Flying into Moscow’s Domodedovo airport, the view is similar to England: green fields, winding rivers and clusters of houses. On the ground, however, the atmosphere is more American. The US dollar is king, McDonald’s has well and truly invaded, and everywhere the capitalist attitude contrasts sharply with Russia’s communist past.
Moscow, with its 15m inhabitants, has come along way since glasnost opened up the country 11 years ago. The city receives 75% of investment into the country, while the second city, St Petersburg, receives 15%, with the remainder going to the rest of the country.
Foreign firms, such as McDonald’s, are keen to ascribe Western attributes to Russians, but happily for Muscovites, this does not stretch to the city’s commercial property market. Hearing Moscow’s agents discuss their market so positively is like taking a step back to a time in the Western world when vacancy levels were low, rents high, development booming and tenants were scraping at the door for more space.
It’ll be quite a while until London or New York sees this situation again. New York is starting to see signs and London has reportedly “bottomed out”. But the Muscovites are living it. Walking around the crowded streets of Moscow, scaffolding dominates the skyline just as much as the Kremlin buildings or St Basil’s.
Coming out of the cold 40 degrees compared with London’s 70 degrees and sitting in DTZ Zadelhoff Tie Leung’s warm offices, managing director, Stephen Wilson says that, in the past two years, both business and construction activity have increased. As a result, high and stable levels of demand now characterise the Moscow office market.
In terms of supply, the stock of class A office space stood at 860,000m² by the end of Q2 this year. It is expected to reach more than 1m m² by the end of next year.
Demand for industrial and retail
B grade buildings are being sought, mainly by companies just entering the market or those in the food industry and which do not want to lease the more expensive prime offices.
Meanwhile, the industrial market is, says Wilson, “about to explode”. Around 50,000m² of space is due to be completed by the end of next year, while agents estimate another 150,000m² will have entered the market by the end of 2005.
The retail market is also in good health. It has doubled in size over the past two years, with more than 18 shopping centres, totalling 345,000m², delivered to the market in 2002. Demand for retail space is growing too, by 15% to 20% annually, and demand exceeded supply by around 200% in 2002.
Jean-Christophe Cattin, head of Moscow’s retail section for Jones Lang LaSalle, predicts that, with 80% of the average Muscovite’s wage being disposable income, the market is set to rise even more.
With such growth, Moscow’s city government, the city’s principal landowner and part developer, could have opened the gates to foreign developers, who would have flooded the market and possibly destroyed the city’s historic face. But it did not.
“Mayor Yuri Luzhkov is very strong and influential and directs everything,” says Wilson. “He has been bringing infrastructure forward, but he has kept an iron grip on development of the modern office buildings. In a way, that’s good, but it stops the Western companies getting what they want.”
Road hazards
Experiencing the demolition derby that is Moscow’s roads, where a red light is a suggestion rather than a command, is enough to realise that Mayor Luzhkov has more work to do on infrastructure. But on the planning front, he has designed a strict system.
Wilson’s own building on Mokhovaja the central ring road around the Kremlin is an example of controlled development without losing the city’s essence. The building looks like an historic but dilapidated office block. But in Tardis-like style, the interior rivals any modern western office.
Wilson says they had to keep the façade while rebuilding the interior. “It’s good that they can control the types of buildings, but it’s also suffocating for development,” he says.
According to some Moscow agents, these planning problems can be overcome for the right price. “If you have enough money you can do anything,” says one. “It’s the nearest thing I have ever been to that’s a pure capitalist market. There are rules but they can be flaunted. Eventually it will be better regulated.”
ENKA, Moscow’s biggest office developer, which owns 18 buildings in the city, agrees that gaining planning permission can be difficult, but would not be drawn on other issues. At its surprisingly understated offices tucked away off the Tsventnoy Boulevard, the firm’s managing director, Erkan Erkek, says: “Getting all the paper work completed can take longer than construction itself.”
The Turkish-based company began its relationship with the Moscow city government more than 10 years ago, when it bid aggressively for sites. ENKA has entered into several joint ventures, some under the name of Mosenka, with the city government, one of which is the third phase of the impressive 35,350m² Paveletskaya Square, which was completed this year.
Mosenka, was responsible for the 29,000m² Paveletskaya Plaza, which started on site in 1997, and was completed just one year later.
ENKA is also behind one of the city’s largest office complexes the 50,000m² Riverside Towers. The scheme, four miles from the city centre, is home to Jones Lang LaSalle, PricewaterhouseCoopers and Unilever.
But by far the most ambitious scheme, of which ENKA is one of several developers, is the Moscow City Project on Kransnopresnenskaya Naberezhnaya. Modelled on London’s Canary Wharf and La Defense in Paris, the US$9bn development is taking shape on 100ha just outside the city centre.
But some agents are already complaining about one of the completed buildings. One agent said the building is a nightmare and the tenants primarily Russian have been allowed to buy their own individual floors. The agent believes this will throw-up logistical problems.
When complete, in 2007, agents expect most tenants will be foreign, despite the fact that Russian firms are starting to look for additional space a fact made clear by the changing client base of companies such as DTZ.
When DTZ first arrived in Moscow in 1992, most of its clients were foreign firms. Now Russian companies are growing and looking to expand. “A lot of foreign companies are already here, so it’s growth from within the country . We are moving into dealing with Russian clients,” says Wilson.
Vladimir Pinaev of Jones Lang LaSalle, Moscow, is in a similar position. “Russian companies are the main force for this market. Before, 90% of the quality office space was going to foreigners, now its down to 60%.”
From a developer’s point of view, getting any group of tenants is still a headache, given the extremely short leases of three to five years. “They are short because of the changing conditions of market. In Russia, 15 years is a very long time,” says Erkek.
Muscovites have not forgotten 1998, when the Russian economy suffered a massive meltdown. Then inflation rose to almost 90% within a few months, causing an economic collapse and a devaluation of the rouble. Now, however, the question is whether Moscow is growing too fast, and some commentators fear either another meltdown or a downturn, similar to Western markets. Wilson, however, is not among them. “Yes, Moscow is changing so rapidly, and it’s moving forward rapidly, but what really is too much growth?”
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Moscow office market |
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Millions of m2 of new offices have been built |
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● Modern office stock: 2.6m m2 ● Completions: 144,100m2 ● Take-up: 269,100m2 ● Availability: 134,300m2 ● Grade A rent: US$540-575 per m2 ● Grade B rent: US$425-I475 per m2 ● Vacancy rate: 5.1% |
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Source: Jones Lang LaSalle Research 2003 |
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Moscow retail market |
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The retail market has doubled in the past two years |
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● Modern shopping centres stock: 688,900m2 ● Completions: 68,000m2 ● Prime shopping centres rent: US$2,400 per m2 ● Average shopping centres rent: US$750 per m2 (anchors excepted) ● Vacancy rate: 3.5% |
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Source: Jones Lang LaSalle Research 2003 |
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Investment market: it is still immature |
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Of all the good things happening in the Moscow market, the investment market is not one of them. Leases ranging from five to 49 years, problems with taxation and the fact that the city only has around 10 buildings that could be considered investment standard have stunted the market In addition, yields are unattractive at around 12%-15%, particularly when compared with other Eastern European cities, such as Prague and Warsaw, where they are around 8.5% But Stephen Wilson, managing director with DTZ Zadelhoff Tie Leung, Moscow, believes things are set to change, and hints that a major international fund is going to enter the market next year. “It’s extremely possible that’s when the floodgates will open” Others are more circumspect. Darrell Stanaford of Moscow-based CBRE affiliate, Noble Gibbons, says there have been similar predictions for the past three years. “Out of all the markets, the investment market is the least mature,” he adds. Stanaford, however, who has lived in Moscow for six years, does believe there are positive signs for the market Stanaford adds that: “There is reduced country risk, a lack of product in Central European markets, a greater availability of product, and the market is larger.” |
