Elsewhere: Time to Collect meters

Even in the US, despite problems, the prospective growth of the economy according to results for this year will be 2 per cent, although frightened creditors have begun to be very cautious with financing not only for housing, but also for other types of real estate. In Germany, the expected annual increase in gross domestic product is 2.1 per cent. In other countries (Russia, China, Singapore, India) growth will reach 6 per cent and more, and in some places will exceed 10 per cent, for example in Latvia. All this gives analysts the basis for optimistic forecasts.

Rollercoaster

As the New York Times wrote, just recently American offices, shopping centers and hotels have been a sales hit. However, the summer crisis of poor-quality mortgages has spoilt everything. And although, according to research by RREEF (belongs to Deutsche Bank), which specializes in investments in real estate, the share of bad mortgage debt does not exceed 15 per cent of the total volume of American mortgages ($10 trillion), the market has become nervous, and prices in all sectors of real estate have started to fluctuate, especially in the retail segment. This is, in particular, connected with the fact that people have begun to go less often to shops and buy less.

Sam Chandan, the chief economist at American analytical company Reis, thinks that by the end of this year the level of vacant retail premises will rise to 7.6 per cent, the highest figure since 1995. This increase, in his opinion, will be provided by new premises being put into operation, which will further saturate the market. There will be much more vacant retail premises in Dallas, Oakland, Memphis and Clevelend.

The American office sector, according to Colliers International, despite the shake-up, has even improved a little in general in the third quarter. The average figure of vacant premises in this sector in the third quarter has decreased from 12.38 per cent to 12.24 per cent in the previous quarter.

In the central areas of large cities, the share of vacant premises stands at 10.62 per cent (down from 10.86 per cent in the second quarter). In the central areas, 35 large cities included in the research, demand for office space slightly decreased, and in 27 cities it slightly increased. In office buildings located in city suburbs, the average of vacant premises fell from 11.11 per cent to 10.97 per cent. Demand for quality buildings/premises located in city centers, in the third quarter doubled in comparison with the second quarter. Such increased demand was promoted by a delay in office construction. As Ross Moore, senior vice president of Colliers International, noted, despite the turmoil in the housing market, Good figures made in the last few years in the office segment have not worsened.

Analysts at Grubb Ellis note that the index of vacant office space in the third quarter was the lowest in Manhattan (New York) at 4.9 per cent, and the highest in Detroit at 21.7 per cent. By their estimations, from September 2006 to September 2007, the rental rates of class A offices in San-Monteo and Austin rose 30 per cent, and in New York, Boston, San Francisco, Houston and Seattle they rose 20 per cent. But in Detroit rental rates fell 7 per cent.

In prestigious city quarters and on the peripheries, in the third quarter class A offices rose 3.2 per cent and 3.5 per cent in price accordingly. And compared to figures in the same period last year, rates have jumped 15.4 per cent and 9.3 per cent accordingly. On average, in the country, the rent of class A office premises in a city centre costs $143 per sq.m a year. The most expensive offices are in Manhattan, where the rental rate averages $652 per sq.m.

There is still high demand for offices remains in San Francisco and some counties adjoining it. The index of vacant premises within the last four quarters in some places has fallen to 730 points, or by 7.3 per cent.

In the state of Texas the level of vacant premises has fallen by 300 points. At the same time in some areas the index has increased: for example, in some districts next to Los Angeles and Las Vegas by 300-400 points. According to CB Richard Ellis, in the third quarter the level of vacant office real estate premises has remained at the same level as the second quarter of 12.6 per cent, which is less than one year ago (13.2 per cent).

The quick tenancy of a 55-storey, class A office tower just under construction in Manhattan costing $1.3 billion testifies to the condition of the office market. Contracts have already been concluded on almost 98 per cent of the premises. The Bank of America has signed a contract on about 80 per cent of the premises (the bank is participating in the construction of the premises). The lower floors are being leased for more than $300 per sq.m a year, and the top floors for $556 per sq.m. The building will be completely put into operation in May 2008. "It is a phenomenal success," commented Kent Swig, president of Swig Equities, one of the largest development and investment companies in New York, on the situation with the tower.

The situation has also stabilized in the industrial real estate segment. The availability of industrial premises in October of this year is fixed at a level 9.9 per cent, which is below the average index for the last two years. This proves that the construction of industrial premises corresponds to the needs of the market. The lowest parameter of vacant industrial premises is noted in Albuquerque with 3.2 per cent, and the highest in Atlanta with 19.3 per cent.

Leaders and lagging behind

Experts at Colliers International note increasing demand for office premises in many countries. According to their forecasts, by the end of this year the total amount of vacant premises in the world office market will decrease, and accordingly, rental rates will grow. At the same time stagnation will appear in some places.

In Europe, the Middle East and Africa (ЕМЕА) the office segment in the first half of this year continued to grow, although not as quickly as the last six months.

It is expected that in the second half of this year Eastern Europe and the Middle East will continue to overtake Western and Central Europe. As a whole, in the EMEA the index of vacant premises at the middle of this year stood at 7.2 per cent. In several cities of the region, including Abu-Dhabi, Dubai, Istanbul, Kiev, Moscow and St. Petersburg, it was as low as 3 per cent and even less. For the first six months rental rates in this region rose 12 per cent, and the average annual rent was 5.1 per cent, or 25 points, less than in the last six months, and 70 points less, than the same period last year.

In Europe alone, the stream of investments has increased, risks have decreased (above all in Western Europe), and the market has become more diversified.

All diversified commercial real estate premises are becoming deposits for credit and investments. At the same time the volume of freely presented mortgages (commercial mortgage-backed security) has simultaneously increased. Last year in Europe $67 billion worth were issued (52 billion euros). This year a new record is predicted.

The steady growth of the European economy is giving confidence to investors. The annual increase of GDP in this region fluctuates from 1.8 per cent (Denmark) to 11.3 per cent (Latvia). This year an average growth of 2.8 per cent (last year – 2.3 per cent) is expected. Germany (the locomotive of Europe), is now even slightly overtaking France, Italy and the UK in economic development.

The most mature and safe cities for capital investments, according to analysts of PricwaterhouseCoopers, are Paris, London, Stockholm, Munich, Lyons, Helsinki, Madrid, Barcelona, Hamburg and Copenhagen. The ranking is made not only on the basis of received income, but also takes into account the probable investment risks, and the risk rating of each megacity.

Two German cities are 4th and 9th in the top ten, which testifies to the rise that has begun in Germany. In this country increased rental rates, especially in the office sector are expected. In large German cities the annual rental rate in the office segment on average is 25 euros per sq.m. In Western Germany the rates are not very much more than in the East.

In Paris, according to research by CB Richard Ellis, in the central areas this autumn the level of vacant office premises fell to 3.8 per cent, and in the La-Defans area fell to 4.5 per cent. The average figure was 5 per cent.

In the first six months rental rates in prestigious areas of Paris rose 10.5 per cent, in Madrid rose 10.1 per cent, in Stockholm rose 13.5 per cent and in Moscow rose 16.7 per cent. At the same time in Frankfurt, Milan and Amsterdam prices in the first half of the year did not practically change thanks to an abundance of vacant premises. In Dublin, rental rates rose 4.3 per cent. According to experts, next year rental rates will continue to rise in Europe. Germany, Finland, Norway and Sweden will lead. The situation in Spain and Greece will improve.

Although investors working in Western and Central Europe are generally optimistic and this year expect slightly higher returns than in 2006, in a number of markets the net profit hardly covers the investments. For this reason investors need to really stretch themselves to find the most effective investments. Of course, in Western and Central Europe there is space to develop; western megacities still draw huge capital, but because of increased competitive pressure and a reduction of opportunities, investors in search of high profits are compelled to look at other markets.

More often they have begun to pay attention to average European cities and rising markets, among which are Russia and Turkey, with quickly developing megacities - Moscow and Istanbul. In the opinion of western experts, looking into the future, Moscow and Istanbul where the realization of a large number of development projects in the commercial real estate sphere are planned, are more attractive to investors than Paris and London, whose resources are already exhausted. Russia, which has an annual economy growth rate of more than 6 per cent, in this respect even overtakes Turkey, whose currency - the lira - is not so steady, and Turkish inflation exceeds Russian. The strengthening of appeal of Russia, as well as other developing markets, is promoted by the falling dollar exchange rate. Analysts assume that with the further weakening of the dollar the tendency of an overflow of capital to Eastern Europe and Southeast Asia will continue.

In Southeast Asia and Australia the percentage of vacant office premises in the first half of the year slowly crept upwards and reached 7.8 per cent. This is a bad sign, because in the last two years (from December 2004 to December 2006) the percentage of vacant premises moved in the opposite direction. "Blame" for it basically lies on India where there appeared to be more vacant premises than was announced at the start of this year. At the same time, vacant premises in Hong Kong, Singapore, Tokyo and Sydney have become less. It is necessary to mention the Australian city of Perth where there are practically no vacant office premises – 0.7 per cent. This is a world record.

According to the research of RREEF, Southeast Asia continues to remain the most attractive from the point of view of investment. The rental rate of class A offices constantly rises in price, and the demand for good premises is growing. It is expected that by the end of this year rental rates in Tokyo, Seoul, Shanghai and Singapore will increase. In the warehouse market the revival caused by an increase in export/import volumes is also observed.

In Canada, the office market is also moving forward, or to be more exact, creeping forward: changes are insignificant, but nevertheless are positive. Toronto has quite good figures (the largest office market of the country), where the level of vacant premises has fallen to 4.6 per cent. Montreal has less vacant offices, however rental rates have reacted to this with only a small increase. Rental rates of offices in city centers have risen on average by 16 per cent.

In 2008-2010, RREEF predicts a decrease in returns of investments in commercial real estate in Europe of 5 per cent on average and lower, in the US of 7 per cent and in Southeast Asia of 8 per cent.

A queue for offices

Experts at Colliers International name Russia as the most attractive country for investors. An overwhelming number of transactions (more than 80 per cent) in the Russian real estate market in the first six months were carried out by foreign investors (last year it was 60 per cent). The regions also bore no grudge as the flow of investments here is also growing. In the last 2.5 years the volume of investments in regional commercial real estate has totaled almost $1 billion. Large-scale contracts have been signed in Astrakhan, Volgograd, Yekaterinburg, Samara, St. Petersburg, Kazan, Krasnoyarsk and Naberezhnye Chelny.

In Moscow, which has already got used to excitement around real estate and astronomical prices, another record in the office market was made last summer: the volume of demand in the first six months totaled almost 67 per cent of the volume of demand for the whole of last year. Analysts of Jones Lang LaSalle explain this by the arrival of new foreign companies to Moscow and the expansion of already existing businesses. As a result of the increased demand and lack of supply rental rates inevitably rose.

Moscow still holds second place in Europe, by expensiveness of premises, notes Jones Lang LaSalle,, conceding only to London (CB Richard Ellis have Moscow in fourth place, after London, Paris and Dublin). The average rental rate in the second quarter rose 3 per cent in comparison with the previous quarter and 28 per cent compared to the same period last year. Last summer the average annual rental rate of quality Moscow office space reached $1,500 per sq.m. As experts of Jones Lang LaSalle note, by the end of this year more than 1.3 million sq.m of quality offices will be put into operation. However, in their opinion, this will nevertheless not be enough. Moscow currently has the least vacant office premises in Europe with almost 4 per cent for class B and 1-2 per cent for class A business centers. Analysts at CB Richard Ellis, in turn, predict a further rise in rental rates.

According to CB Richard Ellis, in the first six months of this year 940,000 sq.m were called for. More than 22 per cent of all office buildings/premises were rented in the city center and more than 51 per cent between the Third Transport Ring and the MKAD.

Rental rates for retail premises are steadily growing. The average annual rental rate for retail premises in September was $1,850 per sq.m. (in August it was $1,800 per sq.m.). The maximum level in some cases reach $3,400 per sq.m. Retail premises located inside the Garden Ring have the highest rental rates.

Demand in the hotel sphere was high in the first half year remains at an average level of 72.5 per cent. In a number of cases hotel capacity reached 82-85 per cent. Traditionally for Moscow, demand for expensive rooms remains high. Total hotel capacity grew 5 per cent compared with the same period last year. The return on one hotel room has increased 15 per cent. The average cost of a room during some periods exceeded $600 per day. The market cost of rooms is growing. In 2005, when the Hotel Ukraine was put up for auction, one room there cost approximately $300,000. In 2007, during the partial sale of the Balchug-Kempinsky Hotel the price of one room had already risen to $565,000.

Demand for warehouse constructions with areas of 5,000-10,000 sq.m has grown to 26 per cent. For small warehouses (1,000-3,000 sq.m) demand has increased 11 per cent, and for warehouses measuring 3,000-5,000 sq.m demand has increased 20 per cent. The maximum demand is marked for warehouse constructions with an area of more than 10,000 sq.m and totals 43 per cent. The rental rates of class A warehouses total $115-$135 per sq.m a year.

Capitalization (the ratio between returns from real estate, and expenses/investments on the purchase of the real estate) in all segments in the first half of the year was quite decent. In the office sector it was 8.5-9.5 per cent, in the retail sector was 9.5-10.5 per cent, and in the warehouse sector was 10-11 per cent.

Experts particularly note that strategic and financial investors, including banks and funds, have started buying the assets of development companies. In spring of this year Real Estate Special Situations Fund III (the fund of Morgan Stanley) bought 25 per cent of the assets of RBI (developer operating in St. Petersburg). At the same time Russian commercial real estate market players are buying assets of foreign building companies. For example, in April Base Element announced the purchase of 30 per cent of the assets of Austrian firm Strabag, and in May announced its intention to increase its share in the largest German building company Hochtief.

Klondike in the West-End

Moscow is constantly trying to catch up with London, which, as if it feels that, again and again torn to new transcendental marks. As The Wall Street Journal Online notes, in the first half-year rent rates in some areas have grown more than on 50 per cent. Traditionally the most expensive district is the West-End. There most of all - on 58 per cent– raise in price a rent in Knightsbridge area which was chosen by heads of investment funds and financiers specializing on investments in risky, but as much as possible profitable, projects. Average annual rates in prestigious premises vary from $487 up to $760 per sq.m a year. In London City average annual rent costs nearby $410 for 1 sq.m. (increase for half a year - 9,1 per cent). " Growth of rent rates in the British capital has surpassed all our expectations ", - Andy Tyler, the partner of London command Cushman Wakefield admits. The index of availability of free premises in prestigious premises keeps at a level 2-2,5 per cent, in City - 3,8 per cent.

The rise in prices in London office segment promotes the conclusion of preliminary contracts on rent in the buildings existing only in a project. So, company LLP has signed the contract on rent of 1,5 million sq.m. of the premises in a building which will be handed over in 2010 and where 6000 person will settle down. Bank Barclays Capital already rents office with an area nearby 1 million sq.m. which will be completely ready to October, 2008.

Analytics mark an excellent condition of the London economy which basis is made with financial sector and business-service. Within the nearest five years in the city will be created 60 000 new workplaces, experts of CB Richard Ellis predict. The London economy within the nearest years annually will increase at least on 3 per cent in a year, which is above rates of growth of the whole country and above an average index in the European Union.

Investments into the central London in II quarter have made 5,8 billion pounds sterling (nearby $12 billion) – this is the largest three-monthly investments since 1993. More than 68 per cent of transactions with the real estate were made by foreign investors.

Motley rows of investors

Experts pay attention on typical for present time many-side of investors. Today money streams go to the sphere of commercial real estate from many sources: individual investors, private and public closed/opened allocations, financial corporations, pension funds, banks, insurance companies and firms, operating real estate. On a number of markets such huge quantity of investments concentrates, that the offer starts to exceed demand. To take profits in such severe conditions, the companies have to think of extra-ordinary decisions.

Recently a many-sided nature, diversification of business becomes a norm. Many broker firms create construction and investment divisions and banks in the structure, and financial corporations establish companies on management of real estate and realization of projects in this sphere.

Large banks began to show special sympathy to the commercial real estate. American leading professional edition National Real Estate Investor on results of the last year has noted the best investment, broker, development and operating companies working in the market of the commercial real estate. The champion among investors became Bank of America, enclosed in the past year in different type of construction $78,5 billion. In this year the tendency of powerful investments in the commercial real estate has proceeded. So, Whitehall, the fund belonging financial corporation Goldman Sachs, invested in the real estate more than $12 billion, and bank Morgan Stanley - $39,8 billion, experts of Global Real Estate Institute note. PricewaterhouseCoopers as an example of strengthening of investment activity in 2007 mark the purchase of the American firm Equity Office Properties, in which management there is 581 office building with a total area nearby 10 million sq.m. for $39 billion by another American company Blackstone Group, and also intention of a consortium among which founders a founder of Microsoft, Bill Gates, and the Saudi prince, to buy for $3,37 billion network of expensive hotels Four Seasons.

The lion's share of all world investments into the commercial real estate is on offices - nearby 50 per cent, then there is a trade, industrial objects and all the rest. The main world investors are still Americans. However recently financial structures of Canada, Ireland, Australia, Britain, Germany and the Middle East are declared more loudly of themselves. In the Europe a parity of "local" and "another's" investors approximately identical - 50 on 50. In the USA almost all investors are local, they are responsible for over 90 per cent of investments. In Asia the share of foreign investors has reached 32 per cent.

One more bright tendency of todays - creation and activization of special companies specializing exclusively on investments into the real estate and operations with it. These are so-called REIT-funds (REIT - Real Estate Investment Trust). There are 81 of such trusts with a turn of $78,7 billion in Asia. 62,6 per cent of the commercial real estate of Southeast Asia is controlled by Japanese trusts and 23,8 per cent – by Singapore. In 1994 besides the USA, according to data of the bank UBS, REIT-funds worked only in three countries. Now capitalization of the similar companies all over the world exceeds $608 billion, from them capitalization of the American trusts reaches $395 billion. Analytics of company Ernst Young consider, that in following year the share of the USA in the general capitalization of similar funds will be less than other world. Now REIT-funds develop the activity in Australia, France, Britain, Germany, Canada, Singapore, China (Hong Kong) and other countries. In the USA within three years (2004-2006) the revenue of the REIT-companies exceeded 15 per cent.

Actions of REIT-funds freely circulate at stock exchanges. These funds invest directly in offices, apartments, trading and warehouse buildings/premises. In the USA similar trusts distribute 90 per cent profits of investors as dividends, therefore are not assessed with the tax to corporations which makes them especially attractive.