Money Growing: Investors on a Warm Spot

The majority of local developers focus on keeping premises and if they decide to sell the property it will be at extravagant prices. It is characteristic that more than half of the investment deals closed in the city, have taken place between foreign companies.

European standard offices

In St. Petersburg the market of ready investment products of office buildings prevails. In the last year (since spring 2007) in this sector seven transactions have been recorded which have become the property of the business public (obviously there are many more non-public purchases.) It is doubtful to consider the given sample representative, but it gives some representation about the investment preferences of buyers. All purchases, with one exception (Kellermann Center business center), were small: their total areas are from 3,000-10,000 sq.m, and they correspond to the category of "strongly average." They are mainly class B business complexes that have long existed on the market, are entirely filled by tenants and don’t have the highest rental rates.

Two office premises were bought at the same time in St. Petersburg by Finland’s Sponda Plc. The first was concluded in May 2007, and was the purchase of the Inform-Future business center on Tambovskaya ulitsa (class B), and is one of the oldest in St. Petersburg.

The Finns bought it for approximately 4 million euros from the developer - German company SPAG. The business complex includes three buildings with a total area of 3,695 sq.m. All premises are rented out mainly to foreign firms with long-term contracts.

A contract for the management of the business center was concluded with Management of Real Estate and Investments Projects, which will manage it until the end of 2015. The current rent is 14,500 rubles per sq.m a year (excluding VAT).

In autumn Sponda Plc became the owner of a business center at 3 Kaluzhsky pereulok. NRC Business Center, located between Tavrichesky Sad and Smolny, came onto the market back in 1992. It occupies a reconstructed building with a penthouse. The area of the building suitable for rent is 2,730 sq.m. It was managed by its owner. At the time the deal was being concluded the complex was completely filled. The owner of the building and the land plot was NRK, 100 per cent shares of which belonged to Cypriot offshore company Baronnessa Trading Ltd. In this case the company was being sold. The transaction was worth $11.5 million. The sum paid for Inform-Future was much more modest. "We advised the proprietor of NRC Business Center in relation to the possible sale of the premies,” says Elena Afinogenova, head of the office real estate department at Praktis Consulting & Brokerage. “In my opinion, the value of the transaction was a little overestimated. Rental rates in this building are approximately 15 per cent lower than the average in the city in terms of corresponding level premises, and in fact the contracts with clients were signed a long time ago. At the same time the sales price, of course, is the market price.

However, to make adequate returns from the premises, the new owner should reconsider the conditions of the contracts."

In Finland Sponda Plc is the largest investment holding in the real estate sphere with assets totaling about 2.3 billion euros (about 1.3 million sq.m of rent-suitable premises). Its largest shareholder is the Finnish government, which owns 34.3 per cent of authorized capital.

"For investment funds, the optimum projects, in my opinion, are projects which combine an operating complex with a stable monetary stream and which are under construction, so that the buyer can create it according to its own standards,” argues Vladimir Sergunin, a senior investment analyst at Colliers International St. Petersburg.

For example, in 2007 Griffin business center at 19-21 Ulitsa Dostoevskaya changed its proprietor. Swedish company Ruric AB acted as the seller. The area of the class B operating complex is about 3,000 sq.m. It is entirely occupied by one tenant - pharmaceutical firm PSI. The base rental rate is $450 per sq.m a year.

The Swedes have decided to extend the existing building by adding another 4-storey building with an area of 4,500 sq.m, which will be positioned as a class B+ premises. When the deal was concluded, construction work had already started. The cost of construction was estimated at approximately $5.5 million.

The investment sale which took place in May at the end of last year concerned both buildings. The seller must transfer to the new owner - Northern European Properties - a completely constructed second building. The deal was worth $23 million. Payment is to be fulfilled in stages, according to the fulfillment of obligations. The prmises has now already been put into operation.

Northern European Properties was created with the participation of one of the largest British investment holdings - London Regional Group - for work in the Northwest of Russia, and also in the Baltics and in Scandinavia.

Another substantive transaction was concluded in March 2008. 100 per cent of the assets of joint stock company Pervomaiskaya Zarya, which were split between several companies (mainly foreign), were bought by EPI Janino BV. This company is registered in Holland and belongs to Evli Property Investments and Scandinavian Manufactrust ApS.

Evli Property Investments is a Finnish investment fund with a capacity of 300-400 million euros and was founded by Evli bank for the realization of development projects in Russia.

Scandinavian Manufactrust ApS is a Danish company, directed by David Kellermann, who prior to the closing of the transaction was the largest shareholder of Pervomaiskaya Zarya.

The main assets of the company are the Kellermann Center business center and its own site measuring about 2 hectares on the periphery of the historical center of St. Petersburg (between 12th Krasnoarmeiskaya ulitsa and 10th Krasnoarmeiskaya ulitsa), which may be used for further office construction. Previously a clothing producer was located on this territory. Now two phases of a class B office complex (in total - 21 000 sq.m) functions here. The construction of a third phase measuring 7,000 sq.m is currently taking place. Work is planned to finish in October. The site is capable of holding another building measuring 20,000-30,000 sq.m with a built in multilevel car park. As it will be constructed from zero it may correspond to class A premises

The operating complex is 97 per cent filled with tenants. The main anchor is San Microsystems SPb, which occupies approximately 8,000 sq.m. Rental rates are 516-540 s.u. per sq.m a year.

The value of the transactions concluded with the former shareholders of Pervomaiskaya Zarya, were not disclosed. However, Swedish investment fund East Capital Amber Fund, which owned a 14 per cent share, has said that its share was sold with a 40 per cent return.

Another Finnish developer - SRV Group - plans to transform an industrial area on Okhta, bordered by Magnitogorskaya ulitsa and Yakornaya ulitsa, and also Prospekt Shaumyana and Prospekt Metallistov. The Finns plan to construct a commercial complex here with an area of almost 700,000 sq.m with the office segment prevailing. The start of the project was the purchase of the operating class B+ Bazen business center at 4 Prospekt Shaumyana.

Becar Realty Group, which reconstructed the incomplete administrative building of the Znamya Truda association into an office center and bought it in 2006, acted as the seller. The new building was handed over to a state commission in December 2007. The investment by Becar in the project was estimated at $11.8 million.

The total area of the 5-storey business center is almost 8,000 sq.m, with rent-suitable space measuring 7,300 sq.m. At the moment 90 per cent of the premises in the building are rented out. Rental rates range from 13,200-15,000 rubles per sq.m a year. Becar continues to manage the business center.

"We initially intended to sell the business center. For us it was a typical development project. However, we planned to sell it much later - in the summer 2008 - when the complex would be completely functioning. However we found a buyer practically straight away, as soon as we have started to advertise it in October 2007. The main applicants were SRV Group and a Spanish investment funds," says Alexander Sharapov, president of Becar Realty Group.

The sale price has been kept secret. According to Sharapov, the Finns were guided by the profitability level of 11 per cent per annum: "This figure served as a reference point for the buyer when Bazen was only half full of tenants. If we had waited, I think we could have made a deal at a rate of 9.5 per cent. This is proof that the business environment for developers is rather profitable."

It is not known if Bazen will be part of the large-scale project of construction in the district and whether it will be necessary to alter the building or take it down. However, according to Sharapov, SRV Group has bought the business center as a profitable business.

The first transaction in the St. Petersburg office market under a lease back scheme, was the sale of the business center that belonged to YIT Lentek at 52 Primorsky Prospekt, which will start to function in June. The 9-storey building, including a built in two-level car park, will measure 18,580 sq.m, with a rentable area of 10,080 sq.m. The majority of the premises will be occupied by the developer, but according to tenant’s conditions. The proprietor of the building will probably become Evli Property Investments.

In April 2007 Finnish company YIT (YIT Lentek is its Russian branch) signed a preliminary sale contract with the fund. The deal will finally be closed once YIT receives the ownership certificate for the constructed premises. According to Peter Forcell, director of real estate projects at YIT Lentek, Evli Property Investments did not participate in financing the construction. "Our company is a classic developer. We select sites, we develop projects and we build, but we do not aim for the long-term ownership of real estate. In Finland YIT also mainly acts as a tenant of buildings used for the needs of the company," says Forcell.

Among Russian developers noted in the market of ready business, is St. Petersburg holding Imperiya, which owns the largest chain of class A and B business centers in the city, which operate under the Senator brand (10 premises in total). In April 2008 Imperiya bought an operating class C office center at 87 Maly Prospekt Petrogradskoi Storoni. The value of the transaction was not disclosed. In autumn 2007 this premises appeared in one of the listings as from $15 million.

The total area of the 4-storey (with cellar) building is almost 5,700 sq.m. "We chose it first of all because of its good location (Petrogradskaya metro station is nearby). The size is also optimum. The office center does not demand complex or major renovations and we will therefore do it stage by stage. In the end we expect to have a typical class B+ Senator center. Those tenants who will want to remain here and will agree to the new rental rates, can keep their premises," says sales manager of Imperiya Andrei Pushkarsky.

There are a lot of completed business centers in St. Petersburg for sale. Among them are not only class B and C premises, but also respectable buildings with prestigious addresses.

For a second year Stroganovsky business center is on sale. The center occupies four floors in the building at 19 Nevsky prospekt. The total area of the building is more than 2,500 sq.m, however the share of offices is only 1,185 sq.m, with the rest of the premises belonging to the city. All the areas in the business center have been rented out. The annual income from rent is almost $900,000. The owner, Korporatsiya S, wants 11.3 million euros for it. The premises will be sold through an auction by the property fund of St. Petersburg. The next tender is scheduled to take place in the near future. However the fund considers the price unrealistic. It would be possible to achieve such a price, if it was the entire building. But the city does not yet have plans to leave the premises.

The rates of capitalization in the office sector are decreasing. The actual range is 10-11 per cent (according to experts at Knight Frank) or even 8.5-9.5 per cent (according to Colliers International). However many proprietors do not accept even those parameters. "Unfortunately, the market valuation of a premises sometimes has only a little in common with the demands of its owner. Quite often the price increases during negotiations, and the funds are left with nothing. Proprietors, who by virtue of the short history of the local office market have not collided yet with the crisis phenomenon yet, are sure that only growth will proceed," considers Maria Ivanova, head of the investment department at Praktis Consulting & Brokerage.

A commodity deficit

In the retail and warehouse sectors investment sales are very for another reason, which is the deficit of profitable premises. "In retail there are actually no completed investment products in the market. Large players, such as Adamant holding for example, do not plan to leave their complexes yet. And shopping centers which are open to offers are unattractive because of mistakes made by developers at the design stage, in the development of the concept, etc,” says Yuri Borisov, managing partner of IB Group. “Investment funds are interested first of all in classic regional malls measuring 30,000-50,000 sq.m, with a stream of income that is absent in the city. Conservative western investors today are guided by quite adequate rates of 9.5-11 per cent, but they are extremely cautious and pragmatic, and therefore pass by bright projects, afraid that such business centers will not provide a stable stream of income."

"Local developers aspire to originality, but in the opinion of investment funds it is not an advantage. They want to purchase typical functional "boxes," although architectural elegance on the whole is welcomed," Sergunin adds.

There have not yet been any public transactions involving operating shopping or shopping and entertainment premises in St-Petersburg. The most outstanding present offer is the Vanity Opera luxury shopping center on Kazanskaya ulitsa, near Kazansky cathedral which, as well as the Strogsnovsky business center, belongs to Korporatsiya S. Its price is also impressive - $80 million. The building has an area of approximately 6,000 sq.m (more than $13,000 per sq.m). The rental revenue from the premises is almost 5 million s.u.

However, the sale of development projects in the retail sphere is also singular. In the summer of 2006 Austria’s Meinl European Land bought from Italian company Promosentro Italia the Northern mall shopping and entertainment center, which is under construction on the intersection between the KAD and Prospekt Kulturi.

At the beginning of 2008 it became known about a deal concluded between Sistema-Gals and French group Apsys, which is one of the largest companies in Europe engaged in the development and management of assets in the retail real estate segment. The parties have created a joint venture, in which each owns 50 per cent. The first project of the new joint venture is the construction of the Leto super-regional shopping and entertainment center on Pulkovskoye shosse as you leave the city. Apsys bought the premises from Sistema-Gals.

The sum of the deal was not disclosed. The opening of the complex, measuring a total of 107,761 sq.m is planned for August. The cost of its creation is estimated at $137 million.

In the warehouse segment there are no transactions involving completed premises. "Investment funds are mainly interested in average size terminals (30,000-50,000 sq.m), and are guided by rates of capitalization of 10-11 per cent. But this dynamically developing market belongs to developers now. Completed products, suitable for sale, will appear in a couple of years," Sergunin considers.