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2011 OFFICE REAL ESTATE MARKET REPORT Moscow
GENERAL TRENDS• Asoftheendof2011,totalsupplyofthequalityofficepremisesvirtuallyreached12millionsqm.
SupplyofClassAandBpremiseshasgrownby720thousandsqmwhichisthelowestvalueoverthepast7years.
• Bytheendof2011,absorptionofClassAandBofficepremisestotaledabout1millionsqm(excludingtheextensionoftheexistingagreements).Thisisslightlymorethanin2010butapositivetrendcouldbenotedastheabsorptionin2010wasbasedprimarilyupondelayeddemand.
• In2011,rentalratesforClassAandBofficesrosebyalmost10%and6%respectively.ThisgrowthpeakedinthefirsthalfoftheyearwithfearsofcrisisstartingtospreadthroughoutEuropeinautumn.Nonetheless,thefourthquarterappearedtobetraditionallyactiveaccountingforsome40%ofallthetransactionsmadein2011.Wedonotexpectanysignificantreductionindemand,andconsequently,rentalrateswillremainstableinthenexthalf-yearwithsomepotentialforaslightgrowth.
OVERVIEW
2011 OFFICE REAL ESTATE MARKET REPORTMoscow
2
OFFICE REAL ESTATE MARKET REPORT
Key indicators Class А Class B+ Class B-
Thetotalvolumeofqualityofficespace,thousandsqm
11,910
including,thousandsqm 2,340(+13%)* 6,410(+5%)* 3,150(+4%)*
Commissionedin2011,thousandsqm 720
including,thousandsqm 275 262 183
Vacancyrate,% 12,5(-5p.p.)* 17,2(-3p.p.)*
Averagerentalrates**,$/sqm/p.a. 830(+9,2%)* 480(+5,5%)*
Therangeofrentalrates**,$/sqm/p.a. 650-1,200(1,000-1,300***)
350-650 260-400
Operatingexpenses,$/sqm/p.a. 110-210 80-120 50-95
*Changecomparedtotheendof2010
**ExcludesoperatingexpensesandVAT(18%)
***Rangerequestedrentsforpremiumspace
Source:KnightFrankResearch,2012
Mikhail Ioannesyants,AssociateDirector,OfficeRealEstateDepartment
“In 2011, the office real estate market did not change a lot over 2010. A slight growth in supply and a steady demand from tenants and buyers of the office premises resulted in the decrease of the vacancy rate available (12.5% for Class A office premises). On the one hand, this is quite a low value to trigger the growth of the rental rates. On the other hand, this is sufficient to meet the demand coming from most tenants. Still, the range of large office blocks in the completed buildings is still highly scarce. Companies seeking for premises over 15 thousand sq m have no more than 5 options available. Today’s demand is driven by the quality development of the market: a substantial share of the demand for Class A and B+ offices comes from companies leasing offices in the business centers of a lower class. In particular, major lease transactions made in 2011 involving “Kaspersky Lab”, “Mail.ru”, TEK “Mosenergo”, “GroupM”, “Renaissance Credit” appeared to be relocations to the office premises of a higher level. Also, major companies continue to consolidate their premises. Such examples would include transactions made by “GroupM”, “Mail.ru” and “Credit Europe Bank”.
We also note the better quality of the newly constructed office centers: property commissioned in 2010-2011 is of better quality than those completed in 2000-2005. However, the technical data disclosure process by owners leaves much to be desired; in this respect, we are well behind the western markets where the technical disclosure is more organized, thus making it easier for the tenants and buyers to make a decision”.
BC“Citydel”9ZemlyanoyValSt
www.knightfrank.ru
3
Key Events
• InDecember2011,theFederationCounciloftheRussianParliamentauthorizedthechangeofthebordersbetweenthecityofMoscowandMoscowRegionwitheffectfrom1July2012.Thisinitiativewouldmeana2.4timesincreaseintheRussiancapital’stotalarea(up148thousandha).ThecityofMoscowwouldtakeoveranareaspanningbetweentheWarsawandKievhighways.
• DevelopersplancompletionoftheMoscowCityprojectby2015.TheareatoberentedtherewillaccountfornearlyahalfofallClassAareascheduledforcommissioningin2013-2015.Thefollowingprojectsarecurrentlyapproachingcompletion:MercuryCity,CentralYadro,VostokToweroftheFederationcomplex,EvolutionToweraswellasthemultifunctionalfacility(sites15and16).TheEmpireTowerwascommissionedin2011.
• AspartoftheeffortundertakenbytheMoscowDepartmentofCulturalHeritage(Mosgornaslediye)tolimitnewconstructioninthecentreofMoscow,over200investmentcontractswerecancelledforatotalofsome2millionsq.m,including1millionsqmofofficepremises.PermitstobreakbuildingsinthecentreofMoscowissuedearlierwerecheckedwith224ofthemsuspended.
• Investmentsincommercialrealpropertygrewby86%in2011to$8.2billioncomparedto$4.4billionin2010.OfficerealpropertyaccountedforsomeU.S.$3billion.
Supply
Asoftheendof2011,totalsupplyofClassAandBofficepremisesinMoscowstoodat2.3millionsqmand9.53millionsqmrespectively.Thesupplygrowthrateshavebeendecreasingoverthepastthreeyears.In2007,supplygrewby20-25%ascomparedtoonly13%and5%(275thousandsqmand445thousandsqm)in2011forClassAandBrespectively.
Thetwokeydriversforthereductionofnewconstructionvolumesarethedecreaseintheactivitycomingfromdevelopersin2008
(asittakes3-4yearstocompleteanofficecentre,thisisthekeydriverforthelowgrowthrateinsupplyin2011-2012)andthenewpolicyofMoscowgovernment.Revisionandcancellationofanumberofinvestmentprojects,aninitiativetochangethetermsofleaseoflandfordevelopment,abanonconstructionwithintheThirdTransportRingRoad,thechangeofthebordersbetweenthecityofMoscowandMoscowRegion,andpotentialrelocationoftheauthoritiesfromthecentreofMoscow–allthosearrangementscausedrevisionofexistingplansanddelaysofnewprojects.
Office premises continue to grow moderatelyClass Аthousand sq m
3,000
2,500
2,000
1,500
1,000
500
0 2005 2006 2007* 2008 2009 2010 2011 2012 F
%
60
50
40
30
20
10
0
Total stock Vacancy rate Total stock increase, %
Class Вthousand sq m
12,000
10,000
8,000
6,000
4,000
2,000
0 2005 2006 2007* 2008 2009 2010 2011 2012 F
%
50
40
30
20
10
0
*In 2007, office premises underwent a reclassification process, and about 1.8 million sq m of Class A property were degraded to Class B. The growth rate for 2007 does not take into account those premises.
Source: Knight Frank Research, 2012
Total stock Vacancy rate Total stock increase, %
“MercuryCity”14,KrasnopresnenskayaEmb
2011 OFFICE REAL ESTATE MARKET REPORTMoscow
4
Inthenextthreeyears,weexpectanumberoflargeClassAofficecenterstobedeliveredtothemarket.DevelopersplancompletionofnewClassApremisestobecompletedwithintheThirdTransportRingin2014-2015(withsomerareexceptions).
Demand
DemandforClassAandBofficepropertyremainedstrongthroughout2011.Inautumn2011,fearsemergedthatasecondwaveoftheglobaleconomiccrisiswasexpectedbutthosehardlyaffectedthedemand.Atraditionallyhighlevelofbusinessactivitywasobserved:thefourthquarteraccountedforabout40%ofallthetransactionsmadeduringtheyear.Absorptiontotaledabout1millionsqmin2011(thisdoesnotincludeextensionofexistingagreements).Thisiscomparabletothe2010valuewhenthebulkofalltheabsorptioncamefromdeferreddemandoriginatingfrom2008-2009.In2011,thedeferreddemandwashardlyinplacemeaningthatactualgrowthofcurrentdemandtookplace.
AsofficepremisesareleasedinMoscowfor5yearsonaverage,mostofthetenantswhoenteredintoleaseagreementsin2007(whenarecordlevelofabsorptionwasregistered)usedtheyearof2011forconsideringotherrentalopportunities.Alongsidewiththat,mosttenantsextendedtheircurrentagreements,partiallyduetonomoreappropriateoptionsavailable.Inparticular,agreementswereextendedbythetenantsoftheofficepremisesatsuchmilestonebusinesscentresas“KrylatskiyeHills”,“DukatIII”,“LesnayaPlaza”and“AuroraBusinessPark”.
Source: Knight Frank Research, 2012
The delivery of the office premises is expected to remain on the low levels,but in 2012-2013 it will be higher over 2011thousand sq m
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Class А Class В
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 F 2013 F
Map of projects commissioned* in 2011 and scheduled for commissioning in 2012. Office premises concentration in Moscow
*OfficecentreshavingtheirCommissioningCertificatesreceivedin2011.BuildingsareclassifiedaccordingtothemodeladoptedbytheMoscowResearchForum.
Source:KnightFrankResearch,2012
www.knightfrank.ru
5
Therehasbeenasteadydeclineintheshareofvacantareawith12.5%and18.3%forClassAandBpremisesrespectively.However,shouldnoeconomicturbulencetakesplaceandintermsofthelowdelivery,therewillbeapotentialinthenearestfutureforasubstantialgrowthintherates.
Theofficepremisestenants’profilechangedin2011:oilandgascompaniesreducedtheirshare,anddemandfromfinancialinstitutionsaswellasITandtelecommunicationcompaniesbecamestronger.
*marketing, construction, retail, automotive, logistics
Source: Knight Frank Research, 2012, according to the data on transactions closed by the major consulting companies: CBRE, Colliers International,
Cushman & Wakefield, JonesLang LaSalle, Knight Frank
Financial institutions as well as IT and telecom providers are expanding their share in total absorption volumes; the share of consumer goods producers and manu facturers is reducing
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0
2007 2008 2009 2010 2011
N/a
Other*
FMCG
Oil / Gas
Manufacturing
Business services / Consulting / Legal / Insurance
Banks / Finance / Investment
Telecommunications / IT / Media
4%
16%
10%
11%3%
10%
30%
16%
11%
19%
9%
11%3%7%
23%
17%
12%
9%
17%
5%
11%
12%
15%
19%
4%3%
28%
19%
14%
10%
15%
7%
4%
17%
12%
7%
8%
9%
21%
22%
As compared to December 2010, the share of vacant area dropped from 17.4% to 12.5% for Class A and from 20.1% to 17.5% for Class B due to robust demand and insignificant volumes of new constructionClass Аthousand sq m
1,400
1,200
1,000
800
600
400
200
0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 F
%
25
20
15
10
5
0
Delivery Take up Vacancy rate, %
Class Bthousand sq m
1,600
1,400
1,200
1,000
800
600
400
200
0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 F
%
25
20
15
10
5
0
Source: Knight Frank Research, 2012
Delivery Take up Vacancy rate, %
2011 OFFICE REAL ESTATE MARKET REPORTMoscow
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Ключевые сделки 2011 г.
Tenant / buyer Volume of the deal, sq m Property Address Property Name
Lease
Mail.ru 29,930 39LeningradskyAve SkyLight
KasperskyLab 29,840 39LeningradsloeHwy OlimpiaPark
RussianArgiculturalBank* 27,500 1ArbatSt AlphaArbatCentre
Sberbank 19,900 8NovodanilovskayaEmb DanilovskyFort
Grinatom 13,500 8PaveletskayaEmb AFInaPaveletskoy
Morton 11,520 8PreobrazhenskayaSq Preo8
GroupMLLC* 10,800 2Tsvetnoyblvd Legend
RenaissanceCredit* 10,68012bld1ADvintsevSt Dvitsev
8bld.1PresnenskayaEmb. CapitalCity
SchneiderElectric 8,680 12bld1DvintsevSt Dvitsev
CreditEuropeBank* 7,620 12/16OlimpiyskiyAve DiamondHall
MRSK 7,600 42ndYamskayaSt NevskiyDom
"Bud’Zdorov»(Ingosstrakhmedicalchain)* 7,400 12SuschevskiyVal OceanPlaza
End-use purchase
FederalGridCompany 40,000 4BelovezhskayaSt WesternGate
Rusal 28,120 1VasilisyKozhinoiSt ParkPobedy
VTB about16,000 13bld1KrasnopresnenskayaEmb FederationtowerEast
Unicreditbank 11,680 18bld1AndropovaAve Nagatinoi-Land
Investment purchase
MarnisGroup 70,000 22AndropovaAve Nagatinskiy
O1Properties about50,000 44thLesnoypassage LesnayaPlaza
UFGRealEstateabout40,000 9StrastnoyBlvd PushkinskiyDom
10ShabolovkaSt Concord
PSNGroup 37,000** 1ArbatSt AlphaArbatCentre
AlivM 12,200 50А/8bld2ZemlyanoyVal Sadko
VTBCapital projectstock 5LesnayaSt WhiteSquare
TPGCapital 27LesnayaSt WhiteGardens
*KnightFrankactsasaconsultantofthedeal
**Totalarea
Source:KnightFrankResearch,2012
www.knightfrank.ru
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Commercial Terms
During2011,averagerentalratesforClassAandBofficepremisesrosebyalmost10%and6%respectivelyupto$830and$480persqmp.a.(triplenet)respectively.Theratesgrewprimarilyduetotheshortageofthepremiumpropertiesinthecentralpartofthecity.
AsitisnowprohibitedtoconstructnewofficesinthecentreofMoscow,rentalratesnowstarttovarymoredependingontheproximitytotheBoulevardRing.
Rentalratesforthepremiumpremisesareintherangeof$1,000-1,300persqmp.a.withevenmoreexpensiveoptionsavailable.ThosecouldbefoundinthehistoricalcentreofMoscowaswellthebusinessareathatemergedalongTverskayaSt.London’sWestEndistheonlylocationinEuropewheretherentalratesarehigher–about$1,530persqmp.a.
Rentalratesforthemid-levelofficepremisesstoodat$750-1,000persqmp.a.ThelowsegmentofClassAofficepremises($650-800persqmp.a.)isrepresentedbyremoteoptionsaswellasanumberofsitescommissionedrecentlywithahighshareofvacantareaavailable.
InspiteoftheMoscowGovernment’sinitiativetorelocateadministrativecentrestotheso-called“newMoscow”,mostofthemarketplayersstilltendtobelievethatinfrastructuraldecentralizationhasahorizonof20-25years.Inthisconnection,demandforpremisesinthecentralpartofthecitywillremaintraditionallyhighaslongasthewholedecentralizationplanbecomesclearandtransparent.
Astheofficerealestatemarketisgreatlyaffectedbytheeconomicenvironment,manymarketplayerswereconcernedthatdemandandrentalratescoulddropbytheendoftheyear.Butthattrendwasonlyobservedinanumberofcaseswiththeaveragelevelremainingflat. Office centres located on the outer side of the ring road belong to the submarket of the respective ring
Source: Knight Frank Research, 2012
Office premises in the downtown are traditionally in a high demand while the new construction only available beyond the Third Transport Ring. As it was not enough affordable supply in the centre of Moscow in 2011, the share of transactions beyond the Third Transport Ring Road grew%
100%
80%
60%
40%
20%
0
2009 2010 2011
100%
80%
60%
40%
20%
0
Delivery Take up
Outside TTR Between the Garden Ring and Third Transport Ring Inside the Garden Ring
2009 2010 2011
Source: Knight Frank Research, 2012
Rental rate forecast, conservative scenario (as based on the forecast of the major economic indicators): the rates are expected to remain stable in the next six months$ / sq m / p.a.
1,600
1,400
1,200
1,000
800
600
400
200
0
2004 2005 2006 2007 2008 2009 2010 I II III IV I II
Class A Class B2011 2012 F
OVERVIEW
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Office Real EstateStanislav TikhonovPartner [email protected]
Warehouse Real Estate, landViacheslav Kholopov Director [email protected]
Retail Real EstateSergey Gipsh Regional Retail Director, Partner [email protected]
Professional Consulting ServicesKonstantin RomanovPartner, Director [email protected]
Elite Residential Real EstateElena YurgenevaDirector [email protected]
Financial Markets and InvestingEvgeniy SemyonovPartner, Director [email protected]
Valuation ServicesOlga Kochetova Director [email protected]
Saint PetersburgNikolai Pashkov
General Director [email protected]
KyivYaroslava ChapkoBusiness Development Director
Marketing, PR, Market Research, HRMaria KotovaPartner, Executive Director [email protected]
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