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Office market repOrtMoscow

H1 2015

research

H1 2015 saw a 58% year-on-year decline in the delivery of high-quality office space, which amounted to 224 thousand sq m.

Net take-up dropped by 73% in H1 2015 compared to the same period last year.

Decline in asking rents slowed down in April-July 2015 reaching 508 $/sq m/year for Class A offices and 297 $/sq m/year for Class B offices.

HigHligHts

Office market repOrt. mOscOw

2

Key indicators. Dynamics*

“Despite the record-breaking negative trends prevailing in the market, including a significant decline in rental rates and high vacancy rate, the current levels of tenant activity allow us to revise pessimistic forecasts provided earlier. Apart from a significant number of lease renegotiations typical of any crisis, companies continue to lease new office space, although this type of activity is at its lowest level today. This means that the key market players proved to be capable of adapting to the current environment. The key factor stimulating tenants to relocate is an opportunity to pay a lower rent. However, it is still early to say that the crisis is nearing its end. If the situation does not change, it may take quite a few years to return to the pre crisis levels”.

Konstantin LosiukovDirector, Office Department Knight Frank

Office market report Moscow

Class А Class ВTotal stock, thousand sq m 14,987

including, thousand sq m 3,584 11,403

Delivered in H1 2015, thousand sq m 224

including, thousand sq m 167 57

Vacancy rate, % 28.2(-1.4 p. p.)*

17.3(+2.0 p. p.)*

Average weighted asking rental rate**$/sq m/year 508

(-13.9%)*297

(-5.4%)*

rub/sq m/year 27,321(-9.3%)*

15,731(-8.3%)*

Rental rates range** $/sq m/yearrub/sq m/year

350–1,20014,000–45,000

250–6508,000–35,000

Average OPEX rate, rub/sq m/year 4,000–6,700 2,500–4,500

* Compared to Q4 2014** Excluding operational expenses, utility bills and VAT (18%)

Source: Knight Frank Research, 2015

SupplyIn H1 2015, new delivery of Class A and B office space dropped by 58% year-on-year to 224 thousand sq m, with Class A offices accounting for 167 thousand sq m and Class B offices – for 57 thousand sq m. By the end of the first six months of 2015, supply of completed high-quality office space reached almost 15 million sq m.

the decline in construction activity was caused by a low demand accompanied by a large

number of office buildings completed in 2013–2014: these properties make up almost half (46%) of vacant Class A and Class B offices.

In H1 2015, Class A vacancy rate was 28.2%, with Class B vacancy rate reaching 17.3%. several large transactions are currently pending, with the office premises withdrawn from the market, which is reflected in the slightly lower vacancy rate.


3

DemandIn H1 2015, take-up of high-quality office space totalled 61 thousand sq m, down 73% versus the same period last year and almost 90% versus H1 2013.

lease renegotiations remain the dominant type of transactions: they accounted for 75% of deals versus 45% in H1 2014 and 25% in H1 2013. Aiming to optimize costs, tenants try to change leasing terms to align with market conditions. However, it should be noted that the share of lease renegotiation deals dropped in Q2 2015 from the beginning of the year, and we expect this trend to continue if the market situation doesn’t change.

Apart from the decline in the number of transactions, the first six months of 2015 has experienced a decrease in their average size, which dropped to 1,063 sq m, with only one deal totalling over 10 thousand sq m closed over this period. It is worth mentioning that the share of take-up in office buildings under construction has been declining over the past two years: H1 2015 saw no pre-lease deals in the high-quality office space market.

With the slightly strengthened ruble and more stable oil prices, forecasts for the

New delivery volume dynamics for Class A and B offices

Key office projects delivered in H1 2015 and due to be commissioned in H2 2015



Rublevskoe Hwy

Leni

nskiy

Ave

Entuziastov Hwy

Leningradskoe Hw

y

Volokolamskoe Hwy

Alt

ufie

v sko

e H

wy

Dm

itrovsoe Hw

y

Ryazanskiy AveVolgogradskiy Ave

Vars

havs

koe

Hw

y

TTR

GR

MKAD

MKADPr

ofso

yuzn

aya

St

Yaro

slavsk

oye H

wy

Slobodskoy9,500 sq m

Sirius Park70,190 sq m

Bolshevik (bld. 1 and bld. 14)14,560 sq m

NEOPOLIS54,400 sq m

MKA

D

Kutuzovskiy Hwy

Shcholkovskoye Hwy

Evolution Tower79,050 sq m

Danilov Plaza25,820 sq m

K2 (bld. B)18,790 sq m

Otradniy (phase II)37,000 sq m

Pallau RB30,250 sq m

Algoritm26,000 sq m

Kutsevo Plaza22,760 sq m

Krylatsky Hills (bld. 5)24,600 sq m

Sheremetyevskiy (bld. 5 and bld. 8)20,890 sq m

Atlantic14,000 sq m

Otradniy (phase II)37,000 sq m

Business Centres

existingClass А Class В

under construction

inside GR; 19%

outside TTR; 47%between GR and TTR; 34%

Knight Frank – exclusive/co-exclusive consultant

existingunder construction

Business Centres

ExistingClass A Class B

Under construction

Concentration of office space

inside GR; 19%

outside GR; 47%between GR and TTR; 34%

Knight Frank – exclusive/co-exclusive consultant

0

5

10

15

20

25

200

0

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2008 2009 2010 2011 2012 2013 2014 2015F 2016F

Class А Class В Class A and B inventory growth

thousand sq m %


4

Russian economy have been improved, which encouraged a number of companies to get back to suspended deals involving lease and acquisition of office space. This marked an insignificant yet visible recovery of demand. two largest Class A office lease deals of 2015 were closed in Q2 2015. It should be noted that both companies took up office space in office buildings located in the rapidly developing business district close to Lenigradsky Avenue.

Properties located close to the MKAD had the lowest take-up volumes. With rental rates falling companies can now afford leasing quality office space in developed business districts less distant from the city centre.

In H1 2015, demand for Class A and Class B office space was dominated by industrial companies, which accounted for 28% of lease and purchase deals. This was mainly driven by several major deals, including BASF, Caterpillar and Swatch Group taking up large office spaces. Another large transaction was completed by Mars, which leased 8,600 sq m in the Alcon office complex, raising FMCG companies’ share of the total take-up to 19%. The banking sector continued to demonstrate low level of activity in the market, which was caused by sanctions imposed on the Russian banking system and a decline in loans granted to both individuals and businesses.

Dynamics of delivery, take-up and vacancy rates of Class A and B offices

Distribution of deals by location

Key office space lease and purchase transactions closed in H1 2015


Source: Knight Frank Research, 2015 Source: Knight Frank Research, 2015

Rublevskoe Hwy

Leninskiy Ave

Prof

soyu

znay

a St

Leningradskoe Hwy

Volokolamskoe Hwy

Alt

uf'e

vsko

e H

wy

Dm

itrovskoe H

w

y

Ryazanskiy Ave

Kashirskoe Hwy

Vars

havs

koe

Hw

y

TTR

GR

MKAD

MKAD

MKADYaro

slavskoe Hw

y

Alcon

Mars8,635 sq m

Sheremetevsky

RFC CFD3,644 sq m

Sirius Park

OKO

CBRE1,230 sq m

Arcus IIIBASF

10,200 sq m

Legion I

NLMK 6,085 sq m

Avrora (phase III)

Caterpillar3,256 sq m

Delta Plaza

Swatch Group2,682 sq m

Aerostar

Cargill1,774 sq m

Good Place1,400 sq m

Mirland BC

MSS1,051 sq m

Nizhegorodskiy

System Sensor Fire Detectors966 sq m

Svyatogor 5

Columbus IT partners920 sq m

Vozdvizhenka Centr

ESAB895 sq m

Concentration of office space take-upbetween GRand TTR; 23%

inside GR; 25%

outside TTR; 52%

Office centres located on the outside of the ring within the 500 m distance belong to the proximate ring submarket

Class А

Class В

Knight Frank acted as a consultantof the transaction

Golden Gate

VTB 24 818 sq m

16.2%

29.8%31.3%

100

200

300

400

500

600

700

800

2013 2014 2015F

Take-up volume Delivery volume Vacancy rate

Class А

11.5%

15.3% 17.3%

0

5

10

15

20

25

30

35

40

2013 2014 2015F

Class Вthousand sq m %

25%37%

23%

32%

39%

19%

13% 12%

New lease and sale Lease renegotiations

MKAD area

Between TTR and MKAD

Between GR and TTR

Within Garden Ring


5

Average asking rental rates dynamics for Class A and B offices denominated in UsD

Average asking rental rates dynamics for Class A and B offices denominated in RUB


Source: Knight Frank Research, 2015Source: Knight Frank Research, 2015

tenant mix

* Fast moving consumer goods and services** IT, media and telecommunications*** Transport & Logistics

28%

19%

10%

8%

8%4%

2%

4%

17%

ManufacturingFMCG* TMT**Oil / Gas / MiningBanking & FinanceBusiness ServicesPharmaArchitecture and constructionOther***

1,500

670 760830 833 800

590503

850

400 455 480 483 492

314 295

200

400

600

800

1,000

1,200

1,400

1,600

2008 2009 2010 2011 2012 2013 2014 2015F

Class АClass В

$/sq m/year

2008 2009 2010 2011 2012 2013 2014 2015F

Class АClass В37,311

21,284 23,086 24,39825,885 25,525

30,14426,000

21,143

12,707 13,821 14,110 15,009 15,69817,150 15,700

10,000

15,000

20,000

25,000

30,000

35,000

40,000rub/sq m/year

Commercial termsRents for high-quality office space continued to fall in Q2 2015; however, the decline slowed down. Class A office rents dropped by 4% to 508 $/sq m/year (triple net) in April–June 2015, with Class B rents falling by 3% to 297 $/sq m/year (triple net). In Q1 2015, Class A and Class B rents declined by 14% and 5.5%, respectively. The decline in asking rents slowed down because the majority of landlords had already responded to the market changes in late 2014 and early 2015 by revising their commercial terms and reducing rents.

It should be noted that Class A and Class B office rents started falling back in 2013. In 2014, they dropped below the level observed during the crisis in 2008–2009.

large exchange rate fluctuations and falling demand has formed the “ruble market”: seeking to reduce the vacancy rate, landlords not only decreased rents, but also suggested signing ruble-denominated contracts, fixing exchange rates or introducing a currency band. However, in most cases such terms were offered for the lease contracts that

did not exceed two years. it is worth noting that another weakening of the Russian ruble forced some office landlords to revise their exchange rate fixation terms.

In H1 2015, the weighted average rent denominated in rubles was 27,321 rub/sq m/year (triple net) for Class A offices and 15,731 rub/sq m/year (triple net) for Class B office space, down 9% and 8% versus Q4 2014, respectively.


6

Submarket

Lease area,

thousand sq m

Сlass A Class B

Average rent Vacancy Rate, %

Average rentVacancy Rate, %$/sq m/

year rub/sq m/

year$/sq m/

year rub/sq m/

yearBoulevard Ring

Central business district 712 753 40,101 13.9 530 28,104 7.2

garden Ring

south 918 606

652

32,251

34,650

20.3

17.0

491

467

26,011

24,930

9.9

13.0West 273 – 48,646 7.2 621 32,913 8.3North 560 757 40,195 6.7 567 30,025 12.6East 401 – 27,054 24.2 380 20,123 21.3

third Transport Ring

leninskiy 278 –

602

28,000

32,049

20.7

33.7

404

342

21,415

20,992

23.0

18.9

tulskiy 908 – – – 365 19,342 13.8Khamovniki 260 970 51,423 20.8 – 31,381 3.4Kievskiy 393 – 25,000 100 – 18,567 61.9Presnenskiy 357 – 28,000 7.3 511 27,078 10.4Prospekt Mira 160 463 24,585 35.8 422 17,825 15.3tverskoy-Novoslobodskiy 752 817 43,318 17.6 392 21,340 5.3

Basmanniy 502 – – – 349 18,473 18.9taganskiy 227 450 – 82.9 223 11,830 15.4Volgogradskiy 383 – 30,000 32.8 317 16,824 21.8MiBC Moscow-City 858 514 27,260 41.4 – – 0.7

ТТК-МКАD

North 680 506

426

27,003

22,736

1.9

21.4

242

269

12,804

14,779

18.2

15.6south 1,614 381 20,231 50.5 254 13,461 19.3West 1,144 490 26,319 13.9 379 20,098 14.9East 658 18,000 46.0 218 11,576 14.1

MKAD

North 525 –

319

–

18,350

–

34.7

145

203

7,691

11,358

13.9

20.8south 432 321 17,014 62.9 182 9,653 18.1West 1,743 319 18,673 27.8 240 12,709 27.1East 248 – – – – 2,726 11.4

Total 14,987 513 27,743 28.2 297 15,750 17.3For certain business districts rental rates are not provided because of the 0% of vacant areas as well as the lack of supply nominated in specific currency

source: Knight Frank Research, 2015

Moscow submarket data. Key indicators

ForecastUnless the Russian economy experiences some other shock due to either external or internal factors before the end of 2015, we do not expect a significant deterioration in the key office market indicators. With deadlines for construction of office buildings extended, we believe that new delivery in 2015 will decline by 30% from the level forecasted in late 2014 to approximately 730 thousand sq m. Besides, high level of uncertainty and lack of possibility to attract affordable debt

financing forced companies to freeze the majority of construction projects being at the initial construction or design stages. Just like in 2008–2009, this may bring office delivery down to an extremely low level in 2–3 years.

After reducing asking rental rates to record-low levels, office landlords are most likely to take a temporizing approach, while completion of properties can slightly change the weighted average rent.

With current conditions remain unchanged, demand for high-quality office space, which depends heavily on the macroeconomic and geopolitical environment, may start its recovery. High vacancy rate and lower rents allow companies to consolidate their offices in one building or move to a higher quality office building with a better lease terms offered.

© Knight Frank LLP 2015 – This overview is published for general information only. Although high standards have been used in the preparation of the information, analysis, view and projections presented in this report, no legal responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects.

Reproduction of this report in whole or in part is allowed with proper reference to Knight Frank.

ReseARChOlga YaskoDirector, Russia & CIS [email protected]

+7 (495) 981 0000

OFFiCesKonstantin LosiukovDirector [email protected]

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