Russian real estate market february 2014

Russian Real Estate Market: CEE Context

February 2014

2

Outline

« Russia in the Context of CEE

« Investment Volumes/Deal-flow

« Investors: Drivers of Activity

« Sector Trends: Office, Retail, Logistics

« Olympics: Long Term Legacy?

« Summary

Eastern Europe in Context

3

West Europe East Europe Turkey

Source: Colliers International

Eastern Europe in Context

4

« Long-term potential is very strong! – Russia is 35-40% of CEE

* Cross-border Investment Deals [1,190]

92% 7.6% 0.3%

* Cross-border Investment Deals [2,899]

90.1% 9.5% 0.4%

Office Stock [350 million m²]

65% 34.5% 0.5%65% 34.3% 0.7%

Office Stock [315 million m²]

West Europe East Europe Turkey

90.5% 8.9% 0.5%

*Cross-border Investment Volume [€155 billion]

88.4% 11.0% 0.5%

* Cross-border Investment Volume [€57 billion]

2007 2012

GDP [US$20,134 billion]

81% 16% 3% 77% 19% 4%

50% 41% 9%

Population [843,744 million]

*Investment volumes based on RCA aggregates, excluding development sites and apartments

Source: UNCTAD/IMF/RCA/Colliers International

GDP [US$20,924 billion]

5

Historic Transaction Volumes

« Up on 2012 by around 22% (€2 Billion) to €11 Billion

« Europe up 17% to €178 Billion

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

14,000.0

16,000.0

18,000.0

Regional Total (Volumes) Russia

€ B

illi

on

6

Deal Volumes by Country


« Post-crisis: Russia increasingly dominant – long-term split

« Pre-crisis: Poland dominated: Czech Rep, Hungary & Russia about even, r/o Tier 2 locations ‘didn’t quite get started’.

Poland28%

Hungary17%

Russia16%

Czech Republic16%

7%

5%4%

3%2%

1% 1%

Russia40%

Poland26%

Czech Republic11%

6%

4%4%

3%2%2%

2% 1%

RussiaPolandCzech RepublicMulti-country PortfolioBalticsHungaryRomaniaSlovakiaUkraineSEEBulgaria

Pre-Crisis Volumes Post-Crisis Volumes

7

Deal Flow Dynamics


Breakdown of Real Estate Investments

by Region

89%

4%7%

Moscow Saint-Petersburg

Other Regional

Cities

« Big Cities Dominate (despite only being 15% of country population)

« Moscow & St Pete’s generate large lot size deals: product, debt, investors.

4%9%

17%6% 7% 5%

15%15%

6%

16% 16%11%

18%

25% 30%20% 14%

12%

22%

51%

21%

28% 43%

37%

41%

26% 30%20%

35%

2008 2009 2010 2011 2012 2013

Billio

n$

<$50 million >=$50 million <$100 million

>=$100 million<$200 million

>=$200 million<$500 million

>=$500 million

Dynamics of Deal Size Distribution

8

Player Profiles: Who’s Who?


« Some 63% of investors only completed 1 deal (CEE & Russia)

« Of the post 2009 investors, 80 have completed more than one deal

« Only 5% of investors have been active from 2006 to 2013…..new inst capital emerging

Purchaser name Residence Investor Type Rank

O1 Properties Russia REIM 1

Morgan Stanley Real Estate Investing U.S. REIM 2

CA Immobilien Anlagen AG Austrian REIM 3

BIN Group Russia Banking 4

CPI - Czech Property Investment Group Czech REIM 5

VTB Capital Russia Banking 6

Union Investment Real Estate GmbH Germany Fund Mgmt 7

Blackstone Real Estate U.S. Fund Mgmt 8

Atrium European Real Estate Limited U.K. REIM 9

Unibail Rodamco S.E. Holland REIM 10

Verny Capital Kazakhstan Pte Equity 11

Axa Real Estate France Insurance 12

ECE Germany RE Investor 13

HinesCalPERS (Russia Long Term Hold Fund) U.S. REIM 14

Immofinanz Austrian REIM 15

Heitman U.S. Fund Mgmt 16

Hines Global REIT U.S. REIM 17

Rockspring Property Investment Managers U.S. REIM 18

EPISO Lux REIM 19

DEKA Immobilien Germany GOEF 20

9

« CRE investment only ca. 3% of fund allocations = €180 billion

« Direct CRE investment grows by around 2 – 2.5% (€ 3.5-4) billion per year

« A 1% shift in re-allocation = €57 billion, a 3% shift = 2013 volumes

« Indirect / JVs appears to be the biggest shift – already happening

Q1-

1986

Q1-

1988

Q1-

1990

Q1-

1992

Q1-

1994

Q1-

1996

Q1-

1998

Q1-

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Q1-

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Q1-

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Q1-

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Q1-

2010

Q1-

2012

-4%

-2%

0%

2%

4%

6%

8%

10%

Prime Office Premium EU-Prime Office Yields

10-year German G'ment Bond

Major Driver of Property Investment


Prime Yields: Russia

10

« Yield stability expected in 2014

« Property tax policy for CRE at cadastral (market) value = transparency

« Despite autocratic country politics, English law enables legal transparency

8.0

9.0

13.5

10.5

9.59.0

8.5 8.58.59.0

14.5

10.510.0

9.0 9.0 9.0

1010.5

14.5

11 1111.5

11 11

2007 2008 2009 2010 2011 2012 2013 2014

RetailOffice Industrial

Office Yields: Russia v CEE v Germany

11

« Moscow Yields offer a discount to other competitor markets (Warsaw and Madrid) and Germany, allowing for country/liquidity risk

Tier 1 Cities Tier 2 Cities

300 bps enough?

Capital Value Indices: Moscow & St Petersburg

12

« Values in all sectors/markets have grown

« Moscow logistics flat, v. interesting looking forward (MLP Portfolio US$900mn)

Moscow St Petersburg


20

06

/Q1

20

06

/Q3

20

07

/Q1

20

07

/Q3

20

08

/Q1

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08

/Q3

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/Q1

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/Q3

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11

/Q1

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11

/Q3

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12

/Q1

20

12

/Q3

20

13

/Q1

20

13

/Q3

0

50

100

150

200

250

300

Moscow - Office Prime Headline Capital Value Moscow - Industrial Prime Headline Capital Value

Moscow - Retail Prime Headline Capital Value

20

06

/Q1

20

06

/Q2

20

06

/Q3

20

06

/Q4

20

07

/Q1

20

07

/Q2

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07

/Q3

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/Q4

20

08

/Q1

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/Q2

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/Q3

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/Q1

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/Q2

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/Q3

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/Q2

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/Q3

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/Q4

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/Q1

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/Q2

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/Q3

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/Q4

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/Q1

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/Q2

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/Q3

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/Q1

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/Q2

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/Q3

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13

/Q4

0

50

100

150

200

250

300

StPetersburg - Office Prime Headline Capital Value StPetersburg - Industrial Prime Headline Capital Value

StPetersburg - Retail Prime Headline Capital Value

13

Econ Trends


La

tvia

Tu

rke

y

Lit

hu

an

ia

Ro

ma

nia

Ru

ss

ia

Po

lan

d

Es

ton

ia

Slo

va

kia

Hu

ng

ary

Bu

lga

ria

Uk

rain

e

Cro

ati

a

Cz

ec

h R

ep

ub

lic

Slo

ve

nia

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

3.0

4.1

3.0

1.5

3.4

1.8

3.2

1.5

0.1

1.4

2.0

0.3 0.4

-1.2

4.23.8

3.3

2.5

1.5 1.41.2

0.9 0.80.6

-0.8 -0.8

-1.4

-2.2

Prediction Reality

Gro

wth

Rat

e%

« Lower oil price has reduced the economic growth rate to around 1.5-2%..... long-term

« Oil supplies up, US overtaking global position? ....need for new sectors to grow

« IT & Telecoms, not Energy sector, driving take-up growth in recent years (Yandex)

Country Summary

14

Politic

s

Macro

-Econ

Finance

Office

Marke

t

Retail

Marke

t

Investment

Romania ● ● ● ● ● ●Hungary ● ● ● ● ● ●Bulgaria ● ● ● ● ● ●

Czech Republic ● ● ● ● ● ●Poland ● ● ● ● ● ●

Russia ● ● ● ● ● ●Serbia ● ● ● ● ● ●

Slovakia ● ● ● ● ● ●Ukraine ● ● ● ● ● ●Croatia ● ● ● ● ● ●

Moscow & St Pete’s Office Market:

15


2006 2007 2008 2009 2010 2011 2012 2013 2014-2017

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000 Completions

2006 2007 2008 2009 2010 2011 2012 2013 2014-2017

0

500

1,000

1,500

2,000

2,500

3,000 Completions

2006 2007 2008 2009 2010 2011 2012 2013

0

20

40

60

80

100

120

0

2

4

6

8

10

12

14

16

18

20

68.8

112.9

76.2

52.0

63.3

75.3

78.4 75.4

3.54.2

5.5

16.5

12.3

10.6

8.49.2

2006 2007 2008 2009 2010 2011 2012 2013

0

10

20

30

40

50

60

02468101214161820

52 51.5 45.5

37.5 38

46.1 54.7 54.2

5.06.0

14.0

18.617.6

14.0

9.1

11.7

Moscow Office Stock Moscow Office Prime Rents & Vacancy Rate

St Petersburg Office Prime Rents & Vacancy RateSt Petersburg Office Stock

%

%USD / month

USD / month

« Economic impact collectively felt in both cities, with demand falling

« Vacancy rising, given new supply increases.....rents stabilising or falling slightly

The Retail Market: Growth Capacity

2013 [per thousand capita, m²]

0

100

200

300

400

500

600

700

800

900

1,000Z

ag

reb

Bra

tis

lav

a

Pra

gu

e

Wa

rsa

w

St

Pe

ters

bu

rg

Ky

iv

Bu

da

pe

st

Bu

ch

are

st

So

fia

Mo

sc

ow

Be

lgra

de

Traditional Shopping Centre Stock & Pipeline

« SC capacity remains, esp. Moscow – also driving logistics demand« St Pete’s going through a repositioning phase


The Retail Market: Growth CapacityShopping Centre Distribution Moving East

« Growth in other ‘1Mn+’ Cities..Nizhny Novgorod, Perm, Yekaterinburg, Volgograd« Aura SC in Novosibirsk acquired for US$ 250mn in 2013


Size of SC Stock

The E-commerce Market: Growth Capacity

« The likes of Ozon, KupiVIP and Lamoda leading the e-commerce business in Russia

« Increasing demand for modern warehousing across Russia from retailers and 3PLs

Online Retail Sales Forecast: Russia 2020

Technology inventory/customer

analysis requires capital investment

Shipping & Returns customer loyalty

costs up to 100 bp on gross margins

Fraudulent Claims costs money estimated US$8.9 billion (2012)

Space Rationalisationcan be counter

productive; less traffic = lower sales

In-store fulfilment can counter

balance reduced ‘free shipping’

19

Multi-Channel Balance Essential

Clicks or Bricks?

Both!

US market to see more prototype stores opening in 2013 – wait & learn

The Logistics Market: Growth Capacity

CountryModern Logistics

Stock m² (H1 2013)Population

(UNCTAD 2012)m²/ thousand capita

UK *57,400,000 65,347,252 878

Poland 7,553,920 39,670,133 190

Russia 13,500,000 147,099,939 92

A Comparison: Russian Modern Logistics

Source: Colliers International*Estimated Modern A-Grade Stock; UK Total Stock = 321 million m2

« Russia remains ‘significantly’ undersupplied on a per capita basis

« Less than One Third of the UK

« Half the Size of Poland

The Logistics Market: Growth Capacity

City/RegionModern Logistics Stock

m² (H1 2013)% of Modern Stock

Rental Rate US$/m²/ year

Moscow 9,000,000 66% 130

St. Petersburg 1,536,700 11% 115

Novosibirsk 703,400 5% 120

Yekaterinburg 677,200 5% 105

Krasnodar 355,500 3% 100

Kazan 351,300 3% 90

Rostov-on-Don 348,000 3% 110

Samara 340,000 3% 90

Nizhny Novgorod 264,400 2% 120

Russian Modern Logistics by City/Region


« Moscow dominates the market: but opportunities everywhere

Cheaper robots and growing automation

3D printing

The future of manufacturing in Europe

+

+

+/-

+/-

TECHNOLOGIC INNOVATION

INFRASTRUCTURE + LOGISTICS IMPROVEMENTS

Deep sea water ports

Railway connectionsSource: Colliers International

Offshoring + Re-shoring = “Best-shoring”

% manufacturing in GDP in Western Europe

IS RE-SHORING

NEXT?OFFSHORING

1850 1950

BE

ST

SH

OR

ING

2000

Rising cost of labour

Globalisation

DOMESTICALLY DRIVEN MANUFACTURING

Industrialisation

Economic & population growth


Increase in production capacityStable production capacityDecrease in production capacity

USA / Canada

37% Western Europe

52%EE + Russia

+ Turkey

48%

China

44%

India

37%

Japan

31%

Latin America

30%

Africa & Middle East

26%

Rest of Asia

33%

“Hot spots” for manufacturing Intentions regarding production capacity in the next three years


Summary: a regional perspectiveTurkey Taking Advantage: New Infrastructure

2005 2006 2007 2008 2009 2010 2011

0

1,000

2,000

3,000

4,000

5,000

3,364

FDI in manufacturing

mill

ion

$

Izmir

IstanbulAnkara

Bulgaria

Greece

Georgia

ArmeniaCandarli Port (Izmir)

« 4 mln TEUs/year (Rotterdan 12 mln)

« Completion 2013/2014

Third Bridge Project (Istanbul)

« Completion 2015

New logistics “Villages”

« 16 across Turkey

« 3 in Istanbul’s region

« Built by Turkish State Railways Corporation

Teknopark (Istanbul)« 700,000 sq m construction

area

« Capacity:1000 firms and 30,000 staff

Third Airport (Istanbul)

« 6 runways

« 150 million passengers/year

Istanbul 20th 2nd

Izmir 30th 12th

Distribution Manufacturing


Russia: Rail Trade Routes to Europe?

« The ‘Silk Railroad’ capturing more and more rail freight

« Arctic Shipping Route also set to capture increasing traffic


« Ships notebooks from plant in Chongqing to Duisburg via train (11,179 km-21 days)

« 1.5 train a week in 2013

« Transports components via train from Leipzig to Shenyang

Russia Well Positioned on Trade Routes

27

Sochi & The Olympics

Intentions/Motivation:

« Transform Sochi into a year-round tourist destination - both summer and winter tourism,

« Develop Russia’s first world-class ski resort, to create a national centre for winter sports, and

« Complete upgrade of existing infrastructure as a city – and ‘global’ connections

« Implement a philosophy for investing domestically.

« Funded 60% by public sources and 40% by private investment.

What’s been built?:

« Sochi did not have any competition venues in situ • Sochi Olympic Park (Coastal) and Krasnaya Polyana (Mountain )• Eleven new winter sports venues,: International-quality alpine, ski jumping and sliding facilities,

« New infrastructure and transport systems: colossal• A new highway and high capacity mountain railway corridor, • Offshore terminal at Sochi airport – cruise and cargo • 350 kms of new roads, 200 kms of railway lines, • 55 new bridges, 22 tunnels • Thermoelectric power station• 17 electric power substations, • Engineering and sewerage networks.

« The city has been remodelled; • Numerous shopping malls, hotels, and commercial real estate, medical centres, schools and even a

University

28

Sochi & The Olympics


City/Region Motivation Delivery Legacy Pros & Cons

Lillehammer Regional development, tourism growth

no

Pros: host 2016 Youth Winter OG), media building now used by Lillehammer College

Cons: legacy of debt, underutilised facilities, low tourism demand, hotels bankrupt

Salt Lake City Environmental awareness, centre for winter sports

partly

Pros: new real estate (indirectly Gateway SC), mega-events, occupier demand (office, logistics)

Cons: tourism branding, media sensationalism, political issues, reuse of venues uncertain

Nagano Not specified / used it to promote technology

n/aCons: majority of venues removed after OGs due to cost of maintenance, debt legacy (& legal issues)

Turin Urban regeneration (infrastructure), economic growth, new urban identity

yes

Pros: new real estate demand (Torino Wireless District), Olympic Village, underutilised brownfields now commercial/residential district, new logistic parks, tourism growth, mega-events

Cons: democratic accountability / financial management, branding/media exposure

Vancouver Social/cultural change, tourism growth, national centre for sports

yes

Pros: reuse of some sport facilities, Olympic Village now mixed-use neighbourhood, reuse of industrial brownfield sites, tourism, office occupier demand, sports, environmental, social & cultural legacy

Cons: branding & media damage, high construction costs, Olympic Village housing placed in receivership after Games

Sochi Tourism growth, national centre for sports, urban/infrastructural change

TBDPros: New Infra, Sochi on the map: Grand Prix, FIFA World Cup. Risk of under-used resort/facilities, legacy of debt, ‘tourism security’

Russian Investment: Pro’s and Con’s

29

Pro’s

« Signs of economic diversity

« Product availability – large scale

« Bank finance conditions strong

« Institutional funds increasingly active

« Clear title/English law.

« Yield compression possible, driving values

« Lots of development potential in office, retail and logistics

« Regional cities a long-term prospect

Con’s

« National autocracy

« Transparency/perception of market a barrier to entry

« Economic growth slowing…long-term?

« Rental conditions slowing: office and retail values peaking?

« Significant infrastructure required to drive regional million plus cities

« Will capital continue to flow out of Russia?

Damian Harrington

Regional Director, Research & Consulting

Colliers International, Eastern Europe

[email protected]

+358 400 907972

mailto:[email protected]

Russian real estate market february 2014

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