Russian Real Estate Market Overview by bigpoppamust

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									Russian Real Estate Market Overview
                    December 3, 2007
                           Budapest

                   David O’Hara
                   General Director
                     DTZ Moscow
Executive summary

 Russia Today

 Real Estate Market in Russia Today:
   Products
   Yields and rents

 SWOT analysis

 Reality vs. Perceptions

 Conclusions

                                        Page 1
Russian Federation

17,075,200 sq km total area
                  • Big country
142 million population
                  • Lots of people
Climate varies from temperate
continental to strongly
continental.       • Cold and Snowy

Political regime: Democracy
                  • Define “democracy”




                                         Page 2
                          Political                    Political
             Socio-      Instability                   Stability
           economic                     Economic
             Crisis                      Growth


                       Deep                        Recovery
                      National                        of
                      Malaise                      National
                                                    Pride




            1990s Russia               Russia After 2000
    SOURCE: DTZ.


Russia has changed dramatically.
                                                                   Page 3
Economy growth
       The Economy Is Growing Faster Than Expected…

 Improving economic and
  political environment

 High oil prices support
  continued growth

 High oil income to be
  reinvested (thus many real
  estate transactions off market)


                                                      Page 4
Economy growth
      The Economy Is Growing Faster Than Expected…

Increase in real income sustains          Major economic indicators, 2002–2008F

a high consumer demand.                 17,5

 Inflation rate keeps on
                                        15,0
                                        12,5
                                        10,0




                                    %
  decreasing:                            7,5
                                         5,0
                                         2,5
    2005: 10.9%                          0,0
                                               2002   2003   2004        2005    2006 2007F 2008F
    2006: 9.0%
    2007F: 8.0%                            GDP growth        Inflation          Unemployment rate

 Russia investment grade:
                                                                                 Source: GosKomStat RF


    Moody’s Baa2;
    Fitch BBB+;
    S&P’s BBB+,
             outlook is ―Stable‖.
                                                                                                Page 5
                                                         The Changing Role of Oil and Consumption in Russian GDP
                                                        Share of GDP Held by Private Consumption      Oil Exports Contribution to GDP Growth
                                                5.0%                                                                                       64%
    Direct Contribution of Oil Exports to GDP




                                                4.5%
                                                                                                                                           54%




                                                                                                                                                 Share of Private Consumption in GDP
                                                4.0%

                                                3.5%                                                                                       44%
                   Growth (%)




                                                3.0%
                                                                                                                                           34%
                                                2.5%

                                                2.0%
                                                                                                                                           24%
                                                1.5%

                                                1.0%                                                                                       14%

                                                0.5%
                                                                                                                                           4%
                                                0.0%
                                                           2001          2002          2003         2004          2005          2006
                                                -0.5%                                                                                      -6%
                                                          SOURCE: DTZ, Rosstat, Central Bank of Russia.

The influence of oil decreases, while private consumption gains importance.
                                                                                                                                                                                       Page 6
                          Nominal Wages in $
800
                                                     Statistics
                                           POP Quiz:Moscow ($688) Lie!
700                                        • N. Novgorod pop.: 1.24 mln
                                           • 63.8% of pop. in($477)
                                                      St. Petersburg workforce
600
                                           • Avg. salary = $369/month
                                                      Ekaterinburg ($459)
500                                        If 1.24 mln * 63.8% * $369 * 12
                                           = $3.5 bn, what is the official
                                                      Novosibirsk ($434)
400
                                           retail turnover of the city?
300                                        • $1.5 bn Samara ($415)
                                           • $2.5 bn Russia ($395)
200                                        • $3.5 bn
                                           • $4.5 bn Chelyabinsk ($384)
100

                                                       Rostov-on-Don ($357)
  0
      2002E        2003   2004     2005        2006E
SOURCE: Rosstat.

      Monthly Nominal wages are growing, but …
                                                                              Page 7
BRICs — we call them RBICs




                             Source: Goldman Sachs – Global Economics Paper No: 99 a
                                                                            Page 8
           Global City – “a city that has a
           direct and tangible effect on global affairs
            through socioeconomic, cultural, and/or
                        political means"


                         Moscow
  London                                                      Paris




                                                          Shanghai


New York

                             Tokyo                              Page 9
Today’s Real Estate Market
Background
 Managed Risk, High Reward

 Fast growing market

 Large and successful projects

 Huge consumerism

 Market indicators Office, Retail
  and Logistic: significant Yields
  compression

 Developers move more and more
  to the ―regions‖
                                     MEGA   Page 10
Developers
Main players on real estate
market in Russia are Developers

Russian developer manages:
land acquisition
getting all kind of permissions
dealing with local authorities
organizing development

These activities are difficult for
foreigners and almost impossible
in the regions.


                                     Page 11
Main Trends in Development
 Significantly increased
  construction volume —
  construction boom;

 ―Hot‖ leasing market;

 Arrival of new international
  developer companies;

 Strong local players;

 Improving quality;

 Development companies started
  to perform IPO to attract cheap
  financing: Sistema Hals, PIK, AFI,
  Raven Russia
                                       Page 12
Moscow office market
By the end of 2006, the total office stock in Moscow reached 5.28
mln sq m, out of which:
Class A: 1.54 mln sq m
Class B: 3.83 mln sq m

The annual new supply in 2006 increased by 31% compared to
2005 and amounted to about 920,000 sq m
Class A: 24%
Class B: 76%

By the end of 2008 the total office stock is expected practically
to double, compared to 2005, reaching 8.25 mln sq m with annual
growth of Class A office new supply exceeding the one of Class B
offices.
                                                               Page 13
Moscow office market




Source: DTZ research



                       Page 14
Moscow office market deals
Office space transacted; 2006 historical record since 1998 with
about 1,300,000 sq m take-up (both leased/pre-lease and sold/pre-
sold).

Sale deals accounted for about 40%.

Class A office transactions less than 25% of the gross take-up,

Lack of available offices results in new deliveries been 95-100%
pre-let before the completion date.

Within the next two years the gross take-up is forecast to remain at
current high level.

                                                                   Page 15
Moscow office market deals




Source: DTZ research




                             Page 16
Moscow vs. other cities
Office Stock (sqm) per 1,000 ppl



 Moscow        506


Budapest             1 047


 Warsaw                 1 502


  Prague                 1 656


  London                      2 260


   Paris                                                      7 538


           0   1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000



 Paris     London    Prague      Warsaw   Budapest   Moscow

                                                                      Page 17
Prime rents and typical lease terms: comparative analysis
 The base rents at prime new buildings in the city center are in the range of $1200-1500 sq m per year.
 Leases in prime new buildings in non-central locations are typically signed at $600-1000 sq m per year
  (base rent). In 2007, prime base rents for Class A and B offices are expected to continue on be an
  upward trend – the prime rental growth in 2007 was 50%. In 2008, rents stabilization is forecast.




    DTZ research


                                                                                                   Page 18
                                                          10.0
                                                                 12.0
                                                                        14.0
                                                                                                16.0
                                                                                                       18.0
                                                                                                                20.0




                                        4.0
                                              6.0
                                                    8.0
                                                                                                                     %
                             Moscow
                                 Kiev
                             Istanbul




   Source: DTZ research
                           Bucharest
                              Prague
                                Lyon
                            Marseille
                            Budapest
                              Lisbon
                          Amst erdam
                            Brussels
                             Helsinki
                                                                                                                         Market indicators: Offices




                             Warsaw
                               Rome
                                Milan
                                Oslo
                          Birmingham
                    Copenhagen
                           Stockholm
                          Manchester
                          London City
                                                                           Moscow: 8% in 2007




                           Barcelona
                                                                                                              2001




                              Madrid
                               Berlin
                           Paris CBD
                                                                                                              2005




                              Munich
                            Frankfurt
                                                                                                              2007




                          London WE
Page 19
Office rents
Office centers: base rental rates
 St Petersburg:                     Moscow:

Class A: $500—850                   Prime class A: $1000—1500
Class B: $400—500                   Class A: $700—1000
(per sq m per annum, including      Class B: $450—700
operating expenses, VAT extra)      (per sq m per annum, excl. Opex $60—
                                    130 and VAT )

Class A average terms               Fixed or indexed at CPI for Class A,
are 3 to 5 years                    average term 5 years,
                                    leases of 7—10 years are more often;
Class B terms
are 11 months to 3 years            Class B terms are 11 months
                                    to 5 years.

Last two years rates were growing
at an average of 7-10% per annum
                                                                       Page 20
Retail in Russia – Disposable Income Comparison
                            Houston, USA   USA %   Moscow     Russia

                                USD         %        USD        %

Typical Mid-Manger Salary     $60,000      100%    $24 000    100%



Personal Income Tax           ($13 800)    -23%     (3 120)   -13%

Mortgage/Housing              ($12 000)    -20%     ($480)     -2%

Car Loan                      ($6 000)     -10%       0        0%
Student Loan                  ($5 000)      -8%       0        0%

Credit Card                   ($7 200)     -12%       0        0%
Home & Medical Insurance      ($3,000)      -5%     ($500)     -2%

Food                          ($5,800)     -10%    ($7 200)   -30%



Disposable income             $7,200       12%     $12 700    53%

                                                                       Page 21
                                       -
                                           2.00
                                                  4.00
                                                         6.00
                                                                8.00
                                                                       10.00
                                                                               12.00
                                                                                       14.00
                                                                                                           16.00
                                                                                                                   18.00
                                                                                                                           20.00
                                                                                                                                  %
                           Moscow
                          Budapest




          DTZ research
                           Marseille

                            Prague
                              Lyon
                            Warsaw
                            Helsinki

                           Brussels
                              Paris

                              Rome
                                                                                                                                      Market indicators: Retail




                              Milan
                               Oslo
                          Barcelona

                             Madrid
                         Stockholm
                         Amsterdam
                              Berlin

               Copenhagen
                                                                                                                           2001




                             Vienna

                            Munich
                           Frankfurt
                                                                                                                           2005




                             Zurich
                    Birmingham

                         Manchester
                                                                                       2007: Moscow 8,5%
                                                                                                                           2007




                           Glasgow

                         London WE
Page 22
                                        Prime Retail Investment Yields in Moscow
                                               and Major European Cities
                                   20

                                   18

                                   16
                                                         7%
          Inverstment Yields (%)




                                   14
                                                                                                       Moscow
                                                                         9.5%
                                   12                                                                  Paris
                                                                                                       London
                                   10
                                                                                                       Milan
                                    8                                                         3.5%     Berlin

                                    6                                                                  Warsaw
                                                                                                       Prague
                                    4

                                    2

                                    0
                                         2000     2001   2002   2003   2004     2005   2006     2007
                                        Source: DTZ.


Moscow still enjoys a hefty yield premium over the rest of Europe.
                                                                                                                Page 23
                                               Prime Shopping Centre Yields*
                                   Moscow             St Peterberg      Regional Cities
            14


            12


            10
Yield (%)




             8


             6


             4


             2


             0
                        2006                2007           2008        2009                         2010


                 SOURCE: DTZ Estimates.                                       * Estimated Net Initial Yields.


Regional cities will continue to enjoy a yield premium.
                                                                                                                Page 24
Russia is not just Moscow                                                              City population     Citizens, mln   Cities

                                                                                            >1 mln            25 568         11
– The regions hold 93% of Russia’s population.                                            0.5—1 mln           14 903         23

– Russia holds more than a third                                                        0.25—0.5 mln
                                                                                        0.1—0.25 mln
                                                                                                              13 698
                                                                                                              14 300
                                                                                                                             40
                                                                                                                             94
        of Europe’s 100 largest cities.                                               Russian Federation     142 753




            St. Petersburg (700 km from Moscow)


             Moscow



                               Ekaterinburg (1667 km from Moscow)
                   Samara      Chelyabinsk (1919 km from Moscow)
                   (1040 km from Moscow)
    Rostov-on-Don
    (1226 km from Moscow)                         Novosibirsk (3191 km from Moscow)




                                                                                                                           Page 25
Shopping center developers active across the Russia

                                       1 Project
                                       2 Projects
                                       3 Projects
                                       4 Projects
                                       5 Projects
                                       6 Projects

                                       7 Projects

                                       8 Projects

                                       18 Projects




                                                      Page 26
Regional Scorecard:
                                    Moscow Holds   Regions Hold
                                     Advantage      Advantage
 Investment Yields                                      +
 Freehold Acquisition Possibility                       +
 Lack of Competition                                    +
 Lower Land Costs                                       +
 Lower Construction Costs                               +
 Purchasing Power                        +
 Pipeline                                +
 Market Transparency                     +
 Infrastructure                          +
  SOURCE: DTZ.

                                                                  Page 27
Retail rent rates
Retail centers-rental rates
Anchor tenants:
$200—300 per sq m p.a. in Moscow
$150—250 per sq m p.a. in regions

Retail gallery: $400—2600 per sq m p.a.
excluding operating expenses and VAT

Selling price of shopping centers
Prime Yields in Moscow and St. Petersburg 8 – 8.5% .

Yields for in regional cities are with 2—3% premium compared to
Moscow and St. Petersburg.

                                                              Page 28
SWOT analysis
                Strengths                          Weaknesses

       Steadily economic grow              Lack of investment grade
       Investment grade for Russia          product
       High demand of any RE assets        Market transparency
       General high liquidity in the RE    Legal structure
        Market                              Debt market (project financing)


              Opportunities                           Threats

     High potential in the regions         Many projects in pipeline but
     Despite all the project in             risk of delay for developments
      pipeline, Real Estate market          Russian Investors currently
      still underdeveloped                   with high liquidity to invest
     Hotel market                          Geo-political issues

                                                                               Page 29
Challenges: Perceptions vs. Reality
 Russia: Living Conditions
                                      Developing Real Estate in the
 1. Pre-1985 – Communism              Biggest Country in the World
        ―No money to spend,
         but nothing to buy.‖         • Supply Chain Management
                                      • Construction Management
 2. Perestroika – Yeltsin Years       • Health and Safety
     ―We were better off before.‖     • Environment and Ecology
                                      • On-time Delivery
 3. Post-1998 – Putin Years
      ―Availability. Opportunity.
           Consumerism‖


                                                               Page 30
Conclusions

         Russia is a Big Place! – big population, large projects and opportunities


              Why Does Real Estate Market Work? – oil and consumerism


         Strong local players but increasing presence of international companies



Macroeconomics – during last 6 years Russia’s Sovereign Risk decreased from 13,6% in
 2006 to 1,16% in 2006 (Spread between Russia’s Money Market Spread over US T Bills).




                                                                                     Page 31
    Incomes per Capita, 2050




Goldman Sachs is more optimistic than me!!   Page 32
Conclusion:               Incomes per Capita, 2050




              Goldman Sachs is more optimistic than me!!
                                                           Page 33
Thanks!
                    Come to Moscow
                   & see for yourself!!
                              DTZ Moscow
                        ul. Gasheka, 7, Suite 360
                        Moscow, Russia 123056

                         Tel. +7 (495) 748 1111
                         Fax. +7 (495) 787 8887
           Ferit Yildirim                        David O’Hara
          Managing Director                     General Director

      Mob. +7 (985) 970 3097               Mob. +7 (985) 999 7872
       ferit.yildirim@dtz.com               david.ohara@dtz.com

                                                                    Page 34

								
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