Money Growing: Investors Seek Transparency

Prestige of Uncompleted Projects

New office and retail developments are the largest in volume in the city. The leaders in both those segments are already known. But already today the most far-sighted builders, fearing imminent glut, show an increasingly keen interest in out-of-town real estate and warehouses, the two markets largely underestimated in previous years. As far as the hospitality sector is concerned, hotels are not yet as popular with local investors, due to lengthy paybacks. Hence, major hotel projects are developed chiefly by transnational operators.

Over the past two years over 200,000sqm of office space were launched in the city, according to experts' estimates. “That segment holds the lead in terms of volumes,” says Yuliya Chempinskaya, deputy head of real estate development at the company Povolzhsky Tsentr Razvitiya (Volga Region Development Center). Viktor Antipov, general director at Indest Development, notes that returns on retail projects are just as high but retail operators set tougher requirements than office tenants. “Unlike shops office tenants do not need space for large trucks to drive up to the building, nor do they care about buyer flows,” agrees deputy head of the real estate and construction center Mabis Vladimir Yerofeyev.

“Before 2005, the demand for office space in Samara was 1.5 to 2 times above the available supply,” says Yevgeny Poberezkin, general director of the investment company Dom. But already in early 2006 the city’s office stock grew considerably as the majority of modern business centers operating now in the city were launched in late 2005. Although property consultants say that less than half (70,000sqm) of those properties meet class B criteria, the rest is somewhere between B and C categories. In the opinion of Antipov, the projects that may be rated as top class properties are business centers Vityaz, Delovoi Mir, Skala, Alabinsky, Globus, a business center on Gorky Street, Sky City, Million and Nash Arbat.

Chempinskaya says it is no coincidence that developers have focused on prime quality developments. Samara witnesses arrivals of major nationwide operators who launch their branches in the city and generate demand for top quality office space, she explains. “For major companies – both Samara-based and nationwide operators – a top class office is a matter of prestige,” adds Igor Ryazanov, deputy chief manager at the company Informatika. But for the time being there are no operating class A business centers in Samara. And although developers often position their projects as class A properties, consultants are skeptical. “Existing office centers fall short of class A standards,” says Sergei Vintayev, head of appraisals department at the company Spektr Nedvizhimosti. “Samara's market is anticipating the launch of what is to become the city's first property that does meet the standard. The project is built by BEL Development."

For the majority of local operators a prime office is not essential. They are quite satisfied with properties of lower grade. “They attach importance to a more or less decent quality of refurbishment works and major communication lines, dedicated telephone lines, a web connection, etc,” says Yerofeyev. But new class C office projects are rare, Antipov says. As an example of such he mentions but a handful of projects underway in the city. Those are the office center Olimp and an office building comprising an indoor parking facility at the intersection of Gubanov Street and Moskovskoye Shosse [Motorway], properties at 95 Sanfirova Street (4,000sqm) and at 3-4 Garazhnaya Street (11,500sqm), and business center Strukovsky at 1 Krasnoarmeiskaya Street (3,000sqm).

In 2006, the city expected a large number of office centers to be commissioned and property consultants anticipated a glut. But their fears were dispelled as many developers failed to meet their deadlines. Builders put the delay down to a variety of reasons, blaming the lack of cash, government reshuffle, etc. In late 2006 Samara voters went to the polls to name the new mayor, and before the winner was announced officials refused to issue required permissions for construction. Antipov admits that no more than 65% of all projects in Samara are finalized on time.

Realtors hope that office complexes that originally were to be launched last year will be finalized in 2007. Those are business centers Bel Development (15,000sqm), Aktivny Kapital (5,500), new stages of Vityaz (60,000sqm) and Delovoi Mir (19,000sqm), the complex Lazurny (17,000sqm), Big Ben (13,000sqm) and Vertikal (8,500sqm). Poberezkin expects Samara’s office property market to grow at the expense of deals on the secondary market, as some of redeveloped Soviet-built offices and operating business centers often change hands and their tenant turnover is high.

In their evaluation of the prospects of office property market consultants, nevertheless, do not rule out the possibility of glut. But this is not likely to happen this year. “The rapid growth of business activity in Samara Region and the ongoing expansion of nationwide companies will make office properties attractive for investors in medium-term even against the backdrop of growing competition,” Vintayev is convinced.

Chempinskaya advises investors to put up cash for office units in modern retail and office centers. Analysts at Dom anticipate annual returns of up to 25% on acquisition of such properties, if purchased at early construction stages. Yerofeyev says that last year the prices for office space in the city grew approximately by 25%, rents increased by 10%.

“In 2007, this growth will continue at the same rate,” he says. Vintayev expects rental rates to grow by more than 20%. Recently many properties were put up for sale on the market. Market participants put the price of 1sqm of prime office space in central locations at $2,000; in more remote parts of the city offices were sold at $1,000 to $1,500 per 1sqm. “The sale is of benefit to both parties. Businessmen seek to secure themselves against possible rent increases, whereas developers cannot afford long paybacks,” Chempinskaya explains. However, Vintayev believes that such a state of affairs may result in a shortage of units available for rent. Today, offices in centrally-located, prime office buildings are let at 800 to 1,000 rubles per month per 1sqm; offices in more remote locations are rented out at 400 to 600 rubles, Chempinskaya has reported.

No Shortage in Retail

The sector of retail properties, too, has seen considerable growth recently. In 2006, several major malls were completed in the city, including MegaCity (58,000sqm), Castorama (11,500sqm), the second stage of the shopping center Park Haus (34,000sqm, the total area is now 54,000sqm), Molot, Myagkoff (15,000sqm) and Metro Cash & Carry (8,600sqm). Today, Samara has 46 shopping centers, analysts at Indest Development report. But only twenty of those malls meet modern standards. Those are Moskovsky (120,000sqm), MegaCity and Park Haus. Other remarkable properties, according to the experts, are Imperiya (20,000sqm), Fregat (17,000sqm) and Rus-na-Volge (15,000sqm). “Two main retail corridors have been formed in the city - Novo-Sadovaya Street with six shopping centers built in the area and Moskovskoye Shosse where 15 malls are operating,“ Antipov says.

Developers have announced plans to build 15 other shopping centers in the city. The most ambitious of those are Mega Mall (130,000sqm, IKEA), Planeta (120,000sqm, RosEuroDevelopment) and a shopping and leisure center near the streets Avrory and A.Ovseyenko (90,000sqm, Viktor & Co). Shopping centers Bristol by the company Attis (55,000sqm), a project at the intersection of Solnechnaya and 5-i Proseki streets (Bereg), Rubin (40,000sqm, Rubin) and Most at the intersection of Moskovskoye Shosse and Potapov streets (27,200sqm, Forra), are also quite large, according to Indest Development's analysts.The majority of those properties are to be launched in 2008-2009. The company Attis has pledged to finalize the shopping center Bristol in 2007. Yerofeyev has reported that Most, too, is likely to open this year.

Sale prices for retail space grew by 30% in 2006, Spektr Nedvizhimosti reports. Rents grew only by 10%. Although this year is not likely to see launches of any large malls, real estate consultants do not expect prices to sky-rocket. The market is quite saturated and there are enough offers, they say. Antipov even notes that may retail centers experience the shortage of tenants as competition between retailers intensifies.

“Nowadays, 1sqm of shopping space in the city center may cost $2,000 to $3,000, and $1,400 and over in commuter areas,” Vintayev says. Units on upscale Leningradskaya and Kuibyshev streets where luxury boutiques are situated are sold at up to $3,500 per 1sqm, Chempinskaya says. Monthly rental rates in the city center stand at 1,000 to 5,000-6,000 rubles per 1sqm. According to Yerofeyev, shops in the city's bedroom suburbs are let at 600 to 800 rubles per 1sqm per month.

Almost all large projects in the city are pursued by Samara-based developers. Their advantage is their knowledge of the local specifics. Operators from other parts of the city are warded off by underdevelopment of the local land market. In private conversations federal officials complain that securing a building plot in Samara is virtually impossible without connections in the local government. In their opinion, in other Volga provinces, for example in Ulyanovsk and Saratov regions, the situation is much better. Swedish retailer Ikea first annonced its plan to build a mall in Samara in 2002 but construction had to be postponed several times because of difficulties the company encountered in securing a building plot. It was not until 2005 that construction works were finally launched on the site.

Beginning 2005 construction not just of large shops but of real shopping and leisure complexes began in Samara. Larger malls are more appealing to the buyer, says Galina Sorokina, head of commercial and countryside real estate at Dom. Park Haus features the bowling alley Planeta Bowling, multiplex cinema Kinomechta and a children’s amusement park. The leisure zone at Megakompleks comprises a water park, Karo Film and a bowling alley.

The sector of specialized stores is growing rapidly, too. In 2006 alone the new furniture store Myagkoff was launched, in addition to DIY and household goods stores Sem Gnomov, Megastroi, Castorama and furniture stores MegaMebel, MegaMebel II, Intermebel and Planeta Mebeli already operating in the city. Planeta Mebeli expanded its space from 6,000 to 10,000sqm, head of marketing at the retail company Sergei Popov has reported.

Head of real estate at the company Dissa, Maxim Khvostov, believes that smaller shopping centers, measuring 5,000sqm or less, operating chiefly in densely populated commuter areas, too, have good prospects. The examples of such stores are Apelsin and Orbita. “They offer a civilized alternative to district markets,” Khvostov says. “After all, people are unlikely to drive, say, to Metro Cash & Carry, for their day-to-day grocery shopping.”

On the whole, the retail real estate market remains quite attractive for investors, experts agree. “Major nationwide and international chain operators continue to show interest in the region," Vintayev says. Chempinskaya recommends investing in retail space this year. Later on, after all the planned properties are launched the market may reach the point of saturation, she says. “As early as today investors are switching their attention to warehouses and countryside homes," Sorokina says.

Leaders in Store

The logistics property market has for many years remained one of the most slowly growing segment of Samara real estate. These days, the situation is changing. “Investors are showing an increased interest in that sector," Poberezkin notes. Terminals rated class A and B are being developed in the city, Antipov says. “The arrival of major retail chains does not only result in higher volumes of prime office and retail space. It also boosts qualitative growth of the warehouse market,” he explains. The growth of the safekeeping services market in Samara began comparatively recently, with old unheated developments dominating. Higher grade properties were launched in the city over the past two years.

For quite a long while the city suffered an acute shortage of prime storage space. Major manufacturers Nestle, Baltika, PepsiCo and Coca-Cola, local companies Samara Produkt, Allegreta, drugstore chains Vita and Imploziya had to raised storages on their own.

The shortage is yet to be eliminated but it is no longer as acute as it was before, according to market participants. According to various estimates, Samara has 200,000sqm of class A and B warehouses. The largest complexes are warehouses run by Srednevolzhskaya Logistics Company (a total of 80,000sqm including 55,000sqm of class A and 25,000sqm of class B properties), Armada (25,000sqm), Soyuz (25,000sqm), Nestle (18,000sqm) and Volgatransterminal (10,000sqm).

Samara-based company Viktor & Co. has finalized the first stage of a class A logistics terminal. The property measures 35,000sqm. In 2Q 2007 the company is set to launch the second stage providing 60,000sqm. The total area of the complex is 130,000sqm. A local association Versivo has announced plans to build a class A storage measuring a total of 18,000sqm.

The project will be built in Zheleznodorozhny District, on the site of the household chemicals production facility. The first stage measuring 5,400sqm is to be completed in autumn of this year. The second part - 5,400sqm - is to be launched six months later. The 3rd and 4th stages, 3,600sqm each, will be raised later.

One of the key reasons that have triggered the builders’ interest in warehouse properties is the increasingly tense competition in the sector of offices and shops. Yevgeny Poberezkin says that as the pool of major players on that market has already been formed developers are now looking for new niches. Returns and payback on warehouse construction are comparable to those for office properties and stand at 15 to 18% and 4 to 7 years respectively. Construction of logistics terminals is believed to have the best prospects. Returns on such projects are estimated at 18 to 20% per year.

Last year, international logistics Alers announced its plans to build a warehouse complex in Samara. Before 2009, the company plans logistics centers measuring over 100,000sqm in St. Petersburg, Samara, Rostov-on-Don, Yekaterinburg, Kazan and Novsibirsk. The Russian company KFS Group also nurtures plans to build a large storage in Samara, measuring 20,000 to 50,000sqm. The company is now looking for a building plot, a spokesperson for KFS has reported.

Warehouses operating in Samara are situated chiefly in the area of Kinelskaya Trassa and Zavodskoye Shosse motorways, Tovarnaya Street, in Kirovsky and Zheleznodorozhny districts, close to railway stations, Irina Semenyuk, head of the real estate investment firm Kamerton, has reported.

Last year the price of 1sqm of storage space grew 15 to 20% in 2006, Spektr Nedvizhimosti reports. Rents grew by 15%. Today, 1sqm of space in redeveloped storages costs $500 on average, 1sqm of space in high-grade modern facilities is $1,200.

Hotels Fall Behind

Samara is clearly short of hotel facilities. “The hospitality business brings good profits but an average hotel pays back no sooner than in 5 to 6 years, and those are optimistic figures," Andrei Mironov explains. Mironov heads marketing and sales department at the hotel Bristol Zhiguli. “Not all businessmen are ready to wait for so long.”

In 2004, the city saw the launch of a first class hotel Renaissance Samara, which is still believed to be the best and most expensive hotel in Samara. The property was built by Marriott International. In 2006, another significant project was finalized in the city – the hotel complex Gostiny Dvor Elektroshchit. That project was raised by the company Elektroshchit. The hotel is situated in a remote district of Krasnaya Glinka. The complex provides 45 rooms, including 34 economy class rooms, seven VIP rooms and four rooms in detached two-storied houses. Gostiny Dvor features a restaurant, a VIP hall and spa facilities.

The 4-star Holiday Inn, providing 170 rooms, is slated to be finalized this year. The project is finianced by a local financial and industrial group Volgaburmash. The property will be run by InterContinental Hotels Group. Sweden’s SAS Hospitality that runs chains of Radisson SAS and Park Inn hotels announced its plans to enter Samara hotel market in late 2006.

The market is still dominated by refurbished Soviet-era developments. Among those are Volga (187 rooms), Rossiya (150), Oktyabrskaya (101) and Azimut Otel Samara (75). The most acute shortage is that of moderately-priced hotels (2-3 stars). Occupancy rates are estimated at 50% to 70%. Hotel managers note that centrally located well-furnished hotels are the most popular with business travelers.