VZCZCXYZ0002
RR RUEHWEB
DE RUEHMO #1765/01 1721228
ZNR UUUUU ZZH
R 201228Z JUN 08
FM AMEMBASSY MOSCOW
TO SECSTATE WASHDC 8692
UNCLAS MOSCOW 001765
Sensitive
SIPDIS
DEPT FOR EUR/RUS
E.O. 12958: N/A
TAGS: ECON EINV EFIN RS
SUBJECT: AN INSIDER'S LOOK AT RUSSIA'S COMMERCIAL REAL ESTATE
REF: A. MOSCOW 1536
B. MOSCOW 1501
C. MOSCOW 1450
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Summary
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1. (SBU) We have reported extensively on the residential real estate
sector. Last week Econoffs returned to Cushman & Wakefield to gain
a better understanding of the flip side of the coin: commercial real
estate. Denis Sokolov, Head of Research, said the commercial real
estate market is "hot," especially in Moscow, which has the world's
second most expensive office space. He said "mixed-use" development
projects, which combine residential, office and retail space, are an
upcoming trend, that Russia's regions are an even more attractive
future market for commercial real estate than Moscow. Finally, he
noted that the commercial sector does take resources from
residential housing and is therefore partly to blame for the current
shortage in adequate housing. End summary.
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Moscow: the World's Second Most Expensive Offices
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2. (SBU) Sokolov told us that Cushman & Wakefield's main source of
revenue is commercial real estate. They provide a menu of services
to developers up to and including management of commercial real
estate in Russia. The commercial real estate sector in Russia,
especially Moscow, is definitely "hot," according to Sokolov. This
includes all three primary categories of property: office, retail
and industrial (i.e. warehouse). Sokolov said that buildings of the
highest quality in terms of location, design, building standards and
efficiency -- referred to as "Class A" property -- are in the
highest demand across all three categories.
3. (SBU) Sokolov told us that office rental rates for Class A
property in Moscow are the second most expensive in the world after
London's West End. He said that the rental price averages more than
USD 1,000 per square meter in Moscow and USD 2,500 in the city's
center. According to Sokolov, high rental rates are driven by
developers taking advantage of high demand and a heretofore weak
supply response. He explained that before construction is complete,
a developer announces a rental rate that is higher than the
prevailing market rate -- speculating that rental rates will
continue to climb. While new office space may not rent as quickly,
Sokolov said developers prefer a vacancy periods in return for the
prospect of a higher rental price. In that regard, Sokolov said
vacancy rates are high, averaging 10 percent in Moscow compared to
only 3-5 percent London.
4. (SBU) Commercial real estate for industrial use in the Moscow
area, which Sokolov said primarily consists of warehouses that are
used by large retailers, is also in high demand. Rental rates
average USD 140 per square meter in Russia compared to only USD 80
in Europe. He noted that current delays in warehouse construction
in Moscow (averaging 9-12 months) were responsible for pushing up
the city's rental rates from USD 125-140 to USD 135-145 per square
meter over the last quarter (4Q07 to 1Q08).
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Mixed-Use Projects: an Emerging Trend
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5. (SBU) "Mixed-use" projects are a growing trend in commercial real
estate, according to Sokolov. These projects combine residential,
retail and office development into one project. The idea is to
create a balanced community that while perhaps located outside a
city center, is still self-sufficient. Sokolov said most
"mixed-use" projects are still in the preparation stage, but that
plans are underway for several major projects: "A-101," located just
outside of Moscow; "Big City," also outside Moscow; the Domodedovo
"community" near the airport; and a mixed use project in Sochi, site
of the 2014 Winter Olympics.
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Economic Growth in Regions Driving Development
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6. (SBU) Sokolov said that Russia's regions hold even more potential
than the Moscow area for future growth of both retail and office
real estate. He said that strong growth in retail sales has
resulted from rising incomes. This in turn has led to a huge
nationwide demand for more retail outlets. He explained that
Moscow's market for retail real estate -- particularly large
shopping centers -- has nearly stabilized. However, other large
cities located in the regions lack quality space and have become
prime locations for retail development. Sokolov said retail space
in the regions has a vacancy rate of less than one percent and that
rental rates are rising rapidly.
7. (SBU) Sokolov told us that retailers were changing their
preferences on what type of property they want, in Moscow but
especially in the regions. With the emergence of foreign chains,
such as Turkey's Metro and Germany's Cash 'n Carry, Russian shoppers
preferences have changed from stand-alone shops to larger shopping
centers that provide more consumer choices. He predicted that in a
few years, people living in the regions would become accustomed to
traveling relatively long distances to do their shopping and that
larger shopping complexes would become much more common.
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Effects on Residential Housing Sector
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8. (SBU) Sokolov told us that the commercial real estate sector was
partly to blame for the lack of an adequate supply of residential
housing. He said that scarce resources, such labor and construction
materials, will naturally follow the money -- which currently means
commercial developers. However, Sokolov added that the lack of land
for residential construction is a different matter, as some land
plots are more suited for particular uses and thus competition
between the residential and commercial real estate sectors in this
regard was not a contributing factor.