REAL ESTATE MONITOR Magazine of the Association of European Businesses

3/2014 REAL ESTATE MONITOR Magazine of the Association of European Businesses

OFFICE · SHOPPING CENTRE · RETAIL · WAREHOUSE · HOSPITALITY · RESIDENTIAL

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Contents

Introduction Letter from the Chief Executive Officer 02 Letter from the Chairman of the Real Estate Committee 03 St. Petersburg market overview Office 04 Shopping Centre 07 Retail 10 Warehouse 11 Moscow market overview Investment Market 14 Retail Market 16 “WE HELP INTERNATIONAL INVESTORS IN RUSSIA! Office Market 26 Warehouse and Industrial 34 IN THIS WAY WE ENSURE A HIGHER QUALITY OF LIFE Hospitality – Moscow hotels in Q2 2014 39 FOR OUR CUSTOMERS, COLLEAGUES AND SHAREHOLDERS!” Residential 42 Prime rental market 45 Hot Topic: Key Changes to the RF Land Code 49

Publication name/ Published by/Учредитель: Chief Editor/ Released date/Дата выхода Publisher’s address/ Наименование издания: Non-profit making part- Главный редактор: в свет: 15 september Адрес издателя, редакции: AEB Real Estate Moni- nership “Association of M.E. Konischev/Конищев М.Е. 2014/15 сентября 2014 16, bld. 3, Krasnoproletars- tor (“АССОЦИАЦИЯ European Businesses”/ Не- Publication volume and Circulation/Тираж: kaya str., 127473, Moscow, ЕВРОПЕЙСКОГО БИЗНЕСА: коммерческое партнерство number/Номер выпуска: 1000 сopies / 1000 экз. Russia/ Россия, 127473, Обозрение рынка “АССОЦИАЦИЯ ЕВРОПЕЙ- 03, 2014 Cost/Цена: Distributed free г. Москва, ул. Краснопроле- недвижимости”) СКОГО БИЗНЕСА” Cover/Обложка: of charge/Бесплатно тарская, д. 16, стр. 3 shutterstock / RomanYa

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AEB Real Estate Monitor | 3/2014 1 AEB Real Estate Monitor | 3/2014 Introduction

Dear Reader,

Welcome to the 3rd edition of the AEB Real Estate Monitor in 2014!

The second part of 2014 looks as if it might turn out worse than the first one. The Ukraine crisis has not been solved yet and new sanctions have been introduced. All this has had a major impact on the numerous companies working in Russia, Frank Schauff and those in the real estate world have not escaped. This, plus inflation and the Chief Executive Officer, perspective of new taxes, has also had its affects. The Association of European Businesses Experts say that we will not see a significant improvement soon. Real prices are unlikely to move much, and any increases will be the result of inflation. In fact, we see prices decreasing slowly, suggesting a future period of stagnation.

I would like to take this opportunity to thank those of our Real Estate Committee members who have been active in contributing to this publication and to the other activities of the Committee.

It is my hope that you will find this publication a useful resource, and that it will help you grow your business. I look forward to seeing many of you at our upcoming Real Estate Committee events.

Sincerely yours,

Frank Schauff, Association of European Businesses

2 AEB Real Estate Monitor | 3/2014 Introduction AEB Real Estate Monitor | 3/2014

Dear Readers,

We would like to present you the 3rd issue of the AEB Real Estate Monitor for 2014. So far we have been witnessing mixed activity in the real estate market. Though engulfed by the serious turmoil caused by political and economic sanctions against Russia, the market is still showing some positive signs and an eagerness to develop further. Victor Verma On the supply side for offices, retail and industrial space in the Moscow area, 2014 will General Manager, match or excel pre-crisis levels of completion. On the demand side, there is a clear OOO Caverion Elmek; indication of around a 10% reduction in the volume of deals signed. Chairman of the AEB Real Estate Committee Limitations on access to the capital markets of the EU and North America will cause an increase in domestic interest rates on loans and for refinancing. Higher inflation and the introduction of a sales tax of up to 3% may impact on the financial models of retail and logistics operators. Reduced operational efficiency may force investors to rethink some of their investment plans.

Rental rates, expressed in hard currencies, have started to drop. So far, this process hasn’t matched the relative devaluation of the rouble in 2014. The market for hospitality looked rather robust in the first two quarters of the year, while requests for rental of high-class residential properties in Moscow continued to decelerate, prolonging a trend which started in 2012.

For second half of the year, some fundamentals look solid, such as consumer confidence. Others have significantly deteriorated, like the markedly increased caution on the part of foreign investors when considering funding new deals.

Real Estate Monitor analyses the markets in Moscow and Saint Petersburg. This issue has an interesting report about the St. Petersburg market, which has signs of refocusing on territorial development.

I would like to take this opportunity to thank all Real Estate Committee members for their contribution and active role.

Victor Verma

AEB Real Estate Monitor | 3/2014 3 AEB Real Estate Monitor | 3/2014 St. Petersburg market overview | Office market

St. Petersburg market overview

Office

Completion levels in Q2 were amongst the highest quar- area, Class A, mainly occupied by Lukoil), Electro BC terly result for the last five years. In the second quarter (15,700 sq m, Class А) and Eightedges BC (11,900 sq m, of 2014 72,960 sq m in six office buildings were com- Class A). (1,2,3 ) pleted. Four completed business centres were Class A buildings, their total leasable area is 56,200 sq m. Two With the 72,960 sq m completed in Q2, modern of- buildings were Class B, their total area is 16,760 sq m. fice stock (Classes A and B) in St. Petersburg increased The largest projects are Lukoil BC (18,600 sq m leasable by 91,960 sq m in H1 2014, which reflects a 12.6% YoY

1 3 OFFICE STOCK DYNAMICS

12 Month Main Indicators, Q2 2014 ‘000 sq m Class A Class B Outlook 2.800 Completions 72.960 sq m 2.400‘000 sq m Class A Class B Vacancy rate 12,2% 2.800 2.000 Net absorption 32.090 sq m 2.400 1.600 Prime rent USD 450 - 550 sq m/year 2.000 1.200 Source: AEB North-Western Regional Committee, Construction & Real Estate 1.600 800 subcommittee, JLL 1.200 400 2 MAIN NEW OFFICE BUILDINGS 800 0 400 2007 2008 2009 2010 2011 2012 2013 2014F Name Class GLA, sq m 0 Source: AEB North-Western Regional Committee, Construction & Real Estate 2007 2008 2009 2010 2011 2012 2013 2014F Completed in H1 2014 subcommittee, JLL Lukoil A 18,600

Electro А 15,700 ‘000 sq m Class A Class B Eightedges А 11,900 4 OFFICE COMPLETION DYNAMICS 450 Pulkovo Airport А 10,600 ‘000400 sq m Class A Class B Paradny Kvartal А 10,000 350450 300400 Pulkovo Star В+ 11,160 250350 Announced for H2 2014 200300 Trinity Place А 27,300 150250 SetlCenter В 21,300 100200 15050 Italyanskaya, 17 В+ 7,000 1000 2007 2008 2009 2010 2011 2012 2013 2014F Stachek, 59 В 9,500 50 Viktoria Plaza В 22,000 0 2007 2008 2009 2010 2011 2012 2013 2014F ECO Status A 4,000

Source: AEB North-Western Regional Committee, Construction & Real Estate Source: AEB North-Western Regional Committee, Construction & Real Estate subcommittee, JLL subcommittee, JLL Pushkinskiy AEB Real Estate Monitor | 3/2014 4 Kirovskiy Pushkinskiy Frunzenskiy Kirovskiy Kalininskiy Frunzenskiy Nevskiy Kalininskiy Vyborgskiy Nevskiy Krasnogvardeiskiy Vyborgskiy Admiralteiskiy Krasnogvardeiskiy Vasileostrovskiy Admiralteiskiy Primorskiy Vasileostrovskiy Petrogradskiy Primorskiy Moskovskiy Petrogradskiy Central Moskovskiy 0 200 400 600 Central Existing Announced to 2014 ‘000 sq m 0 200 400 600

Existing Announced to 2014 ‘000 sq m St. Petersburg market overview| Office market AEB Real Estate Monitor | 3/2014

‘000 sq m Class A Class B 2.800

2.400

2.000

1.600

1.200 growth. This brought the total modern office stock to 2,514 the same as last year: around 32% of new volume in H2 m sq m, which800 corresponds to 488 sq m per 1,000 inhabit- 2014 will be delivered in Moskovskiy District. Its share in ants. (4 )400 2015 is expected to be equal to 40%. By the end of 2015

0 we expect Moskovskiy District to match Central District in Moskovskiy District2007 secured 2008 the 2009 second 2010 place 2011 in 2012terms 2013terms 2014F of existing quality stock and by the end of 2016 of quantity of office space. The leader is Central District Moskovskiy District, may well became the leader among (19.6% of total office spaces), share of Moskovskiy Dis- administrative districts of St. Petersburg. (5 ) trict reached 16.0%. Third place is held by Petrogradskiy District (14.4%). Only in Central District was the share of Interest in green building certification is rising due to high va- Class A office buildings more than 50%. In Moskovskiy, cancy levels. The first two speculative business centres with ‘000 sq m Class A Class B Petrogradskiy,450 Krasnogvardeiskiy and Kalininskiy Districts LEED Gold certificate were Renaissance Pravda and Technop- shares of 400Class A amounted to 30-50%. olis Pulkovo, Phase II . Eightedges BC and Renaissance Plaza 350 BC are going to get the certificate in the mid-term. Total completion300 levels in 2014 will be a bit lower than in 2013. In 2014250 220-230,000 sq m may be delivered to the The transfer of Gazprom and its affiliate companies to market, if 200all announced plans are realized. Share of Class St. Petersburg is the main reason for the leading role of A will be around150 50%. Mining and Exploration in leasing deals structure. In Q2 100 2014 it was announced that Gazprom leased Electro BC Moskovskiy50 District will hold the leading role in 2014-2015 (15,700 sq m GLA). This is the second largest lease deals in terms of 0new office space delivered to the market. In on record (the largest deal was the leasing by Gazprom of 2014-2015 the trend2007 of 2008 geographical 2009 2010 distribution 2011 2012will be 2013 the 2014F whole of Zeppelin BC). (6, 7 )

5 SUPPLY STRUCTURE BY DISTRICTS 6 MAIN DEALS IN H1 2014

Pushkinskiy Office Centre Tenant Area, sq m Kirovskiy

Frunzenskiy Zeppelin (Class А) Gazprom 16,500

Kalininskiy Electro (А) Gazprom 15,700

Nevskiy Senator Prof. Popova (А) FosAgro 3,500

Vyborgskiy Zolotaya Dolina (В) M-Style 3,000

Krasnogvardeiskiy Severnaya Stolitsa (А) Deutsche Bank 2,340 Admiralteiskiy Source: AEB North-Western Regional Committee, Construction & Real Estate Vasileostrovskiy subcommittee, JLL

Primorskiy

Petrogradskiy

Moskovskiy

Central

0 200 400 600

Existing Announced to 2014 ‘000 sq m

Source: AEB North-Western Regional Committee, Construction & Real Estate subcommittee, JLL

AEB Real Estate Monitor | 3/2014 5 AEB Real Estate Monitor | 3/2014 St. Petersburg market overview | Office market

Mining/Exploration – 41% Information (IT) – 14% Business services – 10% Manufacturing – 8% Banking & Finance – 7% Net absorption levels in Q2 2014 were the same as in The average vacancy rate increased in Q2 2014 from Construction – 7% Q2 2013. In April–June 2014, the net absorption volume 10.9% to 12.2%. Vacancy rates have increasedWholesale in Class & ARetail – 5% reached 32,090 sq m, which is comparable to Q2 2013 from 17.6% at the end of Q1 2014 to 18.1% atTelecommunications the end of – 3% levels. These solid results came from the leasing of Electro Q2 2014, in Class B even more - from 8.0% to Insurance9.4%. The & Pension Funds – 2% BC by Gazprom and the occupation of Lukoil BC. However, increase was due to high level of completions and low level Transport, Storage – 1% outside of these, the net absorption level in Class A was ac- of net absorption in existing business centres. Other(9 )– 2% tually quite limited and the net absorption volume in Class Vacancy rate has increased in the northern districts and B in Q2 2014 was negative. In Q2 2014, Petrogradskiy Dis- in those districts where new business centres have been trict of St. Petersburg showed the highest results in terms commissioned. No significant changes in vacancy rates of net absorption (24,080 sq m). We observed negative net geographic distribution happened in Q2 2014. Only in four absorption volumes in seven districts (8 ) districts vacancy does exceed 15%. (10 )

‘000 sq m Class A Class B

7 OFFICE DEAL BREAKDOWN BY BUSINESS SEC- 1609 VACANCY RATE: DISTRIBUTION BY DISTRICT TOR, H1 2014 Mining/Exploration120 – 41% 10 – Mining/ExplorationInformation – 41% (IT) – 14% <5% 5 – 10% >15% Information (IT) – 14% 15% Business services –80 10% Business services – 10% Manufacturing – 8% Kalininskiy Admiralteyskiy Krasnogvardeiskiy ManufacturingBanking – 8% & Finance – 7% 40 Banking & ConstructionFinance – 7% – 7% Kirovskiy Primorskiy Moskovskiy ConstructionWholesale – 7% & Retail – 5% Vasileostrovskiy Petrogradskiy Central Wholesale Telecommunications& Retail – 5% 0– 3% Telecommunications – 3% 2007 2008 2009 2010 2011 2012 2013 2014F Insurance & Nevskiy Vyborgskiy Insurance &Pension Funds – 2% Pension Funds – 2% Transport, Storage – 1% Frunzenskiy Transport, OtherStorage – 2%– 1% Other – 2% Source: AEB North-Western Regional Committee, Construction & Real Estate subcommittee, JLL

Source: AEB North-Western Regional Committee, Construction & Real Estate subcommittee, JLL 10 OFFICE MARKET BALANCE

‘000 sq m 8 OFFICE COMPLETIONS AND NET ABSORPTION 2000 40%

‘000 sq m Class A Class B ‘000 sq m Class A Class B 1600 30% 160 160 1200 20% 120 120 800

80 10% 80 400

40 40 0 0% 2007 2008 2009 2010 2011 2012 2013 2014F 0 0 2007 2008 2009 2010 2011 2012 2013 2014F Base rent, Class A Base rent, Class B 2007 2008 2009 2010 2011 2012 2013 2014F Vacancy rate, Class A Vacancy rate, Class B

Source: AEB North-Western Regional Committee, Construction & Real Estate Source: AEB North-Western Regional Committee, Construction & Real Estate subcommittee, JLL subcommittee, JLL

6 AEB Real Estate Monitor | 3/2014

‘000 sq m‘000 sq m

2000 2000 40% 40%

1600 1600 30% 30%

1200 1200 20% 20% 800 800

10% 10% 400 400

0 0 0% 0% 2007 20082007 20092008 20102009 20112010 20122011 20132012 2014F2013 2014F Base rent,Base Class rent, A Class A Base rent, BaseClass rent,B Class B Vacancy rate,Vacancy Class rate, A Class A Vacancy rate,Vacancy Class rate,B Class B St. Petersburg market overview | Shopping Centre AEB Real Estate Monitor | 3/2014

In Q2 2014 rental rents slightly increased. The rent growth We don’t expect a change in rental rates. Despite the high amounted to 0.6% in Class A and 0.8% in Class B office quality of new business centres, developers’ rental rate ex- buildings. Currently, average rents are RUB 1,630/sq m/ pectations are often overestimated at the start of market- year for Class A and RUB 1,190/sq m/year for Class B office ing. However, largely due to increased competition, and buildings (including VAT and OpEx). pressure on rates in existing buildings there is a natural gap on rents.

Shopping Centre

The size of the retail market remained unchanged in H1 the district’s position in terms of shopping centre stock per 2014 — 2m sq m of quality retail spaces. There were no ‘000capita, sq m which is now at quite a low level compared to the shopping centres commissioned in first half of 2014. (11 ) other districts. The second largest project is Monpansye14% 2000SEC, located in Primorskiy District. Total leasable area of

This was the first time since 2011 we saw no completions these two centres forms 76% of new supply that will be10% 1600 in the first six months of the year. The volume of retail delivered to the market in 2014. premises scheduled for 2014 is the lowest since the crisis 1200 6% (118,990 sq m). In April–June 2014 the vacancy rate in St. Petersburg 800 SECs decreased to 5.5%. This vacancy rate reduction was Four shopping centres are scheduled for 2014. The major- 400partly due to the lack of completions in H1 2014. It should2% ity of new retail space will be located in Kalininskiy District, be noted that most quality shopping centres are almost 0 0% where regional Europolis SEC will be opened in the sec- fully2004 occupied 2005 2006 and 2007 there 2008 is 2009 a waiting2010 2011 list 2012 in the 2013 most 2014 2015Fpopu - ond half of 2014. This opening will significantly improve lar projects. (12 ) Stock by the end of previous year Completions Vacancy rate

12 SHOPPING CENTRE QUARTERLY COMPLETION DYNAMICS 11 SHOPPING CENTRE STOCK AND VACANCY RATE DYNAMICS ‘000 sq m Q1 Q2 Q3 Q4 ‘000 sq m 14% 300

2000 250 10% 1600 200 1200 6% 150 800 100 400 2%

0 0% 50 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F Stock by the end of previous year 0 Completions 2008 2009 2010 2011 2012 2013 2014 2015F Vacancy rate

Source: AEB North-Western Regional Committee, Construction & Real Estate Source: AEB North-Western Regional Committee, Construction & Real Estate subcommittee, JLL subcommittee, JLL

AEB Real Estate Monitor | 3/2014 ‘000 sq m Q1 Q2 Q3 Q4 7 Petrogradskiy 300 Vasileostrovskiy

250 Krasnosel’skiy

Kirovskiy 200 Kalininskiy 150 Krasnogvardeiskiy

100 Admiralteiskiy Vyborgskiy 50 Central

0 Frunzenskiy 2008 2009 2010 2011 2012 2013 2014 2015F Nevskiy

Moskovskiy

Primorskiy

0 100 200 300 400 500

Existing stock Future stock (2015) ‘000 sq m

Petrogradskiy

Vasileostrovskiy

Krasnosel’skiy

Kirovskiy

Kalininskiy

Krasnogvardeiskiy

Admiralteiskiy

Vyborgskiy

Central

Frunzenskiy

Nevskiy

Moskovskiy

Primorskiy

0 100 200 300 400 500

Existing stock Future stock (2015) ‘000 sq m ‘000 sq m 14%

2000

10% AEB1600 Real Estate Monitor | 3/2014 St. Petersburg market overview | Shopping Centre

1200 6% 800

400 2%

The leaders0 in shopping centre stock per capita are Mosko- the0% brand name Ulybka Bolshaya, which includes not only 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F vskiy, Primorskiy and Central districts. Primorskiy district is household goods but also foodstuffs. The Perm supermar- Stock by the end of previous year also the leader in terms of Completionstotal stock (more than 20% of ket chain SemYa is also going to appear in St. Petersburg. all shopping centre stock areVacancy located rate there). Quality shopping centres are trying to attract new fashion- Along with this the majority of the future retail spaces that retailers. The first Violeta by Mango store will be opened are scheduled for 2014 will be located in Kalininskiy Dis- in September in Pearl Plaza SEC, moreover the company trict, where regional Europolis SEC will be opened at the plans to develop in Russia one more format of it’s shops

second ‘000half sqof m 2014. (13,14Q1 ) Q2 Q3 Q4 — Mango Megastore. German shoe store chain Deichmann entered the St. Petersburg market and opened stores in 300 International brands are entering the children’s goods and several SECs across the city.

entertainment250 segment. In the second half of 2014 the An- gry Birds Activity Park will be opened in Europolis SEC. In Retailers oin the café and restaurants segment continue July the 200first store of the British chain Hamleys will appear in their expansion. Among the new openings are Moscow chain St. Petersburg in Nevskiy Centre SC. Italian brand Prenatal Chayhona №1 in Galeria SEC, Meat Line restaurant in Ligov 150 Milano has recently started its work in Grand Kanyon SEC. SC, the first bar of Karlovy Pivovary chain in Voyazh SEC.

100 Food retailers are interested in the further development. In H1 2014 prime base rental rates in quality shopping Magnit supermarket50 chain is actively increasing its pres- centres remained stable at USD 2,000/sq m/year (rents ence in St. Petersburg, the sixth store of Azbuka Vkusa exclude VAT and OpEx). Along with this, during the quar- chain has0 recently been opened in Q2 2014, owners of ter there were small rental rate changes for some tenant 2008 2009 2010 2011 2012 2013 2014 2015F Ulybka Radugi chain have started a new format under profiles. 15( )

13 QUALITY SHOPPING CENTRES: DISTRIBUTION 14 FUTURE SEC, 2014-2015 BY DISTRICT

Name GLA, sq m Developer Petrogradskiy

Vasileostrovskiy 2014

Krasnosel’skiy Evropolis 60,500 Fort Group

Kirovskiy Monpansye 30,500 Stroitelnoye Upravleniye-1 Kalininskiy Torgovy Dvor 16,750 Torgovy Dvor Krasnogvardeiskiy

Admiralteiskiy Admiral 11,240 Sovetnik

Vyborgskiy 2015

Central Piter-Raduga, 27,000 Ralmir Holding Phase II B. V. Frunzenskiy Outlet Village 21,800 Hines Nevskiy Pulkovo Moskovskiy

Primorskiy Source: AEB North-Western Regional Committee, Construction & Real Estate subcommittee, JLL

0 100 200 300 400 500

Existing stock Future stock (2015) ‘000 sq m

Source: AEB North-Western Regional Committee, Construction & Real Estate subcommittee, JLL

8 AEB Real Estate Monitor | 3/2014 St. Petersburg market overview | Shopping Centre AEB Real Estate Monitor | 3/2014

The preference for fixing the currency corridor in the retail ity and the uncertain political and economic environment. market has ceased as the rouble has strengthened. Due to Retailers don’t want to take on more risk by investing in a rouble weakness in Q1 2014, retailers began negotiating new openings in SEC with uncertain concept, as well as in with developers in order to fix the upper and lower borders SEC with a distant date of completion. In anticipation of of the currency corridor. In Q2 this has stopped due to the stabilization and clear understanding of prospects. Instead stabilization of rouble-dollar/euro rates. retailers prefer to postpone decisions about further development (new openings, entering new markets). In April–June 2014 the vacancy rate in St. Petersburg SECs decreased to 5.5%. This vacancy rate reduction was partly 15 BASE RENT IN SHOPPING CENTRES due to the lack of completions in H1 2014. It should be noted that the most quality shopping centres are almost Rental rate Profile Area (sq m) fully occupied, there is a waiting list in the most popular (USD/sq m/year) projects. Hypermarket >5,000 130-170 The current macroeconomic environment is increasing Supermarket 1,000-2,500 350-500 competition amongst shopping centres for customers and DIY 8,000-15,000 110-160 retailers. Shopping centre stock per capita in St. Peters- Fitness clubs 2,500-5,000 120-180 burg will reach 424 sq m per 1,000 inhabitants at the end of 2014 and 434 sq m in 2015 (if all announced projects Household goods <2,000 140-180 are completed). Considering the situation, quality concepts White & Brown 2,000-3,000 200-350 and unique components (this may include a specific ten- Sport goods >4,000 130-150 ant or be reflected by the positioning of the project) are 800-1,500 180-220 becoming a necessary condition for a successful SEC in the St. Petersburg market. Shopping centres that do not sat- Cinema >3,000 130-180 isfy these conditions will have difficulties in attracting both Entertainment 2,000-3,500 130-170 customers and quality tenants. 1,000-2,000 140-200

SEC differentiation is continuing. In the context of eco- Perfume and 300-500 800-1,500 cosmetics nomic and political instability, retailers want to optimize 50-100 1,200-2,000 their stores by cutting unprofitable ones. Therefore profit- Goods for >1,000 280-400 able and successful SECs are becoming increasingly popu- children <150 700-1,200 lar amongst retailers due to their guaranteed income and large stable footfall. At the same time, poorly managed Food courts 40-150 1,100-2,000 SECs are suffering from an outflow of quality tenants. In Restaurants 250-600 450-700 the future, developers of less successful complexes will Shoes <100 1,300-2,000 have to reconsider their concept: from changing the ten- 100-250 1,000-1,600 ant mix, refocusing on another target audience to the SECs closing and changes of internal planning, facades and so >250 500-700 on. Another example of this was announced in Q2 2014 Fashion and 1,500-2,500 220-350 by O’KEY group of companies: Podsolnukh SC will be con- apparel 600-1,200 270-400 versed to an outlet centre, the reconception will involve a complete change in the tenant mix. The name of the cen- 400-600 400-600 tre will be changed to Villa Outlet Center. 200-300 600-900

100-200 900-1,500 Retailers are cautious and are postponing their decisions. <100 1,000-2,000 Retailers’ cautious attitude is largely due to rouble volatil- Source: AEB North-Western Regional Committee, Construction & Real Estate subcommittee, JLL

AEB Real Estate Monitor | 3/2014 9 AEB Real Estate Monitor | 3/2014 St. Petersburg market overview | Retail

Street retail

Street retail premises which are located on the main In Q2 2014 the upper border of the prime rental rates de- retail corridors remain in demand. The most popu- creased to USD 3,500/sq m/year (without OpEx and VAT). lar corridors in the central part of St. Petersburg are The reduction was mainly due to high expectations in Q1 Nevskiy Ave., Sadovaya St., Bolshoy Ave. P.S., Sredniy 2014, that were corrected in Q2 2014 by negative macro- Ave. V.O. The most popular decentralized streets are economic environment and high volatility of rouble. (16 ) Engelsa Ave., Prosvescheniya Ave., Leninskiy Ave. and Moskovskiy Ave. Food retailers and also cafés and restaurants showed the highest activity in the St. Petersburg street retail market through H1 2014. In January-June 2014 the share of deals 16 PRIME STREET RETAIL RENT DYNAMICS in these two segments accounted to 90% of total deal volume. Along with this food retail segment held the leading USD / sq m / year position in terms of demand in both Q1 and Q2 2014 and

4000 for first half of 2014 — 68%. 3500 Nevskiy Ave. attracts international premium brands. At the be- 3000 ginning of the avenue Nash Khleb Bakery Group has opened 2500 the luxury bakery Le Pain Quotidien, which occupies 480 sq 2000 m. Luxury British lingerie store Agent Provocateur are open- 1500 ing Staronevskiy Ave. The store will be opened on Nevskiy 1000 Ave., 117 this summer and will occupy an area of 110 sq m. 500 The demand on privatization of leased premises located on the 2007 2008 2009 2010 2011 2012 2013 H1 2014 main street retail corridors is rising. Because of the lifting of the

Source: AEB North-Western Regional Committee, ban on privatization on the main St. Petersburg highways at Construction & Real Estate subcommittee, JLL the end of 2013, the number of companies wishing to acquire

‘000 17sq m HIGH STREETClass ARETAILClass RENTS, B Q2 2014

2400 Prime locations Secondary locations 2000 Nevskiy Avenue 2,200–3,500 Liteiny Avenue 600–1,050 1600 Bolshoy Avenue P.S. 750–1,300 Veteranov Avenue 500–1,200 1200 Sredniy Avenue V.O. 900–1,600 Vosstaniya Street 600–1,250 800 6–7th Line V.O. 870–1,600 Ligovskiy Avenue 500–1,400 400 Leninskiy Avenue 400–1,400 Komendantskiy Avenue 600–1,300 0 Vladimirskiy2004 2005 2006 Avenue 2007 2008 2009850–1,300 2010 2011 2012 2013 2014F Kamennoostrovskiy Avenue 600–1,300

Moskovskiy Avenue 600–1,900 Chernyshevskogo Avenue 750–1,500

Engelsa Avenue 600–1,400 Grazhdanskiy Avenue 600–1,050

Prosvescheniya Avenue 750–1,350 Novocherkasskiy Avenue 500–700

Sadovaya Street 500–1,750 Bolshevikov Avenue 600–1,200

B. Konyushennaya Street 1,300–2,000 Industrialny Avenue 600–950

Source: AEB North-Western Regional Committee, Construction & Real Estate subcommittee, JLL ‘000 sq m Existing stock Vacancy rate AEB Real Estate Monitor | 3/2014 10 25% 2400 20% 2000

1600 15%

1200 10% 800 5% 400

0 0% 2007 2008 2009 2010 2011 2012 2013 H1 2014 St. Petersburg market overview | Warehouse AEB Real Estate Monitor | 3/2014

the leased premises increased. However the process is held ing. Currently rents in some residential districts are equal back by administrative barriers and, in many cases, by the price to rents in central corridors. determined for premises which is declared for a purchase. Creation of paid parking zones on the central St. Peters- The largest increase in street retail supply which meets burg streets will entail changes in street retail tenants the tenants high requirements is observed in residential structure in these zones. If all announced plans are real- districts. Due to a limited volume of new supply in cen- ized we can expect redistribution of pedestrian flows in tral districts, and because of administrative restrictions and these areas, which will entail consumer profile chang- the absence of new construction, residential districts main- ing, retailer rotation strengthening and tenants struc- tained their growth in new supply. ture changing. Besides paid parking zones, the creation of pedestrian zones also can influence tenant structure. Store type is largely determined by district. As expected the Considering recent Moscow experience, restaurants and share of café and restaurants is higher in the central part of mid-level fashion retailers show a high interest in pedes- the city, the same for clothing, shoe and accessories retail- trian zones. ers. Services and household goods tenants predominate in residential districts. We expect specialization of retail cor- Retailers prefer to focus on existing stores rather than driv- ridors to increase in the mid-term. ing growth through expansion. Considering current macro- USD / sq m / year economic environment, efficiency of each particular store 4000 Retailers are maintaining their interest in existing and up- becomes more and more important for retailers. Compa- coming residential districts of St. Petersburg. Stable footfall nies3500 try to optimize their chains in order to rise a success and high spending levels in new residential areas attract of3000 every shop. The opening of a new store in the chain is retailers, especially FMCG companies (such as food retail- possible2500 only after careful selection of premises. (17 ) ers), the health and beauty segment and, of course, cater- 2000 1500 1000 500

Warehouse 2007 2008 2009 2010 2011 2012 2013 H1 2014

The total volume of the warehouse market exceeded 2m sq 18 WAREHOUSE QUALITY STOCK SUPPLY m by the end of H1 2014. Five warehouse complexes, with DYNAMICS total leasable area of 27,500 sq m, were delivered to the ‘000 sq m Class A Class B market in Q2 2014. There were no completions in Q1 2014, so the total of completions in H1 2014 was equal to 27,500 2400 sq m. 2000

350,000 sq m of quality warehouse space is planned to be 1600 delivered to the market by the end of 2014 with the majority 1200 being Class A. If all announced projects are completed, this 800 volume will be the highest for the last five years. It should be noted that the warehouse complex STC, Phase I (54,000 400

GLA) of whichcurrently operates but is not commissioned, is 0 included in pipeline. (18 ) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F

Source: AEB North-Western Regional Committee, Construction & Real Estate subcommittee, JLL

AEB Real Estate Monitor | 3/2014 11

‘000 sq m Existing stock Vacancy rate 25% 2400 20% 2000

1600 15%

1200 10% 800 5% 400

0 0% 2007 2008 2009 2010 2011 2012 2013 H1 2014 AEB Real Estate Monitor | 3/2014 St. Petersburg market overview | Warehouse

USD / sq m / year

4000

3500

3000

2500 In Q2 2014 we observed the prerequisites for an in- In H1 2014, as in 2013, retail companies held the lead- 2000crease in the share of owner-occupied warehouse coming position in terms of demand. Their share of the total 1500plexes. Several large retail companies announced plans leased volume was equal to 69% in H1 2014 (71% in 1000for the construction of owner-occupied warehouse com- Q2 2014). Manufacturing companies took second place 500plexes. Among them are: Х5 Retail Group (two ware- — 24% in H1 2014, but their share reduced from 39% house complexes till the end of 2017), and Ulmart (it in Q1 2014 to 19% in Q2 2014. Logistics companies is planned2007 2008to build 2009 four 2010 logistic 2011 centres). 2012 2013 Russian H1 2014 Post showed worse results — 7% in January-June 2014 (all also plans to create its own distributional centre. If all deals were closed in Q2 2014). There were no deals in announced projects are completed, the share of own- other sectors in H1 2014. (21 ) er-occupied warehouses will be almost a quarter of all warehouse market supply in St. Petersburg by the end of In Q2 2014 the vacancy rate remained the same as in ‘000 sq m Class A Class B 2015 (21% according to the results of Q2 2014). Q1 2014 and it was 1.6%. Currently, the total volume of 2400 available space in quality warehouse complexes is still

2000In Q2 2014 net absorption reached 28,000 sq m. This is low (31,500 sq m). Despite a significant increase of new the highest volume QoQ since 2011. Net absorption over speculative warehouse supply by the end of 2014, the 1600 H1 2014 was the worst YoY in two years and equal to vacancy rate will not grow greatly. This is due to the 120029,560 sq m. (19 ) major part of the leasable area in the new warehouse

800 complexes being occupied by the time of commission- The total take-up in Q2 2014 reached 66,750 sq m. This ing. We expect vacancy rates will increase to 3.5% by 400 is 55% more than in Q2 2013 (43,140 sq m in Q2 2013). the end of 2014. (020 ) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F

19 SUPPLY AND VACANCY RATE DYNAMICS 20 MAJOR DEALS, H1 2014

Warehouse Company Area complex ‘000 sq m Existing stock Vacancy rate 25% Lease 2400 Torgovy Dom 11,500 Magnitogorskaya 20% 2000 Edelveys St., 32

1600 15% Torgovy Dom 6,367 AKM-Logistics Centr Obuv 1200 10% Kintetsu 3,200 Orion 800 World Express 5% 400 Rittal 2,000 Logopark Shushary 0 0% 2007 2008 2009 2010 2011 2012 2013 H1 2014 Source: AEB North-Western Regional Committee, Construction & Real Estate subcommittee, JLL

Source: AEB North-Western Regional Committee, Construction & Real Estate subcommittee, JLL

12 AEB Real Estate Monitor | 3/2014 St. Petersburg market overview | Warehouse AEB Real Estate Monitor | 3/2014

In Q2 2014, asking rental rates decreased. Prime base We expect a slight rental rate decrease. The uncertain rental rates in quality warehouse complexes in St. Pe- macroeconomic and political environment combined tersburg are equal to USD 125―130/sq m/year (without with a high volume of future supply will result in further OpEx and VAT). As a rule, local developers denominate rental rate decreases in quality warehouse complexes. rents in roubles. Professional Russian and international Retail – 69% companies are paid in USD or EUR. Typical lease length Manufacturing – 24% for quality warehouse projects is 5-7 years. Short-term Logistic – 7% leases (11 months) are available for Class B complexes. (22 )

21 WAREHOUSE DEMAND BREAKDOWN 22 PRIME RENT DYNAMICS IN ST. PETERSBURG BY COMPANY TYPE, H1 2014

USD / sq m / year 160

120

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 H1 2014

Retail – 69% Source: AEB North-Western Regional Committee, Manufacturing – 24% Construction & Real Estate subcommittee, JLL Logistic – 7%

Source: AEB North-Western Regional Committee, Construction & Real Estate subcommittee, JLL

USD / sq m / year 160

120

0 AEB Real Estate2003 Monitor 2004 2005| 3/2014 2006 2007 2008 2009 2010 2011 2012 2013 H1 2014 13 AEB Real Estate Monitor | 3/2014 Moscow market overview | Investment Market

Moscow market overview

Investment market

The first half of this year has proven truly challenging for March, from 32.8/USD at the start of the year. However, Russian investors. The regime change in Ukraine, the an- as the situation in Ukraine stabilized somewhat after the nexation of Crimea and subsequently the sanctions that presidential elections the ruble has recovered much of were imposed by the US and the EU on Russia have com- its losses to trade at 33.7/USD by end-June. The recent bined to put significant pressure on an economy that was heightening of political risk after Flight MH17 may well already experiencing a cyclical slowdown. Consensus GDP put the ruble again under pressure through to year end. forecasts have been significantly revised down with little growth now expected for 2014. According to Oxford Eco- Indeed, it is political risk and investor sentiment to- nomics, GDP growth for this year will be 0.2% having been wards Russia that will largely determine the commercial revised down from 0.4% previously. In July 2013 the fore- real estate market through to the end of the year. This casted growth rate for 2014 was originally set at 3.1%. sentiment is not only reflected in the marked decline Oxford Economics anticipate that economy will recover in investment deals $1.4bn in 1H 2014 (-59% YoY) but somewhat in 2015 with 1.7% growth expected. (23 ) also in the relatively low proportion of foreign transactions. This dynamic can been seen in the overall level of As a reflection of the concerns for the economy, capital foreign investment into Russia. The Central Bank’s first flight from Russia accelerated aggressively in the first half estimates of FDI are little over USD17bn, compared half of the year with USD75bn leaving the country, com- with USD42bn for the first half of 2013. To put that in pared to USD62.7bn that left the country for the whole context, that’s roughly half of Gazprom’s 2014 CapEx of 2013. The ruble weakened to 36.9/USD by early forecast.

23 REAL GDP GROWTH 24 RUSSIAN SOVEREIGN 30-YEAR USD DEBT

9% 10% 9% 6% 8%

3% 7% 0,2 6% 0% 5% 4% -3% 3%

-6% 2%

-9%

Source: Oxford Economics (chart is designed by JLL) Source: VTB Capital (chart is designed by JLL)

14 AEB Real Estate Monitor | 3/2014 Moscow market overview | Investment Market AEB Real Estate Monitor | 3/2014

After some dislocation as the events in Ukraine played pipeline of potential deals we felt confident that there would out, debt markets did reopen over the summer with be upside risks to this number, assuming the macro envi- both Gazprombank and Sberbank’s recent debt place- ronment stabilised, which all evidence suggested would ments oversubscribed. The Finance Ministry, which can- happen. The downing of Flight MH17 forces us to revise celled its government debt auctions through February, this view. We still think USD3.4bn is achievable, however, March and April successfully came back to the market by we acknowledge that with the significant increase on risk mid-May. Following flight MH17 we expect it will again perception, combined with further pressure on the econo- become more difficult for both Russian companies and my, getting to that number may well prove more challeng- the Russian government to access international debt ing than we thought even a month ago. (25 ) markets. The big question now for the commercial real estate market is this dislocation in the market will be However, despite this challenging environment, away from reflected in financing costs, given that Russia’s Risk Free the turbulence of capital markets, Russia still remains sig- Rate has only moved some 20bps since the end of June, nificantly undersupplied in all segments of commercial real we expect that costs will be manageable. (24 ) estate. The country benefits from a powerful consumer base, still sizeable economy and we believe that once the As far as our forecasts for FY14 are concerned, in April, situation in Ukraine settles and the government refocuses we adjusted our expectation of investment volumes from its attention on what is important - attracting the invest- USD7bn at the start of the year to USD3.4bn now. With ment and limiting market volatility - there is the very real USD1.4bn of deals being done in the H1 and with a strong chance of upward revisions in expectations in 2015.

25 RUSSIAN INVESTMENT VOLUME DYNAMICS

USD bn 10 8,8 8,5 8,2 8

6 5,1 4,9 4,0 3,9 4 3,2 3,4

2 0,8 0,1 0,3 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F

Q1 Q2 Q3 Q4

Source: JLL

AEB Real Estate Monitor | 3/2014 15 AEB Real Estate Monitor | 3/2014 Moscow market overview | Retail Market

Retail market

Shopping centres

Russia might become the second largest market in Despite economic pressures, prime rents are like- Europe after United Kingdom by the end of 2014. To- ly to remain stable in H2 2014. Rents in lower qual- tal stock is likely to exceed 18m sq m by the end of the year. ity schemes may still come under pressure. (26, 27 )

Moscow will see a record level completions in 2014. Demand in Q2 2014 was affected heavily by the macro The announced pipeline is a little less than 1m sq m for Mos- economy. Growth forecasts for GDP, income, and retail cow and, in our view, more than 730,000 sq m is realistic, turnover in 2014 have been significantly revised down which would be a record annual figure for the city. and consumer credit growth actually contracted (-10%) in Q1 2014 for the first time since 2009. Several retailers In Q2 2014 completions in Russia were at the have acknowledged pressures on revenue although oth- level of 261,500 sq m which is 12% less than Q2 ers continued to announce development plans. Foreign 2013. Over the course of the first half of the year, mar- retailers (mainly fashion and apparel) have still been ket saw 430,500 sq m of new completions which is a targeting the Russian market. 28% YoY decline. We still anticipate 1.7-1.8m sq m of completions in Russia Moscow’s retail market saw 183,000 sq m of new for 2014 which is slightly less than the record figure for completions in Q2 2014. This is an all-time Q2 record. 2008. However, Q2 and H1 completions were lower compared to 2013. In H1 the Russian market saw 430,500 sq Vacancy rates in Moscow went up from 2.5% to m of new completions which is a 28% YoY fall. In Moscow, 3.5% in Q2 2014. By the year end this figure may well however, we are actually forecasting a record level of com- increase to 4-4.5%. pletions in 2014 (730,000 sq m) – an upward revision on

26 MOSCOW MARKET BALANCE 27 MAIN INDICATORS OF Q2 2014 IN MOSCOW

12 Month '000 sq m % Indicators 5,000 12 Outlook 10 4,000 Completions 183,000 sq m 8 3,000 6 Vacancy rate 3,5% 2,000 4 Prime SC base USD3,000–4,500/sq m/year 1,000 2 rent * 0 0 Average SC USD500–1,800/sq m/year base rent Total supply Completions Overall vacancy rate * Rents are given for a single unit of 100 sq m located on the ground floor of a retail gallery Source: JLL Source: JLL

16 AEB Real Estate Monitor | 3/2014 Moscow market overview | Retail Market AEB Real Estate Monitor | 3/2014

our previous forecast. Moscow market saw 242,000 sq m time by the end of the year, total stock will exceed 18m of new premises in H1 2014 which actually exceeds the sq m and Russia will become the second largest market total completions level of 2013 (204,000 sq m). in Europe after the United Kingdom (18.2m sq m) leaving France behind (16.5m sq m). In Q2 2014 the market saw a rise in vacancy rates in Moscow shopping centres from 2.5% to 3.5%. We think We are still forecasting a record level of comple- this will rise to 4-4,5% by the end of the year. At the tions in 2014 in Moscow. The announced pipeline is same time we believe that demand for top quality retail about 1m sq m. We anticipate 730,000 sq m of total outlets will still be high enough. Prime rents look well completions by the end of the year (up from our previ- supported although average rents will be under pres- ous forecast of more than 600,000 sq m) as we believe sure. Due to economic uncertainty many retailers are Columbus shopping centre (GLA 142,000 sq m) is now pushing to reduce rents in regional schemes and under- likely to come to the market in 2014. At the same time construction projects in Moscow. we expect that a number of several smaller projects are likely to be postponed until 2015. The largest pipeline Street retail has been affected by the changes in the projects are Avia Park (227,000 sq m) and Columbus economy and the political environment along with legis- (142,000 sq m). lative changes. In Q2 2014 the demand was high but the amount of rental deals was relatively low. At the same Nizhniy Novgorod has the strongest announced pipe- time there was a large amount of purchases of relatively line among millionniki cities until the end of 2014. The small premises (less than 500 sq m). Several tenants city will receive 75,000 sq m of quality retail premises due to reviewed their expansion plans and development strate- the opening of Nebo shopping centre (GLA 75,000 sq m). gies in order to cut down their expenses. Rents on prime Perm and Krasnoyarsk have the strongest potential among corridors went down (by 8%) for the first time since millionniki cities in our view. (28, 29, 30,31 ) 2009 and are now at the level of USD4,000-5,550/sq m/ year. This is due to a certain decrease of tenants’ pay- 28 PIPELINE (2014) IN MILLIONNIKI CITIES ing capacity, underactive development of retailers as '000 sq m 75 well as legislative changes. The vacancy rate continued 80 its growth on secondary retail corridors (from 15% to 70 60 16%). We do not anticipate any growth in vacancy rates 50 among high quality premises or any fall in rents due to 40 30 the stabilization of the ruble exchange rate and shaping 30 20 of deferred demand in H1 2014. However, further nega- 10 tive dynamics is possible in case of political instability. 0

SUPPLY We still anticipate 1.7-1.8m sq m of completions in Russia for 2014. Therefore, the previous record of 2008 (1.85m sq m) will not be exceeded. At the same Source: JLL

AEB Real Estate Monitor | 3/2014 17 AEB Real Estate Monitor | 3/2014 Moscow market overview | Retail Market

29 GROWTH POTENTIAL IN MILLIONNIKI CITIES Moscow is catching up with European capitals in terms of market density. As at the end of Q2 2014

9,000 stock per 1,000 inhabitants reached 327 sq m. By com- Most Yekaterinburg promising parison, in Warsaw this figure is 703 sq m and in Stock-

8,000 Perm Samara holm 675 sq m. We anticipate that by the end of 2014 Kazan Krasnoyarsk this figure will reach 368 sq m in Moscow due to more Ufa 7,000 than 700,000 sq m of new premises. Chelyabinsk Nizhniy Novosibirsk Omsk Novgorod 6,000 Rostov-on-Don Large part of under-construction premises are Volgograd Voronezh in Moscow and smaller cities. 37% of under-con- 5,000 Least struction projects that are to be completed in 2014 are

Annual income per capita, USD capita, per income Annual promising 4,000 planned for Moscow, 15% for Moscow Region, 9% for 100 200 300 400 500 600 St. Petersburg and 28% for cities with a population of less than 1m people. (32, 33 ) * Retail stock per ‘000 inhabitants in 2014 , sq m Source: Rosstat, JLL DEMAND Irkutsk has the strongest announced pipeline among Despite the moderation in economic growth, Rus- the cities with a population of less than 1m people. sian retail turnover growth still remains relatively KomsoMall (GLA 52,000 sq m), Yubileiny (GLA 23,000 sq m) strong in a European context. According to Oxford and Silver Mall (GLA 53,000) are announced to be complet- Economics, Russia holds the first position in Europe in ed by the end of 2014. However, Komsomall and Silver Mall terms of annual retail turnover growth forecast reaching might be postponed until 2015. Khabarovsk and Vladivostok 3.4% through to the end of 2016. The average figure for have the strongest potential among smaller cities in our view. Europe is 1.9%.

30 PIPELINE (2014) IN SMALLER CITIES 31 GROWTH POTENTIAL IN SMALLER CITIES

'000 sq m

140 128 12,000 Most Tyumen promising 120 11,000 100 80 10,000 Khabarovsk Togliatty 60 9,000 Naberezhnie Chelny 40 11 Vladivostok Krasnodar 20 8,000 Lipetsk Novokuznetsk 0 Kemerovo Irkutsk 7,000 Tomsk Yaroslavl Astrakhan Penza Orenburg 6,000 Ryazan Izhevsk Ulyanovsk Least Annual income per capita, USD capita, per income Annual Saratov Barnaul promising 5,000 0 200 400 600 800 1000 Source: JLL Retail stock per ‘000 inhabitants in 2014, sq m Source: Rosstat, JLL

18 AEB Real Estate Monitor | 3/2014 Moscow market overview | Retail Market AEB Real Estate Monitor | 3/2014

32 2014 PIPELINE BREAKDOWN IN RUSSIA 33 STOCK PER 1,000 INHABITANTS IN MOSCOW

sq m 424 450 368 400 350 306

300 250 200 150 100 50 0

Source: JLL

Moscow 37% Millionniki 11% St. Petersburg 9% Other cities 28% Moscow Region 15% Source: JLL

Some retailers reviewed or cancelled their expan- chain (10 shops in Moscow and St. Petersburg are to be sion plans. Aykay – Izhevsk grocery retailer, has de- opened within two years). clared bankruptcy and left the market. 36.6 and A.V.E. pharmacy chains took the decision to quit several re- MARKET BALANCE. MOSCOW gions, namely Tyumen and Ufa. Purpurny Legion closed New changes in property tax regulations will affect their last music store. owners and developers. Starting from 1st January 2014 the real estate tax is based on cadastral value instead of book Several international retailers announced their value that was used in the past. In Q2 2014 new amend- development plans. Detskiy Mir will open 30-50 shops ments were introduced. Starting from 2015 tax base will de- until the end of 2014, with 5-10 of them within the ELC pend on GLA of the building whereas previously the tax level chain, Mango will open 30 outlets in new bigger for- was counted basing on GBA. At the same time new regula- mat by the end of 2014 in Moscow, St. Petersburg and tions will be imposed on the standalone buildings larger than other large cities, Leroy Merlin will open new stores in 2,000 sq m (de facto used as retail premises), classic shop- Ufa, Chelyabinsk and Novosibirsk. Gucci will open two ping centres and integrated premises larger than 3,000 sq m directly operated stores in Moscow. whereas previously this figure was 5,000 sq m.

Several new international retailers are to appear Prime rents are likely to remain stable in 2014. on the Russian market. British department stores Due to the stabilizing of the ruble exchange rate we do chain House of Fraser to enter Russian market by the not expect any downgrades in prime rents in Moscow end of 2017 and to open 4 shops across the country, shopping centres. Rents in lower quality schemes might Inventive Retail Group will develop Unode50 jewelry still be under pressure.

AEB Real Estate Monitor | 3/2014 19 AEB Real Estate Monitor | 3/2014 Moscow market overview | Retail Market

We anticipate further growth of the vacancy rate total completions level of 2013 (204,000 sq m). As of H1 2014 in Moscow shopping centres in 2014. The macroe- total stock in Moscow exceeds the level of 3.8 m sq m (GLA). conomic downturn along with significant amount of new Moscow is catching up with European capitals in completions will lead to an increase in the vacancy rate terms of market density. As of at the end of Q2 2014 to 4-4.5% by the end of the year. (34, 35 ) stock per 1,000 inhabitants reached 327 sq m. By comparison, in Berlin this figure is at the level of 329 sq m SUPPLY. RUSSIA per 1,000 inhabitants. Russian market demonstrated negative dynamics in Q2 and H1 2014. In Q2 2014 completions were at DEMAND the level of 261,500 sq m which is 12% less compared The weakening economy is putting pressure on to Q2 2013 and 55% more compared to Q1 2014. As for retail. Real income growth in Russia showed 1.7% the H1, the market saw 430,500 sq m of new comple- growth in April 2014 whereas in Moscow that figure tions which is a 28% YoY fall. Total stock in Russia is at dropped by 11.8%. Consumer credit growth showed the level of 16.7 m sq m as of H1 2014. negative dynamics in Q1 2014 for the first time since 2009 (-10%). Retail turnover is still growing. This in- SUPPLY. MOSCOW dicator demonstrated 2.1% YoY growth in Russia and Moscow market saw record Q2 completions. Moscow 2.2% growth in Moscow in May 2014. retail market saw 183,000 sq m of new completions in Q2 2014. This is the highest quarterly level for 4.5 years. The Regardless of the macroeconomic uncertainty, previous record (280,000 sq m) was set in Q4 2009. This new international retailers continue to target the means that Moscow saw 242,000 sq m in H1, which is the Russian market. Several fashion and footwear retail- highest H1 level since the 211,000 sq m record which was set ers (Deichmann, Harmont & Blaine, Moncler and Nor- in 2009. Moscow H1 2014 completions actually exceed the ma J Baker), children’s goods store (Prenatal Milano),

34 RETAIL SALES FORECAST IN 2014-2016 35 PRIME RENT DYNAMICS IN MOSCOW

% 6 USD/sq m/year 6 000 5 5 000 4,500 4 3,4 4 000 3 average level 3 000 2 2 000 1 1 000 0

0 UK Italy Spain Czech Russia Turkey Turkey Poland France Ireland Finland Romani German Belgium Sweden Portugal Hungary

Source: Oxford Economics (chart is designed by JLL) Source: JLL

20 AEB Real Estate Monitor | 3/2014 Moscow market overview | Retail Market AEB Real Estate Monitor | 3/2014

cosmetics store (Tony Moly), sports bar (Hooters) and MARKET BALANCE. MOSCOW DIY store (Index Living Mall) are among the newcomers The vacancy rate went up whereas rental rates of Q2 2014. Index Living Mall opened its first store in remained stable in Q2 2014. As of at the end of Q2 Barnaul whereas others started their development from 2014 the vacancy rate in quality shopping centres went Moscow and St. Petersburg. up from 2.5% to 3.5%. Prime rent in Moscow shopping centres is USD3,000–4,500/sq m/year (although Retailers already present on the market have the amount of deals at top price decreased compared been expanding in Q2 2014. Among the examples to 2013) and the average rent is USD500–1,800/sq m/ are O’KEY that entered the Barnaul market (Prazdnichny year. Retailers insist on downgrading the rents in region- SC), Traveler’s Coffee that opened its first cafe in Kras- al schemes and under construction projects in Moscow. nodar, Pyaterochka that opened its stores in Sochi. (36, 37 )

36 REAL INCOME AND TURNOVER GROWTH IN 37 MOSCOW MARKET BALANCE RUSSIA

% '000 sq m %

15 5 000 12

4 000 10 8 3 000 5 6 2 000 4

1 000 2 -5 Jan-11 Jan-10 Jan-14 Jan-12 Jan-09 Jan-13 Sep-11 May-11 Sep-10 Sep-12 Sep-09 Sep-13 Sep-08 May-10 y-14 Ma May-12 May-09 May-13 May-08 0 0

-15 Retail turnover growth, YoY Real income growth, YoY Completions Stock as at the end of the previous year Source: JLL Source: JLL

AEB Real Estate Monitor | 3/2014 21 AEB Real Estate Monitor | 3/2014 Moscow market overview | Retail Market

Street retail

Pedestrianisation is still underway and is growing SUPPLY the limits of the city centre. Moscow authorities have The current market environment gives the most announced plans for the construction of a new pedes- active players an opportunity to lease quality trian area on the territory of former ZIL factory. premises at reasonable prices. Macro economic and political changes of H1 2014 led to rental decreases on The smoking ban will affect restaurants and bars, in both prime and secondary retail corridors as well as our view. Fast food outlets, however, will not be influenced by new supply on the market due to tenants rotation. This the new regulations (smoking was prohibited before 1st June). means that retailers may be able to obtain quality premises at reasonable prices similarly to 2009. Rents went down in Q2 2014 both on prime (-8%) and secondary (-11%) retail corridors. This is the first time New regulations regarding the design of summer since 2009 that rents have dropped. Landlords expectations terraces came into power in Q2 2014. The design of have not adjusted to market conditions meaning that tenants a terrace should correspond with the design of the main can often achieve a substantial discount during negotiations. building. The use of canvases is prohibited, umbrellas should not be higher than the ground floor. Starting from The vacancy rate went up on secondary retail cor- Q2 2014 these regulations concern the premises inside ridors. This figure is currently at the level of 8%on the Boulevard Ring. Since 2015 these regulations will prime and 16% on secondary retail corridors. concern premises inside the Third Transport Ring, since 2016 the whole Moscow territory. Regardless of the ne- Assuming no FX shocks, we believe that both cessity to adapt to new changes, less than 10% of ten- rents on prime corridors and vacancy rates will ants refused to open summer terraces. We anticipate be relatively stable through to YE. Retailers are that new regulations will improve the general image of adapting to new market conditions. the streets and will influence in a positive way on street retail development in Moscow. Moscow authorities plan to extend paid parking area outside the Garden Ring. The price will be 40 Pedestrian zones will exceed the limits of the Rub/hour. (38, 39 ) centre of the city. For instance, Moscow authorities

38 EUROPEAN PRIME STREET RETAIL RENTS* 39 MAIN INDICATORS OF Q2 2014 IN MOSCOW USD/ sq m/year 12 Month 16,000 Main Indicators of Q2 2014 14,000 Outlook 12,000 10,000 Prime locations 8,000 5,500 6,000 Prime street USD4,000–5,500/sq m/year 4,000 2,000 retail rent* 0 Vacancy rate 8% Oslo Paris Milan Milan Berlin Rome Dublin Madrid Prague Munich London Helsinki Moscow Istanbul Hamburg Secondary locations Barcelona Stockholm Amsterdam Copenhagen

t. Petersburg S t. Street retail USD1,300–2,700/sq m/year rent* * On occasion rents can exceed indicative price levels Source: JLL Vacancy rate 16%

*Rents are given for quality premises of 100 sq m Source: JLL

22 AEB Real Estate Monitor | 3/2014 Moscow market overview | Retail Market AEB Real Estate Monitor | 3/2014

are planning to build a new pedestrian area on the ter- 40 MOSCOW STREET RETAIL RENTS* IN Q2 2014 ritory of the former ZIL factory. Maxi- Minimum 12 Street Retail mum USD/sq Month Paid parking area will exceed the limits of the Corridor USD/sq m/year Outlook Garden Ring. Starting from 1st August paid parking m/year will be introduced on Barrikadnaya Street, 1st and 2nd Krasnaya Presnya 2 600 3 500 Brestskaya Streets, Bolshaya Gruzinskaya and Lesnaya Street Streets, Zvenigorodskoe Highway, Triumfalnaya Square, Kutuzovskiy Avenue 2 000 3 700 etc. The price will be 40 Rub/hour. Starting from 1st Kuznetskiy Most 4 000 5 000 June paid parking was introduced in Moscow City dis- Street trict. Due to new developments tenants specify parking Mira Avenue 2 000 3 000 characteristics in their requests whereas landlords will have to develop parking spaces. Myasnitskaya Street 2 500 3 500

Nikolskaya Street 2 500 3 500 DEMAND We anticipate the growth of demand in H2 2014 Novy Arbat Street 2 500 3 500 in case the economy steadies. Due to ruble exchange Patriarshie Prudy 2 500 3 500 rate steadying and shaping of deferred demand increase District in the number of deals is possible in H2 2014. Retailers Petrovka Street 3 500 5 000 will follow new development plans (reviewed in accord- Pyatnitskaya Street 2 500 5 000 ance with the new market conditions). Grocery stores, pharmacies and fashion and footwear retailers will be the Stoleshnikov Lane 3 000 7 000 most active. Source: JLL

Street retail will be influenced by the new law 41 MOSCOW STREET RETAIL RENTS* IN Q2 2014 restricting smoking in public places. For instance, Maxi- smoking is restricted in food outlets since 1st June. This Minimum 12 Street Retail mum USD/sq Month will affect restaurants and bars whereas fast food will Corridor USD/sq m/year Outlook not suffer from new regulations as smoking was never m/year allowed in fast food outlets. 1st Tverskaya-Yams- 2 500 3 500 kaya Street

MARKET BALANCE Arbat Street 2 500 3 800 Due to the stabilization of the ruble exchange rate we do not anticipate any growth in the vacancy Garden Ring 1 200 3 000 rate nor any rental decrease among high qual- Komsomolskiy 1 900 3 500 ity premises. Rents will remain at the average level of Avenue USD4,000-5,500/sq m/year on prime retail corridors and Leningradskiy 2 000 3 000 USD1,300-2,700/sq m/year on secondary retail corridors Avenue (rents on specific streets are given in the tables). In a few Leninskiy Avenue 2 000 3 500 cases rents might exceed the market level. The vacancy Ostozhenka Street 2 500 3 500 rate will be 8% on prime retail corridors and might reach 20% on secondary retail corridors. Negative dynamics is Tverskaya Street 3 000 5 000 possible in case of aggravation of political environment. * rents are given for rectangular form premises of 100 sq m with a (40, 41 ) separate entrance and a showcase on the first floor inside the Third Ring Road. For multi storey buildings and larger premises Source: JLL AEB Real Estate Monitor | 3/2014 23 AEB Real Estate Monitor | 3/2014 Moscow market overview | Retail Market

SUPPLY investment strategies. Rents nominated in rubles be- The segmentation of pedestrian streets is under- came more popular. way. Almost each pedestrian street is getting its own ‘profile’. Restaurants dominate on Pyatnitskaya Street As for purchases, premises cheaper than USD10m and Kamergerskiy Lane, fashion and footwear stores were in demand in Q2 2014. Investors were interest- dominate on Kuznetskiy Most Street. Restaurants and ed in 8-9 years payback period, 10 year payback period fashion and footwear stores go together on Bolshaya is more often for less risky assets. Dmitrovka and Nikolskaya Streets. The proximity of Tretyakovskiy Passage makes Nikolskaya Street more at- Food outlets, health and beauty retailers, and tractive for flagshiop stores of international brands. grocery stores were the most active in Q2 2014. More than 1/3 of requests came from food outlets, 23% New pedestrian zones appeared in Moscow in Q2 from grocery chains and 20% from health and beauty 2014. New pedestrian area opened on Bolotnaya and retailers. Banks along with fashion, footwear and acces- Bersenevskaya embankment (on weekends and bank holi- sories retailers were less active. More than 80% of de- days). Moscow city authorities are investing effort in the mand comprised premises of less than 500 sq m, prem- quality of pedestrian routes outside the centre of the city ises of 500-1,000 sq m and larger were demanded less. (for example, widening of sidewalks on Leninskiy Avenue). Several new international retailers targeted the DEMAND Russian market in Q2 2014, three of them opened Retailers have become more cautious about their first outlets in street retail.Hooters bar opened choosing the premises. In Q2 2014 the demand was in Zlatoustinskiy Lane, fashion, footwear and accessorize high but the rental deals amount was relatively low. Re- store Harmont & Blaine opened on Kuznetskiy Most tailers have been reviewing their development plans. A Street, Moncler fashion store opened on Stoleshnikov large part of completed deals started at the beginning Lane. Audi show room to open on Nikolskaya street in of 2014. At the same time the amount of purchase deals the near future. International retailers prefer opening was high, most of the buyers were Russian companies directly operated stores to leaving the Russian market if which considered street retail as an alternative to other their Russian partners are facing difficulties. 42,( 43 )

42 MAIN INDICATORS OF Q2 2014 IN MOSCOW 43 MOSCOW PRIME STREET RETAIL YIELD 12 Month Main Indicators of Q2 2014 % Outlook 14 Prime locations 12 11 Prime street USD4,000–5,500/sq m/year 10 retail rent* 8

Vacancy rate 8% 6 4 Secondary locations 2 Street retail USD1,300–2,700/sq m/year 0 rent* Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q4 Q4 Q4 Q4 Q4 Q4 Vacancy rate 16% Source: JLL *Rents are given for quality premises of 100 sq m Source: JLL

24 AEB Real Estate Monitor | 3/2014 Moscow market overview | Retail Market AEB Real Estate Monitor | 3/2014

MARKET BALANCE range. Rents denominated in rubles have become more In Q2 2014 rents decreased both on prime and popular. In most cases tenants are ready to negotiate secondary retail corridors. The rent (for premises of lease terms (rent free period, annual indexation, cur- 100 sq m) on prime locations is USD4,000–5,500/sq m/ rency range, etc.) in order to avoid dramatic rental de- year. The rent on secondary locations went down from creases. Average yield was at the level of 11%. USD1,300–3,000/sq m/year to USD1,300–2,700/sq m/ year. On occasion rents can exceed indicative price lev- Tenant rotation has led to a vacancy rate increase on els. The premises of 100–300 sq m are often leased at secondary retail corridors. The vacancy rate as of at the 70–90% of indicated price, premises of 300–600 sq m end of Q2 2014 was stable (8%) on prime retail corridors at 60-80%, premises of 600–2,000 sq m at 50–70%. In and went up from 15% to 16% on secondary ones. The va- Q2 2014 most of tenants insisted on fixing a currency cancy rate on pedestrian streets is 3%. (44, 45, 46, 47 )

44 MOSCOW STREET RETAIL RENT* 45 EUROPEAN STREET RETAIL RENTS*

USD/sq m/year USD/sq m/year 10,000 16,000 14,000 8,000 5,500 12,000 10,000 6,000 8,000 5,500 4,000 6,000 4,000 2,000 2,000 0 0 1 1 1 1 Oslo Paris Milan Berlin Rome Dublin Madrid Prague Munich London Helsinki Moscow Istanbul Hamburg 1 2014 1 2014 2 Barcelona Stockholm Q1 201 Q1 201 Q2 201 Q3 201 Q4 1 2008 Q 1 2008 Q 2 2008 Q 3 2008 Q 4 2009 Q 1 2009 Q 2 2009 Q 3 2009 Q 4 2010 Q 1 2010 Q 2 2010 Q 3 2010 Q 4 1 2012 Q 1 2012 Q 2 2012 Q 3 2012 Q 4 2013 Q 1 2013 Q 2 2013 Q3 2013 Q 4 Q Q Amsterdam Copenhagen t. Petersburg S t. *On occasion rents can exceed indicative price levels *On occasion rents can exceed indicative price levels Source: JLL Source: JLL

46 DEMAND BY SIZE, SQ M 47 DEMAND BY RETAILER PROFILE

Fashion, footwear and accessoriz, 12% 0-100 30% 500-1,000 8% Jewelery, 5% 100-300 30% > 1,000 8% Other, 2% Grocery, 23% 300-500 25% Fast food and restaurants, 35% Bank, 3% Health and beauty, 20% Source: JLL Source: JLL

AEB Real Estate Monitor | 3/2014 25 AEB Real Estate Monitor | 3/2014 Moscow market overview | Office Market

Office market

Volume of completions in 2014 could reach a Overall vacancy rate increased to 14.8% in Q2 5-year record. About 532,836 sq m of new office space compared to 13.9% seen in the previous quarter due to entered the market in H1. Another 670,000 sq m are the ongoing growth in supply on the back of moderate expected to be delivered by the year end, bringing the dynamics of demand. total volume of new supply in 2014 close to pre-crisis highs. FX volatility had a lower influence on office rent dynamics in Q2 compared to Q1. Nonetheless, the Amount of transacted office space was 28% low- macro-factors as well as ongoing political uncertainty er YoY with take-up volume at 522,600 sq m in could affect rents further in H2. H1. Macroeconomic uncertainty curtails demand for office space as market participants become more cautious Tax legislation based on cadastral value is to undergo while making a decision whether to lease or to buy new further amendments. Starting 2015, more office buildings office premises. will be subjected to the new tax system established in 2014. At the same time, in 2015 tax base will be calculated from Over the long term, demand will continue shifting leasable area instead of gross building area. (48, 49 ) to decentralized areas and Moscow City as these submarkets offer numerous opportunities for tenants Total volume of completions in 2014 may reach 1.2m sq m, within the best possible price and quality range. In H1, about 45% of which has already been delivered to the mar- about half of the overall transacted space was located ket in H1. As a result, the total office stock in Moscow could outside the Third Transport Ring. approach the level of 16.8m sq m by the end of the year.

48 TRANSACTED SPACE AND COMPLETION 49 TOTAL OFFICE STOCK DYNAMICS DYNAMICS

sq m % '000 sq m % 2,500 25 18,000 30 26.2 25.7 16,000 25 2,000 20 14,000 12,000 20 1,500 15 10,000 14.4 15 1,000 10 8,000 6,000 8.5 7.7 10 6.4 6.0 500 4,000 5 4.0 5 2,000 0 0 0 0 2007 2008 2009 2010 2011 2012 2013 2014F 2007 2008 2009 2010 2011 2012 2013 2014F Take--up Completions Overall vacancy rate Existing stock Completions Growth in total stock, YoY %

Source: JLL Source: JLL

26 AEB Real Estate Monitor | 3/2014 Реклама

Moscow market overview | Office Market AEB Real Estate Monitor | 3/2014

The majority of future supply is located in Moscow City likely to see another 670,000 sq m of new supply com- and decentralized areas. We expect that occupiers will ing to the market, bringing the total amount of deliver- keep shifting to these submarkets over the longer term ies in 2014 close to 1.2m sq m. The volume of office as they offer a broader variety of high-quality office completions, therefore, could reach a new high over the space at the affordable price. last five years. By the end of 2014, we expect the total stock of Moscow office space to increase by 7.7% YoY As a result of macroeconomic uncertainty in H1, the and reach 16.8m sq m. market participants become more cautious which is reflected in lower take-up volumes YoY as well as the The majority of future supply is located in Moscow changes in demand structure, with renegotiations and City and decentralized areas. Half of the total supply of renewals of lease agreements comprising a substantial new office space for the next two years is located in decen- part of all deals for office space. Total transacted space tralized areas, whereas Moscow City accounts for 21% of for 2014 is estimated at 1.3m sq m. Nonetheless, geo- total deliveries in the near term. As for Moscow City, by the political factors may alter the expectations of market end of 2014, stock will grow further with the completion of players, thus the forecast might be lowered in case the OKO MFC (110,000 sq m). In 2015, we expect the delivery political or economic situation in Russia weakens further. of Evolution Tower (78,000 sq m), IQ-quarter (107,400 sq m) and Federation Tower – East (101,000 sq m) which will Due to the considerable volume of new supply and moder- bring the total supply in the area close to 1m sq m. As for ate demand dynamics, overall vacancy rate increased to the largest projects outside TTR, the key office schemes 14.8% in Q2. Given no change in the current state of Rus- expected to be completed in the near term are Comcity – sian economy, the overall vacancy rate is forecasted to stay Phase I Alfa (107,546 sq m), Vodny MFC (61,600 sq m), at the same level throughout the rest of the year as the Lotos BC (88,400 sq m), Vereyskaya Plaza III (75,261 sq situation on the office market is likely to be balanced. m) and Sirius Park (75,000 sq m).

The impact of rouble devaluation on rents lessened in Legislation amendments: moderately positive Q2 compared to Q1. Over the last quarter, prime rents read-through from news flow in Q2. Over the last stood in the range of USD900–1,100 per sq m per year quarter, a couple of notable legislative amendments and Class A rents ranged between USD580 and USD800. took place following the introduction of the new tax regime in 2014 based on cadastral value. Firstly, the state Amendments to the tax regime based on cadastral value lowered the threshold for office buildings subjected to are to cover the larger scope of Moscow office market by the new tax system from 5,000 sq m to 3,000 sq m means of lowering the threshold for office buildings sub- starting 2015. At the same time, from 2015 the new jected to the new tax system. At the same time, while tax base will be calculated using gross leasable area changing the methodology of tax base calculation, the (GLA) instead of gross building area (GBA). On the one government is taking into account feedback from market hand, by lowering threshold, the government is trying participants. to cover the larger part of Moscow office market by increasing tax burden for owners of smaller and obsolete The volume of new supply in 2014 could reach buildings, forcing the landlords either to improve the pre-crisis highs. For the next two quarters we are quality of buildings by means of redevelopment or to

AEB Real Estate Monitor | 3/2014 27 AEB Real Estate Monitor | 3/2014 Moscow market overview | Office Market

sell them to a potential investor. On the other hand, At the same time we anticipate a decrease in the share of as the switch to GLA decreases the tax base, the new transactions for office premises larger than 3,000 sq m in amendments, in our view, take into account feedback the total amount of transacted space which suggests that from market participants. (50, 51 ) tenants are becoming more cautious in their decision to buy or lease new office spaces and often prefer to renew Macroeconomic factors curtail the growth of de- the current lease agreement than to move to a new of- mand for office premises. We believe the changes fice. Though still stable, the share of foreign companies in macro environment, particularly the outlook for Rus- in demand structure, could decrease as a result of further sia’s GDP, remain the fundamental factors determining political pressure, thereby making Russian tenants more demand for office space over longer term. Over the dominant on the office market.

50 THE MAIN MARKET INDICATORS, H1 2014 51 OVERALL SUPPLY AND VACANCY TRENDS

'000 sq m %

12 Month 18,000 669 30 533 16,000 888 Outlook 846 567 25 1,039 14,000 1,546 Completions 532,836 sq m 12,000 2,195 20 10,000 15 Vacancy rate 14,80% 8,000 14.9 6,000 10 4,000 Take-up 522,601 sq m 5 2,000 0 0 Prime rent USD900–1,100/sq m/year 2008 2009 2010 2011 2012 2013 H1 2014 H2 2014F Total supply Completions Overall vacancy rate

Source: JLL Source: JLL past seven years annual take-up volumes demonstrated Over the longer term, demand will continue shift- strong correlation with the real GDP growth. Our base- ing to decentralized areas and Moscow City. As the case scenario implies the take-up volumes in 2014 to be take-up dynamics suggest, decentralized areas account for close to 1.3m sq m (12% drop YoY), taking into account nearly 50% of the total amount of transacted office space close to zero GDP growth this year. Nonetheless, geopo- in recent years offering numerous opportunities for tenants litical factors have utmost importance this year affecting within the best possible price and quality range. Given the the expectations of market players. Thus, we would not limited supply of the new office space in the city centre for rule out the possibility of lowering our forecast in case the next years, both decentralized areas and Moscow City of a further worsening either the political situation in have become attractive for occupiers in terms of the balance Russia or the outlook for Russian economy. of high-quality office space, price and transport infrastruc- ture. The example in London of several key tenants mov- Moscow office market becomes more short-term ing from the City of London to Canary Wharf highlights the looking. The increasingly conservative behaviour of global trend for many tenants to look for more affordable, market participants caused by unstable political situation but at the same time high-quality office space. (52, 53 ) as well as the rise in FX volatility in H1 will likely persist in the second half of the year. We expect an increasing Vacancy rate will stay at the current level by the share of renegotiations and renewal of lease agreements. year end, unless the macro environment worsens.

28 AEB Real Estate Monitor | 3/2014 Moscow market overview | Office Market AEB Real Estate Monitor | 3/2014

52 TRANSACTED SPACE AND RUSSIA’S GDP 53 TRANSACTED SPACE: EUROPEAN CITIES, Q2 2014 GROWTH '000 sq m % Rome 2,000 10 Lisbon Prague 1,800 8 Amsterdam 1,600 6 Dublin 1,400 4 Budapest 1,200 2 Madrid 1,000 0 Warsaw 800 -2 Brussels 600 -4 Berlin 400 -6 Stockholm 200 -8 Munich London 0 -10 2007 2008 2009 2010 2011 2012 2013 2014F Moscow 522,601 sqm Paris '000 sq m GDP growth, YoY 0 200 400 600 800 1,000 1,200

Source: JLL Source: JLL

Assuming no change in the current state of the econo- these factors as well as ongoing political uncertainty could my, the overall vacancy rate is forecasted to stay close negatively affect rent dynamics further in H2. In terms of to the 15% level throughout the rest of the year. The geographical location, Moscow City and the area outside situation on the office market is likely to be balanced TTR have elevated risks of the further pressure on rents, with an expected 1.2m sq m increase in supply which is taking into account growing supply of new office space in likely to be offset by a forecasted 1.3m sq m volumes these locations on the back of the possible weakening of of take-up. Nonetheless, macroeconomic factors and demand following the further cooling of the economy. In ongoing political uncertainty could deteriorate further longer term, we assume that the rents across all Classes dynamics of the main indicators of the Moscow office will move generally in line with economic growth as both market in the second half of the year. developers and tenants are going to adjust their plans according to the current macro environment. (54, 55 ) The vacancy rate in Moscow City area could be affected further by growing supply. Currently around 54 VACANCY RATE DYNAMICS BY CLASS 400,000 sq m of new office space are actively under construction and are expected to enter the market in the % 30 coming two years. In view of considerable future supply, vacancy rate in Moscow City can possibly reach 40% 25 24.8 level by the end of this year. 20 In 2014 rents are chiefly under the influence of 15 13.7 macroeconomic factors. During Q1, many tenants 10 10.5 were trying to renegotiate the current lease terms, seek- 5 ing either a fixed currency corridor or switching to rouble denominated contracts, which was caused by rouble de- 0 2008 2009 2010 2011 2012 2013 Q2 2014 2014F valuation. The impact of increased volatility in rouble and Class A Class B+ Class B- deteriorating macroeconomic environment on office rents, however, weakened in Q2 compared to Q1. Nonetheless, Source: JLL

AEB Real Estate Monitor | 3/2014 29 AEB Real Estate Monitor | 3/2014 Moscow market overview | Office Market

55 PRIME OFFICE PROPERTY CLOCK New supply in Q2 was equally distributed between Class A and Class B+ segments. In sum, about 11 new Q1–Q2 14 Q3 08 buildings were delivered in Q2 adding 323,788 sq m to the Q2 08 Q4 08 market. In terms of quality of new supply, the total volume Q2–Q4 13 Q1 09 of Q2 deliveries was equally distributed between Class A Q3 11–Q1 13 and Class B+, whereas the completions in Class B- com- Rental Rents Growth Falling Slowing prised less than 1% of the total volume of new office space. Q2 08 President Plaza (115,834 sq m – office space) and Arcus III

Q2 11 (34,305 sq m) were the key Class A deliveries in Q2.

Rental Rents Growth Bottoming Q3 09 Ongoing decentralization of new supply: the ma- Accelerating Out jority of completions in H1 were located in areas outside TTR. In H1, 532,836 sq m of new office space Q4 09 Q1 11 was delivered to the market, about 50% of which was Q3–Q4 10 Q1–Q2 10 Class A. In terms of location, about 63% of all deliver- Source: JLL ies in the first half of the year were located outside the Third Transport Ring. (56, 57, 58, 59 ) In H1, the volume of completions soared YoY. About 323,790 sq m of new office space was delivered in Moscow in Take-up volumes in H1 decelerated by 28% YoY. Q2 2014 compared with 81,497 sq m of new supply seen in The volumes of take-up in H1 were estimated at 522,600 Q1 2013. The total amount of completions in H1 2014 is esti- sq m, which represents 28% decrease compared to the mated at 0.5m sq m bringing the total volume of office stock previous year. In terms of quarterly dynamics, both to 16.2m sq m. In terms of annual dynamics, the volume of take-up and net absorption stood at the levels similar to new deliveries in H1 2014 was 1.5x times higher YoY. those seen in the Q1.

56 TOTAL STOCK BY CLASSES The structure of demand has noticeably changed. The share of transactions for office premises larger than

57 KEY NEW SUPPLY, H1 2014

Office Building Name Class Area, sq m Prezident Plaza A 114 695

Eurasia Tower A 86 834

Arcus III A 34 305

Mebe One: Khimki Plaza A 29 937

Arma (bldg. 19) B+ 19 049

C lass A 19% Solutions BP (Phase III) B+ 14 432 Class B+ 52% Morozov BC (Phase II) A 13 607 C lass B- 29% Avrora BP (Phase III) A 9 930

Source: JLL Source: JLL

30 AEB Real Estate Monitor | 3/2014 Moscow market overview | Office Market AEB Real Estate Monitor | 3/2014

58 DYNAMICS OF NEW SUPPLY BY CLASS 59 DYNAMICS OF NEW SUPPLY BY SUBMARKET

'000 sq m '000 sq m 2,500 2,500

2,000 2,000

1,500 1,500

1,000 1,000 669 669 553 553 500 500

0 0 2008 2009 2010 2011 2012 2013 H1 2014 H2 2008 2009 2010 2011 2012 2013 H1 2014 H2 2014F

Class A Class B+ Class B- CBD From GR to TTR

Source: JLL Source: JLL Moscow City Outside TTR

3,000 sq m decreased from 60% of all recorded deals in Business Services and Manufacturing companies H1 2013 to 40% in were the main drivers of demand, accounting for 26% and 27% respectively of all recorded transactions H1 2014. Moreover, renegotiations and renewals in the first half of the year. Several large deals with of lease agreements accounted for a substantial participation of international companies (e.g. General share in the structure of demand, while the share of Electric, PepsiCo, ING Bank) contributed positively to deals for new office space decreased from 88% seen in the share of foreign tenants which increased in H1 and H1 2013 to 65% in H1 2014. We believe, these facts indi- comprised 49% of all recorded transactions compared to cate that market participants are becoming more cautious 40% seen in Q1. (60, 61, 62, 63 ) in the current macroeconomic situation.

60 DEALS BREAKDOWN BY SECTOR, H1 2014 61 KEY DEALS, H1 2014

Office Building Name Class Area, Occupier sq m Comcity – Phase I Alfa A 17,300 Systematika

Naberezhnaya Tower A 13,121 General Electric

ALCON Business Complex A 13,009 PepsiCo

Omega Plaza B+ 6,360 IT

Amber Plaza A 5,025 ING Bank

Wall Street A 3,954 Modis Source: JLL Metropolis A 2,830 Tele2

Wholesale & Retail, 4% Manufacturing, 27% Lesnaya Plaza A 2,384 PPF Life Insur- ance Banking & Finance, 15% Other, 3% Business Services, 26% Service Industries, 14% Source: JLL Construction, Mining & Exploration, 11%

AEB Real Estate Monitor | 3/2014 31 AEB Real Estate Monitor | 3/2014 Moscow market overview | Office Market

62 TRANSACTED SPACE BY CLASS 63 TRANSACTED SPACE BY SUBMARKET

'000 sq m '000 sq m 2,000 2,000 1,800 1,800 1,600 1,600 1,400 1,400 1,3 m 1,3 m 1,200 1,200 1,000 1,000 800 800 600 600 400 400 200 200 0 0 2008 2009 2010 2011 2012 2013 2014F 2008 2009 2010 2011 2012 2013 2014F

Class A Class B+ Class B- CBD From GR to TTR

Moscow City Outside TTR

Source: JLL Source: JLL

Overall vacancy rate increased over the quarter. On- Pressure on rents from rouble devaluation weak- going growth in supply combined with weak demand dynam- ened QoQ. The increased FX volatility and macroeco- ics for office space in H1 2014, led to an increase in the over- nomic uncertainty which had a negative impact on the all vacancy rate to 14.8% in Q2 compared with the 13.9% rent dynamics in Q1, slightly weakened their influence seen in Q1. In Class B+ the overall vacancy rate ticked up in Q2. Over the last quarter, prime rents stood in the slightly to 13.5% compared to the 12.9% seen in Q1 while range of USD900–1,100 per sq m per year. Class A rents in Class A the vacancy rate reached 24.5% from 20.8% seen were ranging between USD580 and USD800 and Class in the previous quarter which could be attributed to the high B+ between USD350–600 per sq m per year. In Moscow level of completions in H1. In terms of location, the higher City the rents ranged between USD 580–850 per sq m vacancy rate compared to the market average was seen in per year. (64, 65, 66, 67 ) Moscow City (31.5%) and in the area outside TTR (18.5%).

32 AEB Real Estate Monitor | 3/2014 Moscow market overview | Office Market AEB Real Estate Monitor | 3/2014

64 CLASS A AVAILABILITY BY SUBMARKET 65 CLASS B+ AVAILABILITY BY SUBMARKET

'000 sq m '000 sq m 1,400 800

1,200 1,147 700 600 1,000 512 500 800 400 600 300 400 200 200 100 0 0

CBD From GR to TTR CBD From GR to TTR Outside TTR

Moscow City Outside TTR Source: JLL Source: JLL

66 CLASS B- AVAILABILITY BY SUBMARKET 67 BASE RENTS, USD/SQ M/YEAR

'000 sq m 800 Submarket Class A Class B+ Class B- 700 600 CBD 580–1,100 500–600 400–500 512 500 Moscow City 580–850 – 400 300 From GR to TTR 500–650 400–550 300–400 200 TTR to MKAD 400–600 350–450 250–350 100 0 2008 2009 2010 2011 2012 2013 H12014

CBD From GR to TTR Outside TTR

Source: JLL Source: JLL

AEB Real Estate Monitor | 3/2014 33 AEB Real Estate Monitor | 3/2014 Moscow market overview | Warehouse and Industrial

Warehouse and Industrial CONSTRUCTION SUMMARY In H1 2014, more than 637,000 sq m of new warehousing was delivered, more than 328,000 sq m were deliv- THE MOSCOW REGION ered in Q2. The biggest warehouse property, delivered Construction activity in the Moscow Region remains in H1 2014, is the first building in Tehnopark Sofyino high. During the 1st first half of the year, 637,000 sq m (84,966 sq m). Despite the rise in vacancy rates, we are of quality warehousing was delivered, a record volume not observing a decrease in construction levels. Accord- for the market. This indicator is 10-15% lower than the ing to our forecasts, the level of demand will increase average index for 2008-2013. For the first 6 months of in 2014 by 1.2-1.5 million sq m. Most of the new space 2014, 300,000 sq m were purchased and bought com- is planned for the Leningradskoe Highway (more than pared with 480,000 sq m the year before. The vacancy 340,000 sq m), and the Novoryazanskoye (more than rate increased from 0.5% to 3%. Thus, a shortage of 340,000 sq m) and Gorkovskoe Highways (more than warehouses still remains in some Moscow areas. 240,000 sq m). In other regions, the supply level increased 246,000 sq The average rental rates for Class A projects remained the m. 78,000 sq m of Class A warehouses were built in same in Q2 2014, at USD 130-135 per sq m per year. Kaluga, and 61,000 sq m in Novosibirsk. According to the announced developer plans, more than 660,000 sq REGIONS m of new warehouses will be built during 2014 outside Supply outside Moscow increased 261,000 sq m in H1 the Moscow Region. (69, 70, 71, 72 ) 2014. It was higher only in 2008/2009. The absorption level in the first half of the year reached 225,000 sq m of DEMAND warehouse areas, this is 1.5-2 times higher than the av- In Q2 2014, the total volume of warehouse deals in erage indices for 2008-2013. A decrease in rental rates the Moscow Region reached 196,000 sq m. 5% of has been observed. (68 ) these deals were property sale transactions. Tenant activity was lower than the average 2008-2013 indices by 15-20%. 68 MAJOR INDICATORS2014 The average lot size in Q2 decreased compared with the beginning of the year and stood at 10.5-11.5 thousand sq m (in the end of 2013, the average lot size was 18 thousand sq m). In 2014, demand is based on retail 2Mln companies (30% of lots in H1 2014).

0.7Mln 1.3Ml Outside the Moscow Region in Q2 2014, take-up was more than 100,000 sq m and it is higher than in 2008-

0.3Mln 2013. The average lot size in Q2 increased 50% and stood at 14-15 thousand sq m. The share of sale trans- 0.6Mln actions is 42% from total take-up. Production and retail companies were the most active industries on the market (61.5% of lots in H1 2014). (73 )

-3%

Source: Cushman & Wakefield 34 AEB Real Estate Monitor | 3/2014

‘000 sq m Dmitrovskoe 1600 Forecast New Construction shosse (A104) Yaroslavskoe 1400 1400 Leningradskoe shosse (M8) shosse (M10) 1200 1000 Novorizhskoe Shelkovskoe 1000 shosse (M9) 600 shosse (A103)

800 200 Minskoe Gorkovskoe 0 600 shosse (M1) shosse (M7)

400 Kievskoe Novoryazanskoe 200 shosse (M3) shosse (M5)

0 Kashirskoe 2007 2008 2009 2010 2011 2012 2013 2014F Kaluzhskoe shosse (M4) shosse (A101) Simferopolskoe shosse (M2)

30+ km 10-30 km 0-10 km Moscow Реклама AEB Real Estate Monitor | 3/2014 Moscow market overview | Warehouse and Industrial 2014 2014

69 MOSCOW NEW CONSTRUCTION*, 2014 70 NEW CONSTRUCTION* RUSSIA EXCEPT Dis- Total THE MOSCOW REGION, 2014 2MlnDelivery, Project Highway tance, Area, Quarter Total KM ‘000 SQ M Delivery, 2Mln 0.7Mln Project Region Area, Quarter PNK - North Rogachevs- 27 55.32 Q1 ‘000 SQ M koye 1.3Ml 0.7MlnLogocenter Chelyabinsk 34 Q1 Bykovo Novo- 19 61.42 Q2 1.3Ml 0.3Mln Technopark ryazanskoye Tolmachevo Novosibirsk 45 Q1 Logopark 0.6Mln Dmitrov Logistic Dmitrovs- 39 69.30 Q2 0.3Mln Park koye a2Logistic Rostov-on- 33 Q2 Don PNK - Chekhov Simferopol- 50 30.27 0.6MlnQ2 II skoe Logocenter Krasnodar 38 Q2 Kuban Sofyino Tech- Novo- 32 84.97 Q2 nopark ryazanskoye -3% Sever Logopark Novosibirsk 40 Q2 Nikolskoye Rogachevs- 35 104.97 Q3 Armada Park St. Peter- 79 Q3 Logopark koye -3% burg PNK - Chekhov Simferopol- 50 113.31 Q3, Q4 Osinovaya St. Peter- 42 Q3 II skoe Roscha burg

PNK - North Rogachevs- 27 107.45 Q3 PNK KAD St. Peter- 65 Q3, Q4 koye burg

South Gate Kashirskoye 27 129.00 Q3 a2Logistic Rostov-on- 36 Q4 Industrial Don

Nova Riga Novorizh- 25 67.38 Q4 Lorry Ekaterin- 25 Q4 Logopark skoye burg

Radumlya Lo- Leningrad- 32 71.04 Q4 Source: Cushman & Wakefield gistics skoye

Sever II Log- Leningrad- 30 99.56 Q4 opark skoye 72 GEOGRAPHICAL DISTRIBUTION OF Source: Cushman & Wakefield QUALITY WAREHOUSE SPACE BY HIGHWAY, THE MOSCOW REGION (‘000 SQ M) 71 NEW CONSTRUCTION IN THE MOSCOW ‘000 sq m REGION (‘000 SQ M) Dmitrovskoe 1600 Forecast New Construction shosse (A104) Yaroslavskoe 1400‘000 sq m Leningradskoe 1400 Dmitrovskoe shosse (M8) 1600 shosse (M10) Forecast New Construction 1000shosse (A104) 1200 Yaroslavskoe Novorizhskoe 1400 Shelkovskoe 1400 Leningradskoe shosse (M8) 1000 shosse (M9)shosse (M10) 600 shosse (A103) 1200 1000 800 Novorizhskoe 200 Shelkovskoe Minskoe Gorkovskoe 1000 shosse (M9) 0600 shosse (A103) 600 shosse (M1) shosse (M7) 800 200 400 Minskoe Gorkovskoe 0 600 shosseKievskoe (M1) Novoryazanskoeshosse (M7) 200 shosse (M3) shosse (M5) 400 0 Kievskoe KashirskoeNovoryazanskoe Kaluzhskoe 200 2007 2008 2009 2010 2011 2012 2013 2014F shosse (M3) shosse (M4) shosse (M5) shosse (A101) Simferopolskoe 0 shosse (M2) Kashirskoe 2007 2008 2009 2010 2011 2012 2013 2014F Kaluzhskoe shosse (M4) shosse (A101) 30+ km 10-30 kmSimferopolskoe 0-10 km Moscow Cushman & Wakefield Source: Source: Cushman & Wakefield shosse (M2)

30+ km 10-30 km 0-10 km Moscow 36 AEB Real Estate Monitor | 3/2014 1800 1600 1400 1200 Moscow market overview | Warehouse and Industrial AEB Real Estate Monitor | 3/2014 1000 800 600 400 200 0 2009 2010 2011 2012 2013 2014F

Moscow Regions Forecast RENTAL RATES By the end of Q2 2014, the average rental rate in the Moscow Region for Class A was within the USD130-135 74 RENTAL RATES IN MAJOR RUSSIAN CITIES range. Rate variation increases, depending on the di- CLASS A rection. On mass construction routes (Leningradskoe $140 and Novoryazanskoe), rental rates are below average. $130 Outside the Moscow Region, rental rates in the fist half $120 of the year decreased compared with the end of 2013. $110

Class A rental rates changed the most in Ekaterinburg $100 and St. Petersburg, where the level of requested rates $90 in Q2 2014 stood at USD 120-125 in Ekaterinburg and $80 up to USD 125-130 in St. Petersburg. (74 ) $70 TRENDS $60 2008 2009 2010 2011 2012 2013 2014F In the first half of 2014, the warehouse real estate market reflected the country’s economic and political uncer- Moscow Rostov-On-Don Novosibirsk tainty. As a result, in the Moscow Region, rental rates Ekaterinburg St. Petersburg decreased and vacancy levels increased. We suggest that the volume of closed deals in 2014 might be lower Source: Cushman & Wakefield than in 2012 and 2013.

75 RENTAL RATES IN MAJOR RUSSIAN CITIES CLASS A 73 TAKE UP, ‘000 SQ M Avg base rental Avg leased City rates, USD / annum 1800 area, sq m min max 1600 Moscow 130 135 10,000-15,000 1400 St. Petersburg 125 130 2,000-10,000 1200 1000 Ekaterinburg 120 125 5,000-10,000 800 Nizhny Novgorod 120 125 3,000-5,000

600 Samara 110 120 3,000-5,000 400 Kazan 90 100 3,000-5,000 200 Rostov-On-Don 120 120 3,000-5,000 0 2009 2010 2011 2012 2013 2014F Krasnodar 120 125 3,000-5,000 Moscow Regions Forecast Novosibirsk 110 120 2,000-5,000

Source: Cushman & Wakefield Ufa 120 125 3,000-5,000 Source: Cushman & Wakefield

$140

$130

$120

$110 AEB Real Estate Monitor | 3/2014 37 $100

$90

$80

$70

$60 2008 2009 2010 2011 2012 2013 2014F

Moscow Rostov-On-Don Novosibirsk Ekaterinburg St. Petersburg AEB Real Estate Monitor | 3/2014 Moscow market overview | Warehouse and Industrial

The new construction outlook remains unchanged at a level of 1.2-1.4 mln sq m; an increase in vacancy rates 77 STOCK CLASS A (’000 SQ M) will continue. The decrease in rental rates will slow down.

12.000 Outside Moscow the high demand for quality warehouse space remained stable. The absorption level in 2014 will Other - 3.8 % be higher than the average indices in 2008-2014. The N. Novgorod - 1.0 % Rostov-on-Don - 1.4 % decrease in rental rates will stop. (75, 76, 77 ) 10.000 Krasnodar - 1.5 % Samara- 1.5 % Voronezh - 1.5 % Kazan- 2.2 % 8.000 Ekaterinburg - 2.9 % Novosibirsk- 4.6 % 76 LEASE TERMS IN MOSCOW St. Petersburg - 13.0 %

CLASS A CLASS B 6.000

Net Rent Rates $/sq m/year 130 - 135 120-130**

Operating Expenses $/sq m/year 35 - 45 20-30

Utility Charges $/sq m/year 10 - 15 10 4.000 Moscow - 67 % Yearly Rent CPI - 8-10% Indexation 3%/3.5%

Minimum Lease Term years 5 - 10 1-5 2.000 Contract Security months 3 - 6 1-3

Advance Payment months 1 - 3 1-3

Contract Currency USD/EUR RUB 0 Minimum Lease Area sq m 3000 500 2012 2013 2014F

Source: Cushman & Wakefield Source: Cushman & Wakefield

12 000 Other - 3.8% N. Novgorod - 1.0% Rostov -on-Don- 1.4% Krasnodar - 1.5% 10 000 Samara - 1.5% Voronezh - 1.5% Kazan - 2.2% Ekaterinburg - 2.9% 8 000 Novosibirsk - 4.6% St.Petersburg - 13.0%

6 000

38 4 000 AEB Real Estate Monitor | 3/2014 67 %

2 000 Moscow Moscow

0 2012 2013 2014F Moscow market overview | Hospitality AEB Real Estate Monitor | 3/2014

Hospitality – Moscow hotels in Q2 2014

Average occupancy across all market segments of Moscow Business hotels did not show better results in January hotels in Q2 2014 demonstrated a slight (2%) decrease -June 2014. Thus, US dollar RevPAR decreased by 21% to 64% as compared to the same period of 2013. During (115 US dollars), which was composed of a 5% occupancy Q2 2014 both dollar and rouble ADR (average daily rate) drop and a 15% fall of ADR nominated in US dollars (182 decreased (14% and 3% respectively) amounting to 213 USD). The rouble RevPAR decreased by 11% (4,038 rou- USD/7,473 Rubles. RevPAR (revenue per available room) bles) in line with a 4% ADR drop (6,372 roubles). nominated in USD decreased by 17% and to 136 USD. RevPAR nominated in roubles decreased by 4% to 4,762 A certain decrease of ADR and RevPAR was observed in the roubles. midscale segment: both US dollar and rouble ADR demonstrated a negative trend (-18% and -7% respectively) The upscale segment demonstrated a negative trend amounting to 143 USD/4,999 roubles. As a result, RevPAR compared to Q2 2013. Dollar RevPAR dropped by 14% showed a decline of 15% in US dollars (99 USD) and a 4% (193 USD), while RevPAR nominated in roubles by 3% in roubles (3,486 roubles). The overall occupancy demon- (6,762 roubles). Such a result was reached by a 2% oc- strated a slight 1% increase comprising 69%. cupancy decrease (61%) and a 12% fall of dollar ADR (316 It is necessary to point out that the strong fluctuations of USD), while rouble ADR remained unchanged, amounting the US dollar against the rouble had a significant impact on to 11,048 roubles. further declines in the dollar equivalent. As the US dollar

78 MOSCOW HOTELS OPENED IN Q1 2014 79 FUTURE HOTELS ANNOUNCED FOR OPENING IN MOSCOW AND MOSCOW REGION IN 2014

Room Room Name Address Class Name Address Class number number

Moscow Moscow 180 Okhotny Ryad luxury Raikin Plaza 54 Sheremetievs- 4 stars Four Seasons Hotel Moscow kaya Street, 6/1 Street, 2

Intourist Kolomenskoe 259 Kashirskoe 4 stars Moscow Marriott Novy Arbat 230 Novy Arbat, 32 5 Highway, 39Б Hotel stars

Azimut Moscow 486 Olympiyskiy 4 stars DoubleTree by Hilton Moscow 270 Leningradskoye 4 Olympic (former Avenue, 18/1 Leningradsky Riverside Highway, 39/7 stars Renaissance Moscow 200 Marshal Rybalko 3 Ibis Oktiabrskoye Pole Olympic) - rebranding Street, 2 stars

Mercure Moscow 47 Baumanskaya 3 stars Moscow Region Baumanskaya Street, 54 160 Minskoe High- 5 star Moscow Region Four Elements Borodino Club way, 100 away from MKAD Hilton Garden Inn 164 Novorizhskoe 3 stars New Riga highway, Kos- Radisson Blu Sheremetyevo 379 Sheremetyevo 3 trovo village Airport Airport stars

Heliopark Lesnoy 137 Solnechnogors- 3 stars 184 Shelkovo, Prom- 5 (former Marco Polo kiy area, Peshki Astrum Hotel Shelkovo enade Serafima stars Lesnoy) - rebranding village Sarovskogo, 2

Source: EY database, open sources, operators’ data Source: EY database, open sources, operators’ data

AEB Real Estate Monitor | 3/2014 39 AEB Real Estate Monitor | 3/2014 Moscow market overview | Hospitality

in January-June 2014 went up against the rouble by 13% · Renaissance Moscow Olympic Hotel which was under (comparing to the corresponding period of 2013), the dol- Marriott management until mid-December 2013 is now lar figures showed a stronger decline than the rouble. being managed by the Russian hotel operator Azimut Hotels. Azimut Moscow Olympic Hotel opened in Moscow An absolute gap in RevPAR between market segments has on Olympiyskiy Avenue, 18/1, in the end of April 2014. A changed and demonstrated the following results: 4-star hotel offers 486 rooms, seven restaurants, a bar, 16 conference halls, a business centre, a banquet hall, a · The variation between the upscale and midscale seg- fitness centre and parking. ments comprised 77 USD/2,700 roubles compared to 95 USD/2,910 roubles in the same period of 2013. · A new Hilton Garden Inn Moscow New Riga hotel opened at the end of March 2014 in Kostrovo village, 50 km be- · The difference in RevPar between upscale and business ho- yond the MKAD on Novorizhskoe Highway. The hotel of- tels slightly changed to 61 USD/2,144 roubles vs. the Q1 fers 164 rooms, a restaurant, seven meeting rooms, a 2013 results (68 USD/2,079 roubles). business centre, a fitness centre, sports and children’s playgrounds and a summerhouse with BBQ. % Hotels opened in Q1 2014: 400 90 · A hotel,350 known as Marco Polo Lesnoy, started to operate 80 70 · A new Raikin Plaza hotel opened in Moscow on under300 Heliopark Hotels & Resorts operator in the begin- 60 250 Sheremetievskaya Street, 6/1 in the end of January ning of April 2014. Heliopark Lesnoy is located in Solne- 50 200 2014. The 54-room hotel offers a restaurant, a lobby chnogorskiy area, Peshki village. The hotel offers 137 40 150 bar, a conference room, a gym, a beauty salon and rooms, restaurants, conference-halls, a swimming pool, 30 100 20 underground parking. a sports ground and parking. (78 ) 50 10 0 0 · A 4-star Intourist Kolomenskoe business hotel opened Hotels openedjan feb marin Q2 apr 2014: may jun jul aug sep oct nov dec in March 2014 on Kashirskoe Highway, 39Б. The hotel ADR $, 2013 ADR $, 2014 offers 259 rooms, a restaurant, four conference halls for · A new Mercure Baumanskaya hotel opened on Baumans- Загрузка 2013 Загрузка 2014 170 people, ground and underground parking. kaya Street, 54, Moscow in May 2014. The hotel offers 47 rooms, a restaurant and parking.

80 AVERAGE MARKET ADR ($) AND OCCUPANCY 81 5-STAR HOTELS: ADR ($) AND OCCUPANCY DYNAMICS, 2014 VS. 2013 DYNAMICS, 2014 VS. 2013

% % 400 90 400 90 350 80 350 80 70 300 70 300 60 60 250 250 50 50 200 200 40 40 150 150 30 30 100 20 100 20 50 10 50 10 0 0 0 0 jan feb mar apr may jun jul aug sep oct nov dec jan feb mar apr may jun jul aug sep oct nov dec

ADR $, 2013 ADR $, 2014 ADR $, 2013 ADR $, 2014 Загрузка 2013 Загрузка 2014 Загрузка 2013 Загрузка 2014

Source: EY analysis Source: EY analysis

40 AEB Real Estate Monitor | 3/2014 % 400 90 % 350 80 400 90 300 70 350 80 60 70 250 300 50 60 200 250 40 50 200 150 30 40 100 20 150 30 50 10 100 20 0 0 50 10 jan feb mar apr may jun jul aug sep oct nov dec 0 0 jan feb mar apr may jun jul aug sep oct nov dec ADR $, 2013 ADR $, 2014 ADR $, 2013 ADR $, 2014 Загрузка 2013 Загрузка 2014 Загрузка 2013 Загрузка 2014

% 400 90 350 80 300 70 60 250 50 200 40 150 30 100 20 50 10 0 0 jan feb mar apr may jun jul aug sep oct nov dec

ADR $, 2013 ADR $, 2014 Загрузка 2013 Загрузка 2014 %

400 90 350 80 300 70 60 250 50 200 40 150 30 100 20 50 10 0 0 jan feb mar apr may jun jul aug sep oct nov dec

ADR $, 2013 ADR $, 2014 Загрузка 2013 Загрузка 2014

% 400 90 350 80 300 70 60 250 50 200 40 150 30 100 20 50 10 Moscow market overview | Hospitality AEB Real Estate Monitor | 3/2014 0 0 jan feb mar apr may jun jul aug sep oct nov dec

ADR $, 2013 ADR $, 2014 Загрузка 2013 Загрузка 2014

82 4-STAR HOTELS: ADR ($) AND OCCUPANCY 83 3-STAR HOTELS: ADR ($) AND OCCUPANCY DYNAMICS, 2014 VS. 2013 DYNAMICS, 2014 VS. 2013

% % 400 90 400 90 350 80 350 80 300 70 300 70 60 60 250 250 50 50 200 200 40 40 150 30 150 30 100 20 100 20 50 10 50 10 0 0 0 0 jan feb mar apr may jun jul aug sep oct nov dec jan feb mar apr may jun jul aug sep oct nov dec

ADR $, 2013 ADR $, 2014 ADR $, 2013 ADR $, 2014 Загрузка 2013 Загрузка 2014 Загрузка 2013 Загрузка 2014 Source: EY analysis Source: EY analysis

84 OPERATIONAL INDICES DYNAMICS

January-June January-June January-June 2013 2014 / January- 2014 (US Dollars) 2013 (US Dollars) June 2013, % 5 stars

Occupancy 61% 63% 68% -2%

Average daily rate (ADR) 316 $ / 11,048 RUB 357 $ / 11,073 RUB 343 $ -12 % / 0 %

Revenue per available room 193 $ / 6,762 RUB 225 $ / 7,003 RUB 231 $ -14 % / -3 % (RevPAR)

4 stars

Occupancy 63% 68% 71% -5%

ADR 182 $ / 6,372 RUB 214 $ / 6,636 RUB 205 $ -15 % / -4 %

RevPAR 115 $ / 4,038 RUB 145 $ / 4,522 RUB 145 $ -21 % / -11 %

3 stars

Occupancy 69% 68% 73% 1%

ADR 143 $ / 4,999 RUB 173 $ / 5,365 RUB 164 $ -18 % / -7 %

RevPAR 99 $ / 3,486 RUB 117 $ / 3,644 RUB 118 $ -15 % / -4 %

Average

Occupancy 64% 66% 70% -2%

ADR 213 $ / 7,473 RUB 248 $ / 7,691 RUB 237 $ -14 % / -3 %

RevPAR 136 $ / 4,762 RUB 163 $ / 4,976 RUB 165 $ -17 % / -4 %

Source: Smith Travel Research, EY analysis

AEB Real Estate Monitor | 3/2014 41 AEB Real Estate Monitor | 3/2014 Moscow market overview | Residential

Residential

OVERVIEW LOCATION Based on the data collected by Evans for the first two In the first half of 2014 the most popular areas were “Be- quarters of 2014, there has been an accelerated decline lorusskaya/Mayakovskaya”, and Patriarchy Ponds areas in number of requests for rental properties on the Moscow with almost 20% of all rentals located there. This is a market. The decline amounted to over 25% from 2012 to shift from the previous years. In the same period of 2013, 2014. This increased decline continues a trend that started the most popular areas were “Arbat, Kropotkinskaya” and at the beginning of the year. We believe that one of the “Chysty Prudy, Kitay-Gorod”. As always, the city centre remain reasons for this decline is the continued tension in mains the most popular area with those looking for quality the geopolitical arena. Increased sanctions as well as in- rentals in Moscow. (86 ) creased uncertainty in the future has forced many companies to put on hold their plans to bring expatriate workers The “Arbat, Kropotkinskaya” area remained in the top posi- to Russia. (85 ) tion with the largest share of apartments offered for rent. “Patriarchy Ponds” and “Chysty Prudy / Kitay-Gorod” fin- 85 DECLINE IN NUMBER OF REQUESTS WHEN ish up the top three areas. Outside of the city centre, the COMPARED TO 2012 western part of the capital remains far more popular than the eastern. (87 ) 2012 2013 2014 0%

-5% 2012 2013 2014 0% -10% -5% -15% -10% -20% -15% -25% -20% -30% -25% Source: Evans

-30% Arbat, Kropotkinskaya 86 SHARE OF ALL RENTAL REQUESTS BY AREA Belorusskaya, Mayakovskaya

DobryninskayArbat,a, SerpukhovskaKropotkinskayaya

BelorusskaKutuzovskyya, Mayakovskaya, Kievskaya

NovokuznetskayDobryninskaya,a, Serpukhovska Tretyakovskayaya

OrangeKutuzovsky Metro Line,, Kievskay Southa

NovokuznetskayProspect Mira, SukharevskayTretyakovskayaa

SmolenskayOrange Metroa, Ro Line,stovskay Southa

ProspectTverskay Mira, SukharevskayOkhotny Ryada

SmolenskayViolet Metroa, Ro Linestovskay Westa

Tverskaya, Okhotny Ryad 0% 2% 4% 6% 8% 10% 12%

Violet Metro Line West 2014 2013

0% 2% 4% 6% 8% 10% 12%

2014 2013

Arbat, Kropotkinskaya Source: Evans

Chysty Prudy, Kitay-Gorod 42 AEB Real Estate Monitor | 3/2014 TverskayArbat,a, Kropotkinska Okhotny Ryadya

ChystyViolet Prudy Metro, Kita Liney-Gorod West

Universitet,Tverskay Leninskya, Okhotny prospect Ryad

FrunzenskaViolet Metroya, Pa rkLine Ku Westltury

Universitet,Red LeninskyMetro Line prospect South

FrunzenskaOktyabrskayya, Paa, rkPo Kulyankaltury

Smolenskaya, RostovskayRed Metroa embankments Line South

ProspectOkty Mirabrskaya, Sukharevskaya, Polyankaa

SmolenskayDobryninskaya, Rostovskaya, Serpukhovskaya embankmentsa

Prospect Mira, Sukharevskaya 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

Dobryninskaya, Serpukhovskaya

40% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

35% 40% 30% 35% 25% 30% 20% 25% 15% 20% 10% 15% 5% 10% 0% 1 2 3 4 5+ 5%

0% 1 2 3 4 5+ 40%

35% 40% 30% 35% 25% 30% 20% 25% 15% 20% 10% 15% 5% 10% 0% 1 2 3 4 5 5%

0% 1 2 3 4 5

70%

60%

50%70%

40%60%

30%50%

20%40%

10%30%

20%0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000 10% 2014 2013 0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000

2014 2013 50%

40% 50% 30% 40% 20% 30% 10% 20% 0% 10% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000

0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000

160% 150% 140% 130%160% 120%150% 110%140% 100%130% 120%90% 110%80% 100%70% III III IV VVI VII VIII IX XXIXII III III IV VVIIVII VIII IX XXIXII II III IV VVI 90% 2012 2013 2014 80% 70% III III IV VVI VII VIII IX XXIXII III III IV VVIIVII VIII IX XXIXII II III IV VVI 2012 2013 2014

studio 5% 26% bedroom 24% 30% 15% studio 5% 26% bedroom 24% 30% 15%

42% < $4000 8% 22% $4000 - $6000 14% $6000 - $8000 8% 6% 42% < $4000 8% 22% $4000 - $6000 14% $6000 - $8000 8% 6%

130% 120% 110% 100%130% 120%90% 110%80% 100%70% 60%90% 50%80% 40%70% III III IV VVIVII VIII IX XXIXII III III IV VVIIVIIVIII IX XXI XII II III IV VVI 60% 2012 2013 2014 50% 40% III III IV VVIVII VIII IX XXIXII III III IV VVIIVIIVIII IX XXI XII II III IV VVI 2012 2013 2014

30% < $4000 11% $8000 - $10000 23% $4000 - $6000 14% $6000 - $8000 15% 6% 30% < $4000 11% $8000 - $10000 23% $4000 - $6000 14% $6000 - $8000 15% 6%

0% 5% 10% 15% 20% 25%

Arbat-Kropotkinskaya Tverskaya-Kremlin 0% 5% 10% 15% 20% 25% Leninsky Prospect Arbat-Kropotkinskaya Lubyanka-Kitay-Gorod Tverskaya-Kremlin Leningradsky Prospect Leninsky Prospect Zamoskvorechye Lubyanka-Kitay-Gorod Krasnopresnenskaya Leningradsky Prospect Kutuzovsky Prospect Zamoskvorechye Patriarshie Prudy Krasnopresnenskaya Tsvetnoy Boulevard Kutuzovsky Prospect Kuntsevo Patriarshie Prudy Tsvetnoy Boulevard Kuntsevo

Others

130% 120% 110% 100%130% 120%90% 110%80% 100%70% 60%90% 50%80% 40%70% III III IV VVI VII VIII IX XXI XII III III IV VVIIVIIVIIIIXXXI XII II IIIIVVVI 60% 2012 2013 2014 50% 40% III III IV VVI VII VIII IX XXI XII III III IV VVIIVIIVIIIIXXXI XII II IIIIVVVI 2012 2013 2014 2012 2013 2014 0%

-5%

-10%

-15%

-20%

-25%

-30%

Arbat, Kropotkinskaya 2012 2013 2014 0% Belorusskaya, Mayakovskaya

Dobryninskaya, Serpukhovskaya -5% 2012 2013 2014 Kutuzovsky, Kievskaya 0% -10% Novokuznetskaya, Tretyakovskaya -5% -15% Orange Metro Line, South -10% -20% Prospect Mira, Sukharevskaya -15% Smolenskaya, Rostovskaya -25% Tverskaya, Okhotny Ryad Moscow-20% market overview | Residential AEB Real Estate Monitor | 3/2014 -30% Violet Metro Line West -25% 0% 2% 4% 6% 8% 10% 12% -30% Arbat, Kropotkinskaya 2014 2013 Belorusskaya, Mayakovskaya

DobryninskayArbat,a, SerpukhovskaKropotkinskayaya

Kutuzovsky, Kievskaya APARTMENTBelorusskaya, Mayakovskaya SIZE Arbat, Kropotkinskaya

TheNovokuznetskayDobryninskay biggesta, a, Serpukhovskademand Tretyakovskaya duringya the first six months of 2014 On the supply side, 2 and 3-room apartments dominate Chysty Prudy, Kitay-Gorod was for apartments with 2 or 3 rooms (1 or 2 bedrooms) with a large share of all apartments offered for rent. As OrangeKutuzovsky Metro ,Line, Kievskay Southa with almost 70% of all requests targeting these types of opposed to theTverskay firsta, Okhotny quarter, Ryad the supply of small, one-room, NovokuznetskayProspect Mira, TrSukharevskayetyakovskayaa apartments. When compared to the first quarter, there was apartments increasedViolet Metro Line to West over 8.5% of the total number SmolenskayOrange Metroa, Ro Line,stovskay Southa a small increase in the demand for apartments with 4 or apartments on the market. (89 ) Tverskaya, Okhotny Ryad Universitet, Leninsky prospect moreProspect bedrooms. Mira, Sukharevskay As mosta families prefer to move during the Frunzenskaya, Park Kultury summer,SmolenskayViolet this Metro smalla, Ro Linestovskay increase Westa is probably due to families with Red Metro Line South childrenTv erskaystartinga, Okhotny to look Ryad at their0% relocation 2%options. (88 )4% 6% 8% 10% 12%

Violet Metro Line West 2014 Oktyabrskay2013a, Polyanka

Smolenskaya, Rostovskaya embankments 87 SHARE OF ALL APARTMENTS0% OFFERED2% FOR RENT4% BY AREA6% 8% 10% 12% 2014 Prospect Mira, 2013Sukharevskaya Arbat, Kropotkinskaya Dobryninskaya, Serpukhovskaya

Chysty Prudy, Kitay-Gorod 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

TverskayArbat,a, Kropotkinska Okhotny Ryadya

ChystyViolet Prudy Metro, Kita Liney-Gorod West 40%

Tverskaya, Okhotny Ryad Universitet, Leninsky prospect 35%

FrunzenskaViolet Metroya, Pa Linerk Ku Westltury 30% Universitet,Red Leninsky Metro Line prospect South 25% FrunzenskaOktyabrskayya, Paa,rk Po Kulyankaltury 20% Smolenskaya, RostovskayRed Metroa embankments Line South 15% ProspectOkty Mirabrskaya, Sukharevskaya, Polyankaa 10% SmolenskayDobryninskaya, Rostovskaya, Serpukhovskaya embankmentsa

Prospect Mira, Sukharevskaya 0% 1% 2% 3% 5% 4% 5% 6% 7% 8% 9% 10% Source: Evans Dobryninskaya, Serpukhovskaya 0% 1 2 3 4 5+ 40% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 88 SHARE OF ALL RENTAL REQUESTS BY 89 SHARE OF ALL APARTMENTS OFFERED 35% NUMBER OF ROOMS FOR RENT BY NUMBER OF ROOMS 40% 40% 30%

35% 35% 25%

30% 30% 20%

25% 25% 15%

20% 20% 10%

15% 15% 5%

10% 10% 0% 1 2 3 4 5+ 5% 5%

0% 0% 1 2 3 4 5+ 1 2 3 4 5 40% Source: Evans Source: Evans 35% 40% AEB30% Real Estate Monitor | 3/2014 43 35% 70% 25% 30% 60% 20% 50% 25% 15% 40% 20% 10% 30% 15% 5% 20% 10% 0% 10% 1 2 3 4 5 5% 0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000 0% 1 2 3 4 5 2014 2013

70% 50% 60%

70%50% 40%

60%40% 30% 50%30% 20% 40%20%

30%10% 10%

20%0% 0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000 10% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000 2014 2013 0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000

2014 2013 50% 160% 150% 40% 140% 50% 130% 30% 120% 40% 110% 20% 100% 30% 90% 10% 80% 70% 20% III III IV VVI VII VIII IX XXIXII III III IV VVIIVII VIII IX XXIXII II III IV VVI 0% 2012 2013 2014 10% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000

0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000

160% 150% I 140% 160%130% 150%120% 140%110% 130%100% 120%90% 110%80% 70% 100% III III IV VVI VII VIII IX XXIXII III III IV VVIIVII VIII IX XXIXII II III IV VVI 90% 2012 2013 2014 80% 70% III III IV VVI VII VIII IX XXIXII III III IV VVIIVII VIII IX XXIXII II III IV VVI 2012 2013 2014 studio 5% 26% bedroom 24% 30% 15% I

studio 5% 26% bedroom 24% 30% 15% studio 5% 26% bedroom 24% 30% 15% 42% < $4000 8% 22% $4000 - $6000 14% $6000 - $8000 8% 6%

130% 120% 110% 100% 90% 80% 70% 60% 50% 42% < $4000 8% 40% III III IV VVIVII VIII IX XXIXII III III IV VVIIVIIVIII IX XXI XII II III IV VVI 22% $4000 - $6000 14% $6000 - $8000 2012 2013 2014 8% 6% 42% < $4000 8% 22% $4000 - $6000 14% $6000 - $8000 8% 6%

130% 120% 110% 130%100% 120%90% 110%80% 100%70% 60% 90% 50% 80% 40% 70% III III IV VVIVII VIII IX XXIXII III III IV VVIIVIIVIII IX XXI XII II III IV VVI 60% 2012 2013 2014 50% 40% III III IV VVIVII VIII IX XXIXII III III IV VVIIVIIVIII IX XXI XII II III IV VVI 2012 30%2013 < $4000 11% $80002014 - $10000 23% $4000 - $6000 14% $6000 - $8000 15% 6%

0% 5% 10% 15% 20% 25%

Arbat-Kropotkinskaya Tverskaya-Kremlin Leninsky Prospect Lubyanka-Kitay-Gorod Leningradsky Prospect Zamoskvorechye 30% < $4000 11% $8000 - $10000 Krasnopresnenskaya 23% $4000 - $6000 14% $6000 - $8000 Kutuzovsky Prospect 15% 6% Patriarshie Prudy 30% < $4000 11% $8000 - $10000 Tsvetnoy Boulevard 23% $4000 - $6000 14% $6000 - $8000 Kuntsevo 15% 6%

0% 5% 10% 15% 20% 25%

Arbat-Kropotkinskaya Others Tverskaya-Kremlin 0% 5% 10% 15% 20% 25% Leninsky Prospect Arbat-Kropotkinskaya Lubyanka-Kitay-Gorod Tverskaya-Kremlin Leningradsky Prospect Leninsky Prospect Zamoskvorechye 130% Lubyanka-Kitay-Gorod 120% Krasnopresnenskaya Leningradsky Prospect 110% Kutuzovsky Prospect 100% Zamoskvorechye Patriarshie Prudy 90% Krasnopresnenskaya Tsvetnoy Boulevard 80% Kutuzovsky Prospect 70% Kuntsevo 60% Patriarshie Prudy 50% Tsvetnoy Boulevard 40% Kuntsevo III III IV VVI VII VIII IX XXI XII III III IV VVIIVIIVIIIIXXXI XII II IIIIVVVI 2012 2013 2014 Others

Others

130% 120% 110% 130%100% 120%90% 110%80% 70% 100% 60% 90% 50% 80% 40% 70% III III IV VVI VII VIII IX XXI XII III III IV VVIIVIIVIIIIXXXI XII II IIIIVVVI 60% 2012 2013 2014 50% 40% III III IV VVI VII VIII IX XXI XII III III IV VVIIVIIVIIIIXXXI XII II IIIIVVVI 2012 2013 2014 2012 2013 2014 0%

-5%

-10%

-15%

-20%

-25%

-30%

Arbat, Kropotkinskaya 2012 2013 2014 0% Belorusskaya, Mayakovskaya

-5% Dobryninskaya, Serpukhovskaya

Kutuzovsky, Kievskaya -10% Novokuznetskaya, Tretyakovskaya -15% Orange Metro Line, South

-20% Prospect Mira, Sukharevskaya

-25% Smolenskaya, Rostovskaya Tverskaya, Okhotny Ryad -30% Violet Metro Line West

0% 2% 4% 6% 8% 10% 12% Arbat, Kropotkinskaya 2014 2013 Belorusskaya, Mayakovskaya

Dobryninskaya, Serpukhovskaya

Kutuzovsky, Kievskaya Arbat, Kropotkinskaya Novokuznetskaya, Tretyakovskaya Chysty Prudy, Kitay-Gorod Orange Metro Line, South Tverskaya, Okhotny Ryad Prospect Mira, Sukharevskaya

Smolenskaya, Rostovskaya Violet Metro Line West

Tverskaya, Okhotny Ryad Universitet, Leninsky prospect

Violet Metro Line West Frunzenskaya, Park Kultury

0% 2% 4% 6% Red Metro Line 8%South 10% 12%

2014 Oktyabrskay2013a, Polyanka

Smolenskaya, Rostovskaya embankments

Prospect Mira, Sukharevskaya Arbat, Kropotkinskaya Dobryninskaya, Serpukhovskaya Chysty Prudy, Kitay-Gorod 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Tverskaya, Okhotny Ryad

Violet Metro Line West 40%

Universitet, Leninsky prospect 35% Frunzenskaya, Park Kultury 30% Red Metro Line South 25% Oktyabrskaya, Polyanka 20% Smolenskaya, Rostovskaya embankments

Prospect Mira, Sukharevskaya 15%

Dobryninskaya, Serpukhovskaya 10%

0% 1% 2% 3% 5% 4% 5% 6% 7% 8% 9% 10%

0% 40% 1 2 3 4 5+

35%

30% 40%

25% 35%

AEB20% Real Estate Monitor | 3/2014 30% Moscow market overview | Residential

15% 25%

10% 20%

5% 15%

0% 10% BUDGET 1 2 3 4 5+ EXPECTATIONS The average request during the first half of 2014 increased As 5%expected, continued turmoil on the geopolitical scene slightly to just above USD 4,300 per month. Still, over 60% have0% contributed to a sharper decline than would be ex- of40% all requests were for apartments under USD 4,000 per pected under1 normal circumstances. 2 3 The addition 4 of sanc 5 - month.35% Overall, we continue to see a shift to less expensive tions is likely to further depress the market in the near apartments. However, given the recent devaluation of the future. rouble,30% the decrease, in USD terms, has not been as large as25% we expected. (90 ) At70% the beginning of the year, we expected demand to sub- side further due to the natural reduction of foreign staff 60% Almost20% 45% of all apartments listed in the first half of in the country. However, the exact numbers are difficult 50% 201415% were priced at USD 4,000 or below, and almost 75% to predict, and will largely depend on the events in rela- were offered for under USD 8,000 per month. This shows tion40% to Ukraine and any additional sanctions that might be 10% a continued shift towards equilibrium as landlords realize imposed.30% more5% and more that tenants’ budgets have been gradually 20% shrinking over the past few years. (91 ) 0% 10% 1 2 3 4 5 0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000

2014 2013 90 SHARE OF ALL RENTAL REQUESTS BY BUDGET 91 SHARE OF ALL APARTMENTS OFFERED FOR RENT BY BUDGET 70%

60% 50%

50% 40% 40% 30% 30%

20% 20%

10% 10%

0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000 0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000 2014 2013

Source: Evans Source: Evans

50% 160% 40% 150% 140% 130% 30% 120% 110% 20% 100% 90% 10% 80% 70% III III IV VVI VII VIII IX XXIXII III III IV VVIIVII VIII IX XXIXII II III IV VVI 0% 2012 2013 2014 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000

160% 150% 44140% I AEB Real Estate Monitor | 3/2014 130% 120% 110% 100% 90% 80% 70% III III IV VVI VII VIII IX XXIXII III III IV VVIIVII VIII IX XXIXII II III IV VVI 2012 2013 2014

studio 5% 26% bedroom 24% 30% 15% I

studio 5% 26% bedroom 24% 30% 15%

42% < $4000 8% 22% $4000 - $6000 14% $6000 - $8000 8% 6%

130% 120% 110% 100% 90% 80% 70% 60% 50% 42% < $4000 8% 40% III III IV VVIVII VIII IX XXIXII III III IV VVIIVIIVIII IX XXI XII II III IV VVI 22% $4000 - $6000 14% $6000 - $8000 2012 2013 2014 8% 6%

130% 120% 110% 100% 90% 80% 70% 60% 50% 40% III III IV VVIVII VIII IX XXIXII III III IV VVIIVIIVIII IX XXI XII II III IV VVI 2012 2013 2014

30% < $4000 11% $8000 - $10000 23% $4000 - $6000 14% $6000 - $8000 15% 6%

0% 5% 10% 15% 20% 25%

Arbat-Kropotkinskaya Others Tverskaya-Kremlin Leninsky Prospect Lubyanka-Kitay-Gorod Leningradsky Prospect Zamoskvorechye 130% Krasnopresnenskaya 120% 110% Kutuzovsky Prospect 100% Patriarshie Prudy 90% Tsvetnoy Boulevard 80% Kuntsevo 70% 60% 50% 40% III III IV VVI VII VIII IX XXI XII III III IV VVIIVIIVIIIIXXXI XII II IIIIVVVI 2012 2013 2014 Others

130% 120% 110% 100% 90% 80% 70% 60% 50% 40% III III IV VVI VII VIII IX XXI XII III III IV VVIIVIIVIIIIXXXI XII II IIIIVVVI 2012 2013 2014 2012 2013 2014 0%

-5%

-10%

-15%

-20%

-25%

-30%

Arbat, Kropotkinskaya

Belorusskaya, Mayakovskaya

Dobryninskaya, Serpukhovskaya

Kutuzovsky, Kievskaya

Novokuznetskaya, Tretyakovskaya

Orange Metro Line, South

Prospect Mira, Sukharevskaya

Smolenskaya, Rostovskaya

Tverskaya, Okhotny Ryad

Violet Metro Line West

0% 2% 4% 6% 8% 10% 12%

2014 2013

Arbat, Kropotkinskaya

Chysty Prudy, Kitay-Gorod

Tverskaya, Okhotny Ryad

Violet Metro Line West

Universitet, Leninsky prospect

Frunzenskaya, Park Kultury

Red Metro Line South

Oktyabrskaya, Polyanka

Smolenskaya, Rostovskaya embankments

Prospect Mira, Sukharevskaya

Dobryninskaya, Serpukhovskaya

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

40%

35%

30%

25%

20%

15%

10%

0% 1 2 3 4 5+

Moscow40% market overview | Prime rental market AEB Real Estate Monitor | 3/2014

35%

30%

25%

Prime20% rental market

15%

EXPERT’S10% OPINION

5% “The upward trend of properties in the prime rental market, noted already in0% the middle of last year, continues in the first half of the current year. The increasing1 number 2 of available 3 residential 4 properties 5 in Moscow resulted in the intensification of competition among landlords who adjusted their rental value. This especially influenced rents for residential housing located outside the city centre.”

Marina70% Morozova. PROJECT MANAGER / SENIOR RELOCATION CONSULTANT

60%

50% DEMAND REVIEWED AT THE END OF THE tenants from Ukraine. The share of tenants from Russia re- FIRST40% HALF OF THE YEAR sulted for 22% of all applicants, which is 5% less compared According30% to Intermark Relocation, the overall market de- with 2013. The demand structure by the figure of tenants mand20% weakened by 4% over the past half of the year. This between the age groups of 30-35, 35-40 and 40-45 years negative growth has been driven by several factors, in- old constitutes, at practically the same level. These age 10% cluding the current unstable political situation. However, groups together account for the 60% of the prime lettings ongoing0% tenant activity remains a good indicator for 2014. market. The overwhelming majority of tenants are couples 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000 Following the results of the last year, it can be concluded with 60% of all applicants for the Intermark Relocation 2014 2013 that tenants slightly adjusted their budgets, but their pref- company. 43% of tenants have children and a quarter of erences stay the same. (92 ) them at least two children. From this perspective, the pres- ence of a good school nearby is among the deciding factors 50% WHO RENTS? of the choice of the future residence. The40% international occupiers have kept their quota in the Moscow prime market. At the moment they are accounting WHAT IS BEING RENTED? for30% the 68% of all tenants. Apartments with 2 to 3 bedrooms are in the most demand

20% among prospective tenants and account for 36% of all the The segment of non-citizens from the CIS countries cur- requested properties for lease. Only 5% of clients are in- rently10% reached 10%, following the 6% last year. At the mo- terested in a studio apartment. Furnished apartments con- ment the market is also witnessing an increasing pool of tinue to be of a strong value and are listed as necessary 0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000

92 DYNAMICS OF DEMAND IN MOSCOW’S PRIME RENTAL MARKET (FIRST HALF OF 2014)

160% 150% 140% 130% 120% 110% 100% 90% 80% 70% III III IV VVI VII VIII IX XXIXII III III IV VVIIVII VIII IX XXIXII II III IV VVI 2012 2013 2014 Source: Intermark Relocation

AEB Real Estate Monitor | 3/2014 45

studio 5% 26% bedroom 24% 30% 15%

42% < $4000 8% 22% $4000 - $6000 14% $6000 - $8000 8% 6%

130% 120% 110% 100% 90% 80% 70% 60% 50% 40% III III IV VVIVII VIII IX XXIXII III III IV VVIIVIIVIII IX XXI XII II III IV VVI 2012 2013 2014

30% < $4000 11% $8000 - $10000 23% $4000 - $6000 14% $6000 - $8000 15% 6%

0% 5% 10% 15% 20% 25%

Arbat-Kropotkinskaya Tverskaya-Kremlin Leninsky Prospect Lubyanka-Kitay-Gorod Leningradsky Prospect Zamoskvorechye Krasnopresnenskaya Kutuzovsky Prospect Patriarshie Prudy Tsvetnoy Boulevard Kuntsevo

Others

130% 120% 110% 100% 90% 80% 70% 60% 50% 40% III III IV VVI VII VIII IX XXI XII III III IV VVIIVIIVIIIIXXXI XII II IIIIVVVI 2012 2013 2014 AEB Real Estate Monitor | 3/2014 Moscow market overview | Housing Market

criteria among 80%. Almost every second tenant desires a had to make a choice if they were ready to go below the parking space located at the residence. desired rental rate or to wait longer for an attractive offer.

The demand is focused on inner locations such as Tvers- The first six months of 2014 resulted in 16% growth in the kaya-Kremlin, Arbat-Kropotkinskaya, Zamoskvorechie and number of properties in prime rental estate including the Krasnopresnenskaya-Barrikadnaya and outside the city apartments which are on the market for the first time. Such centre in the Leningradsky Prospect area. (93 ) properties are very popular among prospective tenants and are primarily considered by them. Such strong rental market According to the latest analysis, the main market demand segment shows its current popularity as a business and its lies with the apartments with the rental value of up to USD attractiveness for the real estate investors. (95 ) 4000 per month for a property. (94 ) The main market share of the property offers (almost 40%) SUPPLY, COMPETITION INCREASES is represented by two bedroom apartments, in contrast to The number of apartments available for lease accelerates the least popular studio apartments that do not exceed from month to month, a statement that can be concluded 2% of the available properties. Therefore the situation fully by the end of the half period of the 2014. (As a result, for expresses the preferences for the accommodations in Mos-

the period from January to June 2014 the volume of deals cow. The apartments for lease have an averagestudio floor area increased by 17%) of 120-150 square metres and make up 22% of 1the bedroom overall 5% offers. However15% they don’t dominate too strongly2 bedroom and the For landlords it results in more competition within the prime properties with different lay-outs are also available3 bedroom in the 24% rental housing market. In the middle of this summer they prime lease market. 4 bedroom and more 26%

30%

93 SUPPLY ANALYSIS OF THE HIGH-BUDGET 94 SEGMENTATION OF DEMAND ACCORDING SEGMENT OF THE RESIDENTIAL RENTAL TO THE RENTAL VALUE OF THE PROPERTIES MARKET IN MOSCOW IN TERMS OF NUMBER IN MOSCOW’S PRIME RENTAL MARKET OF ROOMS (FIRST HALF OF 2014) (FIRST HALF OF 2014)

< $4000 studio $4000 - $6000 1 bedroom $6000 - $8000 5% 6% $8000 - $10.000 15% 2 bedroom 8% $10.000 - $15.000 3 bedroom 8% 24% 42% > $15.000 4 bedroom and more 14% 26%

30% 22%

Source: Intermark Relocation Source: Intermark Relocation

46 AEB Real Estate Monitor | 3/2014

< $4000 < $4000 $4000 - $6000 $4000 - $6000 $6000 - $8000 $6000 - $8000 7% $8000 - $10.000 6% $8000 - $10.000 30% 8% 15% $10.000 - $15.000 $10.000 - $15.000 > $15.000 8% 42% > $15.000 11%

14% 14% 23%

22%

< $4000 $4000 - $6000 $6000 - $8000 7% $8000 - $10.000 15% 30% $10.000 - $15.000 > $15.000

11%

14% 23% 2012 2013 2014 0%

-5%

-10%

-15%

-20%

-25%

-30%

Arbat, Kropotkinskaya

Belorusskaya, Mayakovskaya

Dobryninskaya, Serpukhovskaya 2012 2013 2014 0% Kutuzovsky, Kievskaya

Novokuznetskay-5% a, Tretyakovskaya

Orange Metro Line, South -10% Prospect Mira, Sukharevskaya -15% Smolenskaya, Rostovskaya

-20% Tverskaya, Okhotny Ryad

-25% Violet Metro Line West

-30% 0% 2% 4% 6% 8% 10% 12% 2014 2013

Arbat, Kropotkinskaya

Belorusskaya, Mayakovskaya Arbat, Kropotkinskaya Dobryninskaya, Serpukhovskaya Chysty Prudy, Kitay-Gorod Kutuzovsky, Kievskaya Tverskaya, Okhotny Ryad Novokuznetskaya, Tretyakovskaya

Orange MetroViolet Line, Metro South Line West

ProspectUniversitet, Mira, Sukharevskay Leninsky prospecta

SmolenskayFrunzenskaa, Rostovskayya, Parka Ku ltury Tverskaya, Okhotny Ryad Red Metro Line South Violet Metro Line West Oktyabrskaya, Polyanka 0% 2% 4% 6% 8% 10% 12% Smolenskaya, Rostovskaya embankments 2014 2013 Prospect Mira, Sukharevskaya

Dobryninskaya, Serpukhovskaya

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Arbat, Kropotkinskaya

Chysty Prudy, Kitay-Gorod 40% Tverskaya, Okhotny Ryad 35% Violet Metro Line West 30% Universitet, Leninsky prospect

25% Frunzenskaya, Park Kultury

20% Red Metro Line South

15% Oktyabrskaya, Polyanka

Smolenskaya, Rostovskaya embankments 10%

Prospect Mira, Sukharevskaya 5% Dobryninskaya, Serpukhovskaya 0% 1 2 0% 3 1% 4 2% 5+ 3% 4% 5% 6% 7% 8% 9% 10%

40% 40% 35% 35% 30% 30% 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% 1 2 3 4 5+ 1 2 3 4 5

40%

35% 70% 30% 60%

50%25%

40%20%

30%15% 20% 10% 10% 5% 0% 0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000 1 2 3 4 5 2014 2013

50%

70% 40% 60% 30% 50%

40%20%

30% 10% 20% 0% 10% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000 0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000

2014 2013

160% 150% 140%50% 130% 120%40% 110% 100% 30% 90% 80% 20%70% III III IV VVI VII VIII IX XXIXII III III IV VVIIVII VIII IX XXIXII II III IV VVI 10% 2012 2013 2014

0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000

I 160% 150% 140% 130% 120% 110% 100% 90% 80% 70% III III IV VVI VII VIII IX XXIXII III III IV VVIIVII VIII IX XXIXII II III IV VVI 2012 2013 2014 studio 5% 26% bedroom 24% 30% 15%

studio 5% 26% Moscow market overview | Housing Market AEB Real Estate Monitor | 3/2014 bedroom 24% 30% 15%

42% < $4000 8% 22% $4000 - $6000 14% $6000 - $8000 8% 6% studio 1 bedroom 5% Despite the significant increase in the supply of vacant to 15,000 increased15% by 3% compared to last year. It2 bedroomcould apartments, most of them still predominate in the same be argued that the budget structure of the supply 3reflects bedroom residential130% hubs of the city as the year before. Every fifth the structure of the demand in24% the prime rental market of 120% 4 bedroom apartment110% for lease is situated in the Arbat-Kropotkinskaya Moscow. (97 ) and more 26% district.100% Other popular areas are Tverskaya Street and the 90% Kremlin, Leninsky Prospekt, Lubyanka and Kitay-Gorod, BUDGETS: THE LATEST30% DEVELOPMENT 80% Leningradsky70% Prospect and Zamoskvorechie, where the An average asking price decreased by 4% in comparison supply60% is more or less represented evenly. (96 ) with 2013 and amounted USD 7,500 per month. Consider- 50% 40% ing a significant increase in supply, this figure shows that Talking aboutIII the III budget IV VV inIV theII first VIII IXhalf XXof 2014,IXII theII maI- IIIdue IV to VVstiff IIcompetition,VIIVIII IX someXX Ilandlords XII haveII III been IV forcedVVI to 2012 2013 2014 jority of the supply volume, at 30%, was for rental prices adjust their asking prices. 42% < $4000 8% beneath USD 4,000 per month. 23% of apartments were in 22% $4000 - $6000 14% $6000 - $8000 the price range from USD 4,000 to 6,000. At the same time 8% 6% the supply for larger properties in the budget of USD 10,000

95 DYNAMICS OF THE OF SUPPLY OF MOSCOW’S PRIME RENTAL MARKET (JANUARY 2012 – 100%) < $4000 130% $4000 - $6000 120% $6000 - $8000 110% 6% $8000 - $10.000 100% 8% 90% $10.000 - $15.000 8% 80% 42% > $15.000 70% 60% 14% 50% 40% 22% III III IV VVIVII VIII IX XXIXII III III IV VVIIVIIVIII IX XXI XII II III IV VVI 2012 2013 2014 30% < $4000 11% $8000 - $10000 Source: Intermark Relocation 23% $4000 - $6000 14% $6000 - $8000 15% 6% 96 TERRITORIAL STRUCTURE OF SUPPLY 97 SEGMENTATION OF SUPPLY ACCORDING IN THE RESIDENTIAL RENTAL MARKET TO THE RENTAL PRICE OF THE PROPERTIES OF MOSCOW (FIRST HALF OF 2014) IN MOSCOW’S PRIME RENTAL MARKET

0% 5% 10% 15% 20% 25% (FIRST HALF OF 2014)

Arbat-Kropotkinskaya Tverskaya-Kremlin < $4000 Leninsky Prospect $4000 - $6000 Lubyanka-Kitay-Gorod $6000 - $8000 Leningradsky Prospect 7% $8000 - $10.000 Zamoskvorechye 15% 30% $10.000 - $15.000 Krasnopresnenskaya > $15.000 Kutuzovsky Prospect 11% Patriarshie 30% Prudy < $4000 11% $8000 - $10000 Tsvetnoy Boulev23% $4000ard - $6000 14% $6000 - $8000 14% 23% 15%Kuntsevo 6%

Source: Intermark Relocation Others 0% 5% 10% 15% 20% 25%

Arbat-Kropotkinskaya Source: Intermark Relocation Tverskaya-Kremlin AEB Real Estate Monitor | 3/2014 47 Leninsky Prospect 130% Lubyanka-Kitay-Gorod 120% Lening110%radsky Prospect 100% Zamoskvorechye 90%Krasnopresnenskaya 80% Kutuzovsky Prospect 70% 60% Patriarshie Prudy 50% Tsvetnoy Boulevard 40% Kuntsevo III III IV VVI VII VIII IX XXI XII III III IV VVIIVIIVIIIIXXXI XII II IIIIVVVI 2012 2013 2014

Others

130% 120% 110% 100% 90% 80% 70% 60% 50% 40% III III IV VVI VII VIII IX XXI XII III III IV VVIIVIIVIIIIXXXI XII II IIIIVVVI 2012 2013 2014 2012 2013 2014 0%

-5%

-10%

-15%

-20%

-25%

-30%

Arbat, Kropotkinskaya

Belorusskaya, Mayakovskaya

Dobryninskaya, Serpukhovskaya

Kutuzovsky, Kievskaya

Novokuznetskaya, Tretyakovskaya

Orange Metro Line, South

Prospect Mira, Sukharevskaya

Smolenskaya, Rostovskaya

Tverskaya, Okhotny Ryad

Violet Metro Line West

0% 2% 4% 6% 8% 10% 12%

2014 2013

Arbat, Kropotkinskaya

Chysty Prudy, Kitay-Gorod

Tverskaya, Okhotny Ryad

Violet Metro Line West

Universitet, Leninsky prospect

Frunzenskaya, Park Kultury

Red Metro Line South

Oktyabrskaya, Polyanka

Smolenskaya, Rostovskaya embankments

Prospect Mira, Sukharevskaya

Dobryninskaya, Serpukhovskaya

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

40%

35%

30%

25%

20%

15%

10%

0% 1 2 3 4 5+

40%

35%

30%

25%

20%

15%

10%

0% 1 2 3 4 5

70%

60%

50%

40%

30%

20%

10%

0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000

2014 2013

50%

40%

30%

20%

10%

0% 1. Under $4 000 2. $4 000 - $8 000 3. $8 000 - $12 000 4. Above $12 000

160% 150% 140% 130% 120% 110% 100% 90% 80% 70% III III IV VVI VII VIII IX XXIXII III III IV VVIIVII VIII IX XXIXII II III IV VVI 2012 2013 2014

studio 5% 26% bedroom 24% 30% 15%

42% < $4000 8% 22% $4000 - $6000 14% $6000 - $8000 8% 6%

130% 120% 110% 100% 90% 80% AEB Real Estate Monitor | 3/2014 Moscow market overview | Housing Market 70% 60% 50% 40% III III IV VVIVII VIII IX XXIXII III III IV VVIIVIIVIII IX XXI XII II III IV VVI 2012 2013 2014

The annual lease rate in 2014 slowed by 1.5% in comparison with the same period of the previous year and led to the value of USD 670 per square meter per year. 98 SEGMENTATION OF THE ASKING PRICE ACCORDING TO THE PARTICULAR AREA A significant majority of the supply in the prime leasing IN MOSCOW’S PRIME RENTAL MARKET market situated in Arbat-Kropotkinskaya, Krasnopresnen- (FIRST HALF OF 2014) skaya-Barrikadnaya (taking into consideration the high- class apartments in “Moscow-City” buildings) and Patriar- Change chie Ponds areas. During the first half of 2014 rental rates Area $/month (to dec. 2013) experienced some fluctuations in both directions depending on the location. The largest rental value was observed Arbat-Kropotkinskaya 10 123$ 5% 30% < $4000 11% $8000 - $10000 in the districts of Kitay-Gorod, Tsvetnoy Boulevard and Pa- Krasnopresnenskaya 8 815$ -2% triarchie Ponds.23% $4000 (98 - $6000 ) 14% $6000 - $8000 Patriarshie Prudy 8 310$ 15% 6% 6% The average asking price for tenancies showed no growth Lubyanka-Kitay-Gorod 8 053$ 7% and at the moment is USD 6,900 per month. (99 ) Kuntsevo 7 600$ 5%

0% 5% 10% 15% 20% 25% Tverskaya-Kremlin 7 335$ 0%

Arbat-Kropotkinskaya Zamoskvorechye 7 238$ -3% Tverskaya-Kremlin Tsvetnoy Boulevard 6 271$ 7% Leninsky Prospect Lubyanka-Kitay-Gorod Leningradsky Prospect 6 185$ -8% Leningradsky Prospect Frunzenskaya 6 036$ -3% Zamoskvorechye Krasnopresnenskaya Leninsky Prospect 5 234$ -6% Kutuzovsky Prospect Kutuzovsky Prospect 4 772$ 1% Patriarshie Prudy Tsvetnoy Boulevard Others 4 128$ -2% Kuntsevo Taganskaya 4 083$ -1%

Source: Intermark Relocation

Others 99 DYNAMICS OF THE AVERAGE ASKING PRICE FOR TENANCIES IN MOSCOW’S PRIME RENTAL MARKET (FIRST HALF OF 2014)

130% 120% 110% 100% 90% 80% 70% 60% 50% 40% III III IV VVI VII VIII IX XXI XII III III IV VVIIVIIVIIIIXXXI XII II IIIIVVVI 2012 2013 2014 Source: Intermark Relocation

48 AEB Real Estate Monitor | 3/2014 Hot Topic AEB Real Estate Monitor | 3/2014

Hot Topic:

Key Changes to the RF Land Code introduced by Federal Law No. 171-FZ of June 23, 2014

by Sergey Trakhtenberg, Dentons Partner, Head of Rus- sian Real Estate / Construction Julia Lakhnova, Practice Dentons Associate

With the profound changes introduced to the Russian Federa- building, structure, or premises located on the land plot. With tion Land Code (RF LC) and other legislative acts by Federal respect to leases, Law 171 sets forth more exceptions than Law No. Law 171 of June 23, 2014 (Law 171), property in- for sale of public land. In particular, no auction is required for vestors should be keeping a close eye on how the real estate allocation of land plots to legal entities for siting energy, wa- market will evolve in the new environment. ter, gas and other supply facilities, implementation of major investment projects as foreseen under the RF Government By no means exhaustive, this article presents a general over- Decree, subsoil use, concession projects, etc. Residents of view of some of the major changes relevant to the construc- special economic zones and development territories (territorii tion and development industry, most of which come into force razvitiya) and some other eligible investors may also enjoy on March 1, 2015. exemption from the auction procedure. Thus, Law 171 provides for numerous cases where no auction is required; many MAJOR TRENDS IN ALLOCATION OF PUBLIC of those, however, do not match business needs. LAND FOR CONSTRUCTION One of the advantages of the regime under Law 171 is that Boosting Auction Procedure in terms of procedure, there is a standard detailed auction Businesses should be prepared for a drastic change of the procedure for all cases of allocation of public land. Also, un- procedure for allocation of state and municipally owned land der the new scheme, a public auction may be initiated by plots to citizens and legal entities. The changes are primarily any interested parties (individuals or legal entities). Another aimed at streamlining and standardizing the procedure for substantial development is that Law 171 expressly states that the allocation of public land. a sole bidder of an auction can be awarded the sales contract (i.e., in such circumstances the auction will not be declared To promote transparency and competitiveness, Law 171 re- invalid, unlike under the current rules). volves around the auction procedure. Most importantly, the sale and lease of state and municipal land plots must be solely It seems, however, that one of the possible side effects of the by auction. Still, Law 171 provides for some exceptions to this changes of allocation of public land includes elimination of general rule, when the preliminary site approval procedure the tender procedure – Law 171 makes reference to auctions, applies. In particular, land plots from land allocated for com- not tenders. The auction procedure does allow for eligibility plex development of a territory may be sold to parties to an requirements to be set for bidders, yet it is the tender pro- agreement for complex development of a territory. Land plots cedure that has been specifically designed for allocation of may also be allocated without an auction to the owner of a public land with special terms of use. Now that Law 171 rules

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out tenders, the legal framework for allocation of such land title of the said building at public auction after it was seized plots might arguably be considered less flexible. from the previous owner due to termination of the land plot lease agreement; or Prohibition of Sale of Public Land for Construction 2. the owner of the unfinished building, if within six months One of the most debated issues in connection with Law 171 is of the expiration of the lease agreement for the underlying that it places an outright ban on the sale of state and munici- land plot the competent authority has not filed a claim in pal land plots with a primary permitted use of construction of court as described above; or a court has refused to grant buildings and structures. The allocation of such land plots for such a claim or the property was not sold at public auction construction should be primarily through lease to the future due to lack of bidders. In this case no auction is required, developer. While generally contemplated as an instrument to unless the land plot was allocated to the previous owner of fight corruption and undue influence in relation to allocation the property for construction completion. of public land for construction purposes, this initiative has been criticized by professional developers, who are thus de- Law 171 provides for special arrangements for the owners prived of the opportunity to purchase such land for construc- whose title to an unfinished building was registered before tion and have no option other than to contract a long-term March 1, 2015 or a relevant state or municipally-owned land lease of the land plot. The RF LC sets out an exhaustive list plot was leased before March 1, 2015, where the owner of of exceptions to this rule but, sadly, many of them are not the unfinished property has the right to lease the relevant relevant to developers and construction professionals. land plot without an auction once, for a period of up to three years for the purpose of completing construction, unless the Maximum Term of Lease land plot was previously allocated to any of the previous own- In terms of lease regulation, Law 171 provides for a maximum ers on the terms specified above. term of different lease agreements of state or municipally- owned land. Some of the examples relevant to business may In the event of termination of a lease agreement of a state include agreements for lease of land plots for siting linear or municipally owned land plot any unfinished buildings objects (49 years), for construction or reconstruction of build- on such land plots may be seized from the owner by court ings and other structures of the land plot (up to 10 years), for decision and be sold at public auction, unless the owner subsoil use (the term of the license extended for up to two can prove that the breach of the construction schedule oc- years), or for lease of underlying land plots to owners of the curred due to acts/omissions of the state authorities, local premises located thereon (49 years). authorities, or entities operating utilities systems necessary for the property. Given that, in practical terms, it is not No Pre-emption Rights of Prior Tenants unusual for businesses to forget to reinstate lease agree- Another material change that may hit businesses is that Law ments while conducting construction works thereon, this 171 does not confer on prior tenants any preferential rights new provision should not be neglected. The above rules on to enter into a new state or municipally owned land plot lease compulsory alienation of unfinished buildings do not apply agreement without an auction. There are, however, excep- to co-financed construction. tions to this rule (these are practically identical to those in which a land plot can be leased without an auction), as well Other Material Changes as a set of requirements to be met by the tenants willing to A brief overview of some other highlights of Law 171: rely on such exceptions. · Law 171 refers to the land plot location plans necessary for formation of land plots from state land, which, depending Lease of Land Plots with Unfinished Structures on the purpose for which the land plot is being formed, may Under Law 171 the rights to a state or municipally owned be prepared by a state authority, local authority, citizen, or land plot may be granted without an auction for complet- legal entity; ing construction of an unfinished building thereon, but only once and for a term of up to three years. Only the following · a new simplified procedure for short-term easements (for persons are eligible for acquiring a land plot in this manner: a term of up to three years) with respect to a portion of a 1. the owner of the unfinished building, having acquired the state or municipally owned land plot is introduced, which

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requires no cadastral registration of such portion of a land · it is now possible to exchange land plots in state or munici- plot or state registration of such encumbrance; pal ownership for land plots in private ownership by means of an exchange agreement. · for some purposes the use of state or municipally-owned land will now be possible even without allocation of the land Other important developments include introduction of further plot or establishments of an easement (e.g., siting of non- regulation of the permitted use classifier, new provisions on stationary retail outlets, advertising structures); gratuitous transfers of federally owned land plots into municipal or regional ownership, and other substantial changes. · Law 171 overhauls the procedure of repartitioning of land Overall, more than 30 regulatory acts have been amended by plots and expands the list of cases in which repartitioning of Law 171 to comply with the new rules. land and/or land plots in state or municipal ownership and land plots in private ownership is permitted; and

BOARD COUNCIL OF NATIONAL AUDITING COMMISSION Philippe Pegorier (Alstom), REPRESENTATION Marco Koschier (Deloitte) Chairman Chairman of the Board Austria - Dietmar Fellner Alexander Guskov (IBFS United) Olga Bantsekina (Coleman Belgium - Tikhon Evdokimov René Pischel (European Space Services UK Ltd), First Deputy Chair Czech Republic - Jiří Štěrba Agency) Teemu Helppolainen (YIT), Denmark - Aage V. Nielsen Roman Semiletov Deputy Chairman Deputy Chairman (HeidelbergCement RUS) Joerg Bongartz (Deutsche Bank Estonia - Meelis Milder Gerard Uijtendaal Ltd), Treasurer France - David Lasfargue (HLB Vneshaudit) Michael Akim (ABB Russia) Finland - Jari Jumpponen David Gray (PwC) Germany - Michael Harms CHIEF EXECUTIVE OFFICER Jon Hellevig (Awara Group) Greece - Stefanos Vafeidis Frank Schauff Antonio Linares (ROCA in Russia Hungary - Sandor Rethi and CIS) Iceland - Ingolfur Skulason Gerald Sakuler (Individual Member) Italy - Brenno Todero Ireland - Declan O’Sullivan Lithuania - Julius Salenekas Montenegro - Luka Nikčević Netherlands - Lodewijk Schlingemann Poland - Karolina Skrobotowicz Republic of Croatia - Jakov Despot Sweden - Fredrik Svensson Switzerland - Marco Mariotti Turkey - Ali Tunc Can United Kingdom - Donald Scott Chairman

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Real Estate Committee AEB REAL ESTATE COMMITTEE Steering Group Members The AEB Real Estate Committee was founded in 2003 AEB Real Estate Committee and brings together real estate professionals from a va- Chairman riety of areas including developers, investors, financiers, Victor Verma consultants, project and facilities managers, and other General Manager, service providers. OOO Caverion Elmek The Real Estate Committee has three primary objectives around which its activities are structured: to facilitate Christophe Vicic the exchange of information regarding real estate and Chief Operating Officer, development issues in Russia; to influence existing pro- JLL cedures in order to increase the attractiveness of foreign and domestic investment; and to establish a “bridge” between the AEB, the Moscow Government, State Duma and other relevant governmental bodies.

Christopher Van Riet Managing Director, Radius Group AEB REAL ESTATE COMMITTEE MEMBERS:

AERECO S.A. (FRANCE) - Representative Office in Russian Federation, ALPE consulting OOO, ALRUD Law Firm, Arup, Astron - Lindab Buildings LLC, David Izett Attorneys at law Borenius Russia Ltd., Bank Credit Chief Operating Officer, Suisse (Moscow), Bayer ZAO, BEITEN BURKHARDT Cushman & Wakefield Moscow, Bilfinger LLC, BNP Paribas, BUREAU VERITAS RUS CJSC, Caverion Elmek OOO, CMS, Russia, Crocus International, Cushman & Wakefield, Daikin Europe N.V. Representative Office, Debevoise and Plimpton LLP, Deloitte, Dentons (Salans, FMC, SNR Denton Europe), Olga Arkhangelskaya DLA Piper, DS Law.Attorneys, DuPont Science and Head of Real Estate Technologies, Evans Property Services, EY, FourSquares, Advisory Services, Gerald Sakuler, Gide Loyrette Nouel, GOLTSBLAT BLP, EY Hannes Snellman, IKEA Shopping Centres Russia, Incor Alliance Law Office, Intermark Relocation, JLL, Kinnarps ZAO, KPMG, Lidings, LINDNER, Mazars, METRO AG, Noerr OOO, OBI Russia, Orange Business Services, P&R Engineering, Pepeliaev Group, LLC, Porsche Russland, PwC, Rautaruukki OYJ, Roedl & Partner, Saint-Gobain For more information please contact CIS, Spectrum holding Ltd, Sponda Russia, Stupino 1 Industrial Park, Terrakultur, TMF Group, Troika Saida Makhmudova, Committee Coordinator, Relocations Ltd., VEGAS LEX Advocate Bureau, YIT at [email protected]. Rakennus Representative Office

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