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Feliks Blinov told Comestate what the future had in store for the real estate market of Russia

14.02.2018

Feliks Blinov, CEO of the RWM Capital Investment Group, told Comestate about the current trends of the real estate market.

Today rental rates may be increased only by those who own business property with the lowest levels of vacancy.

The end of 2017 became the busiest and most profitable period on the real estate market for the last 5 years. Is this trend likely to continue or was it a one-time occurrence? These and other real-estate-themed questions we have decided to address to Feliks Blinov, CEO of the RWM Capital Investment Group.

What do you think is an impact of the economic recession on the real estate market of business property?

The real estate market has been able to quickly adjust to the new situation and now it still shows the steadiest growth and reliability for investment. Among the trends of the present-time real estate market I would like to mention falling numbers of international investors, an active SLB market, co-working working style expansion.

Co-working is a definite trend nowadays, and its growth is sustainable. A co-working tenant pays only for that space which they use – no more paid-for empty offices. That is the flexibility needed by start-ups and small businesses, as well as companies with a large proportion of employees working from home. Besides it is a serviced office, so tenants get a ready-made office with no need to spend money on new furniture or repairs. In 2017, there were 380 co-workings registered in Russia with the biggest part of them in Moscow. For instance, Regus is an owner of 3 co-working spaces designed for up to 248 people working simultaneously. Recently, the company opened a new co-working in the south-west of Moscow (within the Kapitolii Shopping Centre). Besides we let Regus our office spaces in the Domnikov and Sinop Business Centres. According to Regus research, it is a co-working sector that is growing most rapidly in the real estate markets of Moscow and St. Petersburg. The number of working spaces may annually increase by 25 % due to them. I think that if built properly, co-working has a great potential in Russia. It is quite widespread abroad, even big companies started to use it.

Could you tell us about the LSB market? What is in your opinion its appeal to a present-day investor?

A LSB transaction may be called a unique solution for both a company owning an asset and an investor ready to enter into a deal. The primary advantage of a SLB arrangement for the owner is that the company selling and then leasing the asset is essentially releasing the cash tied up in that asset prior to selling it. It also continues to benefit from the usage of the asset. Depending on the terms, the SLB arrangement may be cheaper than financing the purchase of the property with a bank loan. The property sale is done with the understanding that the seller will immediately leaseback the property from the buyer. The details of the lease agreement are arranged for a specific period of time and a set payment rate. As a result, the risks have been mitigated for the mutual benefit of the parties. LSBs have been a common practice in Europe for years. Presently, this tool is gaining popularity in the Russian market, too. As an example, we may take a LSB deal that we have been successfully concluded with World Class, the biggest health club chain in Russia. Thanks to it, the Company receives its steady rental income, while World Class has managed to raise money necessary for the chain development. Although quite in fashion now, LSB transactions have been a thing of big cities like Moscow and St. Petersburg for a long time. The situation changed with a LSB deal in the Tyumen region between DOM.RF and the SIBUR Holding. That was a lease project of Class A residential property designed to be sold back for the sake of the ZAPSIBNEFTEHIM company’s employees.

There was so much talk about so-called ‘eco office spaces’. Bit is it a really good idea for the Russian market?

In accordance with the figures received in Q3 2017, there has been a rising demand for Class A office properties. It means that tenants want to establish their working spaces within a high quality business centre built in full compliance with industry best practices and modern international environmental standards. Besides it is a matter of fact abroad for the building industry to work relying on eco-friendly solutions. Hopefully, it will not take long for us to follow suit.

Could you comment on the current state of the Russian office property market? Are there any significant changes in behavior of investors?

By the end of Q3 2017, the overall investment in the Russian commercial property market was USD 2,05bn. In accordance with the data provided by Colliers International, the investment in office buildings (the sector that has stayed positive even in the period of recession) accounted for 42% of the total investment volume. Shopping centres had 40%. But it must be understood that while offices may enjoy certain freedom as their rent rates are defined by the market changes and are stated in rental agreements; shopping centre sector is very dependent on tenants’ performance rate.

What are to do those who have already invested in offices but faced a radical change in what tenants seek?

To begin with, let us highlight what shifts have occurred in demand exactly. With less money, tenants are not ready to pour additional resources into repairs and refurbishment. So they are looking for a serviced office, or a bare option but only if all the expenses on repairs and maintenance are paid by the owner of the property. Apart from that, big companies signing a rental agreement for a 10 000 m2 working space or more expect to receive a 30% discount. Under the present circumstances only the companies that own Class A office spaces with the minimum vacancy rate in the centre of Moscow (i.e. within the Boulevard Ring) may raise rental rates. But it is not even for them to risk long-term rental agreements with reliable tenants to strike a bargain.

Is the Russian market uneasy, with foreign investors leaving it?

As I have already mentioned, this is one of the key tendencies of the present-day market that foreign investors decide to leave for good. To illustrate the point, we may call to mind Immofinanz AG. The company owned a number of shopping centres in Moscow; but sold all of them in a pack to the Fort Group in December 201 and thus concluded its business in Russia. According to the data from Knight Frank, by the end of 2017, the commercial property deals concluded by foreign investors amounted to USD 1,54bn. They invested though tree times less than that – only USD 502m. In spite of that, there are still foreign companies and funds in the Russian market that show no intention of leaving but possess a definite business strategy how they are going to develop here. Besides some new players are coming, mostly those from Asian countries and the Middle East. In June 2017, the Voentorg business complex in the central part of Moscow was bought by the Chinese company Fosun Group. Recently, Mubadala Development, the Arabic Fund that has been working in Russia since 2013, has gone into partnership with the Russian Direct Investment Fund to purchase 84 000 m2 of warehouse space in PNK Park – Bekasovo (Moscow region) and PNK Tolmachevo (Novosibirsk). So, summing it up, we may say that indeed the Russian market is a bit uneasy because of the amount of foreign investment it does not get. But it is being compensated for this loss by new opportunities provided by its new Asian and Arabic partners.

By way of conclusion, let us speak about Moscow rental rates for commercial properties. What is your forecast for possible changes in 2018?

As the results of Q3 2017 show, in Moscow there is a decrease in the office vacancy rate for Class A and B+ business properties, with around 2,2 million m2 of vacant office space compared to 3 million m2 in 2014/16. The market is at last on the rise. The demand for Class A commercial properties in the central part of Moscow (the Garden Ring) is going up.

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