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Яндекс цитирования

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19.03.2009

Commercial real estate market overview 2008

OFFICE REAL ESTATE

Supply

In 2008, supply of high quality office space increased by 1,7 mln. sq. m. The share of class A properties amounted to 30%, and that of class B properties to 70%. Total supply volume of newly built and reconstructed space amounted to 8,3 mln. sq. m. by the end of the year. The delivered space amounted to more than half of the announced volume: due to traditional delays of delivery as well as due the outbreak of the financial crisis in September 2008.




Over the first nine months of 2008, demand for high quality office space remained high, therefore the rate of absorption of new office properties was kept at a high level and the vacancy rate was relatively low. However, the crisis affected the market in a negative way: demand went down sharply, the number of deals made in 4Q was extremely small, and vacancy rates increased to 15% on average in Moscow (up to 20% for class A offices). Even new high quality office properties in a unique location sometimes are less than 50% leased.

Many developers announced that they had put on hold projects at an initial stage, construction of several complexes was frozen, the amount of properties (even uncompleted ones) offered for sale sharply increased, many companies began to search for co-investors. Thus, MR Group says that they’re looking for a partner to complete the first phase of Domino business complex by signing an investment contract for $100 mln. The state bank of Baden-Württemberg LBBW (Germany) will invest in the Nagatino i-Land project. LBBW will act as a co-investor in the construction of an 11-storey office building with a total area of nearly 23,000 sq. m.

Many companies are restructuring expenses by subleasing their space, which caused sharp increase of supply of ready-tomove offices. Total supply of secondary office space in Q4 2008 increased twice amounting to 100 thous. sq. m. by the end of 2008. This trend is likely to continue in 2009, and the submarket will keep on growing.




Demand

As of the end of 2008, demand pattern by transaction type was as follows: the share of requests for purchase of office space was 18% which is 7% less than in 2007, the share of requests for lease of office space increased to 82%. The share of requests for purchase went down so considerably due to the change of market trends under the negative influence of the financial crisis in Q4 2008.

Demand pattern by class of office space didn’t undergo any substantial changes: the share of requests for lease of class A offices grew versus the corresponding period of 2007 (55%). We saw the share of requests for lease of class A offices increase in 1H 2008 as well as in December of 2008, when rental rates started to go down.

Demand pattern by size of office space didn’t change much versus the corresponding period of 2007: the share of requests for lease of space measuring less than 200 sq. m. went down, the most popular size for lease in 2008 was 200 - 1 500 sq. m. The share of requests for lease of the biggest blocks also increased (15% versus 9%).

Demand pattern by class of office space changed quite a lot versus 2007: the share of requests for purchase of class A offices went down 32% and reached 18%, the share of requests for purchase of class B+ offices increased by 14% and of class B- offices almost doubled, 46% versus 24%. This situation was caused by active growth of sales prices in 2007- 2008 as well as by decreasing demand in Q4 2008.





The annual demand pattern by size didn’t change much versus 2007: the most popular size for purchase is 500 – 1500 sq. m. (39% of all the incoming requests in 2008). The share of requests for this size grew 6%, while the share of requests for the smallest and biggest blocks decreased 1%, 35% and 12% respectively.

The first months after the crisis show that demand pattern has changed drastically: the share of requests for purchase was only 10% in Q4 2008, as for lease of office space, 76% of all the requests were blocks measuring less than 500 sq. m. (40% for blocks measuring less than 200 sq. m. and 36%, for blocks measuring 201-500 sq. m.).

The average asking rent for class A offices amounted to $775 per sq. m. per year and for class B offices, $300 per sq. m. per year.

Rental rates and sales prices

In 2008, rental rates for class A and B offices showed stable growth which amounted to 15% over the first nine months. By the end of the year, rental rates began to decrease under the negative influence of the financial crisis. In the majority of the cases, this reduction was hidden, landlords offered discounts and bonuses, for some properties, discounts reached 35-50%.The average rental rates decreased 10-12% in Q4 2008.



The average basic rent (exclusive of VAT and operation expenses) for class A offices were in the range of $500 to $1 500 per sq. m. per year. The average rent for class A offices in CAD decreased significantly amounting to $1 300 per sq. m. per year by the end of 2008. As for class B offices, rental rates vary, from $650 to $1 400 per sq. m. per year in B+ offices and from $400 to $800 per sq. m. per year in B- offices. As for the average operation expenses in 2008, they reach $100–$150 per sq. m. per year for class A offices, $80-$120 for B+ offices, $75- $90 for B- offices.

In September-October 2008, the market saw a record number of offices for sale, which led to considerable reduction of the average asking prices. Yet, by December supply volume was reduced as many landlords opted for keeping their assets other than selling them in a falling market. Demand remains at a low level, potential buyer expectations are 30-50% below the current level of asking prices.

The average sales price for class A varies between $5 000- $13 000 per sq. m., for class B+ -$3 500-$9 000 per sq. m. and for B- offices - $3 000-$7 000 per sq. m.

Landmark events and transactions in 2008




• The real estate market experienced 2 different development trends over 2008: before autumn, the market continued to grow, big transactions were made, lease agreements were signed for a long term, we saw comprehensive development and deindustrialization trends.

• Several big lease transactions were concluded (for spaces measuring over 20 thous. sq. m.) as well as investment deals on purchase of big assets. Out of all the projects announced in 2008, more than 50% measure over 200 thous. sq. m.

In 2008, the market saw 3 precedents:

• Sistema Hals OJSC asked Siemens Company to reconsider the contract for construction of its headquarters in Leningradsky prospect. The construction price fixed in the contract amounted to 120 mln. euro in 2005. Yet, when the project was evaluated in late 2007, the construction price reached 230 mln. euro. According to the German legislation, the fixed contract price may be reconsidered if the prices have grown substantially. So far, the companies have failed to reach a new agreement.

• In early 2008, Yandex announced signing a lease agreement for 29,1 thous. sq. m with Legion Development company in Legion II A class office complex. As the prices grew since the beginning of the year and the leaseholder reconsidered his pricing policy, the companies terminated this agreement. As a result, Yandex company leases office space in Morozov business center which measures over 18 thous. sq. m.

• Upon the outbreak of the crisis, the first precedent was termination of a major preliminary lease agreement by DS Development and IBS companies, the latter intended to lease 36,8 thous. sq. m. in North Star Tower business center.

• By the end of the year, big spaces located outside of the city center gained popularity, business was divided into front and back offices. Thus, in October Sberbank leased Southern Port business center located in 2-nd Yuzhnoportovy proezd (57 thous. sq. m.) for their back office.




Forecast

Undoubtedly, big changes are in store for the office property market. The financial crisis is bound to affect the market structure and many developers will be forced to leave the market or decrease their market presence which in turn, will affect delivery of new office space. 1,5 mln. sq. m. are supposed to be delivered in 2009 but in our opinion, ill will be no more than 1 mln. sq. m (also considering office space which wasn’t delivered in 2008).

Due to the liquidity crisis, demand will remain at a low level, and the number of deals will be small.

It’s a tenants market now. Offices located outside of the city center will be sought after and as for expensive representative offices, tenants will rather consider fit-out and ready-to-move space.

Rental rates are bound to continue going down: many tenants insist that their current leases should be renegotiated, landlords of new offices are forced to reduce rental rates and offer all kinds of discounts and bonuses to attract and keep tenants.

The average leasable area will decrease, tenants will be most interested in properties measuring up to 500 sq. m. Validity period of leases will be shortened as people are unwilling to take risks due to the uncertain market situation, tenants will look to sign lease agreements valid for 1-3 years.

We may expect big preliminary leases to be terminated in 1H 2008. Besides, developers will have to adjust to the situation, some projects will be put on hold or postponed, it’s possible that the share of the office constituent in multifunctional complexes and comprehensive development projects will be reduced.

Many companies will face financial difficulties in 2009 and therefore, will be unable to relocate or expand their business activity, that’s why active demand will fall and delayed demand volume will increase. Delivery of new supply will be postponed, and the office property market is unlikely to see saturation any time soon.

In 2009, rental rates and sales prices will fall and the vacancy rate will grow, and that’s the best time to make lease transactions and investment acquisitions. The office market will return to life when the economy shows the first signs of recovery, and as soon as demand recovers we’ll see a serious gap between supply and demand considering significant decrease of supply volume. That means that prices will start growing again, and quite fast at that.




RETAIL REAL ESTATE

Supply

In 2008, 9 high quality retail centers were launched in Moscow, their total area being 670 thous. sq. m. Total volume of high quality retail space in Moscow amounted to 4,5 mln. sq. m. and there are over 100 high quality retail centers currently operating in Moscow. If we compare 2007 and 2008, fewer retail centers were delivered in 2008, however, their total size was bigger than the size of retail properties commissioned in 2007.

The biggest retail centers launched in 2008 are Troyka (160 thous. sq.m.) and Rio (220 thous. sq. m.). Therefore, out of 27 retail centers the delivery of which was first planned in 2007 and then rescheduled for 2008, only one third was opened.

Therefore, we expect the rest of the properties to be delivered in 2009. The launch of such retail centers as Metropolis, Voentorg, Filion is scheduled for 1H 2009.

Apart from the properties at a final construction stage, the construction of River Mall retail center was announced in 2008. It will be located in Avtozavodskaya street and its total space will be over 250 thous. sq. m. The center will consist of 220 points of sale, including a food hypermarket, an electronics hypermarket, a multi-screen movie theater and a food court.

The retail center will host the biggest parking lot in Moscow (3.900 slots). Total amount of investments is about 400 mln. US Dollars.

In 2008, AFI Development started construction of Tverskaya Mall and Mall of Russia, total amount of investments is 1 billion dollars. Tverskaya Mall is located under Tverskaya zastava square. Total area is 107 thous. sq. m., the retail gallery is 74 thous. sq. m. As far as Mall of Russia is concerned, it will be opened in the central part of Moscow City complex. Total area will amount to 179 thous. sq. m., and the retail gallery will occupy 94 thous. sq. m. Thus, we see that landmark projects were launched in 2008 which will contribute to increasing supply of retail space in Moscow.

Over a half of the retail centers were opened in SAD, CAD, and NAD in 2008. Those centers which are scheduled for delivery in 2009 are located in the northern, western, and southwestern parts of Moscow. Distribution of retail centers in Moscow is irregular, and the eastern part of the city experiences a lack of high quality retail centers.

The global financial crisis hit Russian markets in autumn 2008, that’s why delivery of many retail properties had to be postponed for 2009. On the one hand, developers reconsidered delivery dates of many projects due to financial difficulties and focused on the projects likely to generate the maximum profit in a short-term perspective.

On the other hand, retailers saw demand go down, they faced the same financial problems and had to cut their development plans and be more careful selecting retail space. These two trends slowed down the delivery of new retail properties in late 2008.




Demand

Before October 2008, demand exceeded supply on the real estate market due to a number of reasons. First of all, the Russian economy was growing as well as buyer power of the population. On the other hand, retail market developed fast and foreign investors entered the booming Russian market.




Demand for retail space was mainly determined by development of retail chains. Excellent financial results of such chains as Azbuka vkusa, Perekrestok, Bakhetle, M Video led to the opening of new stores in Moscow and other cities and also influenced plans of mid-term development. For example, it was announced in summer that perfume and cosmetics chain Rive Gauche will come to Moscow market and their first shop was opened in October in Tverskaya street, 18.

Retailers aim at diversifying formats, thus, new formats are being developed by Azbuka vkusa (Olivier chain, economy class food supermarkets, chain of wine supermarkets ), X5 Retail Group (Zeleny perekrestok, chain of premium class supermarkets, Mercado super center, food hypermarkets), Mosmart (Mosmartik chain of convenience stores), Rigla (drugstores for children), etc;

Another trend is convergence in a non-food sector, that is, one project envisages combination of several different companies. For example, the beginning of 2008 saw active development of Tochka network of services. Such operators as a bank, a café, mobile connection companies and tourist agencies are represented on the same territory.

Several major deals were signed in 2008, all of them before the financial crisis:

• Sponda PLC, a Swedish company, purchased two shopping centers from London & Regional Properties: Solnechny Rai (Borovskoe shosse, 6) in Moscow and Solnechny Rai II (Vokzalnaya ploshad, 4) in the town of Ramenskoye. The projects have rentable areas of 9 thous. sq. m and 6,5 thous. sq. m respectively. Both shopping centers have already been leased out to operators. This transaction is worth $110 mln.

• In January 2008, Sistema Hals set up a joint venture with France’s Apsys to co-develop and manage retail projects in Russia. The partners have equal shares in the new entity, financing of projects will also be made on a fifty-fifty basis.

• RTM OJSC has acquired total control over ReMa Immobilien, owner of 18 trade realty premises totaling more than 53 thous. sq. m in Moscow. 77% of these premises have been leased out to Billa supermarket chain on the basis of 25-year lease agreements. Formerly, RTM OJSC had 75% control ReMa Immobilien via a joint venture with Eurobilla.

• Orco Property company purchased Na bagrationovskom, a retail center located on Bagrationovsky pr. from Rubin Development company. Total space of the premises is 122 thous. sq. m, retail area—54 thous. sq. m. Estimates vary but the transaction may be worth more than $300 mln.

• Ivanhoe Cambridge Canadian development company and Europolis investment company purchased Vremena goda retail center on Kutuzovsky prospect. It’s the first property acquisition that the Canadian company makes in Russia, its share now amounts to 60%, the remaining 40% belong to Europolis. The transaction is worth $500 mln.

• Germany-based discount operator Aldi, Wal-Mart (the world's largest retail group) and British-based Tesco retail chain plan to come to the Russian retail market. These companies are now doing some preliminary work, Aldo is registering its trademark license, Wal-Mart is considering cooperation with a local retail chain and Tesco is searching for retail space.

• Besides, Japanese retailer, Australian coffee franchise Gloria Jean's Coffee, British-based Hamleys toy shops have announced their intention to enter the Russian market. British department store retailer Debenhams is again looking to Russia for expansion.

• As for landmark events of 2008, we should mention the liquidation of Arbat Prestizh cosmetics retailer, the closure of Stockmann department store in Smolensky Passage, Ramstore's rebranding, the remaining shops will bear the name Enka TC.

• Under the influence of the financial crisis, development plans of such retail chains as Sedmoy Continent, Rigla, Coffee House had to be corrected, which led to decrease of demand for retail space.

• As for the global chains which planned entering the Russian market, some of them, especially those in the high price segment, are likely to postpone expansion. Yet, mass retailers will continue opening their shops. A good example is GAP, their first shop was opened in December 2008 in Mega – Belaya Dacha retail center and the opening of their second shop is scheduled for February 2009 in Metropolis trade center.

Considering that the Russian retail market, as well as all the Russian market in general, continued its dynamic growth, demand pattern at the year-end reflected this trend. The main changes taking place in late 2008 concerned first of all total demand volume. In this period, demand became delayed as the majority of tenants were reconsidering their development strategies and conducting renegotiations with their leaseholders.

Demand structure will see the first changes on early 2009, the results of the last year are the last results of the market development before the crisis.

In comparison with 2007, demand for retail space within the Third Transport Ring grew while the share of retail space within the Garden Ring decreased. The reason for this lies in the fact that the vacancy rate in the center of Moscow is growing fast, therefore rental rates and prices are also going up. As for spaces within the Third Transport Ring, their rental rates are  lower but they’re provided with more developed infrastructure, first of all, convenient access roads.




Besides, 2008 saw some changes in demand pattern by size. Thus, demand for small spaces measuring less than 200 sq. m. grew 30% for two reasons. The first one is that finding bigger retail space in the center of the city may prove difficult, the second reason is that after Moscow government approved a program on support and development of small business in the city, this group showed higher demand for small retail premises.

If in 2007 the most sought after retail premises were those measuring 501 – 1 500 sq. m. (38%), demand for them in 2008 went down 10%. Therefore, demand for purchase of retail space of different size varied between 20% and 30% in 2008.

Rental rates and sales prices

Before the crisis of 2008, rental rates growth versus 2007 amounted to 10-20%. CAD remains the most expensive district, the maximum rent of $6.000 corresponds to the maximum rent in 2007, but the minimum rent increased from $700 to $1.000 per sq. m. The lowest level of the maximum and minimum rental rates were observed in EAD.

For the most part of 2008, rental rates for street retail premises continued to grow, especially in the main retail corridors of the city. The most expensive retail properties may be found in Tverskaya street and Kuznetsky most. Before the crisis, rental rates in Tverskaya were in the range of $3.000 – 6.000 per sq. m and in Kuznetsky most, $3.000 – 4.000 per sq.m.

The first months after the crisis didn’t show any direct reduction of rental rates, yet landlords and tenants had active negotiations regarding discounts and changes of rent calculation, that is, paying rent depending on the turnover.

As for sales prices of retail premises, the average growth before the crisis reached 15%. In the last months of 2008, minimum and maximum prices increased 25-40% versus the corresponding period of 2007 due to the financial crisis.

The latter introduced changes both in rental rates and sales prices. November saw significant correction of rental rates in such districts as EAD and SEAD, further growth on an unprecedented scale and then 30% rental rates reduction. This chaotic movement shows that market players were taken aback by the financial crisis and failed to assess the length and depth of the market changes.

At the same time, it is evident that demand by retail tenants and end users has fallen down dramatically. That means inevitable reduction of rent and sales prices. At the year’s end, the average reduction reached 20-25%.




Shopping centers due to be constructed in 2008

Many new retail projects were announced in 2008. Obviously, construction activity was most intensive before the crisis, upon its outbreak, developers changed their plans regarding extensive development and announced they’d continue construction but will put on hold other projects at an initial stage.

Yet, most of these announced projects are very attractive, and their development is bound to continue as soon as the market recovers.

The following interesting projects were announced in 2008:

• In early 2008, ?5 Retail Group announced a major development project. A trade and business center with a retail park totaling 250 thous. sq. m is to be developed within 3 km from MKAD on Kievskoe shosse. The retail park (a trade complex where operators of DIY-format will form the core of the tenants’ pool) is expected to measure 100 thous. sq. m.

• In March 2008, the construction project of the retail complex located at the intersection of Akademika Sakharova prospect and Sadovaya-Spasskaya was approved. Its total area will be approximately 30 thous. sq. m. The surface floors will host a retail gallery and four underground floors, a parking lot for 385 cars.

• Construction of a large-scale retail center measuring 400 thous. sq. m. is planned at the intersection of Schelkovskoe highway and Khabarovskaya street, 103-104 km from MKAD. Among its anchor tenants will be a food hypermarket, DIY, a supermarket of electronics and household appliances, a sportswear shop and a movie hall.

• Yuznhy mall multifunctional complex (26 km MKAD) was announced in spring 2008. Its total space will be 170 thous. sq.m and it will comprise a retail center with a gallery of discount shops, car village, entertainment center.

• Construction of Hermitage multifunctional complex measuring 1 mln sq. m is planned at the intersection of 41 km MKAD and Kaluzhskoe shosse. The complex will look like a bigger copy of the Winter palace in Saint Petersburg. Total retail space will be around 1,3 mln. sq. m. There will be an auto and furniture center, a store of household appliances and other shops.

• A trade and entertainment complex will be built in Khoroshevskoe shosse. The rentable trade area will be 150 thous. sq. m, the entertainment zone will occupy 20 thous. sq. m. The complex will have inherent features like a big atrium, an ice hockey stadium, a landscape park and a national aviation museum.

• Mozaika retail center will be constructed at the intersection of the Third Transport Ring and Yuzhnoportovaya and Velozavodskaya ulitsa. Its rentable area will be 64 thous. sq. m. TriGranit Development company is expected to act as an investor.

• A major multifunctional complex will be built on Kutuzovsky prospect, in the vicinity of Park pobedy metro station. The complex will house shops, cafes, restaurants and a multi-level parking lot for 6 224 cars. Total area of the complex will be 514 thous. sq. m.

• Construction of a retail center in Northern Butovo was announced in July. Total area of the project will amount to 30 thous. sq. m, it will include a retail gallery, a food hypermarket, an electronics hypermarket and a food court. The developer is Perga Development and Management.

• Construction of a new retail center was announced on the territory of Slobodka food market located in Korovinskoe shosse, 17-19. The retail center will measure 21 thous. sq. M and will feature grocery shops on the ground floor and public catering, a movie hall and office space on the second and third floors.

• Construction of a multifunctional complex was announced in July. It will be located on a land plot limited by Nastasinsky pereulok, Tverskaya and Malaya Dmitrovka and Pushkin Square. The complex will feature a 4-storey office and retail area, towers with suites and a boutique hotel with an underground parking. The developer is Legacy Development company which is part of Soglasie Alliance holding.

• In July, Moscow government announced that Zhulebino and Vikhino markets will be transformed into retail centers by 2009 and a retail and office center measuring 100 thous. sq. m will be located on the territory of Cheremushki market. The demolition of old buildings on the development territory is scheduled for 2008-2010.

• In September, Strogino multifunctional complex measuring 1,2 mln. sq. m was announced. According to the plan, the complex will include a retail and entertainment zone (170 thous. sq. m), office buildings (360 thous. sq. m), 2 hotels (3* and 4*) and an aparthotel. Besides, the complex will include a car dealership, a fitness complex, a congress center, a multiplex and a multi-level parking measuring 586 thous. sq. m.

Forecast

Further development of the retail market depends upon the length and depth of the crisis. Today we see that the crisis affected the Russian economy as a whole, which means that retailers and developers will experience not only financial difficulties but will also see decreasing demand as the income of the population will go down.

That’s why we expect further decrease of demand for retail space both in new projects and in the existing shopping centers.

If landlords reduce rental rates, it’s possible they’ll keep tenants. The tenants should also behave aggressively since 2009 will see a serious fight for the buyer. The crisis will first of all affect the segment of non-essential goods, such as furniture, household appliances and electronics. Demand in the food retail and pharmaceuticals segment will be most stable as here, serious decrease of consumption is simply impossible.

Therefore, we may assume that rental rates on the retail real estate market will go down 25-30%. It’s possible that leaseholders will provide rent free periods and other benefits to tenants. In order to keep anchor tenants able to provide income revenue, landlords will be ready to accept percentage of the turnover as rental payments.

In 2009, the market will see delivery of those projects which were supposed to be opened in 2008. Besides, the number of new announced projects is likely to go down due to the financial crisis.

It’s possible that shops working in total look format (Debenhams) and new brands (Costa Coffee, Victoria Secret) will come to the Russian market as late as in mid-2009. At the same time, the crisis is a good time for expansion and since demand on the traditional markets is going down, Western retailers may consider entering the emerging Russian market.

We expect 2009 to become a year of merges and acquisitions, major market players will expand by merging with other players. However, it is not a guarantee of survival, some companies will be forced to leave the market forever.

On the whole, we see that in comparison with other market segments, the retail property market has almost reached the saturation point (in Moscow and in the regions), and the crisis will help to purge the market, many unnecessary or low quality centers will never be built, and market players will be more responsible and careful elaborating concepts of new shopping centers, searching for new retail premises, making financial calculations and developing strategies.

HOTELS

Supply

Over 2008, 9 hotels with total capacity of 1 000 rooms were launched out of 28 previously announced, 80% of all the rooms are 4*. Therefore, the Government’s plan to develop hotels in Moscow was only 30% fulfilled.




The following major hotels were launched in 2009:

• In February, Park Inn Sadu 4*, a business hotel which forms part of Rezidor SAS global hotel management chain was opened. It includes a restaurant, a meeting room, a business center and a parking lot for 12 cars.

• In May 2008, Interstate Hotels & Resorts opened Hilton Moscow Leningradskaya 4* under the franchising agreement with Hilton Hotels Corporation, now the hotel consists of 273 instead of 329, 39 of them are representative rooms. Total area of the hotel amounts to 34 000 sq. m., it includes a restaurant, a lobby bar, a banquet hall with a lobby, conference rooms, a business center, a fitness center and other infrastructure objects.

• In June, Aerostar Hotel consisting of 281 rooms was opened after reconstruction. This 4* hotel includes a restaurant, a bar and 4 conference rooms. It is managed by WEL Hotels & Resorts.

• Okhotnik 3* Hotel was opened in summer, in the northern part of Moscow. It was renovated within the framework of the redevelopment project for the Central House of Hunters and Fishermen. The project is located on Golovinskoe shosse 1.

Avant Group was the developer of the project and its investor was Russian Union of Hunters and Fishermen. As a result of redevelopment, the space of the hotel was extended into 3 thous. sq. m. The hotel consists of 104 rooms.

Therefore, in 2008 the hotel real estate market acquired 1 000 rooms, 80% of which are 4*. At the year’s end, 220 hotels consisting of 35 000 rooms were operating in Moscow. The majority of these hotels are located in CAD and NEAD.

As for the hotel market structure, 3* hotels are predominant, their share amounts to 40%. This kind of hotels is most popular with consumers. Yet, the majority of these 3* hotels are old and don’t meet modern requirements of hotel service. We should also say that the hotel market sees supply deficit, especially supply of high quality 3* hotels.

According to the information provided by the Town Planning Department of Moscow, construction of 32 hotels is planned in 2009. It is evident that these optimistic plans will have to be corrected over the year. In view of the current economic situation, many hotel projects were put on hold, therefore increase of supply volume on the hotel market is highly unlikely.

Among hotels scheduled for commissioning in the upcoming months is Aquarium which will be opened on the territory of Crocus Expo IEC. Its official opening is expected in March 2009 but the hotel expects its first visitors in February 2009. The opening of Moscow Hotel after reconstruction is planned for summer 2009. Maxima Hotels chain will open a new business hotel in July. Marriott International is to open a new hotel in Moscow called Renaissance Moscow Monarch Center in 2009.

Besides, Holiday Inn Simanovsky and a hotel in Vivaldi Plaza business centers are also expected to be opened in 2009. Considering the current economic situation, many market players adjust their plans accordingly. Delivery of projects at an initial stage is postponed for an indefinite time, delivery of hotels under construction is also rescheduled. According to the Architectural Committee of Moscow, delivery of the Russia Tower within the framework of Moscow City IBC (which will incorporate offices, suites, a hotel, etc.) may be postponed, complex reconstruction of Minsk hotel located in the center of Moscow will last till October 2010 (initially, the reconstruction was expected to be completed by 2009).

Demand

Moscow is attractive for tourists due to a number of reasons, first of all, its cultural and historical heritage, second, Moscow often acts as a venue for international congresses, seminars, trade fairs, festivals, international sports competitions. Plus, Moscow is the biggest center of Russian Orthodox Church (more than 130 churches).

Considering all these factors, Moscow attracts a large number of visitors. In 2006, 3,7 mln. tourists came, in 2007, 4,1 mln. and it was expected that in 2008 this number would reach 4,5 mln. people. However, the number of tourists significantly decreased in late 2008. The number of tourists who came to Moscow in the first nine months of 2009 was higher than in the corresponding period of 2009, but the anticipated results were never reached.

Periods from mid-March till mid-July, as well as from mid-September till mid-December are traditionally considered high seasons since this is the time of exhibitions, international conferences, symposia and other public events that require conference halls and hotel accomodation for business tourists. In late 2008, the number of business tourists who make up target audience of Moscow hotels decreased.

The medium hotel segment is still in the highest demand. The reason for this is as follows: foreign and domestic tourists as well as the majority of domestic business tourists prefer medium level hotels while foreign business tourists prefer to stay in the hotel rooms of the upper segment. It should be underlined that the number of Russian guests in Moscow’s hotels is almost twice as large as the number of foreigners. All this is due to underdevelopment of the market of world class tourist services, difficulties in obtaining visas and some other factors.

The hotel market experiences a deficit of rooms. The average occupancy rate in 3-5* hotels is over 70%, and in the high season, it reaches 90-100%. We should say that in 2008, the financial crisis took its toll of the occupancy rate, this index went down 5-10% versus the corresponding period last year.

Despite the current economic situation, investment demand for hotel space remains high. The following major deals were made in 2008:

• J&T Group, a Slovakian financial group, acquired 75% of Blachug Company, the owner of Balchug Kempinski Hotel. The 5* hotel located on ul. Balchug 1 consists of 232 rooms. Initially, 69% of the hotel belonged to Moscow Government, later this share was purchased by Kempinski Hotels CA.

• Mos City Group became the owner of 4* Aerostar Hotel of 416 rooms and 50 700 sq. m of total area. In the 90s, the investor of construction of this hotel and office complex was IMP Group, a Canadian air corporation. The hotel was closed in August 2004. It will be operated by WEL Hotels & Resorts, a Russian company. Different sources say, Aerostar is worth $90-95 mln.

• JSC Hotel Novoslobodskaya, a 100% subsidiary of JSC Open Investments acquired 31% of the premises in Novoslobodskaya Hotel (Novotel Moscow Centre Hotel) from the Moscow City Government. As a result of the acquisition, JSC Hotel Novoslobodskaya owns 100% of the hotel space.

• Sibir Energy oil company put a deposit of $115,4 for two properties. Out of this amount, $57,5 mln. (of $81,7 initially planned) was paid for the shares of Sovetskaya Ltd which owns Sovetsky hotel (100 rooms) in leningradsky prospect. Plus, it will pay $75 mln. for Intime LLC which is expected to build a hotel complex (84,7 thous. sq. m.) in Leningradsky prospect by 2011.

• Elektronny Ray LLC which is owned by Zarakh Iliev and God Nisanov acquired 50% shares of Radisson SAS Slavyanskaya from Hotel Invest Company. The transaction amount is not disclosed.

Apart from acquisition deals, a major agreement on hotel management was signed:

• Park Plaza Hotels announced signing an agreement for management of 20 hotels, both existing and planned for construction by Ferens Management Limited. Total amount of investments will reach $800 mln. Renova Stroygroup will act as an investor. The hotels will be opened in big Russian cities (over 500 thous. people), several hotels will be developed in Moscow.

In late 2008, several companies announced that they were selling off hotel assets in view of the current economic situation. Thus, Intourist Company (AFK Sistema owns 65,1% of the shares) plans to sell part of its hotel properties, 15-20% of Pekin hotel. The company also considers selling hotels under construction / reconstruction in Syria and Italy.

Accommodation costs

At the year’s end, accommodation costs in Moscow hotels remained high. We saw price growth in all the categories caused by high demand, especially in spring-summer, but in late 2008 we observed growth price deceleration under the influence of the financial crisis.




The average accommodation costs depending upon the room category are:

• Hotels of 2* category: 2 350 - 4 600 rubles per night;

• Hotels of 3* category: 4 500 - 9 500 rubles per night;

• Hotels of 4* category: 7 900 - 20 200 rubles per night;

• Hotels of 5* category: 15 350 - 56 500 rubles per night.

Moscow hotels offered serious discounts in late 2008, as well as special terms considering low season and decreasing demand in the aftermath of the crisis. Still, prices for hotel services grew 30%. For comparison: at end of Q1 2007, the average price per room per night increased 18-25%.

Projects announced in 2008

Over 50 projects of hotels and multifunctional complexes with a hotel constituent were announced over 2008. Please, see below the most interesting projects.





Forecast

Many hotel projects were put on hold in view of the current economic situation. Only those hotels the construction of which is close to completion are expected to be opened in 2009.

Therefore, it’s unlikely that supply volume on the hotel market will experience any substantial increase.

In 2009, we expect demand and occupancy rates to fall down. Yet, this decrease will not be as blatant as in European countries due to the exiting deficit of supply in Moscow.

Despite the crisis, we expect further price growth provided supply of hotel rooms remains at a low level and demand is stable. That, in turn, will attract Russian and foreign investors to the hotel real estate market.


 





/ Source: Blackwood



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