2010 oFFiCe reAL eSTATe MArKeT - Knight Frank · Class A office segment is failing to keep pace with rapid demand growth. Our recommendation to companies, which plan to expand their

overview

2010oFFiCe reAL eSTATe MArKeTMoscow

Knight Frank

exeCuTive SuMMAry• GrowthinsupplyofClassAandClassBofficesisstillslow,mainlyduetodifficultlyobtainingfinancingfornew

projectsandcautiousattitudeofbankstopropertylending.Reductionofsupplyisparticularlynoticeableforhigh-qualityofficepremisesinsidetheGardenRing,andshortagesoftheofficepremisesinthissegmentareverylikelyinthenext2-3years.

• Demandforofficespaceisgrowing,andabouthalfofspaceisboughtoutright.TransactionvolumesintheClassAandBofficesegmentgrewby1.4timesin2010.

• Rentalrateshavebeengrowingsincetheendof2009whendemandrecovered,andthistrendhasbeenconsolidatedin2010inasituationwheretake-uphasdrawnlevelwithnewcommissioningandthenovertakenitbyabout5%.ClassArentalrateshavegrownby20%andthegrowthinClassBhasbeenabout10%.

• WeexpecttoseemoreintensiveleaseandpurchaseactivityontheMoscowofficemarketin2011,withconsolidationofdemandandrentalratesatthelevels,whichhavebeenachieved.Assumingfurthermacroeconomicstabilizationthereiseveryprobabilitythatbusinessactivitywillexpandinthecoming2-3years.


2

Supply

CommissioningofnewClassAandBofficesinMoscowtotalledto952,000sqmin2010,whichwas30%lessthaninthepreviousyearandbarelyhalfofthelevelin2008.

Fortwoconsecutivequarters(Q2andQ3)therewasnotasinglenewClassAoff icecentredeliveredtothemarket.However,ClassApremiseswereabout30%ofsupplyduringthewholeyear,whichiscomparablewiththeClassAsharein2008and2009.

Fewnewprojectshavebeenannounced.Policyofthenewcityauthoritieshaslimitedconstructionofoff icepremisesinsidetheThirdTransportRing,sothatfurtherreductionofnewcommissioningandrapiddeclineofthevacancyrateshouldbeexpectedintheCentralBusinessDistrict.

Thereisstillashortageofdemandfortheofficebuildingsunderconstruction,andnewlydeliveredbuildingsareusuallyatleasthalfempty,failingtogenerateexpectedincomeforthedeveloper.Ownersofdevelopments,whicharereadyfor

oFFiCe reAL eSTATe MArKeT

Konstantin LosyukovHeadofCorporateClientGroup,OfficeRealEstateDepartment

“The office property market has been growing for the last 18 months. We believe that it will continue growing in 2011-2012. Although the crisis has been left behind, its negative effects will influence the market in the medium term. Most likely, limited supply in the Class A office segment is failing to keep pace with rapid demand growth. Our recommendation to companies, which plan to expand their office space or move to higher-class premises, is therefore to take action in the near future, in order to avoid further increase in rental rates”.

Key indicators Class А Class В+ Class B-

Totalstock,millionsqm 11.2

includingmillionsqm 2.07 6.15 2.97

Commissionedin2010,sqm 952,000

includingsqm 290,400 511,300 150,100

Vacancyrates,% 17.4 20.1

Baserentalrates*,$persqmperannum500-1,100

(900-1,200**)350-550 200-395

OPEX,$persqmperannum 80-210 80-120 50-80

*ExcludingoperatingexpensesandVAT(18%)

**Averagerangeofaskingrentsforpremiseswithpremiumlocations

Source:KnightFrankResearch,2011

Source: Knight Frank Research, 2011

Growth rates of Class A and B office space declined in 2010 and were comparable to 2005-2006thousand sq m

Class А

Class B

2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

200

02003 2004 2005 2006 2007 2008 2009 2010 2011F

0

500000

1000000

1500000

2000000

www.knightfrank.ru

3

commissioning,areinnohurrytocompletedocumentformalities,becausesincethenthepropertybecomessubjecttotaxliabilities,whichcannotbemetfromrentincome.

DuringtheacutestageofthecrisisseveraldozenMoscowofficeprojectswithoverall

spaceof3.3millionsqmweresuspended.Growthofbusinessactivity,recoveryofdemandandimprovementofthef inancialenvironmentenabledseveraldeveloperstoresumeconstructionworkin2010.Atleast1.8millionsqmofoff icespace(15projects)isbeingresumed.Butmorethanhalfoftheseprojectsarestillintheirinitialstagesanditishardtopredicttheirdeliverytothemarketin2-3yearsfromnow.

Theconstructioncycleforoff iceprojectsinMoscowis4-5yearsfromthetimewhenbuildingpermissionisobtained,sointhenext3yearsitisexpectedtheonlycommissioningofprojects,whichhavealreadybeenannounced,andratesof

growthofoff icesupplyarelikelytoremainunchanged.Accordingtoourestimatesabout1.5millionsqmofClassAoff icesarescheduledforcommissioningduring2011-2013.Onlythef ifthpartofthisvolumeislocatedintheCentralBusinessDistrict,representingjust270,000sqm,whichiscomparablewithClassAtransactionvolumeinQ42010.Ashortageofhigh-classpremisesincentralMoscowthereforelookscertain.TheproblemislessacuteforClassBpremisesbecausetotalsupplyinthesegmentisnearlythreetimesgreaterthanforClassAandbecauseagreatervolumeofnewprojectshavebeenannouncedinClassB(mainlyreconstructionofformerproductionfacilities).

Only 22% of premises commissioned in 2010 are located in the Central Business District 22% inside the Garden

Ring

Within the Boulevard Ring

Boulevard Ring-Garden Ring

Garden Ring-Third Transport Ring

Third Transport Ring-Fourth Transport Ring

Fourth Transport Ring-Moscow Ring Road

Construction work has resumed at about half of projects, which had been suspended, but change of status looks unlikely for the other half of projects

* The figure shows the only projects, where construction

works were officially suspended


Construction works resumed in 2010*, sq m

Construction works still suspended, sq m

52%48%

6%

16%

23%

28%

27%

Main projects commissioned* in 2010

Name Location Total office space, sq m

Class А

Domnikov 30AkademikaSakharovaAve 132,600

WesternGate 22BelovezhskayaSt 60,500

Preo8 8PreobrazhenskayaSt 75,000

Officeandretailcentre 1ArbatskayaSq

LegendofTsvetnoy 2TsvetnoyBlvd 30,400

RiversideTowersV 52bld.7KosmodamianskayaEmb 20,800

MarrPlaza 13SergeyaMakeevaSt 21,900

Summit 22TverskayaSt 18,570

Class B+

NagatinoiLand 18AndropovaAve 163,500

SkyPoint 28VMezhdunarodnoeHwy 46,350

MoscowSilkIII 12B.Savvinskiy 33,720

WPlaza 1VarshavskoeHwy 31,390

DanilovskayaManufacture,Knopbuilding

9NovodanilovskayaEmb 26,000

9ZavodaSerpiMolotPassage 25,000

SouthPark 141В-143СVarshavskoeHwy 22,920

Yakovoapostolsky 14bld.1Yakovoapostolskylane 10,460

WellHouse 111bld.2LeninskyAve 10,000

NouvelleComplex 5StaryTolmachevskylane 9,815

Class В-

PerovoBC 9bld.1-9PerovaPolya1stPassage 19,500

EastGate 100bld.7,20SchelkovskoeHwy 12,500

*Completedprojects,whichhavebeenacceptedbytheStateCommissioningCommitteeandreceivedan

ownershipcertificate



4

Demand

Therewasanincreaseindemandforhigh-classof f icepremises(ClassesAandB)during2010,andtransactionvolumesroseby1.5timesincomparisonwith2009.Greaterleaseandpurchaseactivitynotonlyreflectstherecoveryintheeconomy,partlyitwasaone-offef fectofpostponeddemand.Thecr isismadecompaniesreducetheircosts,eitherbypostponingplanstochangeandexpandtheirof f icespaceorbyleasingcheaperpremises.Stabilizationintheeconomyhasencouragedcompaniestoresumetheirsearchforbetterpremises.

Mostrecentlytherehasbeenasignif icantincreaseinpropertypurchases.Thesetransactionsarenotonlyforinvestment

purposes:morethanathirdofthepremiseshavebeenboughtbycompaniesfortheirownuse.

Atthestartof2010therewasanexpectationthatef fortsbycompaniestoreducecostswouldmakeClassBpremisesmorepopular.However,reductionofdemandintheClassAsegmentandattainmentofanattractiveprice-to-qualityratiointhesegmentledtohigherdemandforClassApremises.

Thevacancyratestoppedgrowingin2010andsettledatalevelof18%acrossthemarket.However,theratevariesdependingondistancefromthecentreofMoscow.It ’sworthnotingthatdeliveryofnewbusinesscentrestothemarketimpactsalotontheamountofvacantspaceineachdistr ictofthecity,sincethenewpremiseswereorientedtopre-crisistake-uplevelsandnewlybuiltpropertiestakelongertof ill.


About 50% of total office take-up in 2010 consisted of purchases by end-users

100%90%80%70%60%50%40%30%20%10%

0% 2006 2007 2008 2009 2010

Purchase (end-use)

Lease

Sublease

0

200

400

600

800

1000

1200

Renegotiation of commercial terms no longer represents a large share of overall transactions

0

20

40

60

80

100


100%90%80%70%60%50%40%30%20%10%

0%2008 2009 2010

Renegotiation

Sublease

Lease/Purchase


Distribution of demand by Classes. Since 2010 there has been a positive demand trend and the share of high quality space in all transactions has been restoredthousand sq m

Take-up, Class A

Take-up, Class B

2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

200

02003 2004 2005 2006 2007 2008 2009 2010 2011F

0

500000

1000000

1500000

2000000


An increase in business activity has been evident since the end of 2009 and demand has been increasing steadily since the start of 2010thousand sq m

Delivery

Take-up

700

600

500

400

300

200

100

0Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

20102009

0100000200000300000400000500000600000700000800000

www.knightfrank.ru

5

Vacancy rates in Classes А and В were 17.5% and 19%, respectively, at the end of 2010. But it should be noted that vacant space in Class А was about 350,000 sq m in absolute terms, which is about 5 times less than in Class В (1.73 million sq m)

12%

14%

14%

26%26%

0,652,283,772,292,12

доля ввода новых площадей в соответствующем

районе по отношению к общему объему ввода в 2010 г.доля вакантных площадей

общее предложение, млн кв м

МКАД - 27%

Kutuzovskiy Av.

Leningradskoe Hw

.Volokolamskoe Hw.

Leni

nski

y Av.

Vern

adsk

ogo Av.

Prof

soju

znay

a St

.

Yaro

slavskoe

Hw.

Schyolkovskoe Hw.

Entuziastov Hw.

Altufievskoe H

w.

Dm

itrovsko e Hw.

Ryazanskiy Av.Volgogradskiy Av.

Kashirskoe Hw.

Vars

havs

koe

Hw

.

MKAD

ТТR

GR

Rublevskoe Hw.

Michurin

skiy Av.

Boulevard Ring - 6%

Garden Ring - 16%

Third Transport Ring - 23%

Fourth Transport Ring - 28%

МКАD - 27%

12%0,65

vacant space

total supply, mln sq mThe share of new office space in the area related to the delivery in 2010

Boulevard Ring - 6%

Key transactions in 2010. Lease

№ Company Size, sq m Address Project name

1 TNK-BP 37,700 3BegovayaSt NordStarTower

2 Sportmaster/Ostin 16,700 4KochnovskyPassage Aviator

3 Е4Group 10,435 12KrasnopresnenskayaEmb WorldTradeCentre

4 SanofiAventis* 8,900 22TverskayaSt Summit

5 Danone 6,600 NovorizhskoyeHwy(7kmfromMKAD) RigaLand

6 IT 6,515 Bld6,19LeninskayaSlobodaSt OmegaPlaza

7 SamsungElectronics 5,880 10VozdvizhenkaSt Voentorg

8 MoskommertsBank 5,575 3BegovayaSt NordStarTower

9 Otkrytiye 5,555 12/1Yakovoapostolskylane Yakovoapostolsky

10 Eldorado 5,275 14SmolnayaSt Smolny

*KnightFrankisaconsultantofthetransaction


The vacancy rate in Class A declined thanks to rapid take-up, although it rose slightly in Q4 due to delivery of several large projects in that quarterthousand sq m

350

300

250

200

150

100

50

0 Q1 Q2 Q3 Q4

There was almost no change in the Class B vacancy rate, since growth of demand was matched by high rates of new commissioningthousand sq m

Delivery

Take up

Vacancy rate


0

50000

100000

150000

200000

30%

25%

20%

15%

10%

5%

0%

350

300

250

200

150

100

50

0

30%

25%

20%

15%

10%

5%

0%

20

25

Q1 Q2 Q3 Q4

Vacantspace

Totalsupply,mlnsqm

Theshareofnewofficespace

inthearearelatedtothedeliveryin2010


МКАD - 27%


6

Commercial terms

Take-upofqualityof f icepremisesexceededdeliveryofnewspacebyabout5%in2010,whichledtogrowthofrentalrates.Theimbalancebetweensupplyanddemandcausedunequalgrowthofrentlevelsbetweensegments:ratesforhigh-classpremisesgrewby20%in2010,whilegrowthforClassBpremiseswasabout10%.GrowthintheperiodfromQ32009,whenratesdroppedtotheirlowestlevel ,untiltheendof2010was25%forClassAand18%forClassB.

Forecast

Weexpectslowbutconsistentgrowthofdemandforqualityof f icepremisesin2011thankstofurtherrecoveryandgrowthoftheRussianeconomyandalsoduetosteadydemandfromtenants,whoarecurrentlyoccupyingClassB-andСpremisesandwanttorelocateupwards.

TheRussianmarketforqualityof f icespaceisatanearlierdevelopmentstagethanEuropeanmarkets.LeasetermsinMoscowareshorter(usually5years),qualityofconstructionofof f icecomplexesincreasesyearbyyear,andtheclassofsomeoldanddepreciatedpremisesisdeclined.Companiesareexpandingtheirbusiness

andincreasingtheirstaf fnumberstotakeadvantageofgrowthofmarketsfortheirgoodsandservicesinRussia.Asaresult ,whentheirleasesexpire,tenantsareoftenkeentoexpandtheirof f icespaceandrelocatetonewpremises,whichbetterreflecttheirstatus.

Wethereforeexpectsteadygrowthofdemandforqualityof f icepremises.InthecontextofreducedsupplyintheClassAsegment,thiswillcausefurtherincreaseofrentalrates.Rentswillalsobedrivenbyfurtherhighlevelsofinvestmentactivityin2011.ThereisnoreasontoexpectanyseriouschangesonthemarketforClassBoff iceproperty,andthecurrentsituationinthatsegmentislikelytobemaintained.


Further growth of demand for premises inside the Garden Ring during 2010 caused increase in the share of transactions in that part of the city from 30% to 40% of total transactions (by sq m)

100%90%80%70%60%50%40%30%20%10%

0% 2006 2007 2008 2009 2010

Inside Garden Ring

Between Garden Ring and Third Transport Ring

Between Third Transport Ring and Moscow Ring Road

0

20

40

60

80

100

120

Key transactions in 2010. Purchase**

№ Company Size, sq m Address Project name

1 RWMCapital 84,550 34MashiPoryvaevoySt Domnikov

2 Confidential* 60,410 21BelovezhskayaSt Westerngate

3 Siemens 27,995 13B.TatarskayaSt LegionII

4 BankOtkrytiye 25,040 8/4KozhevnicheskayaSt VivaldiPlaza

5 Sogaz 19,240 10AkademikaSakharovaAve Wave

6 RusHydro 14,700 7/9MalayaDmitrovkaSt PallauMD

7 EastGroup* 14,510 5StaryTolmachevskylane NouvelleComplex

8 Finam* 7,435 Bld2,7Nastasinskylane -

9 Lukoil 7,200 4,5Bld1,2Ulanskylane Ulansky

*KnightFrankisaconsultantofthetransaction

**Purchaseofofficepropertybytheend-user



There was consistent growth of rental rates for Class А and B offices during 2010$ per sq m per annum

Class А

Class B

1,600

1,400

1,200

1,000

800

600

400

200

02004 2005 2006 2007 2008 2009 2010 2011F 2012F

300

600

900

1200

1500

www.knightfrank.ru

7

noTeS

overview

Americas & CanadaBermudaBrazilChileCaribbeanCanadaUnitedStates

EuropeBelgiumCzechRepublicFranceMonacoGermanyHungaryIrelandItalyNetherlandsPolandPortugalRomaniaRussiaSpainSwitzerlandUkraineUK

AfricaBotswanaKenyaMalawiNigeriaSouthAfricaTanzaniaUgandaZambiaZimbabwe

Asia PacificAustraliaCambodiaChinaIndiaIndonesiaMalaysiaNewZealandSingaporeSouthKoreaThailandVietnam

Middle EastBahrainUAE

Office Real EstateStanislav [email protected]

Warehouse Real Estate, RegionsViacheslav Kholopov [email protected]

Retail Real EstateJulia [email protected]

Professional Consulting ServicesKonstantin [email protected]

Prime Residential Real EstateElena [email protected]

Financial Markets and InvestingEvgeniy [email protected]

Valuation ServicesHeiko Davids [email protected]

Saint PetersburgNikolai [email protected]

KyivMikhail [email protected]

Marketing, PR, and Market ResearchMaria [email protected]

EstablishedinLondonmorethanacenturyago,KnightFrankistherenownedleaderoftheinternationalrealestatemarket.Withofficeslocatedglobally,KnightFrankisabletoprovideafullrangeofservicesintherealestatemarketallovertheworld.

TogetherwithNewmarkCompany,KnightFrank’sstrategicpartner,thecompanyencompasses209officesin47countriesacrosssixcontinents.

KnightFrankhasbeenasymbolofprofessionalismfortensofthousandsofclientsallovertheworldfor115years.After13years,KnightFrankhasbecometheleadingcompanyinthecommercial,warehouse,retailandresidentialrealestatesegmentsoftheRussianrealestatemarket.Morethan500largeRussianandinternationalcompaniesinRussiahavealreadymadeuseofthecompany’sservices.

KnightFrank’semployeesareprofessionalconsultantsinvariousfieldsconnectedwithrealestate,suchasrentandsaleofproperties,selectionofproperties,attractionofinvestments,consulting,valuation,marketresearch,marketingandprojectpromotion,propertyandassetmanagement.

Weofferthefullrangeofconsultingservicesnotonlyfordevelopersandowners,butalsoforrealestateusers;bothlegalentitiesandindividuals.Now,thecompany’sstaffconsistsofmorethan330employees.

ThisandotherKnightFrankoverviewscanbefoundonthecompanywebsitewww.knightfrank.ru.

© Knight Frank 2011

Thisoverviewispublishedforgeneralinformationonly.Althoughhighstandardshavebeenusedinthepreparationoftheinformation,analysis,viewsandprojectionspresentedinthisreport,nolegalresponsibilitycanbeacceptedbyKnightFrankResearchorKnightFrankforanylossordamageresultantfromthecontentsofthisdocument.Asageneralreport,thismaterialdoesnotnecessarilyrepresenttheviewofKnightFrankinrelationtoparticularpropertiesorprojects.

ReproductionofthisreportinwholeorinpartisallowedwithproperreferencetoKnightFrank.

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Documents

2010 oFFiCe reAL eSTATe MArKeT - Knight Frank · Class A office segment is failing to keep pace with rapid demand growth. Our recommendation to companies, which plan to expand their