RESEARCH

Q1 2015

INVESTMENTMARKET

COMMERCIAL REAL ESTATE INVESTMENT CLIMATE FORECAST

In Q1 2015, Brent oil prices were in the range of $47.09–$62.48/barrel

barrel

INVE

STM

ENT

MA

RKET

After hitting a new low in February 2015, the ruble strengthened against the US Dollar and Euro in March at 57.8 rubles and 62.7 rubles per US Dollar and Euro, respectively

With the ongoing crisis and pessimistic forecasts for the Russian economy as well as for the commercial real estate market in particular, we witnessed very few investment deals in Q1 2015, most of which resulted from negotiations that started back in 2013 and 2014.

Some of the new players coming to the real estate investment market are Russian companies which find the current risks acceptable and believe that real estate investing guarantees that their money will be secure. Sometimes these are companies for which real estate investment is not a core area of business.

The few investors are focusing their attention on problem assets and expecting a further decline in the market: in the current environment, some commercial real estate owners will have to put their assets for sale at a reduced price after failing to meet their loan commitments. Such deals are likely to make up a large part of investment in 2015.

Another type of deals that might account for a certain proportion of the investments are acquisitions of high-quality assets with revised lease contracts, which will adequately reflect the current market conditions.

$ 47.09–62.48/

$410million

The amount of investment in the Russian commercial real estate sector decreased by 30% in Q1 2015 as compared with Q1 2014 and by 80% from Q1 2013, totaling

Retail

Industrial

Sunny

Sunny intervals

Overcast

Rain

Stormy

Offices

CZECH REPUBLIC

NORWAY

IRELAND DENMARK

BELGIUM

UK

GERMANY

FRANCE

SPAIN

PORTUGAL ITALY

FINLAND

SWEDEN

NETHERLANDS

RUSSIA

POLAND

GREECE

ROMANIA

UKRAINE

TURKEY

INVESTMENT MARKET | Q1 2015

Source: Knight Frank Research, 2015

KEY INTEREST RATE

Net capital outflow Investment volume

Foreign investors Russian investors

COMMERCIAL REAL ESTATE INVESTMENT VOLUME DUNAMICS BY SEGMENT

COMMERCIAL REAL ESTATE INVESTMENT VOLUME DYNAMICS IN RUSSIA AND NET CAPITAL OUTFLOW*

INVESTMENT VOLUME DYNAMICS BY THE INVESTORS’ ORIGIN

0

1

2

3

4

5

6

7

8

9

10

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F

INVE

STM

ENT

MA

RKET

-160

-120

-80

-40

0

40

80

120bln $bln $

bln $

43.7

87.8

-57.5

-30.8

-81.4

-53.9 -61

-151.5-131.0-133.6

0

2468

10

2014 2015F201320122011201020092008

2009 2010 2011 2012 2013 2014

17% 22% 34% 29% 14%

2015F

The massive outflow of capital Russia faced in 2014 is forecasted to continue this year. According to the Central Bank of Russia, if the “risk scenario” for the nation’s economy occurs (i. e., if oil prices are at $40–$45/barrel), the outflow of capital from the country will reach

20072006

The Central Bank cut the key interest rate two times in the first quarter of 2015. As of April, the key rate was

$131

14%

bln

25%43%

5.5%7.0% 7.5% 8.0%

9.5%

17.0%15.0% 14.0%

13/0

9/20

13

3/03

/201

4

25/0

4/20

14

25/0

7/20

14

5/11

/201

4

12/1

2/20

14

16/1

2/20

14

30/0

1/20

15

16/0

3/20

15

10.5%

Retail Hotel Warehouses Offices Other

Source: Knight Frank Research, 2015

INVESTMENT MARKET | Q1 2015

850–1,100$

560–80022,000–35,000

$₽

560–80022,000–35,000

$₽

300–70020,000–25,000

$₽

700–85023,000–37,200

$₽

300–70020,000–25,000

$₽ 700–

850$ 625–78020,000–35,000

$₽

Rental rates

$/sq m/year (triple net)

rub/sq m/year (triple net)

Central business district(Garden Ring)

Kremlin district

Leningradskoe direction

Belorusskiy business district

Moscow-City

Paveletsky business district

South-Western direction

The number of Western companies willing to invest in real estate in the current conditions dropped dramatically; however, Q1 2015 saw completion of a major deal by the US investment fund Hines, which bought an office building in the Metropolis complex

OFF

ICE

MA

RKET

Rents Bottoming Accelerating Rental GrowthRental Growth Slowing Rents Declining

WarsawZurich

AmsterdamBrusselsBucharestBudapestCopenhagenGenevaParis

BerlinHamburgMunichOsloStockholmVienna

FrankfurtHelsinki

BarcelonaDublinEdinburgh LisbonLondon (City)London (West End)MadridMilan

MoscowPrague

Office marketinvestment volume, bln $

GDP growth, %

bln $

0

1

2

3

4

-10-8-6-4-20246810

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F

%

GDP AND OFFICE REAL ESTATE INVESTMENT DYNAMICS IN RUSSIA

OFFICE RENTAL CYCLE

4,000–5,200 $/sq m200,000–260,000 rub/sq m

140,000–260,000 rub/sq m

29.0%

$160

16.7% Class A

Class A

Class B

RENTAL RATES IN THE MAIN BUSINESS DISTRICTS OF MOSCOW

10.5–11.0%

8%

7%6%

4% 4% 4% 4%

Moscow Bucharest Dubai Warsaw London Singapore Tokio

PRIME YIELD IN BUSINESS CENTERS IN THE WORLD

New York

VACANCY RATE

SALE PRICE

PRIME YIELD

2,700–5,000 $/sq mClass B

10.5–11.0%

In the first three months of 2015, investment in the office real estate sector totaled

million

Source: Knight Frank Research, 2015

INVESTMENT MARKET | Q1 2015

RENTAL RATES IN SHOPPING CENTERS OF MOSCOW

THE DYNAMICS OF INVESTMENT IN RETAIL MARKET OF RUSSIA AND CONSUMBER CONFIDENCE INDEX*

The consumer confidence index (CCI), which reflects consumers’ overall expectations, decreased by 14 p. p. in Q1 2015 as compared with the previous quarter

RETAIL MARKET

* CCI is an indicator designed to measure consumer confidence, which is defined as the degree of optimism about the state of the economy that people express through their consumption and savings.Determined on the basis of quarterly surveys by Rosstat in all regions of Russia, CCI is the relative value of the number of positive and negative responses from the total number.

* Rental rate, $/sq m/year; the share paid based on retail turnover, %

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F

Retail investment volume Consumer Confidence Index (CCI*)

0

1

2

3

4

-25

-30

-35

-20

-15

-10

-5

0

%bln $VACANCY RATE

PRIME YIELD FOR SHOPPINGCENTRES IN THE WORLD

6.00% 6.00%

4.25%4.50%

8%

PRIME YIELD

10.5–11.0%

Warsaw Milan LondonParis

In Q1 2015, investment in the retail

property market declined by more

than 70% year-on-year

In the first quarter of 2015, Russia’s retail turnover fell by 6.7% versus the same period last year

Urban hypermarket (3,000–7,000 sq m)$150–350; 2–4%

Hypermarket (>7,000 sq m)$100–250; 2–4%

Accessories (10–70 sq m)$2,500–4,500; 10–16%

White & Brown (1,500–3,000 sq m)$250–500; 2.5–6%

Sporting goods (1,500–2,500 sq m)$400–800; 6–8%

Goods for children (1,000–2,500 sq m)$250–450; 9–14%

Apparels (50–300 sq m)$800–2,500; 10–14%

Footwear (50–300 sq m)$900–3,000; 10–15%

Supermarket (1,500–3,000 sq m)$250–500; 4–6%

Entertainment centres (100–1,500 sq m)$250–500; 8–12%

DIY (>5,000 sq m)$200–350; 4–6%

Entertainment centres (2,000–5,000 sq m)$100–200; 4–7%

Source: Knight Frank Research, 2015

INVESTMENT MARKET | Q1 2015

bln $

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2006 2015F2007 2008 2009 2010 2011 2012 2013 2014

VACANCY RATE

PRIME YIELD

9.8%

12–13%

Rental rates

WAREHOUSE INVESTMENT VOLUME DYNAMICS IN RUSSIA

PRIME YIELDS AND RENTAL RATES FOR WAREHOUSE COMPLEXES IN EUROPE

>20%4,500–5,000

0–5%4,500–5,000

10–20%3,200–4,000

>20%3,500–4,400

10–20%4,200–5,000

5–10%5,000–5,500

5–10%5,000–5,500

5–10%5,000–5,500

0–5%5,000–5,500

WA

REH

OU

SE M

ARK

ETRENTAL RATES AND VACANT SPACE IN TERMS OF DIRECTION

Lond

on

Gen

eva

Ham

burg

Osl

o

Amst

erda

m

Hes

linki

War

saw

Lisb

on

Buch

ares

t

Mos

cow

Although the first quarter saw no acquisitions of warehouse property completed, we can expect that a number of deals will be closed by the end of 2015, with companies buying warehouses either for their own needs or for investment purposes

204

223

73 91 129

71 48 48 103

0

50

100

150

200

$/sq m/year

136

4.75%6.00% 6.25% 6.25% 6.75% 7.00% 7.50% 7.75% 9.50%

12.00–13.00%Prime yield

SALE PRICE

40,000–45,000 rub/sq m

NORTH

NORTH-WEST

MKAD

NORTH-EAST

EAST

WEST

SOUTH-WESTSOUTH-EAST

SOUTH

Moscow

Asking rental rates, rub/sq m/year

Vacancy rates

Source: Knight Frank Research, 2015

INVESTMENT MARKET | Q1 2015

© Knight Frank LLP 2015 – This overview is published for general information only. Although high standards have been used in the preparation of the information, analysis, view and projections presented in this report, no legal responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects.

Reproduction of this report in whole or in part is allowed with proper reference to Knight Frank.

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