Money Growing: Insufficient Offices

The construction of office buildings in Moscow remains one of the most effective forms of investment. The activity of developers is connected with the stability of the market and the arrival of western developers, considers Welhome. Although the figures of various sources differ, all of them confirm an increased growth in the entrance of new premises to the market in 2007. According to S.A. Ricci / King Sturge, 104,000 sq.m of class A offices, 268,000 sq.m of class B+ and 206,400 sq.m of В- offices have been put into operation in the capital, which is equal to growth of 7.86 per cent, 11.5 per cent and 9.62 per cent accordingly. In total, according to the company, class A offices totaled 921,000 sq.m, and class B+ and В- totaled 3,350,700 sq.m and 2,192,000 sq.m respectively.

According to Blackwood and Praedium, in 2007 in Moscow more than 1.5 million sq.m of office premises entered the market, although according to analysts at Peresvet-Group, the annual increase was no more than 1.1 million sq.m.

According to Russian Research Group (RRG), in 2007 in the office real estate segment there were 876 new offers. Exhibited offices totaled 1,357 premises, 6 per cent more than in 2006. “By the end of December quality office premises in Moscow totaled almost 7.2 million sq.m,” says Lada Belaichuk, a leading analyst at Cushman Wakefield / Stiles Riabokobylko.

A significant event of 2007 was the completion of two large class A office centers, which are part of the Moscow International Business Center Moscow-City on Krasnopresnenskaya naberezhnaya. They are the Northern Tower business center with a total area of 135,000 sq.m and the Naberezhnaya Tower business center with a total area of 167,000 sq.m. In addition there is the Lotte Plaza multipurpose complex on the junction of the Garden Ring and Novy Arbat street. The complex measures about 80,000 sq.m, of which 20,000 sq.m are office premises.

According to Novoye Kachestvo, in 2007 approximately 30 per cent of all class A and B office premises constructed in the capital were put into operation in the Central Administrative District (CAD). A significant share of these were built in Moscow-City.

Among the most significant class A premises put into operation in 2007 were the Lotte Plaza multipurpose complex (79,000 sq.m) on Novinsky blvd, the Severnoye Siyaniye business center (39,000 sq.m.) on ulitsa Pravdy, Khimki business park, (23,500 sq.m) on the first row of Leningradskoye shosse, and Residentsiya (22,000 sq.m) on Rublevo-Uspenskoye shosse. Among class B premises were the Krugozor office complex (59,000 sq.m) on ulitsa Obrucheva, and Lefortovo business center (35,000 sq.m) on the first and second rows of ulitsa Electrozavodskaya.

According to Cushman Wakefield / Stiles Riabokobylko, 349,000 sq.m of constructed and reconstructed class A and B premises were put into operation, or around 40 per cent of the planned input.

Sweet center

Every year it is becoming more difficult to build offices in Moscow. Important news in the office market in 2007 was a restriction of the capital authorities on the construction of office premises in the center of Moscow within the limits of Moscow-City. According to Novoye Kachestvo, a condition of getting a building site in the central part of the city is more often becoming the development of industrial premises. Among announced projects are the Yuzhny Port office complex located at the Voshod paper mill on 2nd Yuzhnoportovy proezd, a shopping and business complex on the junction of Zvenogorodsky prospekt and 3rd Silikatny proezd, etc.

The given trend is quite natural when there is almost a complete absence of free space for construction in the city, on the one hand, and a general trend for improving the image of the city as a result of commissioning industrial premises on the other, considers Blackwood.

Andrei Petrov, a partner at international consulting company Knight Frank, notes the formation of new business premises which will become centers of business activity in Moscow in the next few years. Among the largest will be Moscow-City, Nagatino i-Land and business zones near Belarusky vokzal and Paveletsky vokzal.

“There is active construction of class A and B office centers in these zones and around them, including multipurpose complexes,” he says.

In the opinion of Uliyana Aliyeva, director of the consulting and analytical research department at Mayfair Properties, a positive tendency of 2007 was the integration of the construction of office buildings located outside the central district of Moscow, and also in the region of the MKAD. "This is caused by a desire to obtain maximum profit from investments by developers," she specifies. For example, the total area of Khimki business park is more than 130,000 sq.m, the office complex on ulitsa Dvintsev is 57,800 sq.m, and Krugozor is 59,000 sq.m.

Aydar Galeyev, director of the consulting and research department at МIEL - Commercial Real Estate, notes that in 2007 there was increased demand for quality office real estate premises in towns situated near Moscow with a population from 50,000 to 100,000 inhabitants. This has caused an increase in the interest of developers in realizing projects on the same level and in the same number to Moscow ones. “Office premises have appeared in the Moscow region, for example, Bolshoye Domodedovo, А101, etc.,” he says.

In the last several years there has been a trend on the market for tenants to lease office premises that exceed their own requirements in terms of size and to then sub-rent them. “In doing so companies try to protect themselves against the expenses of moving in case of expansion,” says Marina Petrova, an analyst in the valuation and consulting department at DominoM.

The majority of contracts are for a period of five years, however there are an increasing number of examples of lengthier terms of 7-10 years. Also in the last year, proprietors have preferred to lease out premises in large blocks - from 2,000 sq.m.

Foreign activity

A growth in activity of western and Russian investment funds was a positive trend of 2007. The $150-million UFG Asset Management fund entered the commercial real estate investment market of Russia. Midland Development has announced the construction of an office complex in the Yuzhny Port industrial region of Moscow and the reconstruction of several office buildings on Olympisky prospekt. American fund Wells has also invested funds in the construction of the Dvintsev business center on ulitsa Dvintsev in the North Administrative District of Moscow.

For the construction of the Kaluzhsky business park on Kaluzhskoye shosse (Mamyri) a joint venture has been created, which includes investment fund Marbleton Property Fund (JER Partners, Alfa Capital Partners) and development company Storm Properties. Irish fund Quinn Group recently entered the Russian market when it bought the Kaspi shopping and office center in Northwest Moscow. Israeli company Ocif plans to start construction in 2008 of 800,000 sq.m of commercial real estate near Vnukovo airport and a 200,000-sq.m office complex near Bagrationovskaya metro station. Blackwood notes that the high interest in the office real estate market of international funds has led to a growth in the number of investment transactions, but also to the forming of a trend for a gradual decrease in the rate of profitability.

Famous projects

In 2007 the realization of a large number of new office projects has been announced. Paul Blackman, regional director of office real estate at Colliers International, notes the White Gardens multipurpose office complex (63,000 sq.m of rented office premises) at Belaruskaya metro station which is planned to be built by AIG Lincoln Russia. And also an office complex on Oruzheiny pereulok (developer - DS-Development) with a total area of 190,000 sq.m, including 80,000 sq.m of office premises and 10,000 sq.m of shopping premises. Novoye Kachestvo also notes the Bashnya Rossiya project by ST Towers located in Moscow-City with a total area of 460,000 sq.m, which will become the tallest building in Europe (612 m), and the Zolotoi Vek business center (290,000 sq.m), which is planned to be constructed on Altufevskoye shosse by StroiProgress. And experts at S.A. Ricci / King Sturge note Capital Group’s project Gorod Stolits in Moscow-City, (first phase – 288,700 sq.m), and KR-Properties’ project - Krasnaya Roza (first phase – 61,000 sq.m), the construction of which began in 2007.

The largest transactions

The most significant event of 2007 was the conclusion of the first preliminary rental contract for premises in Nordstar Tower (147,000 sq.m) - the first office skyscraper constructed outside of Moscow-City on ulitsa Begovaya by DS-Development, which is part of the Don-Stroi group of companies. IBS, the Russian leader in realizing projects in the administrative and information technologies sphere, has signed a rental contract for the 13th to the 42nd floors of the Nordstar Tower with an area of 36,840 sq.m. According to experts, it is the largest rental transaction of class A office premises in the Moscow commercial real estate market. The second largest transaction, only slightly smaller, is the rent of 32,500 sq.m of office premises in one of the most successful business centers Belaya Ploshad (Lesnaya ulitsa) by PricewaterhouseCoopers.

Other key transactions of the year are the rent of office premises measuring 18,000 sq.m in the Metropolis business center on Leningradskoye shosse by Procter Gamble, 16 000 sq.m in Profiko business center on Krylatskie Holmy by STS Media, 15,000 sq.m in Severnaya Bashnya business center by Transtelekom, 14,000 sq.m in Naberezhnaya Tower on Krasnopresnenskaya naberezhnaya in Moscow-City by Renaissance Capital, and 29,000 sq.m in Hermitage Plaza business center by Deloitte & Touch. The largest tenants of Citidel office complex on Zemlyannoi Val, according to Knight Frank, became JTI, Rusfinans and Bayer, with 6,790 sq.m, 6,580 sq.m and 5,520 sq.m accordingly.

Colliers International notes the rental of the whole first phase of Khimki business park, which is 19,985 sq.m, as a significant event in 2007. Among the tenants are Ford Motor Company, DHL, a division of IKEA, construction company Schuco International Moskau, and also the Russian representation of Renault.

“The growth of business activity from both Russian and international companies along with an increase in the number of preliminary rent and sale transactions testifies to the high level of demand for class A and B office premises,” says Blackman.

The level of vacant premises in quality business centers in Moscow in 2007 did not exceed 4 per cent. According to Belaichuk, Zamoskvorechye and the southwest submarket have the least vacant class A and B premises, where the level of free premises is less than 3 per cent, and in the Frunzensky submarket where its almost 2 per cent.

An extremely low level of vacant premises in class A office buildings is a result of the fact that by the time the buildings are put into operation the majority of office premises in them have already been rented out, Petrova explains. For example, the majority of premises in the Lotte Plaza business center and Aquamarine business center (2nd phase) had already been leased at the construction stage. There is a trend for tenants to lease office premises larger than they need and then subrent them. In doing so companies try to protect themselves against the expenses of moving in case of expansion.

According to S.A. Ricci / King Sturge, among the largest sale transactions of office premises is Gazpromstroi’s purchase of 130,000 sq.m from a total of 250,000 sq.m in the Mirax Plaza business center. Novoye Kachestvo also notes purchase transactions by Pranas of 25,785 sq.m of premises in the YUKOS office building on ulitsa Dubininskaya, by Transistema of 10,350 sq.m in Nagatino i-Land, by Interros of 8,400 sq.m in an office building at 40 ulitsa Bolshaya Yakimanka, and by GidroGK of 7,480 sq.m in a business center at 51 ulitsa Arkitektora Vlasova. And Mayfair Properties notes the purchase of 63,000 sq.m of office premises in the Federation multifunctional complex by VneshTorgBank and 40,000 sq.m in the Novosushevsky business center by Industrial Investments.

Increasing rent

According to Jones Lang LaSalle, in 2007 Moscow set a record increase in the volume of rented and sold office premises in Europe – up 59 per cent compared with 2006. The growth in demand for office premises was accompanied by an increase in rental rates and a decrease in the share of vacant premises.

According to Yuri Yudakov, head of the office real estate department at Praedium, the market has already broken the barrier of $1,000 per sq.m a year, and some premises, for example, in Moscow-City are being offered at $1,500-$2,000 per sq.m a year. Rental rates for class A office premises in the Central business area, according to S.A. Ricci / King Sturge, have reached $1,200-$1,500 a year (triple net), and for class B+ and В- have reached $967 and $863 accordingly. Experts at various companies differ in their estimations of the average rental rate. For example, Praedium considers that for class A offices the average rental rate is $1,000 per sq.m a year excluding VAT and operational charges, and for class B is $750 per sq.m. Novoye Kachestvo puts these figures at $1,050 and $690 per sq.m a year respectively. According to Knight Frank, in the most prestigious premises of Moscow rent per sq.m a year has increased by 50 per cent, and is unprecedented in the market for the last 10 years.

For comparison: in 2006 rental rates for class A and B offices on average increased 15-20 per cent. “There are several causes that have affected pricing: the low volume of vacant premises, the falling dollar exchange rate, great demand from tenants for quality premises, and the growing activity of western funds interested in purchasing attractive office real estate premises for investment,” explains Andrei Petrov.

Vyacheslav Limonov, general director of Novoye Kachestvo, notes that the increase in rental rates for class A premises has defined the growth in rates for class B offices and the difference between these figures increase at regular intervals. For example, in the IV quarter of 2005 the difference was 35 per cent, in the IV quarter of 2006 it was 36 per cent, and in the IV quarter of 2007 it was 52 per cent. The company explains the high growth rates in 2007 by increased output on the market of plenty of unique quality class A premises - Lotte Plaza, Severnaya Bashnya, Stalnaya Roza, etc. - the rental rates for which are higher than others in the corresponding class put into operation previously.

A significant jump in rental rates has also happened with other premises. For example, in the III quarter of 2007 in the business center at 25/10 Leontyevsky pereulok the rate has increased from $1,100 per sq.m a year excluding VAT and operational charges to $1,300, in Krugozor business center at 30/1 ulitsa Obrucheva from $800 to $1,000, and in Fabrika Stanislavskogo business center (21/1, 2, 18ulitsa Stanislavskogo) from $750 to $1,100.

According to Russian Research Group, the average price of office premises at the end of 2007 exceeded $6,050 per sq.m, which corresponds to 73 per cent growth. The average cost per sq.m within the Garden Ring in 2007 has more than doubled (119 per cent) and totals $11,810, and outside the Garden Ring has increased 64 per cent, reaching $5,124 per sq.m.