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Copyright © 2011 by K&L Gates LLP. All rights reserved.
UK and Global Real Estate Trends – Opportunities for 2011/2012
20 September 2011, London
European Real Estate Outlook
Peter DamesickEMEA Chief Economist, CBRE
20 September 2011
CB Richard Ellis | Page 3
Agenda
• Global context
• Economic background
• Occupier market trends
• Capital flows in European real estate
• Performance and pricing
• Prospects
CB Richard Ellis | Page 4
A world of differences
GDP per person, % change Q2 2007 to Q2 2011
Source: Macrobond
CB Richard Ellis | Page 5
CBRE Global Office Capital Value Index
Source: CBRE Research as of Q2 2011
Asian values almost at previous peak, EMEA lagging
CB Richard Ellis | Page 6
Economic Divergence in Europe
Source:, Eurostat
GDP, Q1 2008 = 100
CB Richard Ellis | Page 7
Government debt to GDP ratio
Source: IMF
% of GDP
CB Richard Ellis | Page 8
Trends in Unit Labour Costs
Source: Macrobond, OECD
Index (Q1 2000 = 100)
Uncompetitive economies in European periphery a key structural issue
CB Richard Ellis | Page 9
CBRE Global Office Rent Index
Source: CBRE Research as of Q2 2011.
Index (Q1 2001 = 100)
CB Richard Ellis | Page 10
European Office Take-Up28 Western European markets, 10 CEE markets
Source: CB Richard Ellis
6 Month Rolling Totals (000’s Sq M) % of Stock
CB Richard Ellis | Page 11
CBRE EU-27 Prime Office Rent Index
Source: CB Richard Ellis
Change per Annum (%) Index
CB Richard Ellis | Page 12
Prime Office Rents: Recovery Progress Changes in rents: peak-to-trough and trough to Q2 2011
Source: CB Richard Ellis
Change in Prime Rent (%)
CB Richard Ellis | Page 13
Office Development Completions as % Total StockWestern Europe vs. CEE
Source CB Richard Ellis
% of Total Stock
CB Richard Ellis | Page 14
Office Supply Pipeline
Source: CB Richard Ellis
% of Total Stock
Vacant office space plus developments scheduled for completion by end of 2013
CB Richard Ellis | Page 15
Shopping centre development pipeline, Q1 2011
Source: CB Richard Ellis
Sq m per 1,000 population
Schemes of 20,000 sq m or more
* Data is for Moscow and St. Petersburg only
CB Richard Ellis | Page 16
European retailer expansion plans
Source: CB Richard Ellis
Proportion of sampled (203) retailers targeting country
CB Richard Ellis | Page 17
CB Richard Ellis EU-27 Prime Retail Rent Index
Source: CB Richard Ellis
Change per Annum (%) Index
CB Richard Ellis | Page 18
Global Real Estate Investment Sales * *Commercial real estate only
Source: Real Capital Analytics
Billion US$
CB Richard Ellis | Page 19
Real estate investment in Europe
Source: CB Richard Ellis, Property Data, KTI
Million €
CB Richard Ellis | Page 20
London €9.4 bn
Paris €1.9 bn
Berlin €0.8 bn
Moscow €0.8 bn
Frankfurt €0.7 bn
North America
€ 13.1 bn Asia
€ 5.0 bn
Australia
€ 0.9 bn
Middle East
€4.2 bn
Source: CB Richard Ellis, PropertyData, KTI
Non-European buyers invested €24 billion in Europe in 2010-H1 2011
Cross-region capital flows into Europe, 2010-H1 11
CB Richard Ellis | Page 21
Investment volumes by countryGrowth in German and CEE in H1 2011
Source: CB Richard Ellis, Property Data, KTI
Billion €
CB Richard Ellis | Page 22
Retail property investment in Europe
Source: CB Richard Ellis
Billion € %
CB Richard Ellis | Page 23
Retail investment by country/region
Source: CB Richard Ellis, Property Data, KTI
Billion €
CB Richard Ellis | Page 24
CB Richard Ellis EU-15 prime yield index
Source: CB Richard Ellis
Weighted average prime yield
CB Richard Ellis | Page 25
European Property Value Indices
Source: CB Richard Ellis, European Valuation Monitor
Q4 2007 = 100
CB Richard Ellis | Page 26
Source: CB Richard Ellis. European Valuation Monitor
Q4 2007 = 100
European Property Value Indices
CB Richard Ellis | Page 27
‘Prime’ versus ‘Average’ Office Capital Values
Source: CB Richard Ellis
Index June 2009 = 100
Average values taken from European Valuation Monitor
CB Richard Ellis | Page 28
Average prime property yield minus 10-year govt bond
Source: CB Richard Ellis, Macrobond
Percentage points
Yield gap evolution
CB Richard Ellis | Page 29
Renewed Anxieties
• Downgrade of growth expectations
• Eurozone debt threatening banking stability
• Loss of faith in policy-makers
• Capacity for action – what tools left?
• Political divisions and obstacles
• Fall in business and consumer confidence
• Rise in investment risk aversion
CB Richard Ellis | Page 30
Eurozone GDP GrowthAlternative forecasts
Source: Oxford Economics
Real GDP Growth (%)
Forecasts
CB Richard Ellis | Page 31
“Muddling through”
• Euro debt crisis contained, but with recurrent stress points
• Fiscal austerity curbs growth
• Monetary policy stimulus maintained
• Deleveraging continues
• Consumers under pressure
• Gradual pick-up in business investment
• Overall slow growth with wide divergences in country performance
CB Richard Ellis | Page 32
European Real Estate: Outlook Summary
• Slow growth environment
• Subdued occupier demand – cost-sensitive
• Rental growth limited - mainly prime space where in short supply
• Development restrained
• Debt market constraints
• Major refinancing needs
• Banks more active in managing loans
• Limited new lending – low risk
• Investor bias to larger, liquid markets
• Continued polarisation between prime and secondary
• Prime properties stable/improving with competition for core stock
• Good secondary in stronger markets - opportunity
• Concern for poorer secondary/tertiary stock – yields to soften further
CB Richard Ellis | Page 33
Copyright © 2011 by K&L Gates LLP. All rights reserved.
China Matters: What are the real estate opportunities?
Real Estate Breakfast SeminarLondon, September 2011Amy L. Sommers, PartnerK&L Gates - Shanghai
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Topics:
2025: Planning for China’s built environment
Urban planning 2001 to 2011: Xintiandi as a case study
Gov’t policy aims and concerns: where the next opportunities may lie
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First, some context…
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China by 2025…
350 million Number of people added to China’s urban population – 5+x Great Britain’s current popul.
5 billion SQM Area of roads that will be paved
170 Number of mass-transit systems that could be build
40 billion SQM Amount of floor space that will be built
50,000Number of these buildings that could be skyscrapers – akin to building 10 cities the size of New York City
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Real Estate Development in China
Past Decade: Urban re-development has been a key driverImproving housing stockUpgrading lifestyle from socialist, planned housing to market-driven, invested-oriented housing
Next Decade:Widening to Tier 2 and 3 citiesLinking cities/regions through infrastructure (transport/energy)Demographically-driven opportunities
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Red China …or Grey?
“China’s demographic challenges are captured neatly in the popular saying that the country “will grow old before it grows rich.” China will start going grey some time this decade, and the process will accelerate after 2020.
“ By 2030, China is projected to have more than 300 million citizens beyond retirement age. This will present what the Chinese call a “4-2-1” problem: a single child with two parents and four grandparents to care for.
“Given the significant burdens this will impose, the government is already looking at ways to better fund healthcare. Beijing allocated $124 billion last year for healthcare reform, aiming for basic universal health coverage in the coming years.” Source: http://docs.eurasiagroup.net/chinaoutlook.pdf
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Past Decade - Urban Redevelopment: Re-imagining Old Shanghai - Xintiandi
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Xintiandi - completed 2001
Lifestyle project in central Shanghai
Based on re-imagined use of vernacular structures
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Xintiandi site in 1998
At the time many considered China too poor/unsophisticated - project was doomed to fail or to attract only expatriates
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Xintiandi - 10th Anniversary
Huge success - in 5 yrswill double to 1.2M SQM
Lesson: Predicting what will be popular in China is a mystery…
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Demographics & policy: key drivers in China’s real estate sector
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China’s Healthcare Aims - an example of how policy can drive development…
Improvement of services at grass-roots level: including support for the development of 2000 county-level hospitals; construction or expansion of 3700 urban community health care centers and 11,000 community heath care stations within three years.
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Opportunities & Pressures
Obviously, these forecasts for urbanization spell potential opportunities for all sorts of stakeholders, such as: makers of transit system equipment architects/designers/engineering services,
building/construction material providers suppliers of energy and energy infrastructure health care/aged care
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China’s 12th Five-Year Plan
Proposed by the Chinese Communist Party’s Central Committee in 10/10, adopted by National People’s Congress in 3/11 7 “Strategic Emerging Industries” have been identified and are focused on health care, energy, technology sectorsFocus is on ‘inclusive growth’ of the economy, which will take the form of social benefits (health care), improved living standards (environmental concerns such as clean energy), and value-added industries (growth in R&D facilities)
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Implications for the built environment
Implementation of the aims articulated in the 12th FYP will involve development of China’s built environment, e.g.:
construction of hospital facilitiesWater treatment facilities, power transmission
systems, development of energy-efficient buildings
R&D activities in IT and other areas will require suitable facilities and these users will require housing/amenities for associated workers
Source: http://apcoworldwideinc.com/Content/PDFs/Chinas_12th_Five-Year_Plan.pdf
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Opportunities & Pressures
What about pressures? Power generation: 700 - 900 gigawatts of new coal-fired power
capacity will be constructed from 2005-2025 Arable land supply is diminishing – worst case, 20% decline Inadequate supplies of potable water – today, 59% of China’s river
water is below international standards for potability
Concerns re overheating of real property sector mean that whether foreign-invested real estate projects will obtain needed approvals will be driven in part by whether their organization’s projects/services will (a) help address or redress these pressures or (b) to achieve FYP goals
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Opportunities & Pressures (cont)
Contradictions betw/ national & local govts abound:
Nat’l govt banned construction of new golf courses in ‘04
June 20: People’s Daily reported over 400 golf courses have been constructed since 2004
How? Often by registration as sports parks, recreational parks and forestation areas
"Some local governments have undertaken such programs in an effort to to boost their economies. So they register the clubs under different classifications, and the local government turns a blind eye on farmland and forest acquisition.”*
*Yan Jinming, vice-president of the School for Public Administration at Renmin
University
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Overview of Legal Restrictions for Investing in China Real Property
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Foreign Investment in Real Property
China restricts foreign investment in RE; essentially at least one of these conditions must exist:
if one is a PRC-registered business, one can develop or purchase property for one's own use
one can purchase equity (stock) in a company that hold/develops/rents RE
one can form a company to acquire land rights from the government & develop a project for rent/sale to third parties
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Challenges/restrictions:
Can't buy property w/out forming a company in the PRC – and PRC companies can’t be easily dissolved/wound up - so this significant
Special capitalization and approval requirements before making an investment
Requires converting foreign currency and the gov’t is increasingly concerned about pressure on the RMB to rise – possible to get other approvals, but not be allowed to convert capital to fund the project
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Sectors/areas where foreign projects more likely to be welcome?
Niche projects - eg, health care/bio tech Projects filling policy aims - eg, develop the West
– getting approvals in Chongqing and Chengdu is probably like Shanghai 15 years ago
Senior living, affordable housing, energy-efficient/’green’ projects (again, ties back to policy aims)
Copyright © 2011 by K&L Gates LLP. All rights reserved.
Real Estate in Russia:Recent Developments and New Opportunities
William ReichertK&L Gates LLP4th Lesnoy Pereulok 4, 5th Fl.Moscow, Russia+7 (495) 643-1700william.reichert@klgates.com
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I. Current Russian Real Estate Market
II. Legislative Developments Affecting Real Estate
III. Major Projects and Opportunities for Investment
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I. Current Russian Real Estate Market
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Commercial Real Estate Industry Overview
Return of confidence to the Russian real estate investment market in Q2 2011
Moscow is currently one of the hottest investment markets in Europe
Q2 2011 saw the largest ever quarterly investment volume in Russia
Overall investment volume provides for the potential for 2011 to match the record levels of 2007 and 2008
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Commercial Real Estate Industry Overview Investment Volumes by quarter, 2005 - 2011
Information from CBRE
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Real Estate Investment: H1 2011- Deals
Total volume of deals – Euro 1.77 billion (13 deals) including Euro 1.6 billion in Q2 2011 (11 deals)
Largest Deal: purchase of Ritz-Carlton Hotel in central Moscow by Verny Capital from Capital Partners for Euro 424 million
47% of White Square business center (110,750 m²), purchased by consortium of VTB and TPG from Coalco
50% of White Gardens business center (95,000 m², under construction, due in 2012), purchased by consortium of VTB and TPG from Coalco
Alfa Arbat business center (47,200 m²), purchased by Promsvyaznedvizhimost from TNK-BP
90% of Berlin House/Geneva House (7,400 m² / 9,875 m²) purchased by Lenhart Global from Eastern Property Holdings
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Real Estate Investment: H1 2011 - Deals
Kaluzhsky shopping center (57,000 m²), purchased by Binbank from Z-Build
Filion shopping center (128,000 m²), purchased by Kompleksnie Investicii from Rubin Development
Gorbushkin Dvor shopping center (60,000 m²), purchased by Kompleksnie Investicii from Rubin Development
FM Logistics Industrial Park in Khimki (north of Moscow) (75,000 m²), purchased by Hines Global REIT (USA) from AIG Global Real Estate
Metropolis II business center (22,300 m²), purchased by Heitman from Capital Partners
Proposed sale of CJSC “Inteco”, one of the largest developers in Moscow, to a Binbank shareholder and OJSC “Sberbank Investment” for an estimated US$ 1.2 billion
I
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Real Estate Investment: H1 2011 – Refinancing
Hermitage Plaza business center (Raiffeisen)
Romanov Dvor business center (Nordea)
Gogolevsky 11 business center (Raiffeisen)
Metropolis business center (Nordea)
Ducat III business center (UniCredit)
Four Winds business center (Nordea)
Immofinanz retail portfolio (Rosbank)
White Square business center (VTB, closing in process)
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Demand up by 30-40% compared to 2010
Aggregate supply - 11m m²; new supply - 200-250k m²
New supply will be very low in 2011 (890k m², the lowest during 2008-2010)
New supply will shift away from the city center due to a ban on construction in central Moscow (announced by Mayor Sobyanin):
Suspension of some issued permits and audit of previously issued documents
Limitation and prohibition of virtually all new construction
Likely not to include reconstruction and capital improvements
Possible outcome: fewer offices to rent, return to “seller’s market”, more new offices outside the city center
Moscow Office Market: H1 2011
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Moscow Office Market: H1 2011
Signs of return of confidence to the market:
Stable take-up: volume of deals (leases) in Q2 – 296,000 m² (41% quarterly increase)
Overall vacancy decreased to 12.5% (18% in Class A, 12% in Class B)
Prime rents continue to rise
Tenants attracted primarily by quality
Average rental rate for fitted-out prime offices – US$1,050 per m² per year
97,500 m² of office space delivered to the Moscow market in Q2 2011, a 64% decrease compared to Q1 2011
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Russian Warehousing Market: H1 2011
Current State:
Demand up by 20% compared to 2010 Share of foreign companies as tenants – 10% Increasing size of transactions Rent up by 5-7%; purchase prices stable
Trends:
Increase in demand Increase in rent and purchase price expected to be at least 10%
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II. Legislative Developments Affecting Real Estate
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Applicable law
Civil Code of the Russian Federation
Land Code of the Russian Federation
Town-Planning Code of the Russian Federation
Federal law on state registration of rights to immovable property and related transactions (Registration Law)
Regional laws and regulations
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Proposed Amendments: Civil Code Project
To avoid potential disputes with regard to title registration, the following new registration principles have been proposed:
Verification of basis for original registration of title
Establishment of a true and accurate public register
Introduction of notarization requirement for all transactions creating, changing or terminating rights that are subject to state registration
Property = land plot + building
A land plot and an object on the land plot (building, construction) owned by the same person are considered a sole real estate object
Currently, there is no such concept in Russian law (however, there is a concept of “common fate” of land plots and objects, i.e. all objects closely bound with land plots follow the fate of land plots)
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Proposed Supreme Commercial Court Plenum Resolution*
Seller’s lack of title to real estate upon signing a contract will not in itself lead to the contract’s invalidity, but title will be required for state registration
Better identification of future real estate objects in contracts (important for preliminary agreements and agreements concerning future real estate): location, size, other characteristics, defined in accordance with the
construction plan identification is adequate if the total floor area to be conveyed and
the price per square meter can be established such data can be contained in transfer-delivery certificates
*Plenum Resolutions are obligatory for commercial courts in Russia
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III. Major Projects and Opportunities for Investment
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Skolkovo Research Center
“Russian Silicon Valley” Center for research, development
and commercialization of: energy efficiency and savings nuclear technologies space technologies medical technologies strategic computer technologies
and software Construction expected to take from
three to seven years Largest experimental center for new
economic policy Located 2km to the west of Moscow
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Skolkovo Research Center
Unprecedented legal regime for Skolkovo participants:
Will be exempt from VAT and profits tax for 10 years
Will deal with customs authorities only through the Skolkovo management company, which will be responsible for dealing with customs officials
Land plots and buildings in Skolkovo will be owned by the Skolkovo management company
No quotas will be needed from migration authorities to employ a foreigner; Skolkovo management company will be responsible for paperwork required
Participants must be Russian legal entities, created specifically for research activities, and physically located in Skolkovo (starting from January 1, 2014, prior to then they can be elsewhere in Russia)
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Moscow: extension of territory Aimed at creation of a metropolitan federal
district
Ease the concentration of traffic and business, and possibly form an administrative and financial center outside the city center
Planned to be finalized by the second half of 2012
The new territory is close to Rublevskoye highway, the most expensive and prestigious location in the Moscow Region (with official residences of the President, Prime Minister, oligarchs)
Moscow is to be extended by an additional 160k ha (currently the territory is 109k ha)
The extension is likely to result in a rise in price of land plots and buildings on the territory
Image from www.mos.ru
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Kaluga Region: Industrial Park Development
Total area for industrial construction – 2.3 ha
Over US$ 3 billion of foreign capital invested since 2007, to exceed US$ 5 billion by 2012
Large multinational residents include Samsung, GE, Volvo, Renault, VW, Nestle, L’Oreal, Peugeot/Citroën, Mitsubishi Motors, John Deere
Direct access to federal highways, railway lines and local population centers
Overall infrastructure is already in place and well-funded
Regional government engaged and committed to project’s success
Information from CBRE
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Olympic Games Sochi 2014
Government allocated US$ 12 bln to 2014 Olympics and Paralympics
Approximately US$ 17.8 bln of private investment expected (more than 200 investment projects)
Construction: Coastal cluster
Approximately 50% sports related, 50% infrastructure related Central focus - Olympic Park, connecting all competition venues,
parking zone and infrastructure to accommodate 75,000 visitors Other infrastructure: including airport, three railway lines, recycling
facilities, hotels
Mountain cluster Biathlon and ski complexes, a bobsled track, a snowboard park, etc.
Satellite construction: service, tourism, infrastructure
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Football World Cup 2018
Cities: Kazan, Kaliningrad, Krasnodar, Moscow, Nizhniy Novgorod, Rostov-on-Don, Samara, St. Petersburg, Saransk, Sochi, Volgograd, Yaroslavl, Yekaterinburg
Total amount of expenditure - approximately US$ 22 bln, including:
approximately US$ 8.6 bln for
construction and renovation of roads approximately US$ 4.4 bln for construction and renovation of arenas
Approximately US$ 33.3 bln for construction of high speed railroad network
Image from russiatrek.org
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Titanium Valley
Special economic zone located in the Urals*
Aimed at developing titanium production for aviation, medicine and aero-construction components
More than US$ 1.8 bln to be invested
Will initially cover 300 ha, to be expanded to 1,800 ha
Boeing, Rolls Royce, Spirit, Goodrich, MHI, Alenia are expected to become initial members of the project
Airbus, Snecma, Embraer, Turbomeca may also join
Incentives include no property tax, land tax, transport tax, reduced income tax
*A major factor in establishing the special economic zone is the proximity of OJSC VSMPO-AVISMA Corporation, the world’s largest manufacturer of titanium.
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Caucasus Silicon Enterprise
Private-public partnership with equal investment volume
Amount of investment -approximately US$ 1.14 bln
Amount of annual production -
approximately US$ 1.4 bln
Image from www.themoscowtimes.com
Cluster for silicon production for helioenergetics (solar energy)
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Green Building
Supporting legislation:
Federal law on saving energy and increasing energy efficiency
Federal law – technical regulations on the safety of building and facilities
Federal law on heating supply
Few buildings certified under green standards in Russia, around 20 projects registered for LEED or BREEAM certification
No unified Russian standard currently exists; buildings are being certified under LEED, BREEAM or corporate standards (i.e. Olympstroy standard)
Olympstroy, the state corporation tasked with building sites for the Olympics, is working on its own corporate Green Standard for Olympic construction:
10 venues to be certified under BREEAM and LEED
150 venues to be certified under Olympstroy’s Green Standard
Buildings in Skolkovo are master planned to be LEED certified
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Green Building
The Center for Ecological Certification “Green Standards” (CECGS) has prepared a draft of a national standard to be discussed and reviewed
A consortium consisting of CECGS, the Russian Green Building Council (RuGBC)* and Olympstroy agreed that the amended Russian Green Standard would include the Olympstroy Green Standard
On June 21, 2011 President Medvedev issued orders to the Government and the State Duma to prepare and adopt draft laws for economic stimulation of activities aimed at reducing negative effects on the environment
In late September 2011 a RuGBC working group will announce recommendations in line with the President’s orders
Growing market for consultancy and architectural services
*RuGBC is a newly formed non-profit organization dedicated to the development and adoption of green building practices (170 members in 2 years)
Copyright © 2011 by K&L Gates LLP. All rights reserved.
UK and Global Real Estate Trends – Opportunities for 2011/2012
20 September 2011, London