends of the past year 2010 was the shift of demand and

supply toward street retail segment from shopping centers. Legislative

initiatives of the new Moscow authorities limit possibilities for increasing

trade real estate volumes by means of constructing new shopping centers and

malls in the central part of the city, so investors and consumers started to

concentrate on the corridor real estate segment. This is especially true for the

sectors of consumer goods and catering/food products. As shown in the chart

below, in total these two segments amount 68% of the corridor real estate

market. Then comes sector of consumer services, share of the lessee-

representatives of this sector move toward 12%. And 6% take banks and the

DIY sector makes up 4%.

                 Street Retail Demand Structure by Tenant's Segments

                4%                                                Consumer goods
           6%               9%

                                                43%               Catering, food
          12%
                                                                  Services


                      25%                                         Banks


                                                                  Construction materials (including,
                                                                  household goods, furniture)



       Growth of renting rates stimulated average market growth during 2010.

Stable demand for high-quality facilities with advantageous location caused

maximal rate growth in this segment: in some cases rates rose by 40-60%.

Average rates growth in the shopping halls segment amounted 15-20%.

       According to the Astera agency data at the end of 2010 average renting

rate in Moscow stood at the point of about 1,100 US dollars per sq. m.

                                                                                                       25
Commercial Real Estate in Moscow: business possibilities (market review)


annually (without operating costs and VAT). Rates for the best facilities in

professional high-quality shopping centers amounted about 5,000 US dollars

per sq. m. annually (without operating costs and VAT) in the third quarter

2010 and remained at the same level in the fourth. Chart below shows

different renting rates concerning the profile of the shopping center lessees.

The highest rates are characteristic of clothes and footwear and also goods for

children. While the foodstuffs, DIY segment and entertainment segment are

referred to the refreshing of the traffic leases, who takes the benefit of the

minimal renting rates.

                  Lease Rates by the Tenants' in Malls Profile, USD per sq.m per
                                               year
 700                                  600
 600                                475                                               500
 500                                                 450
                                                   375            400               400
 400                              350                           325
                                                 300                              300
 300                                                          250
            200
          160
 200    120                120                                                                      150
                                                                                                  125
                       80105                                                                    100       min
 100
   0                                                                                                      average
                                                                                                  DIY
           Products




                         Cinema




                                                                                   Household
                                                  Goods for
                                   Clothes and




                                                                Household goods




                                                                                   appliances
                                                   children




                                                                                                          max
                                    footwear




       In 2011 lease rates growth can amount from 5 to 10% for high quality

facilities in shopping centers with convenient location and exceed 10% for

street retail facilities.

       Quantity growth was accompanied by the quality changes in payment

conditions, which were reconsidered in many cases. The most popular type of

rental payment is still fixed form. Per cent from the turnover, as a type of

rental payment, hasn't become the main type of payment in Moscow. This

system of rental payment is applied in Moscow as a rule either in case of
                                                                                                                26
Commercial Real Estate in Moscow: business possibilities (market review)


attracting lessees to difficult shopping centers or these of little promise to

create the synergy effect and as a result later on attracting other lessees, or for

attracting to the high-quality promising facilities large-scale Russian and

foreign operators, which can not only generate customer traffic via own stores

but also due to their presence prove the level of the shopping center and serve

as an "anchor" attracting other retailers. These are Inditex, Maratex,

McDonalds and other companies.

        Growth of renting rates in shopping centers of Moscow in the first

quarter 2011 is observed among both shopping malls and anchor tenants. The

growth compared to the same period of last year as shown on the chart

amounted 10%

          Dynamics of Average Value of Lease Rate, USD per sq.m per year
 3500
                  3030
 3000                                                            2750

 2500                                            2225
                                 1975
 2000
                                                                           Anchor tenants
 1500
                                                                           Trade galleries tenants
 1000

  500     312.5            240             315             340

    0
           1Q 2008         1Q 2009         1Q 2010         1Q 2011


        Distribution of renting rates among different lessees in the shopping

halls segment is different from that of shopping centers. Particularly, the most

expensive leasing of facilities with high traffic flow in shopping halls have

catering and banking companies. Foodstuff, as in the first case, has one of the

lowest renting rate.


                                                                                                     27
Commercial Real Estate in Moscow: business possibilities (market review)



            Lease Rates by Tenants' Profile (street retail), USD per sq.m per
                                          year
 2500                            2300
                                                 2200

 2000                                                            1800
                                                                                   1500
 1500
                 900                                                                        min
 1000                                      750                               800
                           600                             650                              max
           400
  500

    0
             Food          Catering         Banks         Clothes and      Other consumer
                                                           footwear            goods


        As for dynamic, at the beginning of 2011 there was observed a renting

rates increase trend: for the majority of lessees in the shopping centers of

Moscow they grew by 7-10% since the beginning of the year. Regarding

limited supply on the trade real estate market, this trend will be preserved

throughout 2011.

        Average selling prices for street retail facilities on the trade real estate

market of Moscow as of the first quarter 2011 ranged between 13,000 - 15,000

USD per sq. m. Compared with 2010 demand for purchase of facilities in this

segment rose by 70%. Prospective buyers, as a rule, are interested in facilities

with cost recovery period not exceeding 7 years. At the same time proprietors

offer objects with cost recovery period on average starting from 12 years.

According to ASTERA in the first quarter 2011 street retail facilities

sell/purchase transactions dealt with cost recovery period of about 10 years.




                                                                                                  28
Commercial Real Estate in Moscow: business possibilities (market review)


       In conclusion it can be said that in 2011-2012 trade real estate market of

Moscow is expected to face considerable supply shortage. If in the previous 10

years 102 shopping centers were constructed, in crisis time of 2009-2011

construction of new facilities nearly didn't started at all, and the objects that

are expected to be commissioned in 2011-2012 can't satisfy the growing

demand for trade real estate, which has recently got more active in the part of

retail networks, banks, restaurant owners, etc. and even now many

prospective clients have to adjust their plans due to the lack of supply on the

market.




                                                                               29
Commercial Real Estate in Moscow: business possibilities (market review)


       5. Hotel Real Estate

       In 2010 the hotel room capacity of Moscow rose by more than 1.7

thousand rooms, what is comparable to aggregate growth of supply within 2

previous years. Moreover this growth was achieved due to increase of

premium rooms number, while in the medium segment deficit stands at the

same level. The volume of new commissioned hotel rooms has nearly reached

the pre-crisis level. Although it should be noted that such a considerable

volume of new supply is mainly caused by the postponed opening of some

hotels in 2010 that were originally to be commissioned in 2008-2009.

       The table below lists the hotel room capacity of commissioned hotels.

       Hotels commissioned in Moscow in 2010 Table

                          Name                            Categ      Room Number
                                                           ory
    The Garden Ring                                         4*             86
    Renaissance Moscow Monarch Center                       4*             366
    Catherine Park                                          3*             260
    Radisson Royal Hotel                                    5*             545
    Lotte Hotel Moscow                                      5*             304
    SK Royal                                 4*           170
      Almost 50% of entered the market rooms belong to the 5-star category

thus having provided the expanding of the upper segment by 30%. New

supply was consumed by the market and didn't influence significantly 5-star

hotel sales.

       In general last year hasn't changed the structure of the hotel room

capacity, which at the end of 2010 looks as follows (2009 Structure of the Hotel

Room Capacity Chart): the largest number of objects belongs to the medium

                                                                                   30
Commercial Real Estate in Moscow: business possibilities (market review)


class (43%), while high class (Luxe and Business) account for only 32%.

Economy-class takes the last place - its share in the aggregate volume of the

hotel room capacity doesn't exceed 26%.

                        Hotel Room Capacity Structure, units (2010)

                                                                      Luxe class (5*)
                                   5%
                                          11%
                           24%                                        Business class (4 stars)
                                            19%
                                                                      Medium class (3 stars)
                            41%

                                                                      Economy class



       New hotel rooms commissioning projection in 2011 slightly differs from

the established structure (see the chart below). So, almost 96% of objects refer

to high classes (56% and 40% account for Business and Luxe classes,

respectively). But only one medium-class room hotel is planned to be

commissioned          (Azimut hotel), moreover its commissioning has been

postponed since 2010.

           Hotel Room Capacity Structure, units (Commissioning Plans for
                                      2011)
                                  4%

                                             40%
                                                                           Business class (4 stars)

                     56%                                                   Medium class (3 stars)
                                                                           Economy class




Source: NAI Becar



                                                                                                      31
Commercial Real Estate in Moscow: business possibilities (market review)


       According to the experts, in 2011 the hotel room capacity is expected to

rise by 3.7% (i.e. by about 1,500 rooms), that will allow to reach the aggregate

volume of the hotel room capacity of 41,300 rooms by the end of 2011.

       Demand for hotel accommodation in Moscow was mostly formed by the

flow of foreign tourists, which at the end of 2010 showed growth by 4.4%

having overcome negative trend in 2009 and reached the level of 2008.

                     Foreign Citizens Visits to Russia, thousand of entries
        24000
        23500
        23000
        22500
        22000
        21500
        21000
        20500
        20000
        19500
                 2000     2003     2004    2005     2006    2007     2008   2009   2010


       Comments on the chart: the chart is based on the data provided by the Federal

Agency of tourism, which in its turn refers to the data of the Border Service of FSB of

Russia. Persons entering for permanent living in Russia were not taken into

consideration while making this chart.

       Most part of entering Russia tourist state their journey purpose as

private, and business, the chart below shows all range of variants.




                                                                                          32
Commercial Real Estate in Moscow: business possibilities (market review)



                      Moscow Visits Structure by Purposes of Trips
                       2%
                                  7%   14%
                                                                           Work
                                                12%
                                                                           Tourism
                                                                           Private
                            65%                                            Transit
                                                                           Maintenance personnel




       Comments on the chart: the line Service Personnel, according to the standard of

statistical estimation accepted in Russia, includes vehicle drivers and river and sea

vessels, planes and trains crews.

       Growth of the number of visitors to Moscow formed the main positive

trend on the hotel real estate market, i.e. decrease of vacancy rate in all

segments. The end-year hotel sales rate amounted 64% for the medium-price

hotels and 67% for 4-5* hotels. Though growth of the hotel room sales was not

only due to the increase of the checking-in traffic and number of nights but

also in response to the average cost staying at the previous year level.

       Slow hotel real estate market recovery hasn't influenced the prices yet

which grew insignificantly, if at all. In the majority of cases, they stood at the

same level, and profitability rises due to other components, as: decrease of

vacancy rate and increase of the clients' loyalty. According to NAI Becar,

average price level remained stable and at the end of the year amounted 210

US dollars (6,500 rubles) in the 3* segment, and 345 US dollars (10,700 rubles)

in the 4- 5* segment correspondingly. Balance between standard and luxe

room accommodation is presented on the chart below.



                                                                                                   33
Commercial Real Estate in Moscow: business possibilities (market review)



            Average Price for Accommodation in a Single per Day, RUR (2010)
 70000
                      61899
 60000

 50000

 40000
                                                                                                       Standart
 30000
              19580                           17703                                                    Luxe
 20000
                                       7763                           7613                   6698
 10000                                                         2963                   3030
     0
           Luxe class (5 stars)   Business class (4 stars) Medium class (3 stars)   Economy class (2
                                                                                         stars)


         Source: NAI Becar

         At the same time, according to the experts' opinion, average profit index

per room on this market increased by 11% and amounted 134 US dollars (4,150

rubles) for 3* hotels, and 231 US dollars (7,150 rubles) for 4-5* hotels.

         In general 2010 showed growth of interest provided by international

management companies - majority of large-scale operators are working on or

planning to run new hotel projects in the near-term perspective, this forces

main market layers increase service standards and reconstruct old hotels to

meet the international level.

         In conclusion one more trend can be presented: appearance of strategic

projects regarding development of budget hotel chains - both on state and

private investment level, which is promoted by the intention of the Moscow

authorities to create favorable conditions for this market segment.




                                                                                                                  34
Commercial Real Estate in Moscow: business possibilities (market review)


       6. Conclusions and forecasts

       To sum up the provided in the review information the following

significant trends on the Moscow commercial real estate market can be named:

              decrease of vacant space rate;

              stabilization and gradual growth of the price of real estate (both

              purchasing prices and rent rates)

              growth of demand in all segments;

              decrease of high-quality supply;

              decrease of construction pace.

              Main factors to influence the commercial real estate market in 2010

are listed below.

       2010 is sure to be marked by the recovery of commercial real estate

industry. Although due to the long-term investment and therefore slow

respond, this market lags behind the general recovery pace, the turning point

gas already been reached. The positive effect was promoted by increase of

consumers' spendings, recovery of credit market which in their turn provoked

further development of retailing companies (and chains) and growth of

demand for office and retailing real estate.

       At the same time the commercial real estate market progress shouldn't

be overestimated. Demand and supply rates have wide perspectives for

growth, though even now the structure of demand and supply shows shift to

the new level of development, stabilizing regarding objects of different price

segments.




                                                                               35
Commercial Real Estate in Moscow: business possibilities (market review)


       The market of purchase and sale of commercial real estate showed

higher supply in the segment of trade real estate, the most considerable

growth was noticed within the Garden Ring, where according to the experts'

estimate at the end of 2010 supply was 2.5 times higher than at the end of

2009, which is explained by the structural changes (more large objects entered

the market). Beyond the Garden Ring growth amounted only 24%.

       But at the same time the opposite trend is observed in the office real

estate segment where supply has decreased and the sharpest fall is observed

in the central part of the city (about 50%). Probably this was the result of

increased demand for high-quality and marketable facilities within the

Garden Ring Road. And specific volume of new offices commissioning was

not as high as that of new shopping centers.

       End-year price fluctuating in different segments was rather moderate.

However transaction costs have increased, if in 2009 there were discounts up

to 20-30%, in 2010 they didn't exceeds 10%.

       Investment market has been slowly recovering, but due to domestic

investment. foreign investors are still reluctant to invest. Average price rate is

still lower than in pre-crisis period. Apparently, affected by unsteadiness of

positive trends and market payers' lack of capital which could provide the

demand at higher prices. Prices for office, retail and manufacturing and

warehousing facilities were a quarter lower in 2009 than 2 years ago, and for

flexible purpose facilities - more than by 40%. But the this situation cannot be

stable, current 2011 year will probably bring price growth with the trend to

achieve the pre-crisis rate.


                                                                                36
Commercial Real Estate in Moscow: business possibilities (market review)


       Another factor, proving the overcoming the crisis is the observed in 2010

fact that developers show interest for new objects of commercial real estate,

and not only for unfreezing being constructed ones.

       The most successful 2010 was for the lessors. At the background of the

declining supply (due to the low activity during the crisis period and

prohibition to construct new real estate objects the central part of the city after

changing of city authorities) demand went steadily up. The reasons were the

activization of the companies operation and higher consumer spendings of the

population (which in their turn promoted increase of demand both for office

real estate and for trade real estate.

       This resulted in decrease of the vacancy rate and slow but steady growth

of rent rates. So, regarding most high-quality real estate objects vacancy rate

was minimal, almost meeting the pre-crisis level.

       In both sale and leasing markets rates are lower than in the pre-crisis

period. According to the expert's the rent rates in retailing segment are a

quarter lower and in manufacturing and warehousing one - 3-35% lower.

       In 2011 analysts do not predict any considerable changes in the

commercial real estate market environment. Apparently the trends will

remain the same - overcoming the crisis, probably with a bit higher pace:

decrease of the vacancy rate, growth of cost, investment in new construction

increase are expected.

       As for particular figures, according to the experts, in high-quality and

marketable office segment and in street retail segment the rate increase by 10-

15% can be observed throughout the year. Shopping centers rates are probably


                                                                                 37
Commercial Real Estate in Moscow: business possibilities (market review)


to stay at the same level: due to introducing a considerable number of new

complexes in 2010, and minimal, compared to other segments, rate decrease in

the crisis period.

       Supply/demand balance will be broken by the growth of demand which

will affect clients' opportunities to obtain quality and quantity preferences

while leasing and purchasing real estate (as, for example, artificial division of

large-scale facilities into smaller ones, discounts and favorable conditions for

payment etc.) Although it's not the time to tell about the significant

consolidation of the market players' position yet. Apparently, the possibility to

set conditions for the lessees and buyers, which was characteristic of the pre-

crisis period, won't be restored in 2011.

       Special concern of the commercial real estate market can become a lag in

construction investing, observed in the crisis period, which will lead to the

decrease of the growth pace approximately in 2012-2014. However before the

specified period market can consolidate so significantly that the existing

objects will smooth the unsatisfied demand.




                                                                               38
Commercial Real Estate in Moscow: business possibilities (market review)




                                               Analytical department of OPORA-CREDIT

                                                                             Suntsova Daria

                                                                    suntsova@opora-credit.ru




                                                                                          39

				
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