Money Growing: Guessing on the Crisis

Making forecasts in the sphere of commercial real estate in 2009 is certainly interesting, but does not have much practical use. For the first time in history events in the market are developing so dynamically that experts are changing their points of view week by week, and developers altering projects, are confused by the maps being set out by analysts. Quite probably, this article being written at the end of November, will be perceived with known condescension and humor in December, which is good if not so black.

Market players are divided into two camps. The pessimists say that everything is as bad as it can get, and the optimists disagree and say that everything could be much worse. Simultaneously both groups call journalists in order for panic not to spread and find something positive. Although not as persuasive as at the beginning of autumn. Probably, October was the turning point; when everybody realized that not just certain risky developers and superfluous aggressive chains would have difficulties. "Next year will be difficult for all of us - financiers and developers,” says Alexander Olkhovsky, president of the Guild of Managing Directors and Developers and vice president of VTB. “We need to be ready for the fact that in 2009 it will be almost impossible to get loans for the development of projects. In my opinion, it will be even less realistic to count on investments from carrying out IPOs or involving an external partner. Although the total amount of monetary funds in the economic system has not changed because of the crisis. It has not become less for example because someone has not carried out their obligations or somewhere there was a default, etc. It has simply now been concentrated in certain points, which keep the money in. It is a question of trust between market participants: between banks, between banks and borrowers, between these borrowers and their future suppliers, etc. Now we are observing a deterioration of the situation. Instead of the restoration of trust a crisis is developing. For trust to be gained again, stabilization is necessary. We will reach a certain point from which we’ll start over, and gradually greed will beat cautiousness. When this will happen, the monetary funds that are now not being used will start to be. It seems to me, trust will be regained in a year."

"We have always been rather optimistic, but the results of recent tenders for commercial premises have been lower than expected,” says general director of the St. Petersburg Property Fund Andrei Stepanenko. “Contracts worth more than $2 million simply do not get concluded. For example, there is a 1,000-sq.m shop with show windows onto Moskovsky prospekt for sale, but the price of $4,000 per sq.m is now considered by buyers as overpriced. Today it is possible to get an office on Nevsky prospekt for $3,000 per sq.m"

"Now interest rates equal or even exceed profitability in the development business. Therefore it is only wise to take out loans to cover any financial holes or to complete already started projects. In my opinion, this situation will last for about two years, and then very serious inflation will occur, which in some way will resolve the crisis and kick-start the sector in different countries. When money will loose its value in relation to physical assets (gold, buildings, etc), investments again will come,” considers managing director of Teorema Igor Vodopyanov. “There is currently stagnation in the commercial real estate market. No large deals are expected in the near future. Therefore the business centers we’ve put up for sale have become invaluable."

Domino effect

"It is clear that in all segments supply will decrease. Literally, every day there are fewer projects that we can say with confidence, will be finished. The general trend is for developers to use all their resources to complete already started constructions and postpone any decisions on projects which are at an initial stage," says Nikolai Pashkov, director of professional work at Knight Frank St. Petersburg.

In the last month and a half, projects with foreign participation have also become affected (before it was mainly domestic players announcing the partial or full freezing of investment projects, such as Adamant holding, Teorema, Imperiya, etc). For example, the Nevsky Kollizei shopping and entertaining center project (100,000 sq.m) in Bugry, next to the Ring Road, has stopped. The Italian developer, Margheri Group, has stopped work at the stage of laying the foundations.

In November there was information that Swedish investment fund Ruric AB is planning to give up its development activity in St. Petersburg and sell projects including the Teatralny multifunctional complex at 96 Naberezhnaya Moiki, (measuring more than 200,000 sq.m), and a business center at 57 Naberezhnaya Fontanki.

Austrian holding Warimpex Group – the investor of the planned Airportcity on 6.2-hectare site near international airport Pulkovo-2, has been frozen at the second phase of the complex. The total cost of the project is 240 million euros. Although work on the first part of the complex (54,000 sq.m) consisting of two business centers and a Crown Plaza hotel with 300 rooms is currently taking place and should be finished in 2010.

A key question is the presence of a strong parent company and confirmed financing. In October at the junction between Nevsky prospekt and Ulitsa Vosstaniya the construction of the Stockmann Nevsky Prospekt shopping and office complex (100,850 sq.m) has begun. This project at a cost of 170 million euros is considered by Stockmann as a priority, and has therefore promised to build it without delay.

SOK corporation which is part of Finnish holding S-Group, opened its first Prisma hypermarket in Russia in Prisma shopping center in Novoye Devyatkino near St. Petersburg in November (the developer of the project is Adamant) and is ready to invest 500 million euros in the creation of a regional network. They plan at least 15 stores in 10 years. The company says that in connection with the crisis they are receiving many interesting offers from builders.

In November A Plus Development completed the first phase of the class A AKM Logistics warehouse complex in Shushary (52,600 sq.m). The project is broken into three stages and assumes the construction of 195,000 sq.m by the first quarter of 2011. Expenditures are estimated at $210 million. The developer is currently occupied in designing the next phases of the project and is not planning to stop. Financing is being provided by British investment fund Raven Russia Ltd, which in the summer of 2008 concluded an advance deal to purchase the under construction logistics complex.

Domestic heavyweight investors are also not in a hurry to reject capital-intensive and long-term projects. A key example is the start of the international architectural complex on Naberzhnaya Evropy, announced in November. The multifunctional complex on a land plot of about 10 hectares is located on Naberezhnaya Maloi Nevy, opposite Vasilevsky Island, and is being realized by VTB through its affiliated structure VTB Development. The total volume of investments, including relocation from this territory of the Institute of Applied Chemistry, is estimated at more than $2 billion. The total area of the complex, part of which will become the Boris Eifman Dance Palace, will be about 440,000 sq.m. The rough time for completion is 2016.

The pluses and minuses of a "bast shoe"

These days the answers to a simple journalistic question on the prospective volume of input of areas in 2009 in different sectors of the market will be rather inconsistent. Some analysts basically evade giving quantitative estimations. Under the forecast of experts at Colliers International, in 2009 about 270,000 sq.m of class A and B office space will be put into operation, compared with the expected 670 000 sq.m. Knight Frank also estimated the planned input of quality offices in 2009 at the level of 600,000-700,000 sq.m, but now only expect 25-30% of this figure.

At Astera St. Petersburg they predict there to be approximately 160,000 sq.m of new office areas rather than the assumed 545,000 sq.m.

Becar Realty Group look at the prospects of the office market quite optimistically: taking into account delays in the schedule of projects not handed over in 2008, in 2009 it is possible to expect the input of 340,000-350,000 sq.m (about 25 business centers).

Retail real estate has the same differences in estimations: at Colliers International they predict the input of 630,000 sq.m, at Maris Properties/CBRE – 470,000 sq.m, at Astera St.-Petersburg - only 350,000 sq.m, and at Knight Frank the forecast is even more modest at 307,400 sq.m. Meanwhile analysts at Becar Realty Group estimate 726,000 sq.m. Just the right time to make bets.

The future of warehouse projects is also not clear, although experts more closely agree. About 425,000 sq.m will be completed in 2009 according to Astera St. Petersburg, 250,000-300,000 sq.m according to Knight Frank, and about 360,000 sq.m from the 1.2 million sq.m announced according to Colliers International.

In search of a new balance

Analysts are very cautious to comment about the dynamics of rental rates and the future fillability of profitable premises: this subject is rather painful for the market, which since the beginning of the century has showed steady growth. At the moment all experts questioned think there will be no collapse of demand and no free falling prices. If, of course, there will be no devaluation of the ruble like in 1998. "In the street-retail sector we are already observing a decrease in rental rates of 25-30% on some premises. Supply has noticeably increased. First of all, some premises have been frozen on the market since the summer; secondly, a number of tenants have decided not to use sign contracts, and have not started work; and finally, chains have started to get rid of premises that are not bringing in any great income," shares Lyudmila Reva, director of brokering services at Astera St. Petersburg.

Director of marketing at Becar Realty Group SPb Nataliya Chereiskaya predicts that in 2009 there will be a decrease of 10-20% in rental rates in shopping complexes. Head of market research at Praktis CB Roman Urevich thinks that next year the crisis phenomena will be most noticeable in the office segment. It will reach end users (and also retailers) most likely only by 2010. "At the moment many proprietors and managing directors of business centers still haven’t faced this situation, but a decrease in rates cannot be avoided, particularly in overpriced class A premises. Under optimistic forecasts the decrease will be 5-10%, under pessimistic forecasts will be 15-20%. But in class B- and C business complexes rates may grow a little - these premises will be the most demanded," he thinks. "There will be a noticeable decrease in the demand for offices: companies are stopping development, and some are leaving the market. Business centers which will open in the near future, will most likely be filled, but rental rates will decrease by 15-25%," believes Sergei Igonin, managing partner at IB Group.

High quality office buildings, which have actively been under construction in the last couple of years in the periphery of the city, are in a high risk group. According to Colliers International, in the fourth quarter of 2008 rates in business centers have already decreased 15-20% in comparison to the second quarter of this year, and developers of some buildings under construction, especially in the suburbs, have been forced to lower them by 30%. "As a result the difference in the level of rates between those in the center and those in the periphery of the city can be 30-40%, and is characteristic for developed markets,” says Dmitry Kuznetsov, director of office real estate at Colliers International. “According to our estimations, rent rates have already reached a minimum, because the St. Petersburg market unlike the Moscow market has not been overwhelmed by large projects. Moreover, in 2009 rates in offices may rise due to rather high inflation that is forecasted (16%), and also in connection with changes in the deadlines of buildings under construction and limited supply."

The fillability of business centers in 2009, according to the forecast of Colliers International, also remains high - within the limits of 80-90%. In the warehouse segment experts ascertain languid activity of tenants, but there is no talk of falling rates yet. "The profitability of these projects was not high anyway. Discounts within the limits of 5-10% are being discussed, but this is a normal market situation," Pashkov says.