Russian Real Estate Market Overview David O’Hara General Director DTZ Moscow December 3, 2007...
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Transcript of 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
Page 2
Executive summary
Russia Today
Real Estate Market in Russia Today: Products Yields and rents
SWOT analysis
Reality vs. Perceptions
Conclusions
Page 3
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”
Page 4
Russia has changed dramatically. SOURCE: DTZ.
Page 5
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…
Page 6
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…
Page 7
The influence of oil decreases, while private consumption gains importance.
SOURCE: DTZ, Rosstat, Central Bank of Russia.
Page 8
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
Page 9
BRICs — we call them RBICs
Source: Goldman Sachs – Global Economics Paper No: 99 a
Page 10Tokyo
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
Page 11
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
Page 12
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.
Page 13
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
Page 14
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.
Page 15
Moscow office market
Source: DTZ research
Page 16
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.
Page 17
Moscow office market deals
Source: DTZ research
Page 18
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
Page 19
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
Page 20
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
Source: DTZ research
Page 21
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
Page 22
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%
Page 23
Market indicators: Retail
DTZ research
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2007: Moscow 8,5%
Page 24
Moscow still enjoys a hefty yield premium over the rest of Europe.
Source: DTZ.
Page 25
Regional cities will continue to enjoy a yield premium.SOURCE: DTZ Estimates. * Estimated Net Initial Yields.
Page 26
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.
Page 27
1 Project2 Projects3 Projects4 Projects
5 Projects
6 Projects
7 Projects
8 Projects
18 Projects
Shopping center developers active across the Russia
Page 28
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.
Page 29
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.
Page 30
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
Page 31
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”
Page 32
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).
Page 33
Incomes per Capita, 2050
Goldman Sachs is more optimistic than me!!
Page 34
Conclusion: Incomes per Capita, 2050
Goldman Sachs is more optimistic than me!!
Page 35
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!