Money Growing: In a Big Way

Giant projects

Last year in Yekaterinburg four large projects that should become new points of business activity in the city have been presented. Within the limits of the construction of the new Akademichesky district in the southwest of Yekaterinburg (developer - RenovaStroyGroup) the construction of commercial and social real estate premises measuring a total of 4.2 million sq.m is intended. (The volume of residential real estate will be 9 million sq.m). 1.8 million sq.m will be made up of social and commercial infrastructure of step-by-step availability, while the remaining 2.4 million sq.m will be social-business premises of regional and city value.

RenovaStroyGroup plans to locate some significant projects for Yekaterinburg in Akademichesky: the largest shopping and entertainment center will have an area of 350,000 sq.m, a business center (200,000 sq.m in the first phase of construction), a congress hall, etc. Deputy director of a branch of Renova-Stroygroup in Yekaterinburg Alexander Laptev is sure that the commercial areas located far from the city center will find a consumer.

Meanwhile in the center of Yekaterinburg the large “local Manhattan” business district, as it is called by deputy mayor of Yekaterinburg Victor Konteyev is being formed. The area is being built lengthways along Ulitsa Borisa Yeltsina (formerly Ulitsa 9 Yanvarya), and its heart should become the Yekaterinburg-City project (developer - Ural Mining and Metallurgical Company (UMMC), measuring 700,000 sq.m. Within the limits of the project the construction of four office towers, hotels, a business park and a shopping gallery are planned. In immediate proximity to this project Klass-Story and Red are building multipurpose and business centers (Demidov business center, 150,000 sq.m and a business center on Ulitsa Yeltsina, 34,000 sq.m).

UMMC say that in "Yekaterinburg-City" they count on anchor tenants. "We also expect to capture insufficiently developed segments of the market. These are consulates, trade representatives, diplomatic missions, branches of large transnational companies," says the press service of the company. Konteyev thinks that there are quite a few tenants in this segment. "Now in the city, there are 13 foreign consulates, four of which have opened in the last two years, and this trend will continue. Ten international airlines make flights to Yekaterinburg, and in the next few years this figure should increase to 14-15. There are 370 representatives of international companies that have already opened in the city, and each of these companies should have a decent office," the official explains with optimism.

The Novokoltsovsky business district project was recently presented. Sinara Group has undertaken the realization of this project. According to Yuri Moiseyenko, head of complex development and building projects at Sinara Group, the Novokoltsovsky project assumes the development of a 570-hectare territory in the southeast of Yekaterinburg bordered by the Yekaterinburg – Koltsovo motorway, the Siberian highway and the Yekaterinburg Ring Road (YKAD). "It envisages social-business and industrial-logistic construction. Primarily the construction of production capacities, offices, hotels, shopping centers, exhibition centers, logistics and warehouse terminals," says Moiseyenko.

Most of the land is vacant. A small part is occupied by one of the industrial sites of Sverdlovsk poultry farm, but under a decision of the government of the Sverdlovsk region it will be transferred to the Beloyarsk district. The developer may name the size and format of the premises by the end of 2008 when the concept of the building will be developed. A figure of 5 million sq.m of commercial real estate premises had previously been mentioned. Moiseyenko says that demand for areas in Novokoltsovsky will be met by "diagnosing and pre-guessing the new needs of clients."

The Yekaterinburg administration name Italyansky Kvartal (Italian Quarter) as another large project for the creation of a social-business district to the north of lake Shartash (Dzhardi-Group, UMMC, Avtostroykompleks), where the area of construction will total 250,000 sq.m.

"In the market there is a natural process of the integration of projects. The future is in balanced complex projects," head of the analytical department at the Ural Chamber of Real Estate Mikhail Khorkov explains the trend. In Khorkov’s opinion there is no need to worry about the commercial real estate market becoming overheated in connection with the realization of such large projects. "They can be corrected during realization in view of the demands of the market," he considers. David Oganyan, deputy director of commercial issues and marketing at RDK Group supports this view. "There will be no collapse if large premises are competently and stage by stage brought onto the market," he says. Khorkov specifies that the occurrence of large-scale projects "can only lead to the redistribution of streams of tenants and visitors from both out-of-date formats and older premises."

Trade: The moment has passed

"According to the assessment of the administration of Yekaterinburg, the retail real estate market in the city is the closest to saturation. In the next two years the volume of quality retail areas should double, increasing to 1,500 sq.m per 1,000 inhabitants. However, analysts provide much more conservative figures.

According to Evgeny Kovrov, head of the market research department at Torgovy Kvartal, the provision of quality retail space last year was only 198 sq.m per 1,000 inhabitants. And by 2011 this parameter will increase to 432 sq.m per 1,000 inhabitants. On the market there should be such premises as Megapolis shopping center (25,200 sq.m), Prizma shopping center (35,000 sq.m), Gulliver shopping center (10,500 sq.m), Rock ‘n’ Mall shopping center (48,000 sq.m), Evropa shopping center (35,000 sq.m), the third phase of Greenwich shopping and entertainment complex (58,800 sq.m, total area of whole complex will be 150,000 sq.m), Park House - 2 shopping and entertainment complex (150,000 sq.m), Panorama shopping complex (11,000 sq.m), Fan Fan shopping center (32,000 sq.), and the second phase of the Limerance shopping complex (40,000 sq.m).

The first four premises should have appeared on the market last year, but have not been completed. Kovrov considers that the reason for this is mostly due to the global financial crisis which has seriously complicated the access of developers, working on regional markets, to credit sources. Igor Sukhanov, general director of Oboronsnabsbyt agrees, adding to the aforementioned the rise in price of the cost price of construction by a minimum of 30 per cent, the strengthening of state regulation in construction and increasing competition, including the entrance of market players for whom development is a way of diversifying their business.

"Such factors as the opaque land market and administrative barriers have also contributed. There are also no prerequisites that the situation will become better, in fact everything will only become more complicated," Sukhanov predicts. In his opinion, this will lead to a number of development companies that have overestimated their strength and the opportunities in the retail real estate segment leaving the market. "Everything seems difficult - super-profits remain in the past, the moment has gone, and reconsideration of the market has begun,” says Sukhanov.

Kovrov thinks that during the process of these new premises coming onto the market the following trends will gain in strength: the integration of shopping and entertainment complex formats, complication of the structure of their concepts, increasing share of the entertainment component within the limits of the project, and also a general "weeding out" of the market and replacement of poor-quality premises with modern shopping centers. "The logical reaction to this process is for already existing shopping centers to try to carry out as effective preconception as possible in order to keep existing streams of buyers and strengthen the competitive position of the premises in the long term," says Kovrov about the trend.

Dirizhabl, one of the first shopping centers of Yekaterinburg has already announced plans to re-concept. The changes will happen in two stages. The first will be the construction of the second phase measuring 49,000 sq.m, with a hypermarket and entertainment block. The second stage will be updating the first phase of Dirizhabl (escalators will be installed, the floor covering will be changed, interiors will be updated). "The shopping center was opened in 2001, at that time it was a super successful project. It is one of the top three market leaders, but we understand that in the six years that have passed since it opened, it has ceased to meet the demands of the fast-moving retail real estate market," explains Evgeny Melnikov, commercial director of development company Olips, about the motives behind the re-concept of Dirizhabl.

Boom shopping center, which opened two years ago at the foot of Ulitsa Vainera, has also presented a re-concept project. Despite a good location, the shopping center is only 50 per cent full. The new management, led by Ekaterina Pospelova, director of the Boom shopping center management company, has offered the proprietors the new concept of creating a highly specialized shopping center "for festive occasions." The anchor tenant will become Studiya Artemiya Lebedeva, which has previously not been represented in Yekaterinburg, a concept boutique will be open, and there will be tour agencies selling tours for celebratory or festive occasions, a bank branch that provides credit for festive occasions, a wine-cheese supermarket, and also a supermarket with goods from Japan.

Executive director of development company Kit Kapital Sergey Perevalov, presented a project for the Kit shopping center to be re-concepted. According to him, after the re-concept the area of the premises will increase due to the construction of a third block to 27,500 sq.m and will become an outlet or discount center where seconds and old lines of fashion collections of known brands will be sold. The internal space will be modernized (travelators, escalators, halls, a fountain), there will be a McDonalds in the food court, and an entertainment component.

Last year the concept of Oboronsnabsbyt market complex was altered, and was turned into the Doker retail port. "This format of trade is essentially new to Russia - over 12 hectares there will be 20 separately based specialized shops offering buyers a whole spectrum of goods for construction, renovation and decoration of the home," says Sukhanov.

Chairman of the Ural Council of Operating Companies and Developers Alexei Karavayev talks about another trend. "If earlier the formula of a successful development was "Location, location and once again location," then now it is "Concept, concept and once again concept," and soon it will be "Management, management and once again management," says Karavayev. Sukhanov agrees with him that at the moment this problem is being solved by developers who create for their own operating companies for their premises. "Saturation of the commercial real estate market should push the development of the market of operating companies," Sukhanov predicts.

Rental rates in the most successful and high quality shopping centers in Yekaterinburg are fixed at a level of 2,940 rubles per sq.m including VAT and operating costs. "In the last year they have practically not changed," estimates Khorkov. In his opinion, new premises coming onto the market will not cause essential changes in the cost of rent, at least not in the next two years. "New premises will be guided by a pool of successful shopping centers (Mega, Greenwich, Park House), the highest quality will expose similar rates, and unsuccessful projects will be compelled to reduce the cost of rent," the analyst argues.

Offices grow in height

In the office real estate market several projects are also expected to be put into operation. Besides new business areas in the city separate multipurpose skyscraper complexes are under construction. Andrei Braude, assistant general director of operating company Red, considers it one of the trends of this year. "Earlier the majority of office centers, were made with infrastructure directed exclusively on satisfying the needs of business (conference halls, restaurants with an obligatory business lunch offer), this year interesting concepts taking into the account the needs of micro-districts (modern multipurpose complexes) have begun to appear," says Braude.

In April the multipurpose Strazhi Urala (Guards of the Urals) project was announced. This assumes the construction of two towers in the city centre (a total of 300,787 sq.m with a bridge connecting them). The initiator and investor of the project is Russian company Strazhi Urala and the customer is RDK Group. The towers are expected to be put into operation in 2011-2012. Class A offices will be located in both towers.

It is supposed that only one bank premises will be put up for sale, while the other premises will be leased. The exclusive agent for marketing and tenancy is Cushman & Wakefield/Stiles & Riabokobylko.

In April Atomstroicomplex presented projects for two high-altitude complexes - Evropa and Aziya, each with an area of more than 100,000 sq.m.

Aziya will be located on the crossroads of Ulitsa Malysheva and Ulitsa Moskovskaya and will represent two buildings connected to each other (a 29-storey hotel building with an area of 24,000 sq.m and a 39-storey office building with an area of 45,000 sq.m).

Evropa hotel and shopping complex with a total area of more than 100,000 sq.m will be constructed in the center on the crossroads between Ulitsa Malysheva and Ulitsa Krasnoarmeiskaya. On the 39 floors there will be hotel rooms, shopping zones, apartments, restaurants, and entertainment and sports centers. It is expected to be put into operation in 2010-2011.

Andrei Gavrilovsky, the owner of Antei is trying to complete the third phase of the multi functional Antei complex. The 52-storey skyscraper with an area of 120,500 sq.m should be completed in the beginning of 2009.

Red is also realizing its own projects (Palladium business center with an area of 20,700 sq.m and Senat business center with an area of 11,300 sq.m), Metalline is completing the Onegin Plaza business center with an area of 44,500 sq.m, Uralstroiinvest is building the Graf Orlov business center (36,200 sq.m) and the second phase of the World Trade Centre - Yekaterinburg (51,000 sq.m), Korin Holding is building two Korin centers with areas of 6,000 sq.m and 3,000 sq.m, and Olips is realizing a business center on Ulitsa Metallurgistov with an area of 17,000 sq.m.

А2 is at the stage of construction for its re-orientated department store Nebo, and it is also constructing an office building with an area of 9,360 sq.m. Aston Group is completing the Nakhimov Plaza project with an area of 3,500 sq.m.

By the estimations of the administration of Yekaterinburg, by 2015 the volume of office premises will double and reach 4.7 million sq.m. In the city there will be 64 business centers up from the present 35. The majority of projects under construction that have been announced are class A, however Braude considers that once construction has been completed and the client has assessed the premises, many business centers will be lowered in class.

Chairman of the board of directors of Korin Holding Andrei Bril warns of future problems in the market. In the next two years there will be fighting for clients, assures Braude. This is echoed by head of the design office Klass-Stroi Elena Kaplun. "Those premises which cannot meet the growing requirements of consumers will be compelled to reduce their rental rates or give additional services.

Business centers initially projected according to high international business standards will always have waiting lists of interested people," considers Kaplun. In the opinion of Khorkov, the differentiation of preferences of consumers has already been reflected in prices. According to him, since the beginning of the year office real estate has fallen in price by 5 per cent to a level of 82,780 rubles per sq.m. However, this has occurred due to a reduction in price of class C and D offices. In business centers and apartment buildings, prices for commercial premises "either remain stable, or have slightly grown."

As for rent in existing class B business centers (there are practically no class A premises in Yekaterinburg) at the moment they are 1,295 rubles per sq.m a year. "Since the beginning of the year the rate has risen by 15 per cent. On average each year the rent of quality offices rises in price by 20 per cent," says Khorkov. These trends will remain.

Already now, declared rental rates in business centers under construction are 1,580 rubles per sq.m a year.

No place to store

The biggest deficit is noted in the warehouse and hotel real estate segments of Yekaterinburg. In the warehouse segment the deficit, according to the administration of Yekaterinburg, is 1.2 million sq.m. Today, according to the estimation of officials, the volume of warehouse facilities in Yekaterinburg totals 800,000 sq.m, but already by 2011 should reach 2 million sq.m, which will cover the existing deficit.

The majority of announced projects are being realized by non-local companies. Eurasia logistics is building two logistics centers. One measuring 284,000 sq.m is under construction in Verhnyaya Pyshma (a satellite city of Yekaterinburg), and they are choosing a land plot for the other, a container terminal, and in particular are negotiating with UMMC on buying a site near Bolshoye Sedelnikovo, where according to a general plan of development of the city rail stations Sverdlovsk-Tovarny and Sverdlovsk-Sortirovochny will be moved to.

The Euro-Asian International Logistics Center measuring 130,000 sq.m will be built by Otraslevoi Tsentr Vnedreniya (an affiliate of RZhD). The International Agricultural Logistics Center measuring 80,000 sq.m is under construction using the funds of regional investors and with support from German advisers.

In Yekaterinburg there will also be a Megalogix warehouse. And despite this local companies still think there will be demand for their own projects. According to first vice president of AVS Group Olga Naumova the warehouse and transport-logistics services market is far from saturation. AVS Group is building 200,000 sq.m of class B and B+ warehouse premises on a 40-hectare site, located on the crossing between Yekaterinburg’s Ring Road and Berezovsky Trakt. The new warehouse terminal will be put into operation in 2008-2013.

From 2008 to 2010 another local project – the Chkalovsky terminal (250,000 sq.m of class A premises, the developer is Terminal Chkalovsky) will be put into operation.

"The deficit is provoking a constant increase in prices for warehouse real estate and warehouse services, of on average 25 per cent a year," says Naumova.

According to Jones Lang LaSalle, now rates of rent of warehouses in Yekaterinburg make $110-130 for 1 sq.m a year. In the most qualitative objects - $150 for 1 sq.m a year. Naumova considers, that the nearest years the dynamic will be kept and rates of rent will not fall even for warehouses of C class.

Nowhere to stay

According to the committee of consumer services of Yekaterinburg, on April 1, 2008, there were 46 hotels in the city, 31 means of additional accommodation and two camp sites with 6,078 places. Fillability in the first quarter of 2008 was 62 per cent. The administration hopes that by 2015 the volume of hotel rooms will increase to 11,500.

In 2008, 11 hotels are planned to open in Yekaterinburg, including Hyatt, Accor Novotel, a hotel in the Palladium complex, Onegin Plaza, and the second phase of Atrium Palace Hotel. Another six hotels are under reconstruction: Liner, Iset, Bolshoi Ural, Sverdlovsk, Uktus and Zelenaya Rosha. In the near future work on the reconstruction of the Oktyabrskaya Hotel will begin. By the end of 2008 the volume of hotel rooms should reach 7,000.

Also in Yekaterinburg, according to officials, in the next two years there should be representatives of such hotel chains as Radisson and Marriott.

All hotels under construction correspond to 3* and above, says Tatyana Guschina, an expert of the committee. The director of the Taganskaya hotel thinks that developers will undertake the economy segment "not earlier than the resources of 3* and 4* hotels will be used up," which will take at least two more years.

Konteyev hopes that it will happen sooner. He talks about operating company Hotel Management, which is creating a chain of inexpensive hotels. The company takes under management both existing hotels (1-2*), and agrees with proprietors of hostels about re-profiling them into hotels and managing them in the future.