Money-Growing: South Moscow Waking Up to Offices

Moscow’s southern districts suffer from a dire shortage of office space. The reputation of the south-southeastern part of Moscow as an area of low-cost residential estates and enormous industrial zones wards off potential tenants and buyers of office space.

“Southern Moscow accounts for only 0.7 per cent of the office space supply in the city,” explains Viktoria Bekasova, market research consultant at Colliers International. “There are no class A offices there, just a handful of class B buildings, while most premises are class C offices.”

In the opinion of Viktoria Bekasova, the most popular office buildings are situated in the city center, within the Boulevard Ring, in western, northwestern and northern Moscow, within the Garden Ring and in Zamoskvorechye District. The south and southeast of Moscow are the least developed in terms of office space construction, maintains Bekasova.

Offices in South Moscow

But a closer look at the boundaries of the South and Southeast Administrative Okrugs [districts] of Moscow where office space is scarce, according to realty analysts, proves that some areas closer to the center of the city are not entirely neglected by investors.

The closest neighbor of the South Administrative Okrug is Zamoskvorechye with small office buildings of 500 to 3,000 square meters and a few office centers of 5,000 to 10,000sqm, many of which are rated class A and B properties, according to experts from GVA Sawyer.

The only area near the okrug’s border that is of interest to office space developers is the district between Shabolovka Street and Leninsky Prospekt. Farther on lies the gigantic industrial estate of the Likhachev (ZiL) car plant, which has still failed to attract investors. The city authorities have long been nurturing grandiose plans for the development of that area, but so far none has been implemented.

The situation is even more depressing in the areas eastwards and southwards from Nagatino. Respectable tenants show no interest in offices that far from the city center.

According to consultants, annual rental rates for class B office space in southern Moscow range from $320 to $400 per square meter per year, including maintenance charges and VAT. But finding cheaper space is not a problem as most office buildings in southern Moscow are class C properties, with rental rates fluctuating between $200 and $250 per square meter per year.

Given the low demand and inactivity of investors, the office market in the area is characterized by erratic shifts in supply.

“Today the vacancy rate of class B office buildings in the South Administrative Okrug is about 40 per cent,” claims Viktoria Bekasova. “But by examining data on occupancy rates one should take into account the intermittent nature of changes in supply. When large projects are commissioned the vacancy rate is likely to grow as the market needs time to digest new properties. For instance, a 7,000-sqm building offered for sale in the district accounts for nearly 30 per cent of the supply in that segment.”

Historically, southern Moscow developed as an industrial zone (e.g. Kapotnya) and is home to cheaply constructed, municipally-owned residential estates (Maryino, Lyublino). There has never been any demand for top class office centers. As a result, investors cannot count on high rental charges and sale prices. So, is it worth building office centers in an area where there is little profit?

Changing Landscape

South Moscow’s image as an area of municipally-owned settlements and a place where most of the city’s industrial facilities are concentrated began to change in the late 1990s. The first experiment aimed to create jobs if not for white-collar workers, then at least for those with pale-blue collars, was carried out at the very beginning of 2000 when the head of the city government issued a decree (No.53-RP, dated 27 January) authorizing the development of a multi-functional industrial park.

The 4,500-sqm park was built for small, privately owned firms on the site earlier occupied by the dilapidated facilities of the former Universam department store at 10/4, Zagoryevskaya Street. The park was divided into several functional zones to include industrial premises and warehouse facilities, offices and public services enterprises.

Naturally, that project alone, even though it was implemented with the support of the city government, could not play a leading role in boosting office development in the area. However, small business centers financed by private capital began to appear across the south of the city offering good quality premises at reasonable prices.

As almost all the local projects are based in small buildings it is difficult to find detailed information on all of them. However, today many office mansions and complexes developed in the late 1990s and early 2000s, are offered for rent and for sale. Those offers are registered in databases of real estate and consulting firms.

The most expensive of those projects, with a $500 annual rental rate per square meter, is registered in the database of Vesco Realty. The total space of the 8-story building is 5,000sqm, which approximately equals the district average.

The premises are rented by Russian and foreign firms, Vesco’s Web-site reports. The unprecedented rental charges, comparable to rates charged for class A and B office buildings within the Garden Ring, are explained by the location of the business center in the most favorable of all the southern districts – in Zamoskvorechye, near the Serpukhovskaya metro station, on 1st Shchipkovsky Pereulok [lane].

A much cheaper but less prestigious office building is situated at 11, 8th Tekstilshchikov Street. The building with a total space of 6,900sqm and offered for sale at $1,300 per square meter occupies a guarded fenced-in territory of 0.34 hectares, with a parking area for 40 cars. The building is equipped with Otis lifts, an air conditioning system, a conference hall, a caf? and even a sauna.

The properties of the Millenium-1 holding that manages several modern administrative buildings in the Southeast Administrative Okrug constitute a classic example of the southern Moscow office format. One of them is situated near the Kozhukhovskaya metro station, within 700 meters from the Third Ring Road, at 16-18, 2nd Yuzhnoportovy Proezd. The 14,000-sqm office building and warehouse facilities of over 6,000sqm occupy a territory of two hectares.

Another of Millenium-1’s office buildings is situated near the Marksistskaya metro station at 23, Novokhokhlovskaya Street, 100 meters away from the Third Ring Road.

For the most part, those development projects were carried out on territories vacated following the withdrawal of small production units from the area and the subsequent reconstruction of the buildings earlier occupied by them. A new owner would take over the building, either leasing offices of 100 to 200sqm or offering the entire building for sale. Vash Finansovy Popechitel is one of the companies specializing in such acquisitions.

At present, the company is offering an office building for sale at 9a, 2nd Sinichkina Street. The Lefortovo estate occupies a 1.26-hectare area 10 minutes’ walk from the Aviamotornaya metro station and includes 7,000sqm of office and warehouse facilities and 2,000sqm of portable buildings.

A square meter of office space here is leased at $170 to $300 per year, while warehouse and industrial facilities are offered at $120 to 140 per square meter per year. Vash Finansovy Popechitel secured the title deeds to that property by restructuring a major Moscow plastic products maker and securing a controlling stake in Metalloplastmass, which is now offering the class B office complex for sale at $4.5 million.

Sowing the Seeds

Analysts and consultants say that these days there is no rapid office space development in southern Moscow. It transpires, however, that they are mistaken. Construction is being conducted, though not on such a grand scale as in the Paveletskaya business zone or in the Moscow International Business Center Moskva-City. One example is the business center Avia Plaza currently being developed by Corporation TEN, which was awarded the contract for financing the development of a new building for the prefecture of the Southeast Administrative Okrug by the city’s tender commission.

The company is currently erecting a complex of five buildings on a 0.6-ha site at 10, Aviamotornaya Street – formerly occupied by the prefecture – at the intersection of Aviamotornaya and Krasnokazarmennaya streets in Lefortovo. The estate will include a 404-space parking lot. The architectural design was prepared by the Art-Grafik studio.

The prefecture will occupy one of the buildings, while the others will be used for commercial purposes. Office premises will be offered for rent in a 15-story tower of the complex. Three other buildings, too, will house offices, as well as auxiliary facilities, retail areas, public services and catering outlets. The 37,000-sqm complex is to be opened as early as May 2005. The general contractor is SMU Ofisstroi. The total cost of construction is estimated at 28 million euros, according to the investor.

Corporation TEN was established in 2002, and is 99.29 per cent owned by London-based St.John’s Investment Group Ltd. TEN owns retail properties and restaurants in south Moscow; in the third quarter of 2004 its net assets were worth 185 million rubles, with revenues of 121 million rubles.

TEN is one of the most active investors in south Moscow, which can be partially explained by the presence of a former senior prefecture official in the governing bodies of the corporation. Before he became deputy general director of TEN, during the period 2000-2002 Dmitry Sudyin held senior posts in the prefectures of the North and Southeast Administrative Okrugs of Moscow.

ZiL’s Successors

The Nagatino Island area currently occupied by production units of the Likhachev car plant has been chosen as a venue for the construction of a gigantic industrial park, office buildings and residential estates with a total space exceeding 1 million square meters. The project also envisages developing the territory of the island. Over the past five years the city authorities have continuously revised their plans for the area, planning to build a Formula One racing track, then Casino Valley, then an amusement park…

Recently the city government put an end to debates on the future of that area, where, according to the Moscow mayor, there is “dirty reinforced concrete, asphalt that emits goodness-knows-what into the atmosphere, while in winter it is altogether impossible to go there”. The fate of the area was decided in 2003 when the city government issued the decree “On the development of the Moscow city industrial park Nagatino-ZIL” (No.732-PP, 23 September 2003).

The Moscow city government, which owns 90 per cent of ZiL, ordered the car-maker to vacate 12 per cent of its territory for the construction of what is to become the city’s first-ever ‘business incubator’. By the same decree the authorities instructed the Moscow Committee for Architecture to work out town-planning proposals on the development of the surrounding territory, including the Moskva River embankments, the Paveletskaya industrial estate, AMO ZiL, South Port and the Moskvich car plant.

In early summer the Moscow Automobile Company (MAK) took over the management of ZiL. The company was founded by the Center for Investment Projects and Programs (TsIPP) especially to manage the plant’s assets. Observers link the existence of TsIPP to an active interest in the Moscow real estate market on the part of Grigory Luchansky, owner of the Austrian company Nordex, whose annual turnover exceeded $2 billion in the mid-1990s. Luchansky is believed to be one of the most publicity-shy and secretive people in business.

Also, in summer it was announced that MAK would oversee the withdrawal of all the production units of ZiL from the city, except the assembly line, to clear space for the building of the business incubator.

The concept of a business incubator – combining office space with premises for small production units and warehouses – is the most convenient format for small and medium-size businesses, interested in having production facilities and office premises at the same address. The project stipulates using ZiL’s internal driveways as regular city roads and developing the embankments along the Moskva River.

The incubator – to occupy 37 hectares of Nagatino Island – will be financed and developed by the managing company Moscow Business Incubator, in line with a decree by the city government.

For more than a year there was no news of the project. But in autumn of 2004 the town-planning council under the mayor of Moscow unveiled the plans for the future industrial park. The project, now envisaging development not of 1 million square meters – that proved to be only the initial stage of the project – but of 6.5 million square meters, received tentative approval from the city authorities.

Another, less ambitious commercial project on ZiL’s territory envisages the development of office space for companies close to the Bank of Moscow. Currently, a 5.6-ha plot at 16-18, Avtozavodskaya Street is occupied by the dilapidated facilities of what was once ZiL’s shipping department. The project’s planning was overseen by GVA Sawyer.

Evelina Ishmetova, head of the consulting department at the company, says that initially it was planned to build a business park there, comprising a number of small buildings with a total space of 100,000sqm. The volume of investment was expected to exceed $116 million. However, the owner of the site decided to sell the project as is for $15-20 million. So far no buyers have shown up as the price has proved too high.

If the plans of investors materialize, south Moscow will eventually become as attractive for office tenants in the western and northern districts of the capital. It’s quite another matter that as new office premises are developed the need for large-scale investments in the development of local infrastructure will inevitably push rental rates up. While today an office can be rented at $200 per square meter, by 2007 that rate is likely to double.