Russian Real Estate Market : CEE Context February 2014 Outline - - PowerPoint PPT Presentation

Russian Real Estate Market: CEE Context

February 2014

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Outline

• Russia in the Context of CEE
• Investment Volumes/Deal-flow
• Investors: Drivers of Activity
• Sector Trends: Office, Retail, Logistics
• Olympics: Long Term Legacy?
• Summary

Eastern Europe in Context

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West Europe East Europe Turkey

Source: Colliers International

Eastern Europe in Context

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• Long-term potential is very strong! – Russia is 35-40% of CEE

* Cross-border Investment Deals [1,190]

• 92%
• 7.6%
• 0.3%

* Cross-border Investment Deals [2,899]

90.1% 9.5% 0.4%

Office Stock [350 million m²]

• 65%
• 34.5%
• 0.5%

65% 34.3% 0.7%

Office Stock [315 million m²] West Europe East Europe Turkey

90.5% 8.9% 0.5%

*Cross-border Investment Volume [€155 billion]

• 88.4%
• 11.0%
• 0.5%

* Cross-border Investment Volume [€57 billion]

2007 2012

GDP [US$20,134 billion]

81% 16% 3%

• 77%
• 19%
• 4%

50% 41% 9%

Population [843,744 million]

*Investment volumes based on RCA aggregates, excluding development sites and apartments Source: UNCTAD/IMF/RCA/Colliers International

GDP [US$20,924 billion]

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Historic Transaction Volumes

• Up on 2012 by around 22% (€2 Billion) to €11 Billion
• Europe up 17% to €178 Billion

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 € Billion Regional Total (Volumes) Russia

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Deal Volumes by Country

Source: Colliers International

• Post-crisis: Russia increasingly dominant – long-term split
• Pre-crisis: Poland dominated: Czech Rep, Hungary & Russia about even, r/o Tier

2 locations ‘didn’t quite get started’.

Poland 28% Hungary 17% Russia 16% Czech Republic 16% 7% 5% 4%3% 2% 1% 1% Russia 40% Poland 26% Czech Republic 11% 6% 4% 4%2% 2% 2% 2% 1% Russia Poland Czech Republic Multi-country Portfolio Baltics Hungary Romania Slovakia Ukraine SEE Bulgaria

Pre-Crisis Volumes Post-Crisis Volumes

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Deal Flow Dynamics

Source: Colliers International

Breakdown of Real Estate Investments by Region

89% 4% 7% Moscow Saint- Petersburg Other Regional Cities

• Big Cities Dominate (despite only being 15% of country population)
• Moscow & St Pete’s generate large lot size deals: product, debt, investors.

4% 9% 17% 6% 7% 5% 15% 15% 6% 16% 16% 11% 18% 25% 30% 20% 14% 12% 22% 51% 21% 28% 43% 37% 41% 26% 30% 20% 35%

2008 2009 2010 2011 2012 2013

Billion $ <$50 million >=$50 million <$100 million >=$100 million <$200 million >=$200 million <$500 million >=$500 million

Dynamics of Deal Size Distribution

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Player Profiles: Who’s Who?

Source: Colliers International

• Some 63% of investors
• nly completed 1 deal

(CEE & Russia)

• Of the post 2009 investors,

80 have completed more than one deal

• Only 5% of investors have

been active from 2006 to 2013…..new inst capital emerging

Purchaser name Residence Investor Type Rank O1 Properties Russia REIM 1 Morgan Stanley Real Estate Investing U.S. REIM 2 CA Immobilien Anlagen AG Austrian REIM 3 BIN Group Russia Banking 4 CPI - Czech Property Investment Group Czech REIM 5 VTB Capital Russia Banking 6 Union Investment Real Estate GmbH Germany Fund Mgmt 7 Blackstone Real Estate U.S. Fund Mgmt 8 Atrium European Real Estate Limited U.K. REIM 9 Unibail Rodamco S.E. Holland REIM 10 Verny Capital Kazakhstan Pte Equity 11 Axa Real Estate France Insurance 12 ECE Germany RE Investor 13 HinesCalPERS (Russia Long Term Hold Fund) U.S. REIM 14 Immofinanz Austrian REIM 15 Heitman U.S. Fund Mgmt 16 Hines Global REIT U.S. REIM 17 Rockspring Property Investment Managers U.S. REIM 18 EPISO Lux REIM 19 DEKA Immobilien Germany GOEF 20

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• CRE investment only ca. 3% of fund

allocations = €180 billion

• Direct CRE investment grows by around 2 –

2.5% (€ 3.5-4) billion per year

• A 1% shift in re-allocation = €57 billion, a

3% shift = 2013 volumes

• Indirect / JVs appears to be the biggest shift –

already happening

• 4%
• 2%

0% 2% 4% 6% 8% 10%

Prime Office Premium EU-Prime Office Yields 10-year German G'ment Bond

Major Driver of Property Investment

Source: Colliers International

Prime Yields: Russia

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• Yield stability expected in 2014
• Property tax policy for CRE at cadastral (market) value = transparency
• Despite autocratic country politics, English law enables legal transparency

8.0 9.0 13.5 10.5 9.5 9.0 8.5 8.5 8.5 9.0 14.5 10.5 10.0 9.0 9.0 9.0 10 10.5 14.5 11 11 11.5 11 11 2007 2008 2009 2010 2011 2012 2013 2014

Retail Office Industrial

Office Yields: Russia v CEE v Germany

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• Moscow Yields offer a discount to other competitor markets (Warsaw and Madrid) and Germany,

allowing for country/liquidity risk

Tier 1 Cities Tier 2 Cities

300 bps enough?

Capital Value Indices: Moscow & St Petersburg

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• Values in all sectors/markets have grown
• Moscow logistics flat, v. interesting looking forward (MLP Portfolio US$900mn)

Moscow St Petersburg

Source: Colliers International

50 100 150 200 250 300 2006/Q1 2006/Q2 2006/Q3 2006/Q4 2007/Q1 2007/Q2 2007/Q3 2007/Q4 2008/Q1 2008/Q2 2008/Q3 2008/Q4 2009/Q1 2009/Q2 2009/Q3 2009/Q4 2010/Q1 2010/Q2 2010/Q3 2010/Q4 2011/Q1 2011/Q2 2011/Q3 2011/Q4 2012/Q1 2012/Q2 2012/Q3 2012/Q4 2013/Q1 2013/Q2 2013/Q3 2013/Q4

Moscow - Office Prime Headline Capital Value Moscow - Industrial Prime Headline Capital Value Moscow - Retail Prime Headline Capital Value

50 100 150 200 250 300 2006/Q1 2006/Q2 2006/Q3 2006/Q4 2007/Q1 2007/Q2 2007/Q3 2007/Q4 2008/Q1 2008/Q2 2008/Q3 2008/Q4 2009/Q1 2009/Q2 2009/Q3 2009/Q4 2010/Q1 2010/Q2 2010/Q3 2010/Q4 2011/Q1 2011/Q2 2011/Q3 2011/Q4 2012/Q1 2012/Q2 2012/Q3 2012/Q4 2013/Q1 2013/Q2 2013/Q3 2013/Q4

StPetersburg - Office Prime Headline Capital Value StPetersburg - Industrial Prime Headline Capital Value StPetersburg - Retail Prime Headline Capital Value

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Econ Trends

Source: Colliers International 3.0 4.1 3.0 1.5 3.4 1.8 3.2 1.5 0.1 1.4 2.0 0.3 0.4

• 1.2

4.2 3.8 3.3 2.5 1.5 1.4 1.2 0.9 0.8 0.6

• 0.8
• 0.8
• 1.4
• 2.2
• 3.0
• 2.0
• 1.0

0.0 1.0 2.0 3.0 4.0 5.0 Latvia Turkey Lithuania Romania Russia Poland Estonia Slovakia Hungary Bulgaria Ukraine Croatia Czech Republic Slovenia

Growth Rate%

Prediction Reality

• Lower oil price has reduced the economic growth rate to around 1.5-2%..... long-term
• Oil supplies up, US overtaking global position? ....need for new sectors to grow
• IT & Telecoms, not Energy sector, driving take-up growth in recent years (Yandex)

Country Summary

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Politics Macro-Econ Finance Office Market Retail Market Investment Romania

• Hungary
• Bulgaria
• Czech Republic
• Poland
• Russia
• Serbia
• Slovakia
• Ukraine
• Croatia

Moscow & St Pete’s Office Market:

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Source: Colliers International

2 4 6 8 10 12 14 16 18 20 Thousands Completions 500 1,000 1,500 2,000 2,500 3,000 Completions

68.8 112.9 76.2 52.0 63.3 75.3 78.4 75.4 3.5 4.2 5.5 16.5 12.3 10.6 8.4 9.2

2 4 6 8 10 12 14 16 18 20 20 40 60 80 100 120 2006 2007 2008 2009 2010 2011 2012 2013

52 51.5 45.5 37.5 38 46.1 54.7 54.2 5.0 6.0 14.0 18.6 17.6 14.0 9.1 11.7

2 4 6 8 10 12 14 16 18 20 10 20 30 40 50 60 2006 2007 2008 2009 2010 2011 2012 2013 Moscow Office Stock Moscow Office Prime Rents & Vacancy Rate St Petersburg Office Prime Rents & Vacancy Rate St Petersburg Office Stock % % USD / month USD / month

Economic impact collectively felt in both cities, with demand falling Vacancy rising, given new supply increases.....rents stabilising or falling slightly

The Retail Market: Growth Capacity

2013 [per thousand capita, m²]

Zagreb Bratislava Prague Warsaw St Petersburg Kyiv Budapest Bucharest Sofia Moscow Belgrade 100 200 300 400 500 600 700 800 900 1,000

Traditional Shopping Centre Stock & Pipeline

• SC capacity remains, esp. Moscow – also driving logistics demand
• St Pete’s going through a repositioning phase

Source: Colliers International

The Retail Market: Growth Capacity Shopping Centre Distribution Moving East

• Growth in other ‘1Mn+’ Cities..Nizhny Novgorod, Perm, Yekaterinburg, Volgograd
• Aura SC in Novosibirsk acquired for US$ 250mn in 2013

Source: Colliers International Size of SC Stock

The E-commerce Market: Growth Capacity

• The likes of Ozon, KupiVIP and Lamoda leading the e-commerce business in Russia
• Increasing demand for modern warehousing across Russia from retailers and 3PLs

Online Retail Sales Forecast: Russia 2020

Technology inventory/customer analysis requires capital investment Shipping & Returns customer loyalty costs up to 100 bp on gross margins Fraudulent Claims costs money estimated US$8.9 billion (2012) Space Rationalisation can be counter productive; less traffic = lower sales In-store fulfilment can counter balance reduced ‘free shipping’

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Multi-Channel Balance Essential

Clicks or Bricks? Both!

US market to see more prototype stores opening in 2013 – wait & learn

The Logistics Market: Growth Capacity

Country Modern Logistics Stock m² (H1 2013) Population (UNCTAD 2012) m²/ thousand capita UK *57,400,000 65,347,252 878 Poland 7,553,920 39,670,133 190 Russia 13,500,000 147,099,939 92

A Comparison: Russian Modern Logistics

Source: Colliers International *Estimated Modern A-Grade Stock; UK Total Stock = 321 million m2

• Russia remains ‘significantly’ undersupplied on a per capita basis
• Less than One Third of the UK
• Half the Size of Poland

The Logistics Market: Growth Capacity

City/Region Modern Logistics Stock m² (H1 2013) % of Modern Stock Rental Rate US$/m²/ year Moscow 9,000,000 66% 130

• St. Petersburg

1,536,700 11% 115 Novosibirsk 703,400 5% 120 Yekaterinburg 677,200 5% 105 Krasnodar 355,500 3% 100 Kazan 351,300 3% 90 Rostov-on-Don 348,000 3% 110 Samara 340,000 3% 90 Nizhny Novgorod 264,400 2% 120

Russian Modern Logistics by City/Region

Source: Colliers International

• Moscow dominates the market: but opportunities everywhere

Cheaper robots and growing automation 3D printing

The future of manufacturing in Europe

+ + +/- +/-

TECHNOLOGIC INNOVATION INFRASTRUCTURE + LOGISTICS IMPROVEMENTS

Deep sea water ports Railway connections

Source: Colliers International

Offshoring + Re-shoring = “Best-shoring”

% manufacturing in GDP in Western Europe

IS RE- SHORING NEXT? OFFSHORING

1850 1950

BEST SHORING

2000

Rising cost of labour Globalisation

DOMESTICALLY DRIVEN MANUFACTURING

Industrialisation Economic & population growth

Source: Colliers International

Increase in production capacity Stable production capacity Decrease in production capacity

USA / Canada

37%

Western Europe

52%

EE + Russia + Turkey

48%

China

44%

India

37%

Japan

31%

Latin America

30%

Africa & Middle East

26%

Rest of Asia

33%

“Hot spots” for manufacturing

Intentions regarding production capacity in the next three years

Source: Colliers International

Summary: a regional perspective Turkey Taking Advantage: New Infrastructure

3,364

1,000 2,000 3,000 4,000 5,000 2005 2006 2007 2008 2009 2010 2011

million $

FDI in manufacturing

Izmir Istanbul Ankara

Candarli Port (Izmir)

• 4 mln TEUs/year (Rotterdan

12 mln)

• Completion 2013/2014

Third Bridge Project (Istanbul)

• Completion 2015

New logistics “Villages”

• 16 across Turkey
• 3 in Istanbul’s region
• Built by Turkish State Railways Corporation

Teknopark (Istanbul)

• 700,000 sq m construction

area

• Capacity:1000 firms and

30,000 staff

Third Airport (Istanbul)

• 6 runways
• 150 million passengers/year

Istanbul 20th 2nd Izmir 30th 12th

Distribution

Manufacturing

Source: Colliers International

Russia: Rail Trade Routes to Europe?

• The ‘Silk Railroad’ capturing more and more rail freight
• Arctic Shipping Route also set to capture increasing traffic

Source: Colliers International

• Ships notebooks from

plant in Chongqing to Duisburg via train (11,179 km-21 days)

• 1.5 train a week in

2013

• Transports

components via train from Leipzig to Shenyang

Russia Well Positioned on Trade Routes

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Sochi & The Olympics

Intentions/Motivation: Transform Sochi into a year-round tourist destination - both summer and winter tourism, Develop Russia’s first world-class ski resort, to create a national centre for winter sports, and Complete upgrade of existing infrastructure as a city – and ‘global’ connections Implement a philosophy for investing domestically. Funded 60% by public sources and 40% by private investment.

What’s been built?: Sochi did not have any competition venues in situ

• Sochi Olympic Park (Coastal) and Krasnaya Polyana (Mountain )
• Eleven new winter sports venues,: International-quality alpine, ski jumping and sliding facilities,

New infrastructure and transport systems: colossal

• A new highway and high capacity mountain railway corridor,
• Offshore terminal at Sochi airport – cruise and cargo
• 350 kms of new roads, 200 kms of railway lines,
• 55 new bridges, 22 tunnels
• Thermoelectric power station
• 17 electric power substations,
• Engineering and sewerage networks.

The city has been remodelled;

• Numerous shopping malls, hotels, and commercial real estate, medical centres, schools and even a University

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Sochi & The Olympics

Source: Colliers International

City/Region Motivation Delivery Legacy Pros & Cons Lillehammer Regional development, tourism growth no Pros: host 2016 Youth Winter OG), media building now used by Lillehammer College Cons: legacy of debt, underutilised facilities, low tourism demand, hotels bankrupt Salt Lake City Environmental awareness, centre for winter sports partly Pros: new real estate (indirectly Gateway SC), mega-events, occupier demand (office, logistics) Cons: tourism branding, media sensationalism, political issues, reuse of venues uncertain Nagano Not specified / used it to promote technology n/a Cons: majority of venues removed after OGs due to cost of maintenance, debt legacy (& legal issues) Turin Urban regeneration (infrastructure), economic growth, new urban identity yes Pros: new real estate demand (Torino Wireless District), Olympic Village, underutilised brownfields now commercial/residential district, new logistic parks, tourism growth, mega-events Cons: democratic accountability / financial management, branding/media exposure Vancouver Social/cultural change, tourism growth, national centre for sports yes Pros: reuse of some sport facilities, Olympic Village now mixed-use neighbourhood, reuse of industrial brownfield sites, tourism, office occupier demand, sports, environmental, social & cultural legacy Cons: branding & media damage, high construction costs, Olympic Village housing placed in receivership after Games Sochi Tourism growth, national centre for sports, urban/infrastructural change TBD Pros: New Infra, Sochi on the map: Grand Prix, FIFA World Cup. Risk of under-used resort/facilities, legacy of debt, ‘tourism security’

Russian Investment: Pro’s and Con’s

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Pro’s

• Signs of economic diversity
• Product availability – large scale
• Bank finance conditions strong
• Institutional funds increasingly active
• Clear title/English law.
• Yield compression possible, driving values
• Lots of development potential in office, retail

and logistics

• Regional cities a long-term prospect

Con’s

• National autocracy
• Transparency/perception of market a barrier

to entry

• Economic growth slowing…long-term?
• Rental conditions slowing: office and retail

values peaking?

• Significant infrastructure required to drive

regional million plus cities

• Will capital continue to flow out of Russia?

Damian Harrington Regional Director, Research & Consulting Colliers International, Eastern Europe damian.harrington@colliers.com +358 400 907972