Research Q1 215 Office market report Moscow Highlights Delivery volume of quality office space in Q1 215 was 91 thousand sq m that is 6% drop compared to the previous indicator. Share of lease renegotiations in the total transactions volume has reached 86%. Average asking rental rates have dropped to the level of 53 $/sq m/ in Class A and 39 $/sq m/ in offices.
Office market report. Moscow Office market report Moscow Key indicators. Dynamics* Class A Total stock, thousand sq m 14,852 including, thousand sq m 3,495 11,358 Delivered in Q1 215, thousand sq m 9.7 Konstantin Losiukov Director, Office Department Knight Frank With declining take-up and record-high vacancy rate, today s office real estate market is characterized by extremely fierce competition. Landlords are seeking to offer the most favourable lease terms, but only high-quality offices in a good location with efficient layout and attractive commercial terms are in demand. including, thousand sq m 79 11.7 Vacancy rate, % Average weighed asking rental rate** $/sq m/ rub/sq m/ 29. (-.8 p. p.)* 53 (-1%)* 27,93 (-1%)* 16.7 (+1.4 p. p.)* 39 (-1%) 16,769 (-2%)* Rental rates range** $/sq m/ 3 1, 25 97 Average OPEX rate, rub/sq m/ 4, 6,7 2,5 4,5 * Compared to Q4 214 ** Excluding operational expenses utility bills and VAT (18%) As rental rates are falling, the lease renegotiation has become the dominant type of transactions in the Moscow office real estate market. There are examples where companies that signed lease contracts last renegotiate them in 215 to reduce rents or revise other lease terms. Otradniy (phase II), 2B, Otradniy passage 2
Q1 215 Research Key office projects delivered in Q1 215 and due to be commissioned by the end of 215 Pallau RB 3, sq m Rublevskoe Hwy Kuntsevo Plaza 22,761 sq m Leningradskoe Hwy Volokolamskoe Hwy NEOPOLIS 43,6 sq m G1 (phase I) 38, sq m K2 (phase II) 18,22 sq m Dmitrovsoe H w y Bolshevik (phase I) 28,9 sq m Leninskiy Ave Altufievskoe Hwy Evolution Tower 79,53 sq m GR Suvorov Plaza Smolenskiy Passage 17,224 sq m IQ-quarter 11,452 sq m 122,45 sq m Oazis 39,493 sq m Slobodskoy TTR 9,5 sq m Algoritm 26, sq m Profsoyuznaya St Otradniy (phase II) 37, sq m Sirius Park 64,14 sq m Oruzheiniy 88, sq m Danilov Plaza 25,818 sq m Varshavskoe Hwy Kutuzovskiy Ave Business Centres Class А existing Suvorov Plaza 17,224 sq m under construction Evolution Tower 79,53 sq m Entuziastov Hwy Ryazanskiy Ave Volgogradskiy Ave Concentration of office space inside GR; 19% between GR and TTR; 34% outside TTR; 47% Class В existing under construction Knight Frank exclusive/ co-exclusive consultant ТТК IQ-quarter 122,45 sq m Supply In Q1 215, the total supply of highquality office space in Moscow has reached 14.8 million sq m, with Class A and offices accounting for 3.5 million sq m and 11.3 million sq m, respectively. After decrease in supply in 214, the delivery of new office space dropped 6% in Q1 215 -on-, to just over 9, sq m. The Evolution Tower in the Moscow City business center was the only Class A office building delivered in Q1 215. Demand The net take-up of quality offices in Moscow was 37, sq m in Q1 215, 2% below the same period last. Lease renegotiation is the dominant type of transactions in the current market environment. Tenants having foreign currency agreements start renegotiating the lease terms to fix the exchange rate for the period of 1 2 s. Apart from changing the contract currency, tenants who signed lease contracts in a stable or growing market also seek to reduce their rental rents. As a result, lease renegotiations has totalled 86% of all transactions in Q1 215. Distribution of deals by location * Office properties that received the delivery act in Q1 215 The building class is indicated according to the Moscow Research Forum Office Classification of 213 % 1 4% 11% Delivery volume dynamics for Class A and B offices 8 29% 17% thousand sq m % 2, 25 1,8 1,6 2 1,4 1,2 15 1, 8 1 6 4 5 2 28 29 21 211 212 213 214 215 F 216 F Class А Class В Class A and B inventory growth 6 4 2 New lease 43% 24% Lease renegotiations 42% 3% district Between TTR and Between GR and TTR Inside Garden Ring 3
Office market report. Moscow Tenant mix Key office space lease and purchase transactions closed in Q1 215 13% 4% 3% 6% 33% Leningradskoe Hwy Dmitrovskoe H w y Altuf'evskoe Hwy Yaroslavskoe Hwy 15% 26% Volokolamskoe Hwy Baker Tilly Russaudit 85 sq m TMT* Business Services FMCG & Pharmaceuticals Banking & Finance Architecture & Construction Manufacturing Oil / Gas / Mining Krylatskiy Rublevskoe Hwy Solar Turbines CIS 482 sq m FCm Travel Solutions 677 sq m CBRE 1,23 sq m Novodmitrovskiy Streletskaya Sloboda Diamond Hall GR Fond Razvitiya Dalnego Vostoka 59 sq m ОКО Naberezhnaya Tower GE 733 sq m Capital City Silver City TTR Imperia Pharma 42 sq m MEDA Pharma 669 sq m Arma ABD 693 sq m Pioneer 462 sq m Ryazanskiy Ave * TMT technology, media and telecommunication Vacancy rate, which had been rising throughout 214, totaled 29% for Class A office buildings in Q1 215. The vacancy rate in the office market was 16.7%. Since 213, there has been a tendency for companies seeking to reduce rental costs and move to higher-quality premises, which made them look for office space near the Moscow Ring Road. However, the falling market has changed the direction of this decentralization trend. Businesses are still keen to reduce rental costs and mostly consider offices outside the Garden Ring. However, with the rents falling, they can afford less distant options with rates almost the same as the ones for offices of similar quality near the Moscow Ring Road: properties located near the Third Transport Ring accounted for the largest number of office lease deals (43%) in Q1 215. As for the distribution of demand by company type, the largest volume of lease and sales transactions across Class A and B offices was completed by TMT companies, which had been among the key occupiers of high-quality office space in Moscow for a long time. In the current environment, when the number of deals is low, the market share of one or another tenant or buyer type does not give an objective Dynamics of delivery, take-up and vacancy rates of Class A and B offices thousand sq m Class A % 8 36.% 4 7 35 29.8% 6 3 5 4 3 2 1 16.2% Leninskiy Ave 213 214 215 F Take-up Profsoyuznaya St Varshavskoe Hwy Delivery Kashirskoe Hwy 11.5% Concentration of office space take-up outside TTR; 33% 15.3% Vacancy rate 17.% 213 214 215 F between GR and TTR; 43% inside GR; 24% Office centres located on the outside of the ring within the 5 m distance belong to the proximate ring submarket Knight Frank acted as a consultant of the transaction 25 2 15 1 5 4
Q1 215 Research picture. Nevertheless, we can point out that the highly volatile oil prices and the sanctions against the Russian economy translated into oil and gas companies and banking businesses accounting for only a small proportion of the demand. Commercial terms The weighted average rental rate in the Class A office market, which is calculated on the basis of asking rental rates for vacant office space, went down by 1% from the previous quarter, to 27,93 rub/sq m/ (triple net). For the Class A offices with US dollar-denominated rents, the decrease was also about 1%, to 53 $/sq m/ (triple net). For offices, the asking rents have decreased to the level of 16,769 rub/sq m/ (triple net), or 39 $/sq m/ ( 1%). Today a large number of landlords are ready to surrender and propose rental rates in rubles, fixing the exchange rate and providing a currency band. However, a few owners of Class A offices are ready to revise the commercial terms for the entire duration of the contract: just 12% of Class A vacant office premises were available on such terms as of the end of Q1 215. More often, landlords agree to provide rental rates fixed in Russian national currency for the first two s, after which they are planning to switch back to a foreign currency. Average asking rental rates dynamics for Class A and B offices denominated in RUB rub/sq m/ 4, 35, 3, 25, 2, 15, 37,311 21,143 21,284 23,86 12,77 Average asking rental rates dynamics for Class A and B offices denominated in USD 24,398 13,821 14,11 Class A 25,885 25,525 15,9 15,698 3,144 17,15 26, 15,7 1, 28 29 21 211 212 213 214 215 F $/sq m/ 1,6 1,5 1,4 1,2 1, 8 6 4 85 67 4 76 455 83 833 8 48 483 492 2 28 29 21 211 212 213 214 215 F Class A 59 51 314 3 G1 business park, 1 st km of Kievskoe Hwy 5
Office market report. Moscow Forecast Despite the recent stability of the Russian ruble and oil prices, office market players are still very cautious. Almost 1 million sq m of quality office space is due to be delivered in 215; however, most likely, the current state of the office market will force the developers to hold over the deadlines. We do not expect the owners to put on hold construction of the projects scheduled for delivery by the end of the, but the current environment will probably make them suspend those that are at the initial construction or project stages. It should be noted that about 13, sq m of office space is expected to be delivered in 215 in the territory of New Moscow near. A number of construction projects in this area were announced in 212, after the Moscow territorial expansion plan has been unveiled. However, with the current state of the office market, the landlords are likely to open these properties without having lease contracts signed. A similar situation is observed in the Moscow City business district, where almost half of the office space remains vacant. In 215, the vacancy rate in this district will continue increasing, because, as reported earlier, 2, sq m of Class A office space is due to be completed in 215 in addition to the 2, sq m delivered in 214. As the market is still unstable, the volume of transactions will be mainly formed by lease renegotiations, with the net takeup remaining at a low level. Taking into account the volume of offices to be delivered in 215, the vacancy rate will continue rising. We estimate that for Class A offices this figure may exceed 35% by the end of the. Research Olga Yasko Director, Russia & CIS olga.yasko@ru.knightfrank.com Offices Konstantin Losiukov Director konstantin.losiukov@ru.knightfrank.com +7 (495) 981 Knight Frank LLP 215 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. Moscow submarket data. Key indicators 6 Submarket Lease Area, thousand sq m Class A Average rental rates $/sq m/ rub/sq m/ Vacancy Rate, % Average rental rates $/sq m/ rub/sq m/ Vacancy Rate, % Boulevard Central business Ring district 712 94 49,795 14.9 387 2,59 1. South 918 529 28,19 21.3 457 24,245 1. Garden Ring West 273 916 48,54 8.1 532 28,19 7. North 56 769 573 4,733 3,357 6.4 15.6 598 472 31,363 24,93 11. 13. East 41 511 27,17 18.8 47 21,586 2. Leninskiy 27 528-9.1 419 22,194 25. Tulskiy 9 - - - 39 2,669 15.1 Khamovniki 26 98 51,949 2.7 592 31,381 1.7 Kievskiy 393 472 25, 1. 487 25,791 58. Presnenskiy 357 448 23,729 7.3 5 26,59 7.1 Third Prospekt Mira 16 483 639 25,583 33,881 34.6 36. 298 396 17,825 2,992 16. 15. Transport Ring Tverskoy- 738 828 43,95 19.5 43 21,34 4.5 Novoslobodskiy Basmanniy 52 - - - 352 18,645 16. Taganskiy 227 45-82.9 218 11,575 14. Volgogradskiy 383-3, 48. 278 14,736 3. MIBC Moscow-City 83 618 27,458 44.2 North 659 598 31,696 1.9 221 11,737 19. TTR- South 1,634 473 25,58 51.7 262 13,878 18. 476 25,238 23.3 279 14,779 West 1,164 526 27,857 16.3 381 2,184 13. 16. East 649 44-49.3 249 13,199 12. North 525 - - - 177 9,4 17. South 413 336 17,81 66.8 171 9,57 18. 314 16,634 35.2 214 11,358 West 1,73 31 16,49 28. 245 12,977 3. 23. East 248 - Total 14,852 53 27,93 29. 39 16,769 16.7