Guiding Lines: Class A Left Behind

While the city is still short of prime, class A office buildings, it has already seen the emergence of top quality class B developments. There are plenty of building sites in the city where construction of class B business centers is underway; there are buildings, with leases already in place, which may be rated as class A, and not only in terms of their exterior (e.g. Vaviloff Tower, Gas Field, Borodino, etc.).

A closer look at those facilities shows that many class B buildings raised in the 2000s deserve being rated if not as class A, but at least as top quality class B developments, by virtue of favorable locations, convenient entry driveways with direct access from main city streets and proximity to key transport routes, such as Leningradsky Prospekt, the Garden Ring or the Third Ring Road.

Spacious parking areas, panoramic glazing, winter gardens and other features add to their appeal. Class B office developers pay special attention to the exterior and interior design. Perhaps, what we witness these days is the new generation of class B office complexes, which may as well be officially rated as class B+. They are equipped with hi-end engineering systems and centralized management consoles.

A quality class B office project is attractive both to Russian and foreign buyers. Until recently it was commonly believed that investors were focused solely on class A developments. But before the 2000s such deals – being quite rare – received wide media coverage and were discussed in business circles for months afterwards.

Lately, market operators have been reporting first acquisitions of class B office centers by foreign firms and investment funds. Many property analysts insist that even a highly successful class B office project still fails to qualify for investment grade. Moscow has but a handful of truly excellent office projects, included in that category, which are expected to retain their top ranking and appeal for years after their completion. Examples are Berliner Haus, Dukat I, Baltschug Plaza, etc. But other quality developments that do not have an investment grade still attract investors.

Acquisitions of buildings by foreigners have always been seen as a tell-tale sign in Russia, as it is widely believed that they know a good project when they see it and also because they carefully calculate future profits. Another reason is that on the whole Western investors are extremely cautious and do not take risks unless they come across something truly worthy of their attention.

Therefore, it is impossible to ignore foreigners’ interest in Moscow’s class B offices. Moreover, international investors are showing keen interest not only in acquisition of completed buildings, they also join development projects. In the upshot, office landlords, too, benefit from investment deals as the status and market value of their properties grows.

Not long ago, the 40,000-square-meter Novosushchyovsky business center, one of the largest class B complexes in Moscow, currently in final stages of development at 18 Sushchyovsky Val, was sold to the Promyshlennye Investitsii company by the owners of development company MR Group. In the spring of 2006 a foreign investment fund – its name being kept secret – joined the project and pledged to finance construction works. Some analysts may say such cases are still rare. But in the years 2005 to 2006 the market has seen several deals where foreign operators took part.

In 2005, Fleming Family & Partners purchased a class B+ development at 3/9 Lesnaya Street from Sino Real Estate. In November 2005, Amerop Investment Fund acquired George Plaza. The Moscow Business Incubator project under development on the territory of the ZiL car-making plant is expected to be financed by 75 percent through foreign investment. All those projects are rated fully or partially as class B.

Nowadays, class B projects are taking on their own style and characteristic features. Novosushchyovsky, for example, is remarkable for its size. The gigantic complex provides more space than Meyerkhold, Sadovaya Plaza and Olympic Plaza taken together. The future complex Slava on Leningradsky Prospekt will be a cluster of class B offices. Krasnaya Roza is an ambitious redevelopment of an ancient factory building.

It is quite possible that class B complexes such as Krasnaya Roza or developments by Khorus Capital and MR Group will attract attention of potential buyers. Real estate consultants say that Moscow developers, too, have changed. The number of those who pursue top quality projects and hire professionals to develop the concept of future buildings and oversee the development from the beginning to the end grows day by day.

Russian companies, too, show interest in large class B office centers. The acquisition of Petrovsky House by Coalco from Elbert received wide coverage in 2005. The M.O.P.E.-Plaza construction company has signed an agreement with MR Group with a view to acquire an office center at 14 Dvintsevsky Side-street. A complex of class B offices at 11/10 (1-28) Letnikovskaya Street was sold to Capital House by ALM Development. Banks continue to show interest in purchasing offices for own use. In 2005, the Bank of Moscow acquired a top quality class B office center at 9/2 Tryokhprudny Side-street.