Commercial real estate market of Russia. Results of 2014

Since the beginning of 2014 the economy of the Russian Federation proved to be in front of a new crisis, both in the political and economic field. Instability in the relations with the European Union and the United States affected the entire economic situation of the country. Against this backdrop the new 2015 year for the real estate and construction market of Russian will be coming with the slogan “Optimization”. The companies will make efforts to reduce the cost of development, staff, preparing projects. Tenants will be looking for ways to reduce the cost of rent, and investors – opportunities to get maximum benefits of the current market situation through indirect investments. In general the tendency to search for new solutions, develop new products, revision, re-conception and optimization of business development strategies will gather pace.

Major tendencies
Growth of geopolitical tensions as a result of the aggravation of relations with Ukraine, and an additional wave of capital outflow resulted in a weakening of the Ruble during the period of twelve months of the year by more than 40%. According to the latest forecast of Ministry of Economic Development GDP growth according to the results of 2014 will stop at a level of 0.5-0.6% instead of the expected 3.5-5%. According to forecasts of the Ministry of Economic Development and the Ministry of Finance, in 2015 GDP growth will be zero. The International Monetary Fund forecast the fall of Russia's GDP by 3% in 2015. Against the backdrop of this state of public opinion and forecasts the indicators of some sectors of the economy, including real estate and construction, deteriorate.

According the results of 2014 the main tendencies in different segments of the commercial real estate (commercial, office, hotel, warehouse) move in one direction: it is a recession in demand, especially on the part of foreign companies, changes in rates, changes in the terms of contracts, as well as the growth of input, which in totality with all other trends cause an increase in volume of vacancy areas.

• First of all, it is worth noting a significant increase in the commercial real estate proposals for different of market segments in the large cities. So in St. Petersburg in 2014 growth of office areas (total area) was more than 15% relative to the end of 2013. 2014 was a record year for Moscow with regard to growth of retail space. It was built 16 new shopping centers with a total leasable area of over 750 sq. m. Such tendency is a result of the construction boom of the last 3 years. Proposal increases due to completed projects.

• The event, affecting commercial real estate market in all regions of the country to a greater or lesser degree, became the decline in demand for rent and purchase of objects of various purposes. In St. Petersburg the demand for office premises rent in total amount in all classes decreased by 30%. The same dynamic can be observed in other cities with one million and more population.

• The tendency of revising the cost of rent by many companies, that results in a shift in demand towards lower-cost projects, is still preserved. This results in an increase in the share of vacant premises in all sectors of the market. The main changes affect the retail and office property. In Kazan, compared with 2013, the volume of vacancies in the retail segment increased by 2.5 times, in Moscow – 3 percentage points. About 10 international retailers such as Esprit, River Island, New Look and others, withdrew from the Russian market.

• In large cities a positive tendency in the warehouse segment is preserved. In 2014 increased the proposal of quality warehouse real estate, demand remains stable. There is a significant increase in the popularity of build-to-suite projects, which are designed for particular companies. Half of transactions in the modern warehouse market are settled with regard to build-to-suite projects.

• The main change in commercial terms became general lessors transition to ruble rate. In an effort to keep tenants and attract new ones in vacant areas the lessors make various concessions. The office and warehouse segment rates claimed in rubles, in the retail segment discounts are available for the first months of rent, percentage of sales, collected by shopping centers, reduced. Rental rates in dollar equivalent decreased by 12-15% in all segments of the market, at the same time there was an increase of ruble rates by 1-3%.

One of the main problems for the Russian economy in 2015 will remain the increase of investment activity. Uncertainty of investors in the stability of future growth of the Russian economy affects the volume of investments in commercial real estate. On the one hand, a decline in the ruble makes exchange investments profitable. On the other hand, the sense of uncertainty in the market, the lack of clear forecasts, growing risks and unstable capitalization rate restrain investors intentions. At the same time there are investors who are looking for a possibility to buy objects with a substantial discount. Among the new tendencies in the investment market it is worth marking out the interest in indirect investments (purchase of a share of the company, rather than the whole object), a desire of the local capital to be diversified.

Demand for rent of commercial real estate will be falling in the first quarter of 2015, and depending on the general situation the decline may continue. Companies-tenants may revise plans of business development, make retrenchments or become bankrupt.
In 2015 and in the next few years the volume of new construction will reduce. Many have not yet realized projects will be revised towards shortening of areas and optimization of construction. The increase in the key rate of the Central Bank will provoke rise in the cost of loans and deposits. Due to the rising cost of loans the cost of the projects actualization will also increased. Taking into account the current difficult general economic situation and the fact that loans for business are expensive in any case, it can be supposed that most of the development projects will become unprofitable.

OJSC the Auction House of the Russian Federation is a company that joined together experts in sales, business appraisal, marketing, finance and law. The professional team of RAD consists of more than 100 employees in six offices throughout Russia.
The successful sale of the property is largely dependent on its original presentation in the market and quality advertising campaign. To eliminate the competitive advantages of the object, to fully “pack” the object for buyers and investors, to determine the best format of sale, to set an objective price and to develop an advertising campaign will help professional consultants of RAD-Consulting.
We provide the following services:
• Creation of investment memorandums;
• Analysis of the best use of the object;
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• Due diligence;
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• Development of advertising campaigns.
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