russian real estate market overview david o’hara general director dtz moscow december 3, 2007...

Russian Real Estate Market Overview

David O’Hara General Director

DTZ Moscow

December 3, 2007Budapest

Executive summary

Russia Today

Real Estate Market in Russia Today: Products Yields and rents

SWOT analysis

Reality vs. Perceptions

Conclusions

Russian Federation

17,075,200 sq km total area

142 million population

Climate varies from temperatecontinental to strongly continental.

Political regime: Democracy

• Big country

• Lots of people

• Cold and Snowy

• Define “democracy”

Russia has changed dramatically. SOURCE: DTZ.

Economy growth

Improving economic and political environment

High oil prices support continued growth

High oil income to be reinvested (thus many real estate transactions off market)

The Economy Is Growing Faster Than Expected…

Economy growth

Increase in real income sustains a high consumer demand. Inflation rate keeps on

decreasing:2005: 10.9% 2006: 9.0%2007F: 8.0%

Russia investment grade: Moody’s Baa2; Fitch BBB+;S&P’s BBB+,

outlook is “Stable”.

Major economic indicators, 2002–2008F

0,02,55,07,5

10,012,515,017,5

2002 2003 2004 2005 2006 2007F 2008F

%GDP growth Inflation Unemployment rate

Source: GosKomStat RF

The Economy Is Growing Faster Than Expected…

The influence of oil decreases, while private consumption gains importance.

SOURCE: DTZ, Rosstat, Central Bank of Russia.

Monthly Nominal wages are growing, but …SOURCE: Rosstat.

POP Quiz: Statistics Lie!• N. Novgorod pop.: 1.24 mln• 63.8% of pop. in workforce• Avg. salary = $369/month

If 1.24 mln * 63.8% * $369 * 12= $3.5 bn, what is the official retail turnover of the city?• $1.5 bn• $2.5 bn• $3.5 bn• $4.5 bn

BRICs — we call them RBICs

Source: Goldman Sachs – Global Economics Paper No: 99 a

Tokyo

Shanghai

Paris

New York

Moscow

Global City – “a city that has a direct and tangible effect on global affairs through socioeconomic, cultural, and/or

political means"

London

Today’s Real Estate MarketBackground Managed Risk, High Reward

Fast growing market

Large and successful projects

Huge consumerism

Market indicators Office, Retail and Logistic: significant Yields compression

Developers move more and more to the “regions”

MEGA

DevelopersMain players on real estate market in Russia are Developers

Russian developer manages: land acquisition getting all kind of permissions dealing with local authorities organizing development

These activities are difficult for foreigners and almost impossible

in the regions.

Main Trends in Development Significantly increased

construction volume — construction boom;

“Hot” leasing market;

Arrival of new international developer companies;

Strong local players;

Improving quality;

Development companies started to perform IPO to attract cheap financing: Sistema Hals, PIK, AFI, Raven Russia

Moscow office marketBy the end of 2006, the total office stock in Moscow reached 5.28 mln sq m, out of which:

Class A: 1.54 mln sq m Class B: 3.83 mln sq m

The annual new supply in 2006 increased by 31% compared to 2005 and amounted to about 920,000 sq m

Class A: 24%Class B: 76%

By the end of 2008 the total office stock is expected practically to double, compared to 2005, reaching 8.25 mln sq m with annual growth of Class A office new supply exceeding the one of Class B offices.

Moscow office market

Source: DTZ research

Moscow office market dealsOffice space transacted; 2006 historical record since 1998 with about 1,300,000 sq m take-up (both leased/pre-lease and sold/pre-sold).

Sale deals accounted for about 40%.

Class A office transactions less than 25% of the gross take-up,

Lack of available offices results in new deliveries been 95-100% pre-let before the completion date.

Within the next two years the gross take-up is forecast to remain at current high level.

Moscow office market deals


Office Stock (sqm) per 1,000 ppl

7 538

2 260

1 656

1 502

1 047

506

0 1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000

Paris

London

Prague

Warsaw

Budapest

Moscow

Paris London Prague Warsaw Budapest Moscow

Moscow vs. other cities

Prime rents and typical lease terms: comparative analysis The base rents at prime new buildings in the city center are in the range of $1200-1500 sq m per year. Leases in prime new buildings in non-central locations are typically signed at $600-1000 sq m per year

(base rent). In 2007, prime base rents for Class A and B offices are expected to continue on be an upward trend – the prime rental growth in 2007 was 50%. In 2008, rents stabilization is forecast.

DTZ research

Market indicators: Offices

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0%

2001 2005 2007

Moscow: 8% in 2007


Office rentsOffice centers: base rental rates St Petersburg:

Class A: $500—850Class B: $400—500(per sq m per annum, including operating expenses, VAT extra)

Class A average terms are 3 to 5 years

Class B terms are 11 months to 3 years

Moscow:

Prime class A: $1000—1500Class A: $700—1000Class B: $450—700(per sq m per annum, excl. Opex $60—130 and VAT )

Fixed or indexed at CPI for Class A, average term 5 years, leases of 7—10 years are more often;

Class B terms are 11 months to 5 years.

Last two years rates were growingat an average of 7-10% per annum

Retail in Russia – Disposable Income Comparison

Houston, USA USA % Moscow Russia

USD % USD %

Typical Mid-Manger Salary $60,000 100% $24 000 100%

Personal Income Tax ($13 800) -23% (3 120) -13%

Mortgage/Housing ($12 000) -20% ($480) -2%

Car Loan ($6 000) -10% 0 0%

Student Loan ($5 000) -8% 0 0%

Credit Card ($7 200) -12% 0 0%

Home & Medical Insurance ($3,000) -5% ($500) -2%

Food ($5,800) -10% ($7 200) -30%

Disposable income $7,200 12% $12 700 53%

Market indicators: Retail

DTZ research

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%2001 2005 2007

2007: Moscow 8,5%

Moscow still enjoys a hefty yield premium over the rest of Europe.

Source: DTZ.

Regional cities will continue to enjoy a yield premium.SOURCE: DTZ Estimates. * Estimated Net Initial Yields.

Moscow

Russia is not just Moscow City population Citizens, mln Cities

>1 mln 25 568 11

0.5—1 mln 14 903 23

0.25—0.5 mln 13 698 40

0.1—0.25 mln 14 300 94

Russian Federation 142 753

Novosibirsk (3191 km from Moscow)

Samara(1040 km from Moscow)

Ekaterinburg (1667 km from Moscow)

Rostov-on-Don(1226 km from Moscow)

St. Petersburg (700 km from Moscow)

Chelyabinsk (1919 km from Moscow)

– The regions hold 93% of Russia’s population.– Russia holds more than a third

of Europe’s 100 largest cities.

1 Project2 Projects3 Projects4 Projects

5 Projects

6 Projects

7 Projects

8 Projects

18 Projects

Shopping center developers active across the Russia

Regional Scorecard:

Moscow Holds Advantage

Regions Hold Advantage

Investment Yields +

Freehold Acquisition Possibility +

Lack of Competition +

Lower Land Costs +

Lower Construction Costs +

Purchasing Power +

Pipeline +

Market Transparency +

Infrastructure +

SOURCE: DTZ.

Retail rent ratesRetail centers-rental ratesAnchor tenants: $200—300 per sq m p.a. in Moscow$150—250 per sq m p.a. in regions

Retail gallery: $400—2600 per sq m p.a.excluding operating expenses and VAT

Selling price of shopping centersPrime Yields in Moscow and St. Petersburg 8 – 8.5% . Yields for in regional cities are with 2—3% premium compared to Moscow and St. Petersburg.

SWOT analysis

Strengths Weaknesses

Steadily economic grow Investment grade for Russia High demand of any RE assets General high liquidity in the RE

Market

Lack of investment grade

product Market transparency Legal structure Debt market (project financing)

Opportunities Threats

High potential in the regions Despite all the project in

pipeline, Real Estate market still underdeveloped

Hotel market

Many projects in pipeline but

risk of delay for developments Russian Investors currently

with high liquidity to invest Geo-political issues

Challenges: Perceptions vs. Reality

Developing Real Estate in the Biggest Country in the World

• Supply Chain Management• Construction Management• Health and Safety• Environment and Ecology• On-time Delivery

Russia: Living Conditions

1. Pre-1985 – Communism“No money to spend, but nothing to buy.”

2. Perestroika – Yeltsin Years“We were better off before.”

3. Post-1998 – Putin Years“Availability. Opportunity.

Consumerism”

Conclusions

Why Does Real Estate Market Work? – oil and consumerism

Russia is a Big Place! – big population, large projects and opportunities

Strong local players but increasing presence of international companies

Macroeconomics – during last 6 years Russia’s Sovereign Risk decreased from 13,6% in 2006 to 1,16% in 2006 (Spread between Russia’s Money Market Spread over US T Bills).

Incomes per Capita, 2050

Goldman Sachs is more optimistic than me!!

Conclusion: Incomes per Capita, 2050

Goldman Sachs is more optimistic than me!!

David O’HaraGeneral Director

Mob. +7 (985) 999 7872 [email protected]

Ferit YildirimManaging Director

Mob. +7 (985) 970 [email protected]

Come to Moscow & see for yourself!!

DTZ Moscowul. Gasheka, 7, Suite 360Moscow, Russia 123056

Tel. +7 (495) 748 1111Fax. +7 (495) 787 8887

Thanks!

russian real estate market overview david o’hara general director dtz moscow december 3, 2007...

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