Money growing: Investment benefit

It will be remembered with nostalgia by developers and analysts will be using it as a standard of good investment in research. Peak rental rates in profitable premises completely filled, unprecedented high rates of new premises entering some sectors of the market, big clients in obscenely expensive premises, big costs spent on amazing architecture by developers and other signs of the past will remain in 2008.

Perhaps for the first time in the history of the local market, a new year does not continue the trends of the last year, which has mainly passed in an atmosphere of pre-crisis prosperity. The disturbing autumn has not led to a universal decrease in rental rates. In November large scale commercial constructions began in the city, and in December respectable hotels opened. The reality of January is an abundance of empty display windows on the best retail streets, super-discounts in new business centers, and empty class A warehouse terminals, which there was recently a deficit of. Between 2008-2009 the rising market has very quickly been replaced with the opposite, the market passed a plateau, practically in exact conformity with the calendar. Therefore some figures that are traditionally used in final reviews (for example, describing the share of vacant areas and price dynamics), had already partly lost their actuality in February.

Records for the end

In 2008 office developers in St. Petersburg set a record. According to various advisers, 350,000 to 430,000 sq.m of new class A and B business centers were put into operation. There were no new class C premises last year. As a result the supply of quality office space increased at least 50%. This is an unprecedented high figure for this segment, although as usual, it was no more than 60% of the premises that had been planned.

The real breakthrough was achieved in the class A segment: 150,000 new sq.m came on the market (a gain of 2.5 times) – according to Colliers International and Knight Frank. Currently, according to the calculations of Colliers International, the highest-class business complexes now make up 28.1% of quality areas (in the last year their share has increased by 10%). The updating has turned out rather motley. The first class A business center, constructed from zero in the historical center of St. Petersburg was Renaissance Plaza at 69-71 Ulitsa Marata (the former site of Severnoye Siyaniye (Polar lights) factory). It was completed at the beginning of 2008. The investor was Turkish company Renaissance Development, which invested about $70 million in the project. The total area of the complex consisting of three buildings, with a communal court yard and underground car park with 170 spaces, is 39,000 sq.m. Usable space totals about 29,000 sq.m.

Several buildings allocated as high class appeared in the suburbs (also a local precedent) at much the same time. The first-born of the business zone near Pulkovo airport was the 8-storey Aeroplaza business center of BiznesLinkDevelopment (34,200 sq.m, of which 22,000 sq.m ios rentable). On the crossroads of Bogatyrksy prospekt and Ulitsa Gakkelevskaya in the Primorsky area is the 21-storey RESO International business center, one of the first skyscrapers (75 m) of the city. The builder - Autohouse, St. Petersburg - is part of the RESO holding. Class B complexes in the last year are an even more evident illustration of the decentralization of the office market. Among large peripheral premises are Leader on Ploshchad Konstititsy, Obukhov Center and Pal House on Prospekt Obukhovskoi Oborony, the next phase of Sodruzhestvo business center on Kolomyazhsky prospekt, Kontinent on Ulitsa Zvezdnaya and others

According to Maris Properties, in association with CBRE, the leaders by volume of class A and B office areas still remain the Central (22%), Petrogradsky (16%) and the Vasileostrovsky (11%) areas though the Primorsky area is already in fourth position (10%), and behind it is the Moskovsky area (9 per cent), including the vicinities of the airport.

In 2008 (except for the fourth quarter which has impaired the general picture a little) demand for offices was integrated on pleasure to developers. And many anchors concluded contracts at the construction stage. The following are some indicative contacts. In spring 2008 VTB Severo-Zapad bank signed s contract to purchase an office block measuring 6,100 sq.m in the Tolsty Skver multi functional complex on the Petrogradskaya side, which was completed at the end of the year. It was one of the largest purchases in the history of the local office market. According to the contract signed by the investor of Tolsty Skver, a St. Petersburg’s investment company, the bank obtained a 13-storey office tower (semi-detached), and also places in the underground car park. The sum of the transaction was not disclosed.

Among the champions in rental were LEK corporation which has occupied 6,100 sq.m in the Arena Hall business center on the Petrogradskaya side (class B); T-Systems – 3,200 sq.m in Senator business center on the 18th line of Vasilevsky (class B+); 585 – 3,043 sq.m in Vyborgskaya Zastava business center on Bolshoi Sampsonievsky prospekt (class B); Rosstroiinvest – 2,500 sq.m in Senator at 37 Ulitsa Professora Popova (class A); and Gazprominvestarena – 1,700 sq.m in Avenue business center on Aptekovskaya Naberezhnaya (class B+), etc.

According to Colliers International, in the first half of 2008 rental rates of class A offices increased by 12%, reaching their peak (for the same period in 2007 growth was fixed at about 4%). However in the fourth quarter dollar rates decreased 15-20% in comparison with the third quarter, to fell to levels observed in 2006. So, in the middle of last year the average rate for class A premises was $853 per sq.m a year, and at the end of the year was only $647 per sq.m a year. In class B premises the decrease was not so big - from $525 to $447 per sq.m. Ruble quotations (which by the end of the year were being used by the majority of business centers in St. Petersburg), are naturally more stable. Operating complexes, for example, in the chains of Senator or Teorema, were extremely reluctant to give discounts at the end of 2008, offering tenants the opportunity to reduce their occupied space, however new complexes offered impressive discounts (for example, 30% less than the base rate in the under construction Atlantic City business center). According to Knight Frank, premises in the city center are double the prices of similar on the periphery of the city.

According to Colliers International, the average fillability of premises in St. Petersburg’s business centers put into operation in 2008, by the end of the year, had reached, 37% for class A premises and 29% for class B. The average market figure was 76% and 90% accordingly, and in the city center close to 100%. As a whole it is possible to ascertain, that the market has reached saturation.

According to ARIN, by the end of the year the volume of frozen office projects had already reached 400,000 sq.m. The first victims of the crisis were peripheral constructions and therefore it is unlikely that in 2009, decentralization of the business center market will continue.

Local routine

In the retail real estate sector 2008, no significant projects were complteted. The comletion date of some ‘special’ projects, for example Leto super-regional mall on Pulkovskoye shosse, were delayed and scheduled for 2009. In 2008, a total of 400,000 – 450,000 sq.m in shopping and shopping and entertainment centers came on the market (advisers as always could not come to the same result).

According to IB Group, the total area suitable for rent (GLA) increased by 305,000 sq.m. The se results are more modest than in 2007 (385,000 sq.m) and even 2006 (925,000 sq.m.). However, we should not forget that only a couple of years ago St. Petersburg was top in Russia for providing the population with shopping center premises of miscellaneous formats. At the beginning of 2009, experts at Colliers International, estimated the capacity of the city’s market of professional retail premises at 3.7 million sq.m.

Analysts at IB Group note that in 2008 11 shopping and shopping and entertainment centers were put into operation with a total area of 369,400 sq.m (GLA – 237,230 sq.m.). The largest was Felichita in the Nevsky area (83,000 sq.m), Atlantic City on Ulitsa Savushkina (Atlantic), and Atmosfera on Kommendantskaya ploshchad by Adamant holding. All of them are regional scale, classical complexes with quite a traditional set of anchors. Each of the following hypermarket chains have obtained an additional outlet: DIY Maksidrom, Obi, K-Rauta, and Leta (cash & carry). New brand, Zelenaya Strana DIY hypermarket, also has premises. The total area is 68,400 sq.m (according to IB Group).

Among the significant events of the year is the start of the expansion of well-known Finnish chain, Prizma. Its first hypermarket (8,350 sq.m) was opened in autumn 2008 in rented premises in Prizma shopping cneter in the Novoye Devyatkino settlement near St. Petersburg (the investor was Adamant holding), and its debut supermarket opened several months earlier in Moskovsky shopping center on Ploshchad A.Nevsky (the same proprietor).

The end of 2008 was marked by the closure of the first chain stores. Prior to the Christmas season 7 Banana Mama shops, two Bookbery shops, and Viktoria supermarkets and Grossmart stores closed down.

Among large projects started in 2008 are the Galeriya shopping and entertainment complex (190,000 sq.m) and Stockmann Nevsky Center shopping and office complex (approximately 100,000 sq.m.). Both centers are in the city center, on Ploshchad Vosstaniya and Moskovsky vokzal.

The shopping and entertainment center market appears to have been more inertial in comparison with the office market. By the end of last year analysts at Colliers International cautiously ascertained an increase in the share of vacant premises by up to 6%. According to Maris Properties in association with CBRE, the decrease in dollar rates in the fourth quarter eanged from 5-15%. Rates for shops in shopping centers, according to results from 2008, were $550-$2,750 per sq.m a year (according to Knight Frank).

Wrong time

Last year was very promising for the warehouse sector. Developers planned to commission about 1 million sq.m, which would allow the narrow market of modern terminals in St. Petersburg to reach a better level. And the forecast on fillability of these complexes at the start of 2008 was favourable. But in the end, developers delivered about 400,000 sq.m and because of the crisis, even this appeared to be too much.

Experts at Knight Frank estimated the capacity of the city market of quality warehouses at the end of 2008 at 1.387 million sq.m. In 2008 that was a gain of 357,200 sq.m of class A premises and 79,600 sq.m of B class.

Among the most significant constructions of class A premises completed in 2008, were the second phase of the MLP Utkina Zavod complex, and the first phases of the Gorigo, Neva Logopark and AKM Logistics terminals. The latter, by the way, in summer 2008 became the subject of a significant transaction. It was bought by British fund Raven Russia Ltd for $216 million. The total area of the complex, which is planned for completion in the first quarter of 2011, will be 195,000 sq.m.

Development activity is still concentrated in the south of the city – in the Shushary industrial zone.

According to Knight Frank, the share of vacant space in class A warehouses at the end of the year was 27.3%, and in class B only 3.9%. Unfortunately, it is hard to trace the real situation in regards to the fillabilty of new complexes. But for example, in 2009, the N.K. Krupskaya confectionery factory rented 6,300 sq.m in a building measuring 52,000 sq.m, which was completed at the end 2008.

Declared rental rates remained high: $100-$140 per sq.m a year (triple net) for class A warehouses and $115-$135 for class B.

Attack of Finnish kindliness

The results of 2008 appear rather impressive for hoteliers. According to Praktis CB, seven hotels with a combined capacity of 1,295 rooms were put into operation (in 2007 this figure was only 872).

According to Praktis CB, the quality hotel fund in St. Petersburg (new and reconstructed 3-4-star premises) totals 9,596 rooms. In the city 3-star hotels are still most prevalent (20 premises making up 46%). Most of the hotels are concentrated in the Central and Admiraltisky areas – accounting for 44% and 22% accordingly.

The leader according to the results of 2008, is Finnish corporation SOK Holding (a division of S-Group holding) which debuted in St. Petersburg with three premises at once. In January, the 5-star Holiday Club Sankt-Petersburg SPA-hotel with 278 rooms on Birzhevaya Liniya and under the control of SOK Holding, opened. In the second quarter, the 4-star Sokos Hotel Olympic Garden (348 rooms) on Bataysky pereulok opened, and in December Sokos Hotel Vasilievsky with 255 rooms on the 8th line of Vasilievsky Island, opened. Before the New Year, the 4-star Marriott Courtyard hotel (214 rooms) on the crossroads of the 2nd line of Vasilievsky Island and Naberezhnaya Makarova also officially opened. The building with a total area of 16,000 sq.m belongs to BSK-65.

At the end of 2008, hotels had not had time to experience the crisis yet. A decrease in mid-annual fillability, according to Praktis CB, will be seriously shown in 2009. And it is likely that hoteliers will hold prices until they can, sacrificing fillability.