Moscow 2011 Annual Real Estate Review

Economic Overview • In 2010, the positive trends in the Russian economy that had been observed at the end of 2009 continued. GDP growth rate for the eleven months of 2010 amounted to 3.7%.

• Overall, Russian economy was growing faster than most of the developed Western economies, such as the USA, the countries of the continental Europe and the UK. However, it was growing slower than many developing countries, the other BRIC countries for example.

• In Q3 2010, the drought and the forest fires caused by it encompassed practically the entire European part of Russia, which became one of the reasons for a reduction in the GDP growth rate (2.7% versus 5.2% in Q2) and affected the inflation rate.

Prices of oil and key industrial metals that exert a considerable influence on the growth rate of Russian economy displayed a positive trend. The price of oil increased from $81.23 per barrel to $93.975 per barrel during 2010. The prices of copper, aluminum, and nickel increased by 18.9%, 6%, and 31.5%, respectively, during the same period.

• Industrial production was growing at a record pace (the highest since 2004). However, it was largely caused by a low base effect that tends to overstate indicators. This is evidenced by a significant difference of the final industrial output growth indicator of 8.8% from the growth of 10 to 12% planned at the beginning of the year.

• Among other positive factors one can name declines in the unemployment rate and the inflation rate back to their 2007 values, which were accompanied by an increase in the real disposable income of the population.

• For most of the year, the inflation rate was at its historic lows and reached its lowest level (5.5% per year) in July. However, due to higher food prices caused by the drought, the final value amounted to 8.8%.

• The growth rate of exports slowed down from 18.1% in September to 14.9% in October 2010. This can be traced to the introduction of a government ban on grain exports until July 2011. Even though the revenue from oil exports grew, the increase was not significant and was unable to compensate for this decline.

• In September 2010, the law regarding the budget for 2011–2013 was enacted. A prohibition on increasing the headcount of government employees in 2011, as well as its gradual reduction by 20% by 2013, which would allow for cutting government payroll costs, can be considered one of the key innovations. Unlike in previous years, it is planned to fund the budget deficit by means of domestic borrowings and state property privatization (previously, it was mostly funded by means of foreign borrowings; these are planned to be cut in half).

Indicator %

GDP growth rate 3.7*

Industrial production growth rate 8.2

Unemployment rate 7.2

Inflation rate 8.8

Retail trade turnover 12.1**

Budget deficit –25.5***

* January–November 2010. ** January–November 2010 / January–November 2009.

*** Change vs. 2009. Sources: the Federal State Statistics

Service, Colliers International

* Данные за IV кв 2010 г являются предварительной оценкой

Igor Pushchen Associate Director Investment Services Department [email protected]

FORECASTS

• In 2011, most analysts expect GDP growth rate to be at 4.3%, which is 0.3% higher than what was expected in 2010. Because of the accelerated inflation rate at the end of 2010, its forecast for 2011 has been increased to 8%, that is, by 0.2%.

• We expect a decline in the industrial production growth rate to 4.6% in 2011.

Chart 1. GDP GROWTH RATE, INDUSTRIAL PRODUCTION GROWTH RATE, AND UNEMPLOYMENT RATE

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Q1,2009

Q2,2009

Q3,2009

Q4,2009

Q1,2010

Q2,2010

Q3,2010

Q4,2010

GDP Growth Rate *

Industrial Production Growth Rate

Unemployment Rate

* The data for Q4 2010 are preliminary estimates.

Source: The Federal State Statistics Service

Investment • In 2010, the market continued its recovery that had been rooted in pre-conditions existing as early as Q4 2009. The total volume of deals increased by 67.8% and amounted to $3.93 bln.

• The office segment of the market continues to be the key growth driver; this segment accounted for 72.7% of deals, which is slightly lower than in the previous year (85.5%).

• At the beginning of the year, end-user companies like SOGAZ, RusHydro, Evraz Group, etc. were the main buyers in the office property market. However, the acquisition of the Horus Capital development company’s property portfolio and an unfinished business center Classic on Valovaya Ul. by OTKRITIE Financial Corporation that took place at the end of the year could be considered a trend change. As of the end of the year, several major investment deals expected to close in the first half of 2011, were in advanced stages of development.

• In the retail property segment, the volume of deals was significantly lower, amounting to $185.5 mln. The much smaller volume of completed deals is explained

both by a smaller number of properties with purchase appeal and by the fact that the investor, rather than the end user, has always been the main buyer of shopping and entertainment centers, contrary to the trend observed in the office segment during the past 1.5 years.

Indicator %

Total volume of investment deals

$3,937,410,215

Capitalization rate for office properties

9–10%

Capitalization rate for retail properties

9–10%

Capitalization rate for warehouse properties

9.5–11%

• The warehouse property segment, which hadn’t seen any deals since 2008, started to exhibit signs of revival, which did not go unnoticed by investors. Three deals for a total amount of $729 mln were completed.

• Capitalization rates continued to decline for all segments of the commercial real estate market. However, by the end of the year, the decline slowed down considerably, stabilizing at the 2006 levels.

• Higher energy prices, contractionary policy of the Central Bank, and cautiousness of the banking sector have led to a considerable improvement in the banks’ liquidity, which has been evidenced by a continuous reduction in deposit interest rates. Historically, real estate sector lending has been one of the key areas for major banks, which, combined with positive market signals, allowed them to lower interest rates and relax borrower requirements somewhat. At present, it is possible to obtain a foreign currency loan at 10–11% for the term of up to 7 years using completed projects as collateral; compared to 2009, it is 300–500 basis points lower. Interest rates for Russian ruble loans are traditionally higher by 200–300 basis points. However, the crisis still continues to have quite a significant impact on projects at the land development stage.

Nonetheless, the volume of lending in the construction industry is going to be higher than in 2009. During the eleven months of 2010, there were 33% more loans issued compared to the same period of the previous year. Even taking the updated statistical data for the end of 2010 into account, we would register the growth of the lending volume, as during the eleven months of 2010 there were already more loans issued (by RUR 207.5 bln) than during the entire 2009.

FORECASTS

• For 2011, we forecast an increase in the volume of deals in all market segments. The highest growth is expected in the retail property segment, as several properties under construction that may change hands are available in the market.

Igor Pushchen Associate Director, Investment Sevices Department [email protected]

Chart 1. CHANGES IN DEAL VOLUME BY MARKET SEGMENT

3.40

2.35

4.85

4.33

0

1

2

3

4

5

6

2007 2008 2009 2010

Bill

ions

Office Retail Mixed-use Warehouse Hotel

Source: Colliers International

We also expect an increase in the volume of deals in the warehouse property segment, which follows the retail property segment’s trend and at the same time is characterized, on average, by longer contract terms and less complex management.

• Professional investors will start to dominate in the office property market, while the volume of deals with participation of end-user companies will be declining. This process is directly related to the decrease in the vacancy rates and stabilization of rental rates, which we are currently observing in the market.

• We are not projecting a considerable decrease in capitalization rates in 2011. Further movement of the rates will take place at a much slower pace, because they are close to the stabilization level.

• A similar scenario is possible for loan interest rates, as well. Banks will be relaxing borrower requirements and more readily lending to developers, but a considerable decrease in rates should not be expected.

Chart 2. CHANGES IN CAPITALIZATION RATES BY SEGMENT, %

5%

7%

9%

11%

13%

15%

17%

19%

21%

2003 2004 2005 2006 2007 2008 2009 2010

Office Retail Warehouse Source: Colliers International

Office Segment 2010 saw a growing interest in the office property market on the part of tenants and developers. Thanks to the revival of demand, the gross take-up in Q1–Q3 2010 exceeded the corresponding figure for the entire 2009. The number of the companies interested in leasing and buying office premises with an area of over 10,000 sqm increased; in particular, there was emerging demand for properties to be commissioned in 2–3 years. The take-up increase led to a drop in vacancy rates and growth of rental rates, which, in its turn, resulted in an improvement of the situation in the construction market and renewed development of the previously suspended projects. According to our estimates, the trend for the office property market revival is stable and is going to gather pace in 2011 unless any macro-economic disruption occurs. This will lead to a further decrease in vacancy rates, growth of rental rates and gradual strengthening of landlords’ position in negotiations. SUPPLY AND NEW CONSTRUCTION

2010 saw the commissioning of 970,000 sqm of new space in the office property market, with Class A properties accounting for 34% and Class B properties for 66%. The percentage shares of new construction and reconstruction were 76% and 24%, respectively. As a result, by the end of 2010, the total stock of Class A and B office space amounted to 12.64 million sqm. It should be noted that in 2010 the amount of commissioned space was considerably lower than in the previous several years, when approximately 1.5–1.8 million sqm of office space had been commissioned annually. The reason is that in 2009, against the backdrop of a slump in demand for office properties, many projects were suspended at early construction stages.

Table 1. MAJOR PROJECTS PUT INTO OPERATION IN 2010

Building Building class Developer Total area,

sqm Rentable office area, sqm

Commissioning date

Nagatino i-Land, Phase I, part 2 В Moscow Business Incubator OJSC 87,164 78,245 September

2010

Nagatino i-Land, Phase I, part 1 В Moscow Business Incubator OJSC 89,200 76,500 April 2010

Preo 8 В Montazhspetsstroy 118,700 75,000 October 2010

Domnikov А OPIN 132,000 64,100 March 2010

Western Gate А Centurion Hypermarkets 60,500 56,000 February 2010

SkyPoint Business Park В Otdelstroy-Invest 74,267 38,092 December 2010

Building Building class Developer Total area,

sqm Rentable office area, sqm

Commissioning date

W Plaza В Absolute Group of Companies 200,000 31,155 September 2010

Legend of Tsvetnoy А Capital Group 112,000 30,862 December 2010

Trio В MR Group 37,550 30,770 November 2010

Danilovskaya Manufaktura, Korpus Knopa

В KR Properties 42,000 26,000 April 2010

Marr Plaza А Marr Capital 34,000 21,913 December 2010

Helios City В Russian Investment Company 22,000 20,000 September 2010

Summit А Rossiyskiy Kredit Bank 63,800 18,570 October 2010

Sherland 2 В Sherland 18,700 17,500 November 2010

Kalanchevskaya Plaza В Absolute Group of Companies 20,045 15,830 December 2010

1/2 Arbatskaya Ploshchad А Zhilrekonstruktsiya 31,447 15,168 March 2010

Novakhovo BC В AeroВus 18,000 15,000 February 2010

AFI at Paveletskaya В AFI Development 19,700 13,600 July 2010

Moscow Silk, Phase III В Moscow Silk 33,700 13,500 May 2010

Avignon В Capital Group 24,180 13,440 December 2010

Novatek BC А Novatek 17,596 12,730 December 2010

Krasnogorsk Plaza В Sadovoe Koltso Group of Companies

39,611 12,000 December 2010

South Park В PromSvyazNedvizhimost / Russky Monolit

22,400 11,500 June 2010

Taurus А Gazprombank-Invest 18,680 11,060 September 2010


DEMAND

In 2010, a revival of demand was registered in the office property market, primarily on the part of companies operating in the primary, public, and consumer goods sectors. Demand from financial companies also increased, which testifies to the renewal of their business activity and the need to expand the occupied office space. An outstanding trend of 2010 was the demand for office premises with an area of 10,000–30,000 sqm, both in completed buildings and buildings under construction to be commissioned in 2–3 years. A larger portion of such requests – about 95% – came from Russian companies.

In 2010, the gross take-up in the office lease market amounted to approximately 1,000,000 sqm, which is 38% more than in 2009. Deals with Class A and Class B properties accounted for 28% and 72% of the total leased area, respectively. It is noteworthy that in 2010 the volume of lease terms renegotiation deals decreased by more than a factor of two. In 2009 it amounted to 196,000 sqm, whereas in 2010 it was only 95,000 sqm. It should be noted that in 2010 the demand remained focused on operating business centers.

Chart 1. TOTAL STOCK AND NEW CONSTRUCTION, CLASSES A AND B

Source: Colliers International In 2010, gross take-up by end users in the office sales market amounted to 320,000 sqm. The total area of office premises purchased in 2010 was 16% more than in 2009. This report contains data on office property sales to end users. Information about investment sales is provided in the “Investment” section.

Table 2. MAJOR LEASE DEALS CONDUCTED IN 2010

Tenant Building Building class

Office area, sqm. Quarter

TNK-BP Nordstar Tower, 3 Begovaya Ul. A 37,700 Q2

Confidential Western Gate, 21 Belovezhskaya Ul. А 17,900 Q2

E4 Group World Trade Center III, 12 Krasnopresnenskaya Nab. А 10,433 Q4

Sanofi-Aventis Pharma Summit, 22 Tverskaya Ul. А 8,800 Q2

CTC Media Monarch Center, 31 Leningradsky Pr-t B 7,000 Q4

Danone Riga Land В 6,600 Q4

IT Omega Plaza, 19 Leninskaya Sloboda Ul. В 6,512 Q1

Philips Marr Plaza, 13 Sergeya Makeeva Ul. А 5,935 Q3

Samsung Voentorg, 10/2 Vozdvizhenka Ul. A 5,879 Q4

Moskommertsbank Nordstar Tower, 3 Begovaya Ul. А 5,573 Q3

1Million sqm

4

12

10

8

6

4

2

0 1999 2000 2001 2002 2003 2010 2011E 2004 2005 2006 2007 2008 2009

New construction (million sqm)) Total stock (beginning of the reporting

period)

Tenant Building Building class

Office area, sqm. Quarter

OTKRITIE Financial Corporation 14 Yakovoapostolsky Per., Bldg 1 В 5,553 Q3

Eldorado 14 Smolnaya Ul. В 5,273 Q3

Confidential Nordstar Tower, 3 Begovaya Ul. А 5,251 Q1

Avon Fusion Park, 1 M. Trubetskaya Ul. В 4,861 Q1

Nycomed Fusion Park, 1 M. Trubetskaya Ul. В 4,748 Q3

Enel Pavlovsky, Phase II, 7 Pavlovskaya Ul. А 4,736 Q3

Merck (MSD Pharmaceutical) Pavlovsky, Phase II, 7 Pavlovskaya Ul. А 4,407 Q3

ChTPZ Group White Square, Bldg B, 13–15 Lesnaya Ul. А 4,400 Q2

RZD Trading House Pallau-NK, 39 Nizhnyaya Krasnoselskaya Ul. В 4,351 Q2

Acron World Trade Center III, 12 Krasnopresnenskaya Nab. А 4,233 Q3

Grinatom Novospassky Dvor, 7 Derbenevskaya Nab. В 4,000 Q1

Microgen Volkonsky, 10 2nd Volkonsky Per. В 3,890 Q3

Gazprom Maintenance and Procurement Krugozor, 30 Obrucheva Ul., Bldg 1–3 В 3,763 Q3

Confidential Georg Plaza, 5A Ogorodnoy Slobody Per. В 3,750 Q4


Table 3. MAJOR SALE DEALS CONDUCTED IN 2010

Buyer Building/Seller Building class

Office area, sqm Quarter

RWM Capital Domnikov, 34 Mashi Poryvaevoy Ul. А 84,548 Q3

OTKRITIE Bank Vivaldi Plaza, 2 Letnikovskaya Ul., Bldg 4 A 25,037 Q4

SOGAZ Volna, 10 Akademika Sakharova Pr-t / Eurasia Group А 15,825 Q1

Confidential Pallau-MD, 7–9 M. Dmitrovka Ul. / Ferro-Stroy В 14,744 Q2

ICT Group Complex Nouvelle, 5 Stary Tolmachevsky Per. В 14,511 Q4

Finam Megapolis, 7 Nastasyinsky Per., Bldg 2 В 7,437 Q1

LUKOIL Ulansky Tsentr, 4–5 Ulansky Per. / London & Regional В 7,209 Q1

ROSENERGOBANK Prokhorov Manor, 30 Podsosensky Per. / Dresdner Bank А 4,278 Q2

Confidential Novodanilovsky Dom, 4A Novodanilovskaya Nab. В 2,440 Q4

Ankor Bank Sokol House, 3 Marshala Meretskova Ul. В 2,400 Q2


VACANCY RATES

Recovering demand and growing take-up, typical of the office property market in 2010, provided for a decrease in vacancy rates. It is noteworthy that the reduction of vacancy rates for Class A premises began in Q2 2010, while for Class B premises this trend had emerged as early as in Q3 2009. As of the end of 2010, vacancy rates in Class A buildings amounted to 17.1%, in Class B buildings to 11.0%. It is worth mentioning that Q4 saw a slight growth of vacancy rates for Class A premises (from 14.3% to 17.1%) following the commissioning of approximately 160,000 sqm of office space and, correspondingly, an increase in supply. This is comparable to the total area of Class A properties commissioned in the first three quarters of 2010.

Chart 2. AVERAGE VACANCY RATES

0%

5%

10%

15%

20%

25%

Q4

2000

Q2

2001

Q4

2001

Q2

2002

Q4

2002

Q2

2003

Q4

2003

Q2

2004

Q4

2004

Q2

2005

Q4

2005

Q2

2006

Q4

2006

Q2

2007

Q4

2007

Q2

2008

Q4

2008

Q2

2009

Q4

2009

Q2

2010

Q4

2010

Class A Class B


* Hereinafter, rental rates are stated net of VAT and OPEX.

RENTAL RATES AND SALE PRICES

In 2010, we observed gradual stabilization of rental rates in the first half of the year followed by their slight increase in the second half of the year. It was noted that in H1 2010 owners were ready to offer discounts and favorable lease terms to potential tenants. This was the position of landlords offering new business centers with high vacancy rates, buildings in less favorable locations, and premises without finishing. Lessors of more competitive properties started increasing rental rates as early as in the first half of the year. In H2 2010, weighted average rental rates for Class A and Class B business centers somewhat increased. This resulted from demand recovery, increased take-up and reduced vacancy rates. The most significant growth was registered for business centers located in the central business district. As of the end of 2010, weighted average rental rates there amounted to $ 760/sqm/year* for Class A, $660/sqm/year for Class В+, and $390/sqm/ year for Class В– properties. For comparison, in the beginning of the year they amounted to $660/sqm/year for Class A, $560/sqm/year for Class В+, and $300/sqm/ year for Class В–. Outside the CBD, weighted average rental rates for office premises remained practically the same since the beginning of the year and amounted

Table 4. ASKING RENTAL RATES AND SALE PRICES IN 2010

Building class Asking rental rates, $/sqm/year (net of VAT and OPEX) Sale prices, $/sqm (net of VAT)

Class A 550–1,000 7,000–12,000

Class В+ 300–750 3,000–8,000

Class В– 200–550 2,000–6,000

Source: Colliers International to approximately $450/sqm/year for Classes А and В+ and $220/sqm/year for Class В–. An increase in rental rates across the market overall facilitates a strengthening of landlords’ position in negotiations. TRENDS AND FORECASTS

In 2010, the following positive trends developed in the office property market: demand revival, absorption volume enhancement, and vacancy rates reduction. This resulted in an increase of rental rates, as well as in developers becoming more active and resuming previously suspended projects. For example, one could name the following business centers: Olympia Park, Metropoliya, Nagatino i-Land, Skyline, Classic, and Olympiysky Prospekt. This is testimony to the fact that both developers and financial institutions are feeling positive about the office market development prospects and forecast that by the time the new properties are commissioned, there will be corresponding demand in the market. We believe that the market revival trend is stable and is going to gather pace in 2011 unless any macro-economic disruption occurs. It will result in further reduction of vacancy rates, growth of rental rates, increase of competition for office space between tenants, as well as a gradual enhancement of the bargaining power of landlords and property owners. We expect that in 2011 the trend of longer lease agreements will grow, due to the expansion of leased space and the landlords beginning to see the possibility of long-term business development planning.

Table 5. MAJOR PROPERTIES PLANNED TO BE COMMISSIONED IN 2011

Building Building class Developer Total

area, sqm Rentable office area, sqm

Imperia Tower А MosCityGroup 287,723 70,110

RiverSide B New Life Group 72,146 70,000

9 Akrov, Phase II B Garmet 90,738 67,824

Vivaldi Plaza А OTKRITIE – Real Estate 68,824 63,680

Olympia Park A OTKRITIE – Real Estate 71,185 45,966

Aquamarine III A AFI Development 75,500 42,000

Solutions BP, Phase II B MosKapStroy 44,000 40,040

Diamond Hall А Midland Development 61,500 38,000

Lootch А INTER RAO UES 30,000 28,500

Building Building class Developer Total

area, sqm Rentable office area, sqm

Linkor В Agrostroy 35,000 28,500

Krasnye Vorota А Olmineya 33,440 25,760

Riga Land, Phase II B Polishelk 28,800 21,700

Sokol Bridge II B CS Trading 33,000 21,691

Radisson SAS Olympiysky Moscow A Kuznetsky Most Development 79,955 19,846

Mirland, Bldgs 14 and 26 В Mirland Development Corporation 21,242 19,769

Ochakovo BC B Premier Development Company 26,014 19,676

Delta Plaza В Accent Real Estate Investment Managers

27,000 19,300

Legion II, Phase II B Legion Development 30,290 19,300

SKY House A MCG Group 145,000 17,500

Flacon B Elitstroy 23,300 16,800

4 17th Maryinoy Roshchi Proezd B Kvartstroy Development Company 17,500 15,000

Trefoil Plaza B Rialtservis 20,160 14,590

3 Sadovaya-Kudrinskaya Ulitsa В Proektstroyinvest 13,925 13,925

Center of Contemporary Architecture A Technocom Trade 29,100 13,300

Danilovskaya Manufaktura, Ryady Soldatenkova

В KR Properties 15,700 12,956

Moskva hotel А Moskva Hotel / DekMos 187,000 11,133

12–14 Zhukovskogo Ulitsa А Lizingbiznes 25,000 10,000


Financial institutions, which came into ownership of collateral properties may make an impact on the office market development in 2011. The way they manage these assets (whether they would sell them or establish developer units within their corporate structures and dispose of these properties independently) will, to a certain extent, determine the supply, vacancy rates, rental rates and sale prices in the office property market. In 2011, it is planned to commission about 900,000 sqm of office space. The majority of the properties due to be commissioned are located outside the Garden Ring (see Chart 3). This important fact predefines a short supply of office space in the city center, which allows us to forecast a keen demand for these properties, and, as a result, a more rapid increase in rental rates within the Garden Ring compared to the market average.

Chart 3. BREAKDOWN OF 2011 COMMISSIONING VOLUME BY GEOGRAPHIC SEGMENT

1.8%9.5%

46.4%16.0%

23.3%

3.0%

Within Boulevard Ring

Boulevard Ring - Garden Ring

Garden Ring - Third Ring Road

Third Ring Road - Fourth RingRoad

Fourth Ring Road - MKAD

Outside MKAD


Olga Pobukovskaya Director Office Property Department [email protected]

Warehouse Sector The warehouse property market was experiencing perhaps a more profound impact of the crisis than other segments of the commercial real estate market: the demand dropped dramatically, vacancy rates increased sharply from 1% at the end of 2008 to 19% in the middle of 2009. As a result, most of the new projects were put on hold. The consequences manifested themselves in 2010, when new construction volume decreased by a factor of 1.6 compared to the previous year and amounted to about 400,000 sqm. In this environment, a revival of demand in the warehouse segment was observed in 2010. As a result, the take-up of warehouse space was double the volume of new construction. These factors defined the main trends of 2010: reduction of vacancy rates to 6% and growth of rental rates.

Chart 1. TOTAL SUPPLY AND NEW CONSTRUCTION OF CLASS A WAREHOUSE FACILITIES

0

1,000

2,000

3,000

4,000

5,000

2007 2008 2009 2010 2011F

'000

sqm

Total Stock (beginning of the reporting period ) New Construction

Commissioning of about 350,000 sqm of warehouse space has been announced for 2011. This is 1.5–2 times less than the yearly commissioning volumes in 2007–2009. Relatively small new construction volumes allow for projecting, by the mid-2011, an insufficient supply of quality warehouse premises ready for tenants to move in. Correspondingly, 2011 will see a continuation of the trend toward reduction of vacancy rates and growth of rental rates. Nonetheless, the revival of demand, which took place in 2010, has served as a catalyst for energizing developers. A number of developers are resuming implementation of previously suspended projects and considering offers of land plots for new construction. In the next two to three years, this will lead to a rebound in construction rates and an increase in the supply of quality warehouse facilities.


SUPPLY

By the end of 2010, total supply of Class A warehouse facilities in the Moscow Region amounted to 5.1 mln sqm, having increased during the year by approximately 400,000 sqm. It is important to note that over 500,000 sqm of quality warehouse space was announced for commissioning in 2010 initially; however, commissioning of about 25% of this space was postponed to the next year. Among the major projects rescheduled to be commissioned in 2011 are: Aparinki warehouse complex (61,000 sqm), Krekshino logistics park (22,000 sqm), and Salaryevo warehouse complex (20,000 sqm). As commissioning timeframes for some Class A warehouse facilities were postponed from 2010 to the next year, it is expected that the total supply of quality warehouse space in the Moscow Region will increase by about 350,000 sqm in 2011. This is almost the same as the amount commissioned in 2010, but still 1.5–2 times less than annual commissioning volumes in 2007–2009.

Table 1. MAJOR CLASS A WAREHOUSE PROJECTS IN THE MOSCOW REGION

COMMISSIONED IN 2010

Property Developer Location Phase, area, sqm

Commissioning date

PNK-Chekhov PNK Group

Simferopolskoye Shosse, 50 km from the MKAD

106,000 Q3

PNK-Chekhov PNK Group

Simferopolskoye Shosse, 50 km from the MKAD

105,100 Q4

Krekshino logistics park

RosEuroDevelopment

Kievskoye Shosse, 24 km from the MKAD

Phase IV, 46,800 Q2, Q4

Sherland Sherland Leningradskoye Shosse, 13 km from the MKAD

23,000 Q3

Istra logistics park

Espro Group / Raven

Novorizhskoye Shosse, 40 km from the MKAD

Phase V, 20,000 Q4

Source: Colliers International DEMAND

2010 demonstrated revitalization of demand in the warehouse property market, primarily on the part of retail operators and companies working in the FMCG segment. This was a consequence of an increase in the population’s purchasing capacity, which determined a more intensive development of the companies operating in the end-user goods and services market. As a result of demand recovery, in Q1–Q3 2010, the total volume of transactions in the warehouse property market of the Moscow Region was almost the same as during the entire 2009 (about 600,000 sqm). In 2010, the total take-up in the warehouse property market of the Moscow Region amounted to about 950,000 sqm, which is 55% greater than in 2009.

In the demand structure, a trend towards a higher share of requests for premises in excess of 3,000 sqm was observed. For example, if in H1 2010 they accounted for less than 50% of the requested areas, in H2 2010, they accounted for over 70% (see Chart 2). Overall, there was a noticeable increase in the number of transactions for areas in excess of 20,000 sqm in 2010 as compared to 2009.

Diagram 1. BREAKDOWN OF DEMAND* BY TENANT PROFILE IN THE MOSCOW REGION

19.3%

7.1%

5.7%

5.0%

31.4%

12.1%

9.3%

3.6%3.6% 2.9%

Retail & Trading

Fast Moving Consumer Goods

Logistic operators/3PL

Manufacturer

Automobiles/technics/machines

Construction materials

Services

Alcohol

OTHERS

Pharmaceuticals & Healthcare

The regions were also characterized by a revival of demand in the warehouse property market in 2010, primarily in such cities as St. Petersburg, Novosibirsk, Yekaterinburg, and Rostov-on-Don. There, several major transactions for premises with an area of up to 34,000 sqm were completed.

Source: Colliers International * by requested area

VACANCY RATES


Revival of demand in the warehouse property market in 2010, combined with the absence of new projects, led to the fact that the take-up was more than two times the new construction volumes, approximately 950,000 sqm versus 400,000 sqm, respectively. As a result, the warehouse space that had become vacant in 2009 was gradually filling with tenants, while the vacancy rate – decreasing. The trend of declining share of vacant space began to take hold in Q2 2010, but the sharpest drop in the vacancy rates was observed in Q3 2010 (from 11.7% to 7%). In Q4 2010, there was no considerable reduction in the vacancy rates, as about 160,000 sqm of new Class A warehouse space was brought to the market. Thus, in the end of 2010, the vacancy rates in the warehouse property market of the Moscow Region amounted to 6%, having contracted by more than a factor of 2 compared to the end of 2009. RENTAL RATES

2010 was characterized by growing rental rates and changing commercial terms. For example, in the first half of the year, we noted that landlords started to provide discounts less frequently, especially at completed warehouse complexes with small vacancy rates. The second half of the year was marked by growth of rental rates in the market as a whole. For Class A warehouse space, rental rates increased from $100/sqm/year in the beginning to middle of the year up to $110–115/sqm/year at the end of 2010; while rental rates for Class B office space increased from $90/ sqm/ year to $95–100/sqm/ year, respectively. In addition, an increase in the length of lease agreements can be noted in 2010. While short-term agreements had been common in 2009, in 2010, the minimum lease term increased to 5 years.

Table 2. MAJOR 2010 LEASE TRANSACTIONS IN THE MOSCOW REGION

Tenant Property Location Leased area, sqm

Transaction date

X5 Retail Group PNK-Chekhov Simferopolskoye Shosse, 50 km from the MKAD 46,211 Q1

Arconada Agroterminal Simferopolskoye Shosse, 30 km from the MKAD 32,430 Q2

S-3/SkladLogistik Krekshino logistics park Kievskoye Shosse, 24 km from the MKAD 25,780 Q2

Mitsui PNK-Chekhov Simferopolskoye Shosse, 50 km from the MKAD 23,062 Q2

Unix Severnoe Domodedovo Don Shosse, 13 km from the MKAD 22,000 Q1

Auchan Trilogy Park Tomilino Novoryazanskoye Shosse, 7 km from the MKAD 21,972 Q1

Axima Trilogy Park Tomilino Novoryazanskoye Shosse, 7 km from the MKAD 21,873 Q4

Univeg Logistics Trilogy Park Tomilino Novoryazanskoye Shosse, 7 km from the MKAD 21,870 Q4

Merlion Infrastroy Bykovo Ryazansky Prospekt, 19 km from the MKAD 20,000 Q3

Alliance Healthcare SLT Klimovsk Varshavskoye Shosse, 21 km from the MKAD 17,800 Q2

General Motors CIS Tomilino TLC Novoryazanskoye Shosse, 6 km from the MKAD 16,728 Q3

Tsentralny Division Eastern industrial park Gorkovskoye Shosse, 44 km from the MKAD 15,700 Q2

Vinexim Trilogy Park Tomilino Novoryazanskoye Shosse, 7 km from the MKAD 14,500 Q4

Chart 2. BREAKDOWN OF DEMAND BY REQUESTED AREA IN THE MOSCOW REGION

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

less than1,500 sqm

1,500-3,000 sqm

3,000-5,000 sqm

5,000-10,000 sqm

over 10,000 sqm

Q1-Q2 2010 Q3-Q4 2010

Table 2. MAJOR 2010 LEASE TRANSACTIONS IN THE MOSCOW REGION

Tenant Property Location Leased area, sqm

Transaction date

Uhrenholt PNK-Chekhov Simferopolskoye Shosse, 50 km from the MKAD 12,960 Q1

FixPrice Krekshino logistics park Kievskoye Shosse, 24 km from the MKAD 12,429 Q3

Stockmann MLP Leningradskiy terminal Leningradskoye Shosse, 13 km from the MKAD 11,184 Q4

TNT Express Troitse-Lykovo warehouse complex Moscow 10,884 Q2

Liga Chistoty Rostinvest Novoryazanskoye Shosse, 22 km from the MKAD 10,100 Q1


Table 3. MAJOR 2010 LEASE TRANSACTIONS IN THE REGIONS

Tenant Property City Leased area, sqm

Transaction date

Dixy St Petersburg Megalogix St Petersburg St Petersburg 34,000 Q3

X5 Retail Group Pyshma Logistics Park Yekaterinburg 24,118 Q3

Gala Center Pyshma Logistics Park Yekaterinburg 17,000 Q1

Sima-Land Pyshma Logistics Park Yekaterinburg 14,000 Q2

Russkiy Svet Pyshma Logistics Park Yekaterinburg 12,500 Q1

Global Logistic Projects MLP Utkina Zavod St Petersburg 12,320 Q2

Elopak MLP Utkina Zavod St Petersburg 11,512 Q2

Confidential Megalogix St Petersburg St Petersburg 11,173 Q3

Confidential Megalogix Rostov-on-Don Rostov-on-Don 9,583 Q3

Tarkett PNK-Tolmachevo Novosibirsk 8,680 Q2

Kinetika Pyshma Logistics Park Yekaterinburg 8,400 Q3

Confidential Gorigo St Petersburg 8,056 Q2


TRENDS AND FORECASTS

The total area of Class A warehouse properties announced to be commissioned in 2011 in the Moscow Region amounts to about 350,000 sqm. It should be noted that some of this commissioning volume has been rescheduled from 2010. There are practically no new projects among those expected to be commissioned in 2011; these are mostly properties that had started to be developed even before the crisis. Despite the fact that the total area of Class A warehouse properties announced to be commissioned in 2011 is comparable with 2010 new construction volumes, this indicator is 1.5–2 times lower than yearly commissioning volumes in 2007–2009. This fact, combined with the revival of demand in the warehouse property market allows for forecasting that the vacancy rates in 2011 will continue to decline, while rental rates will continue to grow. This will lead to the fact that by mid-2011 there may be a supply shortage of quality warehouse space ready for tenants to move in. This, in turn, will lead to an increase in demand and a gradual decline of vacancy rates in the segment of warehouse properties under construction. At the same time, one can’t fail to note that the revival of demand that ocurred in 2010 contributed to energizing developers. This was reflected in resumption of the projects previously put on hold and search for new land plots to be developed. Because of this, we expect new projects to be announced in 2011; and in the next 2–3 years, this will lead to higher construction rates and larger supply of quality warehouse space. A potential restriction on entry of heavy trucks into Moscow may become an additional incentive for building new warehouse complexes in the Moscow Region.

Chart 4. CHANGES IN RENTAL RATES*

0

20

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120

140

160

2007 2008 Q12009

Q22009

Q32009

Q42009

Q12010

Q22010

Q32010

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Ren

tal r

ate,

$/s

qm/y

ear

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15

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30

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40

$/R

UR

exc

hang

e ra

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Class A Class B USD exchange rate

* not including VAT, OPEX, and utilities

Table 4. MAJOR CLASS A WAREHOUSE PROJECTS IN THE MOSCOW REGION PLANNED TO BE COMMISSIONED IN 2011

Property Developer Location Phase, area, sqm

Aparinki VVV Company Kashirskoye Shosse, 4 km from the MKAD 61,000

PNK-Chekhov PNK Group Simferopolskoye Shosse, 50 km from the MKAD

38,800

Belaya Dacha Hines Novoryazanskoye Shosse, 4 km from the MKAD

32,000

Salaryevo New Logistics Systems Kievskoye Shosse, 2 km from the MKAD 23,000

Agrocomplex Agrocomplex Kashirskoye Shosse, 20 km from the MKAD 22,000

Krekshino logistics park Krekshino logistics park Kievskoye Shosse,

23 km from the MKAD 21,700

Chart 3. VACANCY RATES

18.0%

6.0%

1.7% 1.0% 1.0%

5.0%

19.0%

13.0% 13.0%11.7%

7.0%

0%

4%

8%

12%

16%

20%

2006 2007 2008 Q12009

Q22009

Q32009

Q42009

Q12010

Q22010

Q32010

Q42010


Vladislav Ryabov Director, Warehouse, Land and Industrial Property Department [email protected]



Retail Sector The last year was characterized by a revival of demand in the retail property market of Moscow and the Moscow Region. This resulted in the renewed interest of international operators to the Russian market, entry of new foreign brands and expansion of regional chains to the Moscow market, and active regional development. This, in turn, led to decreasing vacancy rates, growing rental rates, cancellation of bonuses for tenants and expanding “waiting lists” for the most appealing and successful retail facilities. The growing demand for retail properties triggered developers' activity, who resumed construction of the previously suspended projects. However, no major new projects were announced during the past year; construction of all shopping centers opened in 2010 and planned for opening in 2011 had begun before the crisis. In Moscow, coupled with the new tougher commercial property development policy, this may lead to a growing shortage of supply in the Moscow retail property market and, as a result, to an increased interest of developers and retailers to regional markets. SUPPLY

Chart 1. TOTAL SUPPLY AND NEW CONSTRUCTION (GLA)

In 2009, nine new properties with a GBA of 962,000 sqm (GLA – 373,000 sqm) were opened in the Moscow retail property market. Over half of this area is represented by two properties: Vegas SEC and Gagarinsky SEC (GBA – 590,000 sqm, GLA – 194,000 sqm). Vegas SEC became a significant project for 2010. Its market importance lies in the fact that the developer managed to ensure maximum convenience for potential

visitors thanks to a combination of fine architectural concept and design with the center’s efficient retail concept.

It is noteworthy that the area of the shopping facilities opened in 2010 accounts for approximately 75% of the previously announced area. Opening of the other announced properties (GBA of 249,000 sqm; GLA of 128,000 sqm) has been postponed to early 2011, including AFIMALL CITY SEC with a GBA of 179,000 sqm (GLA of 101,000 sqm).

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2006 2007 2008 2009 2010 2011 F

'000

sqm

Gross leasable area at the beginning of the reporting period New construction (GLA)


As a result, the GBA of the new shopping centers opened in Moscow in 2010 was 7% greater than in 2009: 962,000 sqm and 900,000 sqm, respectively. However, the GLA of the new properties opened in 2010 is 25% less than the previous year: 373,000 sqm and 497,000 sqm, respectively. By the end of 2010, the GBA of retail properties opened in Moscow amounted to 5,819,000 sqm (GLA of 2,911,000 sqm).

Table 1. SHOPPING CENTERS OPENED IN 2010

Name Address GBA, sqm GLA, sqm Major tenants Opening date

Rechnoy

2 Festivalnaya Ul., Rechnoy Vokzal metro station

26,000 18,140

Perekrestok supermarket, M.video household appliances and electronics store, Detsky Mir, Cosmic children’s entertainment center

March

Azovsky 28V Azovskaya Ul. 34,500 16,900 Perekrestok supermarket March

Viva Severnoye Butovo, 8 Polyany Ul. 32,000 21,900

Karusel food hypermarket, MediaMarkt household appliances and electronics hypermarket, Domania household goods supermarket, Limpopo children’s goods store

April

Vegas 24 km MKAD 390,000 124,000

Auchan food hypermarket, Tvoy Dom household goods hypermarket, Luxor cinema, Saturn and M.video household appliances and electronics hypermarkets

June

RIO Reutov, 2 km MKAD 175,000 56,400

Nash Hypermarket food hypermarket, Nash Dom DIY hypermarket, Eldorado household appliances and electronics supermarket, Cinema Star cinema

September

Marcos Mall 70 Altufyevskoye Sh. 41,800 36,200 Perekrestok supermarket, Euroset intellectual supermarket, Karo Film cinema

September

Klyuchevoy Borisovskie Prudy Ul. 26,600 13,700 Victoria supermarket, Deti children’s goods supermarket September

Gagarinsky Ordzhonikidze Ul. / 3 Vavilova Ul. 200,000 70,000

Auchan food hypermarket, Sportmaster sporting goods hypermarket, M.video household appliances and electronics supermarket, Detsky Mir, KIABI, Fun City family entertainment center

November

Tsvetnoy Tsvetnoy Blvd. 36,500 15,600 Department store format December


Another positive fact is the continued development of regional retail property markets. In 2010, the following shopping and entertainment centers were opened: City Mall Belgorodsky in Belgorod (70,000 sqm), Viva Land in Samara (68,000 sqm), KomsoMALL in Yekaterinburg (67,200 sq), Europe in Lipetsk (60,000 sqm), as well as Rubin in Tver (55,000 sqm), Frant in Kazan (54 000 кв. м), JUNE in Cherepovets (46,000 sqm), Golden Park in Novosibirsk (30,000 sqm), and RIO in Ivanovo (45,000 sqm) and Tula (25,000 sqm). DEMAND

2010 saw an increase in demand for retail properties on the part of practically all types of operators, not only in the largest cities but also in the cities with a population of 300–500 thousand people. It is worthy of note that 2010 saw a very fast expansion of

demand from federal operators across cities of various size. Competition level rather than the local market scale has become the decisive factor for retailers deciding to enter a new regional market. In 2010, food retailers were active. X5 Retail Group purchased Ostrov and Kopeyka retail chains, and plans to open over 500 new stores in 2011. Magnit from Krasnodar plans to develop on a large scale this year, including opening of approximately 700 stores and construction of distribution centers. Lenta chain of hypermarkets is going to resume development in 2011 and build 8 hypermarkets in St Petersburg, Tver, Vologda, Cherepovets, Volzhsky, Ufa, Novosibirsk, and Omsk. French group Auchan intends to develop Raduga hypermarkets in the chain format and increase the Atak retail chain from 40 to 200 supermarkets by 2015. Foreign operators also became more active: in 2010, Thomas Sabo, UNIQLO, home&you, Burger King, and Dunkin' Donuts entered the Russian market. The Inditex Group brought a new concept to the Russian market, the Uterque accessories store. The first stores of Cool Club, a Polish children’s clothing chain, and German brand Apart (women’s clothing) opened in Gagarinsky SEC in Moscow. American clothing retailer Abercrombie & Fitch is considering the possibility of entering the Moscow market. Fiba Group plans to open the first Banana Republic stores. MONEKS TRADING, operating under franchise agreements, has got the right to develop new brands in Russia, including Victoria’s Secret, Bath & Body Works, and American Eagle, and plans to develop them in Moscow and other regions in the near future. British department store chain Debenhams resumed the search for partners in Moscow in order to enter the Russian market. Operator of Spanish brand Desigual is in negotiations with Jamilco, a company representing international brands in Russia. Tashir group of companies got the right to develop British brand Quiz in Russia: the first stores were opened in RIO SEC at Dmitrovskoye Shosse in Moscow and RIO SEC in Reutov. The company plans to open four more Quiz stores in Belgorod, Tula, Vologda, and Yaroslavl in Q1 2011. In 2010, an increase of international brands’ activity in the Russian market was noted. French company KIABI (budget family clothing) opened its first Moscow store in Gagarinsky SEC and is considering the possibility to expand to other Russian cities. Turkish brand LC Waikiki independently entered St Petersburg’s market in the clothing supermarket format (the first store was opened in Galeria SEC) and plans to open about 50 more stores all over the country in the next three years. Other Turkish brands, Koton and Network, also started to actively search for new sites in Russia. New Yorker, S'Oliver, Mango, and Promod announced they were going to continue operating independently in Russia. Reima, a Finnish children’s clothing producer, is opening a representative office in Russia to directly interact with retailers rather than via distributors. In addition, Reima is going to introduce the previously unrepresented Lassie, Tutta, and Progress brands to the Russian market. In 2011, Ecco is going to continue replacing franchise stores with its own ones and plans to open about ten new stores in Russia. Increased demand and competition encouraged retail operators to develop new retail formats. Euroset opened the first intellectual hypermarket which combines selling electronics and books in Marcos Mall SEC and intends to develop a chain of such stores all over Russia. X5 Retail Group launched a new retail format, Pyaterochka-Maxi, having opened the first store in Syzran. The company plans to develop this format in Russia’s regions, including small cities with a population of over 50 thousand people. Auchan is considering the possibility to develop a wine boutique chain following the success of its first wine shop opened in EuroPark at Rublevskoye Shosse in 2010. German retailer METRO Cash & Carry is going to introduce new store formats to the Russian market, METRO Punct and METRO Eco. Operator of women’s clothing brand Pompa developed a new store format based on the general Pompa mini concept for cities with a population exceeding 100 thousand people.

RENTAL RATES

Growing demand for quality retail properties resulted in a decrease in vacancy rates and expansion of waiting lists for Moscow’s most attractive shopping centers. In a number of cases, this led to renegotiation of commercial terms for tenants. In 2010, the fixed portion started to account for a larger part of rental rate structure, as it used to be before the crisis, with a percentage of sales being preserved (a mixed scheme). Moreover, many shopping centers cancelled bonuses for tenants, such as finishing of the premises at the owner’s expense or free rent for the first 1–2 months, which had been widespread in 2009. It is noteworthy that rental rates at the most successful shopping centers have started to grow not only in Moscow, but also in some regional cities.

STREET RETAIL

In 2010, a recovery of demand for street retail premises was registered. In particular, Incity opened a store at 17 Tverskaya Ulitsa, and Inditex is going to open a Massimo Dutti store on Tverskaya Ulitsa. This was facilitated by the overall improvement of the economic environment, growing sales turnover, and increasing purchasing power. As a result, vacancy rates began to decrease, and rental rates started to grow. The growth was registered first and foremost at those premises where lease agreements or the period of reduced rates valid for tenants during the crisis were coming to an end. By the end of 2010, maximum asking rental rates reached $3,500– 4,000/sqm/year; for Tverskaya Ulitsa, the figure was $10,000–13,000/sqm/year, even though in 2009 rental rates in the street retail segment had been $500–3,000/sqm/year, and on Tverskaya Ulitsa they had ranged from $2,500 to $5,500/sqm/year. The restrictions on parking on Tverskaya Ulitsa, which took effect at the end of the last year have not yet caused a decrease in rental rates, but they have led to tenants’ rotation: a number of stores designed for long customer visits are leaving the street as the traffic of customers arriving by car has dropped. TRENDS AND FORECASTS

According to the statements of developers and the estimates of Colliers International, the GBA of shopping centers scheduled for opening in 2011 is about 1,000,000 sqm. This is roughly the same figure as in 2010. However, the GLA of properties to be commissioned in 2011 exceeds the 2010 figure by 34%: 500,000 sqm compared to 373,000 sqm, respectively.

Table 2. MAJOR SHOPPING CENTERS PLANNED FOR OPENING IN 2011

Name Address GBA, sqm GLA, sqm

AFIMALL CITY MIBC Moscow-City, Plot No. 8 179,000 101,000

River Mall 16–18 Avtozavodskaya Ul. 258,000 90,000

GoodZone 12 Kashirskoye Sh. 120,000 70,000

Kaleidoscope 7–23 Khimkinsky Blvd 119,000 41,000

Outlet Village Belaya Dacha Kotelniki, Belaya Dacha district 40,800 38,000

Fashion House Leningradskoye Sh. 38,600 28,800

Parus 1 Novokurkinskoye Sh., district 17 35,500 25,800

Name Address GBA, sqm GLA, sqm

Brand City / Waymart* 26 km MKAD 30,000 24,500

Favorit Yuzhnobutovskaya Ul. 37,000 24,000

Avenue 77 Severnoye Chertanovo 35,000 20,000

Moskvorechie Kashirskaya metro station 30,000 19,800

TPU Planernaya Planernaya Ul. 50,380 14,790

Severnoe Siyanie Dmitriya Donskogo Blvd 20,000 12,000

EGO Mall 23 Dezhneva Pr-d 12,000 7,800

* Concept change; is not included in the new supply calculation for 2011.


In our opinion, an increased supply of quality shopping centers in 2011 will result in the following trends becoming more prominent. • A more balanced approach of developers with regard to the quality and the

architectural concept of their properties. The year 2010 demonstrated that many developers strive to make their properties more competitive, by means such as engaging experts in various areas. IKEA, for example, has temporarily frozen new project development, focusing instead on attracting new brands not yet represented in Russia to the existing shopping centers and the retail facilities due to open shortly. Thus, the tenant pool will be improved and, therefore, the competitive advantages of these properties will be enhanced, against the backdrop of increasing competition from new projects.

• New shopping center formats emerging in the market. For instance, in 2010

development of outlet center projects picked up pace, and the first such properties will open in 2011 in Moscow. These are the new shopping centers Outlet Village Belaya Dacha in Kotelniki and Fashion House on Leningradskoye Shosse. Also, Waymart shopping center, located at 26 km MKAD, is being transformed into an outlet center, Brand City.

In 2010, a more stringent policy of Moscow authorities with regard to new commercial property development was declared. In the end of 2010, the Moscow authorities made a decision to suspend development of about 400,000 sqm of retail space in the city center with the aim of easing the burden on the traffic network. Such policy will predetermine a shortage of retail properties in the Moscow market over the next few years. Market situation development in 2011 will result in the following trends taking shape. • Reduction of vacancy rates and further increase in rental rates, primarily in Moscow’s

most successful shopping centers with professional concept. • Renewed activity and shifted focus of developers and retail operators toward the

regions. This trend progressed in 2010 and we are expecting it to strengthen over the next year. In particular, 2010 saw many developers resume work on previously suspended projects.

Among the major shopping centers due to open in the next two years, one could name the following: SEC OZ in Krasnodar (227,000 sqm), SEC MoreMall in Sochi (150,000 sqm), SEC Planeta (126,000 sqm) and SEC JUNE (42,000 sqm) in Ufa, SEC Yarmarka in Astrakhan (81,700 sqm), М5 Mall SEC in Ryazan (81,500 sqm). Also, one should mention SC Yuzhny in Kazan (78,000 sqm), SEC Gostiny Dvor in Tula (60,000 sqm) and the shopping and entertainment center on Komsomolsky Prospekt in Tomsk (42,000 sqm). Moreover, in 2011 two major MEGA properties are due to open in Ufa (150,000 sqm) and Samara (150,000 sqm). In 2012, one of the largest shopping centers in the Moscow Region, REC JUNE in Mytishchi (178,000 sqm), is scheduled for opening. Since over the last year rental rates for premises in Moscow’s main retail corridors increased significantly, one can forecast a growth of demand in the suburban areas of the city where rental rates, on average, are lower. This, in its turn, will facilitate rapid increase in rates for the most attractive properties.

Galina Maliborskaya Director, Retail Property Department [email protected]

Hotel Sector SUPPLY

• At the end of 2010 the current hotel room stock in Moscow included about 28,176 rooms (Diagram 1) in 3-4-5 star segments (the total room capacity of Moscow grew by 7.7% compared to the same period of the previous year). Diagram 1. BREAKDOWN OF MOSCOW HOTEL ROOM Diagram 2. BREAKDOWN OF MOSCOW HOTEL ROOM

CAPACITY BY CLASSES CAPACITY BY CLASSES INTRODUCED TO THE MOSCOW MARKET IN 2010

Source: Colliers International Source: Colliers International

42%

38%

20%

5*

4*

3*

13%

28%59%

5*

4*

3*

• About 70% of number of rooms announced in 2010 entered the market (Table 1). This circumstance is explained by the fact that hotels postponed opening dates for a number of hotels. The opening dates for Marriott Courtyard in the Vivaldi Plaza mixed-use complex, a hotel on Krasnopresnenskaya embankment within the second phase of the mixed-use complex and Radisson Blu Hotel at Belarusskaya were rescheduled for 2011. • Last year the number of rooms increased mainly due to the 4-5-star hotels (it accounts for 80% of the total number of rooms introduced in 2010) (Diagram 2). • Among the new supply we single out the opening of Lotte Hotel Moscow, the first project in Russia by Lotte Hotels & Resorts, the Korean hotel chain. One of the infrastructural components of the hotel is a SPA center belonging to a world-famous spa management company, Mandara Spa.

Table 1. HOTELS IN 4-5 STAR SEGMENTS THAT ENTERED THE MOSCOW MARKET IN 2010

Name Location Class Number of rooms

Management

Radisson Royal Hotel (former Ukraine hotel)

2/1 Kutuzovsky Prospect 5* 543 The Rezidor Hotel Group

Lotte Hotel Moscow 8, Bldg 2 Novinsky Boulevard 5* 304 Lotte Hotel & Resorts

Renaissance Moscow Monarch Center (part of the Monarch mixed-use complex)

31a, Bldg 1 Leningradsky Prospect 4* 338 Interstate Hotel Group

SK-Royal office and hotel complex

163а Dmitrovskoe Shosse 4* 170 Independent

Aquamarine 26 Ozerkovskaya Naberezhnaya 4* 159 1 Africa Israel Hotels &

Resorts

Garden Ring 14, Bldg 3 Prospect Mira 4* 86 Accord Management

Group

Total 1,600

1 The hotel had its soft-opening in November 2009. Then only 75 of 159 rooms were opened. The other 84 rooms were opened in February 2010.

Sources: Hotel data, Colliers International

• A third of the available accommodation is under the management of international operators. However, if we look at the share of hotels of a modern-standard kind in each segment, there is a shift toward hotels in the upscale and upper upscale categories.

Table 2. SHARE OF HOTELS UNDER INTERNATIONAL OPERATOR MANAGEMENT IN THE APPROPRIATE CATEGORY

Hotel category Share

5* hotels 65% 4* hotels 43% 3* hotels 3% Source: Colliers International

• International operators are represented in the top segment of Moscow accommodation facilities in the largest volume: two-thirds of the city hotels are under their control. In the 3-star segment supply is still under the management of Russian operators. Only 3% of 3-star hotels are managed by international operators. • The main share of hotel supply is predominantly located in the centre of Moscow. Chart 1. BREAKDOWN OF MOSCOW HOTEL ROOM CAPACITY BY DISTRICTS

0%

20%

40%

60%

80%

100%

Central W SW S NW NE N E SE

5* 4* 3*


• Upper upscale hotels are located in the historic center: 85% of 5-star hotels operate in the Central Administrative District. In the future we may witness other districts developing subject to the proximity of the main demand generators (development of business areas, construction of exhibition facilities, etc.). DEMAND

• According to the Tourism Committee of Moscow, 3.7 million foreign guests visited the capital in 2009 which is 10% less compared to the statistics of 2008. • During the first 9 months of 2010 Moscow was visited by 3 million foreign guests which is 17% more than at the same period in 2009. It proves that tourist flow is gradually recovering. • The main purpose of a Moscow trip remains the same for many years: business or professional. In Moscow recreational tourism is predominantly short-term in its nature. Chart 2. DYNAMICS OF THE FLOW OF ACCOMMODATED VISITORS

SEGMENTED BY TRIP PURPOSES, 2004-2009

0%

10%

20%

30%

40%

50%

60%

2004 2005 2006 2007 2008 2009

Leisure and recreation

Business

Other

Source: Mosgorstat

• The RevPAR index for 2010 in the luxury hotel segment increased by 5.5% compared to the same period of 2009. Meanwhile, the occupancy level increased by 11.2% and stands at 63.9%. The average price per room (ADR) decreased by 5.2%. Chart 3. PERFORMANCE DYNAMICS OF KEY INDICATORS IN THE LUXURY SEGMENT

0

3,000

6,000

9,000

12,000

15,000

2007 2008 2009 2010

RU

R

0%

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40%

60%

80%

100%

ADR RevPAR Occupancy

Sources: STR Global, Colliers International

• The RevPAR index in the upper upscale and upscale hotel segments remained the same as the previous year. The occupancy level grew by 7.7% as compared to 2009, thus, reaching 67.9%. It is practically similar to the index for 2006 which was 67.5%. The average price per room decreased by 7.1%. Chart 4. PERFORMANCE DYNAMICS OF KEY INDICATORS IN THE UPPER UPSCALE AND UPSCALE SEGMENTS

0

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8,000

10,000

2007 2008 2009 2010

RU

R

0%

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40%

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100%


Sources: STR Global, Colliers International • In the midscale hotel segment the average price per room decreased by 8.8%. The occupancy level grew by 14.4%. It resulted in a RevPar increase by 4.3% compared to 2009. Chart 5. PERFORMANCE DYNAMICS OF KEY INDICATORS IN THE MIDSCALE SEGMENT

0

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4,000

6,000

8,000

10,000

2007 2008 2009 2010

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R

0%

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Sources: STR Global, Colliers International • Thus, in 2010 the main features of the hotel market in Moscow were a decrease in ADR and an increase in occupancy. The increased occupancy levels may be considered as a factor that characterizes the beginning of market stabilization and potential for growth in key indicators in the hospitality segment.

Polina Kondratenko Director, Valuation & Consulting Department [email protected]

FORECAST

• In 2011 we expect a supply increase by 6.9% (1,934 rooms) (Table 3). Developers and investors remain interested in upscale and upper upscale hotel projects (Diagram 3).

Table 3. THE MOST SIGNIFICANT HOTEL PROPERTIES PLANNED FOR OPENING IN 2011 (selected)

Name Location Class Number of rooms

Management

Intercontinental Moscow Tverskaya

22 Tverskaya Ulitsa 5* 203 Intercontinental Hotels Group

Marriott Courtyard (part of the Vivaldi Plaza mixed-use complex)

8/4 Kozhevnicheskaya Ulitsa

4* 170 Marriott Hotels

Radisson Blu Belorusskaya

26, 3rd Ulitsa Yamskogo Polya

4* 264 Rezidor

A hotel on Krasnopresnenskaya naberezhnaya

12 Krasnopresnenskaya Nab.

4* 149 ING

Hilton Doubletree Vnukovo

Vnukovo Airport 4* 439 Hilton

Azimut Hotel 9 Varshavskoe Shosse

3* 134 Azimut

Sources: Hotel data, Colliers International Diagram 3. BREAKDOWN OF MOSCOW HOTEL ROOM CAPACITY BY CLASSES

PLANNED FOR OPENING IN 2011

20.9%

72.2%

6.9%5*

4*

3*

Olga Moussienko Head of Consulting Group [email protected]


• We note that the total new hotel room supply will be managed by chain operators (international and Russian operators account for 93% and 7% respectively).

• New brands will be introduced to the Moscow hotel market: Hilton Doubletree and Mercure by such international operators as Hilton and Accor respectively.

• In Q1 2011 Windham Hotel Group plans to open a hotel under the brand name of Ramada (5 km from the Domodedovo airport).

• Limited supply of hotels of a modern-standard kind will still be the case in the budget and middle scale segments.

• There is a positive tendency of a continued RevPAR growth which indicates that the hotel market is gradually recovering.