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27.04.2007

Commercial real estate market overview. The 1st quarter 2007

Office Market
In the 1st quarter of 2007, the Moscow office market maintained the rapid growth of development observed in the end of the previous year. Growth of investment activity is characterized by the entry into the market of several large development companies and investment funds among which are MCG, the Singaporean Fund Capitaland, Rutley Russia Property Fund, Starr Investments Russia and R.G.I. International Limited. For example, MCG is planning to begin construction of more than 400,000 sq. m. of classes A and B office premises in 2008. The projects will be constructed in cooperation with a large Moscow developer. The total volume of office premises put into operation in the 1st quarter amounted to: class A about 68,600 sq. m., class ? (including ? and ?+) about 49,200 sq. m. The total growth of high quality office space comes nearly to 117,800 sq. m., which is lower than planned as delivery dates of some large projects such as Lotte Plaza, Silver City and Rezidentsiya were postponed to the 2nd3rd quarter of 2007. The proportion of office premises entered into the market came to: class A 60%, class ? 40%. In the 2nd quarter of 2007, approximately 262,000 sq. m. of class A office premises and about 196 000 sq. m. of class B are scheduled for delivery. The total growth of high quality office space for the 1st half of the year will amount to nearly 614,000 sq. m. Stable growth of demand both for lease and sale has been observed against a persisting shortage of classes A and B office premises. The level of vacant space of class A for the 1st quarter decreased by nearly 1.5% (from 3% for the end of 2006 to 1.5% for the beginning of the 2nd quarter).

Vacancy rate:
Class ? - about 1.5%
Class ? - about 45%

Rental rates ($/sq. m./per year)
Format (typical examples of projects of each format are given in brackets)Rental rateOperational costs
Class A Business Centres (Hermitage Plaza, Ducat)7001 00090150
Class A highrise office buildings (higher than 30 stories) such as Moscow City8001 200120150
Mixed use complexes with class A office premises (Lotte Plaza, Metropolis)70090100120
Class A Business Parks (Greenwood, Rezidentsiya)4008006090
Mansions6501 000
Class B+ Business Centres new construction (Novosuschevsky)52070080-120
Class ?+ Business Centres reconstruction (Lefort, Krugozor)45068070-80
Class ?+ Business Parks (Novosspasky Dvor, Western Gate)48065050-70
Class ? Business Centres reconstruction35055050-80


Sale prices ($/sq. m.)
Class A Business Centres - 6,000 8,000
Class ?+ Business Centres - 3,500 7,000
Class ? Business Centres - 2,500 4,000
Mansions - 4,000 10,000

Class ?+ to nearly 3%. Owing to the high speed of the fall in the exchange rate of the US dollar to the ruble, rental rates were more often fixed in conventional units (in euros or dollars with indexation 36% per year).

Trends and market events
In the 1st quarter of 2007, the office real estate market developed within the limits of earlier scheduled trends confirmed by key events and transactions:
The acute shortage of high quality office premises is persisting the level of class A vacant spaces decreased by 1.5%
High interest of companies (mainly raw materials companies) in purchasing office buildings has been observed. Interros acquired an administrative building with a total area of 8,400 sq. m., located on 40, Bolshaya Yakimanka St.
Growth of interest on the part of developers in the marketing of office properties upon construction has been observed. Forum Properties Company plans to construct 4 office buildings with a total area of 20,00030,000 sq. m. with the possibility of their further sale.
High interest of banks in investments into office real estate is persisting. Konversbank plans to commit 10.7 mln. into construction of an office centre on Prospekt Mira)
Amount of halfconstructed and suspended office projects due to lack of land plots for construction is decreasing. An incompleted business centre Zenit located on Prospect Vernadskogo with a total area of 100,000 sq. m. passed into stateowned property. The complex is to be put up for tender.
High speed of redevelopment of industrial sites with further construction of office premises is persisting. Mirax Group Corporation, in cooperation with Altius Development, will construct a multifunctional complex on the territory of "First
Moscow instrumentmaking plant named after Kazakov V.A." On the territory of Korunit Factory, the ZBuild company is planning to construct a business centre with a total area of 30,000 sq. m.
The popularity of multifunctional complexes, which include office premises, is growing. Several large participants in the market announced the construction of large mixed use complexes at the same time such as London & Regional Properties, Dynamo Sports Society and Capital Group
It is being planned to limit the construction of office spaces in the Central Administrative District. The Moscow government is developing legal documents concerning this limitation).

Largest transactions in the 1Q 2007
Among investment transactions it is necessary to mark the acquisition made by Mirax Group 15% shares of OAO "First Moscow instrumentmaking plant named after Kazakov V.A." It is planned to construct a multifunctional complex on the site. In the salepurchase market, an unprecedented transaction was made by Mirax Group to Gaspromstroy (133,000 sq. m. in the Mirax Plaza Business Centre under construction). The project will be put into operation in phases from 2008 to 2012. Among lease transactions of class A office premises, the company STS Media could be noted. It has leased more than 16,000 sq. m. in the Profiko office centre (now under construction) for 10 years. The project will be put into operation in the 1st quarter
of 2008.

Most significant projects put into operation in the 1Q 2007
PropertyAddressClassTotal area, sq. m.
Sheremetyevskoe Podvorye, mixed use complex10, Nikolskaya St.A39,000 (total office
space 17,200)
Aquamarine, phase 226, Ozerkovskaya Emb.A16 800
Schkola Zhurnalistov Office Complex2224, Malaya Dmitrovka St.A13 305
Office Building30, Bolshaya Polyanka St.A9 480
Technopark Sintez2, Ugreshskaya St.B21 500
Office and retail complex2026, Spartakovskaya St.B16 000


Most significant projects scheduled for launch in the 2Q 2007
PropertyAddressClassTotal area, sq. m.
Voentorg mixed use complex10/2, Vozdvizhenka St.A70 700
Monte Falcone21, Semenovsky LaneA34 650
Khimki Business Park, 1 phaseLeningradskoe HighwayA23 500
Office Building6, Nauchniy PassageB42 000
Rostek6, Zavoda Serp I Molot PassageB22 230
Alteza Business CentreAltufyevskoe HighwayB21 000
Lefort, phase 227, Bld.8, Elektrozavodskaya St.B20 300


Most significant projects announced for construction in the 1Q 2007
PropertyLocationDeveloperTotal area, sq. m.
Mixed use complexKievskoe Highway nearby the MKADLondon & Regional500,000 (office space n/a)
Mixed use complexNear Petrovsky ParkDynamo Sports Society450 000 (office space 250,000)
Mixed use complex located on the territory of reorganized Instrumentmaking plant named after Kazakov V.A.At the intersection of the 3rd Transport Ring and Kutuzovsky Ave.Mirax Group in cooperation500 000 (office space n/a)
Highrise office complexAt the intersection of Dmitrovskoe Highway and Dmitrovsky PassageMirland Development92 000


Warehouse market
In the 1st quarter 2007, the warehouse market continued to demonstrate rapid development. In spite of the considerable and still growing interest of international investment funds and large developers in the construction of warehouse projects in regions, the warehouse market of the Moscow region is maintaining high investment attractiveness. This has been characterized by the appearance of new projects being constructed by well known developers as well as by the entry into the market of new participants. Among them, a Turkish developer EGL Holdings, in cooperation with the British Fund Raven Russia, is constructing a class A logistics complex near Sheremetyevo airport. Shares in this complex will be sold to the British fund Raven Russia. The growth of high quality warehouse spaces in the first quarter of 2007 amounted to 30,000 sq.m. The tendency to postpone delivery dates of announced projects is continuing.

Vacancy
Class A - 1%
Class B - approximately 3%

Rental rates ($/sq. m./p. a.) (Excluding VAT, including operational costs)
Class ? - 140160
Class ? - 110130

Operational costs ($/sq. m./p. a.)
Class ? - 2535
Class ? - 1020

The maximum volume of warehouse premises entering the market in the 3rd and 4th quarters is connected with the completion of construction of the first phases of several large projects such as Severnoe Domodedovo, Logopark Domodedovo, Giffels South Gate and MLP Podolsk. In the 1st quarter, an increase in the rates of operational costs of some properties (both class A and B) was noted.

Most significant properties put into operation in the 1Q of 2007
PropertyClassTotal area, sq. m.Warehouse area, sq. m.Location
Tomilino TLCA20 50017 370Novoryazanskoe Highway (6 km. from the MKAD)
Kupavna Logistics CentreA9 5009 000Gorkovskoe Highway (21 km from the MKAD). Staraya Kupavna Town, 3, Dorozhnaya St.


Most significant properties scheduled for delivery in the 2Q of 2007
PropertyClassTotal area, sq. m.Warehouse area, sq. m.Location
Springs Park, phase 2A14 00014 000Egorevskoe Highway, 15 km from the MKAD


New projects announced for construction in the 1Q 2007
PropertyLocationDeveloperTotal area (sq.m)Delivery date
Industrial Park in the SergievoPosadsky DistrictThe Moscow region, the SergievoPosadsky DistrictAn open contest will be held for construction of the project415 000 (warehouse premises)2011
Ramenskoe Logistics TerminalNovoryazanskoe Highway, 31km from the MKAD, Ramenskoe Townn/a140 0001Q 2009
Logistics Complex located nearby Sheremetyevo AirportLeningradskoe Highway, 14 km from the MKADRaven Russia in cooperation with EGL Holdings55 000n/a


Largest lease transactions in the 1Q 2007
PropertyTenantArea (sq.m)
Tomilino TLCTablogix15 500
Pushkino Logistics ParkArt Style MartMoebel Russland12 500
Pushkino Logistics ParkAshan10 000
KrekshinoIntertorg6 500
Pushkino Logistics ParkHilti Distribution6 000
Tomilino TLCInterkhemal4 500


Retail market
In the 1st quarter of 2007, the retail market continued stable development. Nevertheless, the volume of high quality retail spaces, put into operation in the 1st quarter of 2007, was at an extremely low level. Delivery dates of some large retail centres (Schuka retail centre, Vremena Goda RetailEntertainment Centre) were
postponed to the next quarter. The total volume of high quality retail spaces, put into operation in the 1st quarter of 2007, came to about 66,000 sq. m. More than 1 mln. sq. m. of retail premises has been announced for launch till the end of the year.

Main tendencies, which had been observed in 2006, obtained further development
in the 1stquarter of 2007. Among them it is necessary to note:
Shifting of chain retailers to multiformat business. The following
retailers announced their plans concerning the launch of
new formats:
"12 months" convenience stores "12 months";
"Dixi" convenience stores "VMart";
"Viktoriya" hypermarkets (6,000 10,500 sq.m);
"Sedmoy Kontinent" discounters "Svetofor".
Format enlargement. Interest of retailers in construction of hypermarkets is growing. Such companies as Vioktoriya group of companies, X5 Retail Group hypermarkets under the Frank brand), Tekhnosila (the strategy of business development only in the format of hypermarkets)
Growth of interest in the format of convenience stores on the
part of grocery chains ("12 months", "Dixi").

Most significant projects announced for construction in the 1st quarter of 2007
Among announced projects it could be noted a mixed use complex (at the intersection of the MKAD and the Ostashkovskoe Highway, Mytischi Town) with a total area of 125,000 sq. m., the Aerotropolis retail and entertainment centre located nearby Domodedovo Airport, the Galaktika mixed use complex above the crossing of Michurinskiy Ave. and Lobachevskogo St. with a total area of 213,000 sq. m.

Most significant projects put into operation in the 1Q 2007
PropertyLocationTotal area, sq. m.
Mosmart Borovskoe HighwayIntersection of the Borovskoe Highway and the MKAD75 000 (retail space 28,000)
Sheremetyevskiy mixed use complex10, Nikolskaya St.36 000 (retail space 12,960)
Stolitsa6, Kustanayskaya St.9 000
Belaya Dacha, a garden centreThe 14th km. of the MKAD, outer side9 500 (8,000 indoor area, 1,500 outdoor area)


Most significant projects scheduled for launch in the 2Q 2007
PropertyLocationTotal area, sq. m.
SchukaSchukinskaya metro station98 800
Vremena Goda48, Kutuzovsky Ave.64 228


Investment transactions
PropertyBuyerSellerAmount of transaction, $ mln.
50% shares of the Kopeyka retail chainUralsibKopeyka Traiding House520
40% shares of OAO Arbat Prestizh??? Arbat PrestizhTroyka Dialog400
50% of the retail area of MetropolisRodamco EuropeCapital Partners264,2
29 shops with a total area of 68,000 sq.mSedmoy KontinentDekra150


Purchase and Sale Transactions
PropertyBuyerSellerArea (sq. m.)Amount of transaction, $ mln.
Kvadro Retail CentrePodium HoldingPartiya Group11 00060
Svetofor (18 convenience stores)Sedmoy Kontinent??? City Marketn/a10
18 shops of the Billa chainRTMReMa Immobilien52 400100

/ Source: Praedium



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