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Colliers International Reviews Year’s Results for Commercial Real Estate Market in Russia and Shares Forecasts for 2015

The international consultancy Colliers International has summed up the results of the outgoing year and shared its prognosis for the development of the real estate market in Moscow and Russia’s regions in 2015. Given the current unstable economic environment, many companies are revising their business development plans, property owners are lowering lease rates and vacancy rates continue to rise. However, the general atmosphere in the market is not overly pessimistic.
Nikolay Kazanskiy, Managing Partner of Colliers International Russia, noted that despite the unfavourable macroeconomic environment the company remains rather optimistic about the prospects for the year ahead. Some large companies are already eyeing potential properties and look to make lease agreements next year. “The most advantageous deals are reached during times of crisis,” Kazanskiy noted.

Capital markets

According to Colliers International, the total investment volume for 2014 reached $3.5 billion, 60% less than in the record year of 2013, when this figure peaked at $8.2 billion. Most of the investments went into office real estate – approximately $1.4 billion (40%). Retail premises came in second with $1 billion in investment (29%), while hotels were third with $559 million (16%).

The volume of investment is expected to remain at a similar level next year. “There were few classic investment deals,” noted Stanislav Bibik, Head of Capital Markets, Colliers International Russia. “In 2014 investor engagement increased yet the volume of actual deals completed decreased. However, this was not a bad result considering the market conditions. Given the heightened volatility and unstable currency market, investors had difficulty reaching decisions about entering one project or another. They followed to a very cautious policy and tried to comprehend what is going on in the market,” Bibik believes.

New trends of the year include interest in indirect investment (for example, the purchase of a stake in a company rather than an entire property), the desire of local capital to diversify and the emergence of new types of investors. 

Russian investment accounted for 80% of the investment and Moscow assets accounted for 85% of this volume. At the same time, the Russian capital is demonstrating the highest yields among major European cities.

Warehouses

In 2014 a record volume of warehouse space was introduced to the market of the Moscow region – 1.7 million sqm. Meanwhile, the take-up rate was down 30% from the previous year. In 2013 the market saw a clear deficit of quality warehouse space, as 890,000 sqm of new space was commissioned while a total of 1.4 million sqm was bought or leased, according to the calculations of Colliers International.

The average vacancy rate for quality warehouses is estimated at 6.3%, which is the highest vacancy rate seen in the past 5 years. In 2015 this figure could reach as high as 10%. “Next year not so many projects will be completed – a maximum of 500,000 sqm total. Here we are not counting the projects for which contracts have already been signed and will be occupied. So the vacancy for properties just entering the market will not be very high,” said Vladislav Ryabov, Partner, Regional Director of Warehouse and Industrial Department, Colliers International Russia. “Vacancy on the secondary market is another question. Right now we cannot predict how various companies are going to feel and how much they will cut back their development plans, but we can say for sure that there will be a certain amount of tenant rotation. The space freed up will find new tenants by the end of 2015 and in the first half of 2016 the vacancy rate will decrease to a level no higher than 5%”, he said.

The average lease rate for Class A warehouse complexes in the Moscow region at the end of 2014 was 4500 roubles/sqm/year.

Retail real estate

Competition among shopping centres is growing ever more intense and in this environment they are extremely sensitive to crisis phenomena. In 2014 the total supply of quality shopping space in Russia reached 23 million sqm (GLA). The city of Moscow accounts for approximately one-fourth of the market. As Nikolay Kazanskiy pointed out, in 2014 Russia moved into the top spot in Europe according to volume of shopping space, moving ahead of France and Germany. However, considering the country’s large population the level of saturation of retail space still remains at about one-half of that found in Western countries. 

In 2014 a total of 67 new shopping centres opened in Russia with a total space of 2.4 million sqm (GLA), while in 2015 announced plans call for the completion of another 105 shopping malls with 3.9 million (GLA). This year 17 retail centres with more than 800,000 sqm (GLA) opened in Moscow, with another 1.3 million sqm in new space expected in 2015. However, according to experts of Colliers International, developers will substantially scale down their projects. At present the vacancy rate in Moscow stands at 6%.  

“Tenants began to revise their plans at the end of 2013, and right now this trend has become quite apparent. Due to the challenging economic situation we can assume that many of the properties of projects announced by developers for opening in Q4 2015 will be postponed to 2016,” says Anna Nikandrova, Regional Director of Retail Property Department, Colliers International Russia.

Among the key events of the year, Anna Nikandrova highlighted the change in retail space per capita for Russian cities. For a long time St. Petersburg was first in the rating but this year Samara took over the top spot. Moscow climbed from fifth to fourth place. Next year the largest number of projects are planned for cities with a population of 300,000 to 1 million, with Kursk, Barnaul, Arkhangelsk, Irkutsk and Tyumen leading the way.

Offices

Office real estate is traditionally the most vulnerable segment to fluctuations in the macroeconomic situation. The main trends in this segment include a transition of many owners to rouble-based lease rates, primarily in the Class B+, while dollar-base rates are being pegged to a specific exchange rate. The average asking lease rate has declined by 17% in dollar terms while growing 15% in rouble terms. In 2014 approximately 1.5 million sqm of new office premises entered the market, which is 70% more than in 2013.

Developers have announced plans for the construction of 1 million sqm of new office space in Moscow in 2015, which would increase the total volume of quality office premises to 16.9 million sqm. Vacancy rates are holding steady at a level of 14%. The new supply coming on the market will force owners to be more flexible and compromise in their dealings with tenants, adjusting lease rates and offering various types of bonuses.