Guiding lines: Regarding opinions of rumours

Give an approximate figure, in hundreds of thousands, and it does not have to be in euros? At the start of 2008 this was a question for trainee analysts at solid consulting firms. Today even experienced professionals prefer not to answer the question, saying that first of all, it’s necessary to measure the bottom of the market. What this magical term means is another topic.

We openly admit that questions on the market cost of profitable real estate in St. Petersburg have become rhetorical, and the reasonings for rates of capitalization have become pure abstract. How is it possible to calculate the potential income under conditions of unpredictable rental rates and to what comparative method of valuation is there in the absence of transactions?

Undoubtedly, there are competent individuals but they prefer to keep their revelations to themselves. The rest have to act on fear and risk, trying to distinguish scenarios by means of guessing on oil prices, exchange rates, share indexes, etc.

The investment sales market, which had formed in St. Petersburg in the last 2-3 years, no longer exists. There are so-called stress transactions, which they prefer not to advertise. "For us it looks like we took a rather conservative position and did not manage to make any large purchases,” says Dmitry Chubik, acquisitions director at Aberdeen Property Investors fund. “There are some funds under the control of our company that are ready to buy completed commercial real estate premises. Business centers in Moscow and shopping complexes in St. Petersburg are being considered. We won’t make any decisions until February, but if we close a deal in both capitals in 2009, I will personally be very happy."

In autumn 2008, Swedish company Rubric AB put up for sale three office complexes in the center of St. Petersburg (categories A and B), with a total rentable space of 15,000 sq.m and a net operational income of $5.4 million a year. The discussed price for the wholesale transaction, according to unconfirmed information, was in the range of $50-$55 million. However the prospective buyer - international investment fund Invesco Real Estate GmbH has not advanced in further exploratory talk. Before New Year another deal Ruric AB considered practically completed was squashed. Norwegian fund E-Star Property AS changed its mind about buying the Swede’s class B Grifon business center on Ulitsa Dostoyevskogo for $29 million (useable space - 7000 sq.m). According to Ruric AB, the net operational income of Grifon is $2.4 million a year (real as of December). The sale was announced last spring. However the Norwegians have offered a much more modest new price, and the sellers did not consider this adequate.

Well known businessman in St. Petersburg Vasily Sopromadze, who has already been trying to sell the tiny Stroganovsky business center on Nevsky prospect (area of offices is about 1,200 sq.m), reduced the price of it from 11.3 million euros to $8 million in February 2009. Whether this will bring any results it is still too early to judge. According to rumours, buildings with windows onto the main retail streets of the city are already twice cheaper than in the summer. But there is no information on real transactions, as clients with suitcases of cash (greetings from 1990) do not like publicity and actively use rumours as a marketing tool.

"The market still exists, although it is in a compressed condition. New risk-taking market players have come, who are prepared to buy up everything cheaply, but they don’t have experience yet. There are people with money, pension funds of oil companies, etc. Conversations start at a capitalization rate of 16%, but 20% is desirable. And this is an absolute stress for sellers, who in July refused to sell at 9%," says Oleg Barkov, general director of Knight Frank St. Petersburg."

"The rate of capitalization cannot be below interest rates. This is a reference point that can be used. Currently we are talking about 20%," says general director of Colliers International St. Petersburg Boris Yushenkov.

President at Becar Realty Group Alexander Sharapov ascertains that investment funds are actually leaving the market and transactions for sums of more than $10 million are not considered at al. "However small deals are nevertheless taking place. Buyers, prepared to invest around $1 million, are guided by rates of capitalization of 20-25%. They communicate little with experts and argue that even if rent rates halve, I will still make annual returns of 12% and that quite suits me because the bank [when putting money in a safety deposit] will not give me anymore money. At the moment there are not many sellers who want to get rid of premises under such conditions, but when the time to pay the next payments for bonded loans will come, there will be more."

In November Becar acquired a 3,200 sq.m plot with two utilitarian office-warehouse constructions near the popular Vyborgskaya Naberezhnaya. According to unconfirmed information, during negotiations that have lasted since summer, the price in question has decreased by approximately 50% and the transaction was completed for 40 million rubles.

In January Becar put up for sale an unfinished industrial building measuring 47,000 sq.m on a 3-hectare plot of the land in Rybatsky (a suburb of the city near the Central Ring Road (KAD)). The company had planned to create a class B business park here measuring 100,000 sq.m, but the project is now considered irrelevant. The land is being offered at $200 per sq.m. According to the calculations of the firm, this is 2.5-3 times lower than price levels in the summer.

The city authorities are in a difficult situation. In January in St. Petersburg a program for small and medium sized businesses to buy their premises started. The committee for management of the city’s property has already received tens of applications. The premises are certainly not first grade: They aren’t located on the main streets and among them are lots of basements, but they have been equipped and cultivated by their tenants. Under the act, how much should they be sold for? At market price would be correct. It’s a shame the extensive database compiled by experts of the Municipal government of inventory and valuation of real estate, is of little relevance today. And, perhaps, the only real source of information on conjuncture in this segment is the tenders of the property fund, at which the city sells similar premises. Despite the crisis, 20-30 lots have been sold under the hammer in a month. According to the property fund, in the first half of 2008 the average price for a lot was about 41,500 rubles per sq.m, and in the second half of 2008 was already 24,200 rubles.

So it looks like the new picture of the market will be formed from individual, patchy pieces of information.