Money Growing: Capital Ambition

The city is being supplied with commercial trading areas, and in the office segment a large number of high quality projects have been announced for the next five years, each of which is estimated to be hundreds of thousands of square meters. And currently in the warehouse market there is an investment boom.

Outside investment

The achievement of local developers has caused interest in the city from professional investors, including foreign investors. Among the foreign investment funds and large organizations that have started to operate actively in St. Petersburg from 2006 are London and Regional Properties, Morgan Stanley, EPI Russia, Deutsche Bank, Fleming Family and Partners, Raven Russia, Baltic Property Trust Asset Management A/S, Ruric AB, White Days, etc.

International players are entering the St. Petersburg market, some forming alliances with local builders. The St. Petersburg holding RBI, which works on both housing and commercial projects, created a joint venture with Deutsche Bank in 2006 and in 2007 sold 25% of its shares to Morgan Stanley. In 2006 the Finnish fund EPI Russia signed an agreement with development company YuIT Lentek, which operates in St. Petersburg and also has Finnish origin, on financing the construction of two commercial projects.

Investment transactions are a sign of the development of the region. Investors have bought St. Petersburg business centers (Petrovsky Fort, Grifon), hotels (Pulkovskaya, Baltic, Radisson SAS) and even warehouses (PNK Logistics complex) and this testifies to the maturity of the market.

The estimated returns for investors this year strongly varies depending on the specific segment and the stage of completion of the project. "It is necessary for investors to consider different groups of risks arising at the research stage, the construction stage or from the purchase of an existent business," Igor Luchkov, head of the valuation and analysis department at Becar warns. According to the company, the profitability of investments in shopping space currently wavers around 20-35% if a project is started from scratch and 12-16% if an already operating premises is purchased. For offices the figures are 20-28% and 8-10% respectively.

Shopaholic Developers

In 2006 developers in St. Petersburg set a record for trading space commissioned, exceeding the 1-million sq.m mark and practically doubling the area of the city's shops that meet modern requirements. According to the estimations of various experts, new shopping and entertaining complexes and hypermarkets cover a total of 1.2-1.35 million sq.m, and their effective area totals 850,000-950,000 sq.m.

If we compare these figures to the last three years (no more than 400,000 sq.m of new area, according to IB Group), it is clear that the market has had a growth spurt. According to Becar Commercial Property, for every 1,000 people in the city there is 441 sq.m of high quality trading area.

"In St. Petersburg shopping complexes have at last started to be constructed using an adapted concept instead of just simply being built next to metro stations," executive director of Praktis Consulting and Brokerage Julia Drovyannikova says.

The most outstanding and largest scale openings in 2006 were the two Mega complexes - Dybenko (180,000 sq.m) and Parnas (138,000 sq.m), located on the St. Petersburg ring road, and the shopping and entertainment complexes Grand Canyon (75,000 sq.m, developer Solomon), Continent (60,000 sq.m, developer Adamant), Yuzhny Polyus (35,000 sq.m, developer Symvol), June (46,500 sq.m, developer Regions) and Peter (47,500 sq.m, developer Peter).

Last year developers started to create certain shopping-entertainment hybrids due to increased competition. For example, Planeta Neptune shopping and entertaining complex on Ulitsa Marata has a 5,000-sq.m aquarium on the third floor (the total area of the complex is 28,000 sq.m and the developer is Rubin). This is the first of its kind in Russia.

At Rodeo Drive shopping and entertainment complex on Prospekt Kultura (47,450 sq.m, developer Makromir) work has begun on a full-fledged aqua park with a SPA-zone. Approximately half the floor space of the complex has been devoted to various entertainment facilities. The June complex and the Varshavsky Express complex (34,000 sq.m, Adamant) on Obvodnaya Nabarezhnaya has the same ratio of shopping and leisure facilities.

Year by year the realization of projects increases. Of premises with floor space more than 30,000 sq.m, 27 % of them were put into operation in 2006. In the city there are 14 super-regional and regional shopping and entertainment complexes, covering more than 700,000 sq.m (according to data from Praktis CB).

In 2006 the hypermarket and specialized shopping center markets extremely actively developed in St. Petersburg. Their share of the city's shopping areas, according to Colliers International, already accounts for 21%. О'Кei (developer - Dorinda) has expanded its hypermarket chain by 5 new stores in the city and there are 10 new Karousel stores (Agrotorg) and two new Lenta stores.

The DIY market was practically formed from scratch this year. International DIY brands appeared in St. Petersburg one after another: the UK's Castorama, Germany's Obi, and Finland's K-Rauta. Local operators have also actively developed. Two Metriki stores and one Maksidom store have opened and DIY chain Start debuted on the market.

According to Colliers International, rental rates in professional shopping centers increased 9-13% last year, with the highest rates reaching $2,000-$2,400 per sq.m a year. The majority of complexes are 95-98% occupied. However the threat of a possible overproduction crisis is already seriously worrying market participants.

Yuri Borisov, managing partner at IB Group (operates several shopping centers), considers, that saturation of demand for shopping premises will come not earlier than 2010-2012, after which the market of lessors will become the market of tenants. The constant growth of incomes of the population, a change of consumer preferences in favor of chains, the significant potential of depressed zones within the boundaries of the city, etc, hold back this moment.

However it is evident that even partial reconception of outdated or incorrectly positioned shopping centers will become a mass phenomenon in the near future. The first such examples of these already exist and are Svetlanovsky on Prospekt Engels, Kosmopolis on Vyborgskoye shosse and River House on Ulitsa Akademika Pavlova.

By Becar Realty Group's calculations, in 2007 another 750,000-800,000 sq.m of shopping space will be put into operation. In reality 120,000-150,000 sq.m less will come onto the market, taking into account the traditional delays in construction.

The first big inauguration of the year has already taken place. In the Moskovsk area of St. Petersburg, on Prospekt Kosmonavtov in April work was started on the Peter Raduga shopping and entertainment complex, which will have a total floor space of almost 90,000 sq.m (renting approximately 75,000 sq.m). The developer is Vinci Construction Grands Projets. The investor and proprietor is Ralmir Holding BV, which was created by a group of Geneva bankers especially for the project.

Investments total 130 million euros. The main anchors are Raduga DIY store (18,070 sq.m), hypermarket Real (17,150 sq.m), entertainment complex Kinostar City with a 14-screen, 3,500-seat multicomplex, including an IMax theater, and Media Markt household appliance and electronics store (5,700 sq.m). The average rental rate of the complex is about 250 euros per sq.m per annum. The highest rate reaches 1,000 euros. The predicted rental income is nearly 16.5 million euros a year.

Shopping and entertainment complex projects in St. Petersburg are becoming more and more capital-intensive and complex. Investors have actively started to move to the city centre where until now the large-scale construction of shopping space had practically not been conducted. For example, Aditum investment company has reignited the idea of developing the underground space under Ploshchad Vosstaniya (near to Moscow station). The rough area of the two-level complex will be 42,500 sq.m.

State interest

The St. Petersburg market of business centers is made up of approximately 250 buildings, which at the end of the first quarter of 2007, experts from different companies estimate to cover 1.15-1.38 million sq.m. According to Colliers, for every 1,000 people in the city there is approximately 260 sq.m of quality office space.

In this sector 2006 was characterized by an increased level of investment activity. According to estimations by experts, the volume of office space that entered the market has increased approximately 30% if compared with 2005. Although leading analysts of the city don't share a general opinion concerning how much the market has grown over the last year.

By Becar Realty Group's calculations, almost 110,000 sq.m of new space in business centers has come on the market. According to Colliers, the gain in class A and B segments reached 105,000 sq.m and experts at Praktis CB optimistically name their figure at 243,000 sq.m. Such differences in parameters speaks first of the lack of information, while also the parameters of projects change and the set dates or their realization are chronically not observed.

However by and large it is not the quantity of square meters new on the market that is important it is how it has been developed. The quality of office space is changing. For the first time after the 1998 default, class A business centers are opening one after another in the city. Offers in the last year in this segment have actually doubled, though by the capital's measures this is still paltry. Two business centers (measuring 2,500 and 3,000 sq.m), which are part of the Senator chain created by Imperia Holding, have been commissioned, and Severnoi Stolitsy (5,000 sq.m), two premises by Ryurik Management - Magnus (7,700 sq.m) and Gustav (3,700 sq.m) and Langenzipen by Teorema (10,200 sq.m), etc, have also come on the market.

Analysts at Praktis CB calculate that by the end of last year 48,300 sq.m of class A office space came on the market of which 28,800 was available for rent. As a result, according to Knight Frank St. Petersburg, "the effective area of class A business complexes in the city has reached nearly 55,000 sq.m.

Rental rates in this category of business center range from $460-$1,171 per sq.m per year, including VAT and operating costs (data from Becar Realty Group). The level of vacant premises, according to Colliers, is about 5%.

Class B office buildings is the most dynamically developing segment of the market. According to experts at Praktis CB, in the past year 20 B and B+ business centers with a total area of 144,000 sq.m have come on the market. Experts at Knight Frank estimate the cumulative space of business centers of this category to be approximately 480,000 sq.m.

The most significant projects realized in 2006 are the Kellermann Center (space for rent - 15,000 sq.m), the Baltic Factory (12,600 sq.m), Prizma-center (5,000 sq.m), Grenadersky (6,800 sq.m), etc. The actual range of rental rates is from $360-$794 per sq.m a year. Vacant space stands at 5%.

Class C office space is still the most abundant in St. Petersburg. It currently has a 49% share of the business center market according to Becar Realty Group. At the beginning of 2006 this segment made up 57% of the total business centers in the city. In the past year seven class C properties have come on the market including Grani, Megapark, and Matisova Ostrova.

In the background the growing demand for high quality utilitarian business centers is less popular with investors, while operating class C buildings seem rather successful. The level of vacant space in this category is minimal with a huge disparity in rental rates - from $200 up to $479 per sq.m per year.

Experts estimate rental rates for business centers in St. Petersburg to have grown 10-12% in 2006. If we analyze the changes in rates of specific premises, converting standard units into rubles, then the disparity is from 0% to 40%. Experts at Becar Realty Group calculate that in the last year dollar rental rates have on average increased 20-37%, and ruble rental rates 18-27%.

In 2006 the price of office premises for sale in built business centers and multipurpose complexes have increased on average 45-50%. The increase in prices in the housing segment influenced the increase in the office segment. According to GVA Sawyer, the average cost of offices in good quality buildings planned to enter the market in 2007-2008, is in the range of $1,850-$2,900 per sq.m.

The share of business centers in the central district is 26.5%, with the Admiralteisky district not far behind with a 16.2% share, followed by the Petrogradsky district with a 12.6% share, say analysts at Becar Realty group.

The leader in terms of office space in 2006 was the Petrogradsky district with 27.4% of the total office space, with the Vasileostrovsky district coming in second with a 20.3% share and the central district in third with 12.3% of new office space. The Moskovsky, Primorsky, Frunzensky and Krasnogvardeisky suburbs were supplied with almost 20% of the new offers (almost 47,000 sq.m).

If at the beginning of the 21st century the most courageous investors developed the embankments of the former industrial belt now they are proving that high quality business complexes can be built in quieter suburban areas. "Considering the limited possibilities for development in the city center, it is possible to expect, that in that in the next 5-7 years projects will be realized in the suburbs, and will make up not less than half of the market," Alexei Fedorov, an adviser of the office and industrial real estate department at Colliers International believes.

A 95-meter class B+ office tower (25,000 sq.m) will be part of the Atlantic City multifunctional complex being built by Atalntic on Ulitsa Savushkina. A multifunctional complex on Ulitsa Yakhtennoi by Arsenal-Real estate will also include a high-altitude class B+ business center measuring 40,000 sq.m. In the Moskovsky district StroiIndustriya M is building Leader multifunctional complex, which will include class B and B+ offices and measure 14,000 sq.m.

On the corner of Lunaisky prospekt and Pulkobskoye shosse Adamant plans to build Adamant-Park multifunctional complex with a class A office center measuring 29,000 sq.m, by the end of 2009.

Not less than 150,000 sq.m of offices will be comprised in the mini-town being built by on the former land plot of the Leto cooperative society on Pulkovskoye shosse by Israeli company Fishman Group.

Under forecasts by Colliers International, in 2007 developers will put a record 330,000 sq.m of office space into operation in class A and B business centers. Plans for the next five-year period are grandiose. In connection with the consolidation of projects more and more multifunctional complexes in which office areas adjoin shopping centers, hotels and even housing are being built.

Among top-list projects which will be finished in 2010-2013 are Novy Kvartal by Teorema (more than 300,000 sq.m of class A and B+ office space), Smolny Kvartal by Vozrozhdeniye Sankt-Peterburga (nearly 22,000 sq.m of housing and a 190,000-sq.m class A business center, a business quarter on Maloi Okhte by SetlCity and St. Petersburg bank (150,000 sq.m of class A office space), Nevskaya Ratusha by M, an affiliate of VTB (up to 300,000 sq.m of office space), and a multifunctional complex on Prospekt Medikov by LSP group measuring almost 200,000 sq.m with approximately 60% of the area dedicated for offices.

Despite the scale of investment plans, experts believe that the office market is not under threat from being overstocked in the next few years. Especially as large construction projects are phased and most likely don't finish on time.

Business takes shape

Last year in the vicinities of St. Petersburg a number of large European-standard logistic terminals have started to be built. Under the forecasts of analysts, in the next two years offers of professional warehouse space will at least double, and exceed 1 million sq.m. Now only about 10% (approximately 400,000 of class A and B space) of local warehouses on the market correspond to international standards.

Until recently professional complexes were built for by large manufacturers, shopping chains, and also logistic companies (Containerships Lld Oy, NKK, Avalon Logistics, Astros Logistik) for their own needs.

In 2006 professional investors entered the warehouse sector. The main trend was the development of chains and the inclusion of logistic centers in the structure of multifunctional commercial complexes. Western funds and international banking structures are prepared to finance the construction of similar terminals.

Warehouses are probably not as profitable as high-class office centers, but are simple to build and operate. It is currently the easiest and least risky investment in commercial real estate premises, Oleg Barkov, the general manager of Knight Frank said when commenting on St. Petersburg. The expected returns on your own capital in the realization of warehousing projects are 18-21%. The average returns for an investor (the rate of capitalization) if purchasing an already built premises is 12-13%. Rental rates for the best warehouses are currently $130 per sq.m per year.

Zones adjoining operating and built up areas by the ring road are the most attractive to developers. Almost all warehouses announced to be built are to the south of the city with the southwest and southeast being the most popular. This is strategically important for the presently little-developed north.

Eurasia Logistics (a subsidiary of investment-industrial group Eurasia) is a top developer. In December 2006 it started the construction of the class A Kolpino logistic park, located 8 km from the KAD on trasse E-95. The company plans to build on the 187.7-hectare site a 790,000-sq.m terminal. The project will be split into four phases, the first of which (200,000 sq.m) should be ready in October 2007. In August 2010, the final phase measuring 120,000 sq.m. is expected to be put into operation.

Another developer, International Logistic Partnership (ILP) has two projects near St. Petersburg. Construction of class A terminal ILP Utkin Factory began in July, 2006, in Novosaratovka within the KAD. On the 40-hecatre site, ILP will build a 200,000-sq.m complex. The first 85,000-sq.m phase is expected to be completed in the second quarter of 2007 and the whole terminal should be ready by the end of this year. About 90% of the premises in their first phase already have tenants waiting. 55,000 sq.m have been reserved for 10 years by Relogix and 15,000 sq.m by RLS. Investments in the construction of the complex are estimated at $150 million. These funds were provided by Deutsche Bank Hypo Real Estate. ILP also intends to build a similar terminal in Shusharakh.

British investment fund Raven Russia Limited has serious plans. It is currently working on two projects in St. Petersburg together with Moscow company Espro Development. By the end of 2008 near Pulkovo airport two class A complexes should be built on a total area of 15 hectares. Once completed they will be Kulon-Pulkovo (approximately 34,000 sq.m) and Pulkovo-estate (almost 60,000 sq.m).

At the end of 2006 work at Logopark Neva began which is located in the Shushary industrial zone near to the KAD. The investors are Raven Russia and logistic company Avalon Group, who are participating on an equal basis. The total area of the terminal will be 142,500 sq.m. The first phase (55,000 sq.m) will be completely occupied by Avalon Logistics, while the other two will be offered for rent.

Last summer White Days Investments (a subsidiary of investment fund White Days) bought a 40-hectare land plot in the Vsevolozhsk district near the KAD and the Yanino settlement, to build a 170,000-sq.m top class logistics terminal. The developer is building a second similar project outside of Moscow.

In 2006, the first phase of class A Interterminal-Predportovy logistic complex was completed. The project is being realized by Interterminal (the owners of Big City and Green Mark). Construction will come to the end in the third quarter of 2007 and the total area of class A warehousing will be 65,000 sq.m.

Investors are now including warehouse complexes in the structure of large-scale multifunctional centers. For example, Tsvety envisages the inclusion of one in its industrial-logistic park for which it has allocated about 200 hectares in the Lomonosovskom area. Pantikapei has given a 50-hectare land plot for a class A, 250,000-sq.m terminal as part of the Megacity "LenKAD" project.

It is evident that the potential of St. Petersburg as a European scale distribution center has not yet been realized. The great bulk of freight traffic that transits the city is processed and stored in Moscow, Finland or Baltic countries. However this situation will change when the announced logistic projects will be completed.

The risky zone of hospitality

In St. Petersburg there are a total of 330 hotels with approximately 18,000 rooms. Mini-hotels are also included in these statistics. In total in the city there are more than 520 small hospitality premises that have on average on 10-20 rooms.

According to Knight Frank, 8% of the city's hotel rooms are 5*. Among them are Grand Hotel, Evropa, Koruntiya, Nevsky palace, Astoria, Grand Hotel Emerald, Renaissance Sait Petersburg Baltic Hotel, Radisson SAS Royal and Moika 22 Kempinsky.

The share of 4-stars hotels makes up 20% from the general number. Among them are Angleter, Pulkovskaya, Pribaltiiskaya, Ambassador, Novotel St. Petersburg Center and Petro Palace Hotel. Hotels in the 3* category make up 23% and the most well known are Moskva, Oktyabrskaya, Sovetskaya, Rossiya, Rus, Deson-Ladoga, Neptune and Dostoyevsky.

The city noticeably lags behind European parameters in the ratio of hotels to the population. According to auditing company MKD, St Petersburg has only 7.2 hotel rooms per 1,000 people, while, for example, Milan has 35.

The hotel business in North Palmera is very seasonal. Mid year hotels are only 55% full. The figures for higher class hotels are traditionally higher than this though due to more efficient control. In 2006, according to Jones Lang LaSalle, it reached 68%.

Last year in St. Petersburg not one large hotel was opened. Experts at Knight Frank calculated that with the openings of small hotels only 150 hotel rooms were added to the market. This is approximately 12% of the planned target set by the city administration.

However in Smolnom such failure cannot be connected with low investment activity in the hotel segment, where the main problem is non-observance of deadlines of construction. According to the Investments and Strategic Projects of St. Petersburg committee, there are currently 137 projects with a total of 11,700 hotel rooms at various stages of realization. In 2007 8 hotels with 1,100 rooms should open.

This summer on Birzhevy pereulok work should begin on 5* SPA-hotel Holiday Club Sankt-Petersburg. Finland's SOK Holding (which owns, in particular, the Sokos chain of hotels) will operate it. The hotel belongs to British investment company London and Regional Properties, which at the start of last year bought the premises from the developer, LenSpetsSMU. Investments in the project are estimated at 60 million euros. The hotel is calculated to have 276 rooms and 26 timeshare apartments.

Two more hotels are being built in the city under the Sokos brand name. Sokos Hotel Vasilyevski (255 rooms), which, according to plans, will open in autumn this year on the 8th line of Vasilevsky island. Estonian company Manutent OU acted as the investor for the project. And Sokos Hotel Olympic Garden (348 numbers) near the Institute of Technology metro station is being built by Norwegian company Wenaas Holding.

At stages of realization are projects by international chain operators, which are not yet present in St. Petersburg, including Starwood (brands - Le Meridien, W, Sheraton), Four Seasons, InterContinental (Holiday Inn and Crown Plaza) and Domina Hotels and Resorts.

In 2006 two of the city's largest 4* hotels, Pulkovskaya and Pribaltiiskaya came under the management of the Rezidor SAS chain and now work under the brand name Park Inn. This is connected with the purchase of both hotels by Norwegian holding Wenaas, which owns a network of hotels in Scandinavia. The transactions, which were completed last year, became a sign for the St. Petersburg market.

In the mid-term future experts predict substantial growth in the capacity of the city's hotels. And an increasing number of hotel projects have been announced within the structure of multifunctional complexes.