Money growing: The End of an Easy Life

However not all the constructed premises will be demanded, analysts warn.

The most competitive segments are office and trading real estate. The most attractive for investment remains hotel and warehouse real estate, where the market capacity is greater, and there are not so many players.

Complexes: the tastiest

Companies belonging to Oleg Deripaska have the most ambitious plans. Structures of Baeela have suggested to the mayoralties of Novosibirsk to build almost 2 million sq.m of residential real estate in the city. Israeli's Lev Levaev has slightly less modest plans. Under his control AFI Development is going to construct two residential complexes with a total area of 397,400 sq.m, 4000 sq.m of office space, 3,600 sq.m of trading space and 76,000 sq.m of warehousing on a territory of 166.9 hectares in Novosibirsk.

The creation of multipurpose complexes in which office areas are adjacent to shopping areas, hotels and even residential buildings, is becoming a real trend, Sergei Dyachkov, managing partner at DSO Consulting says. It is favorable for large companies to be engaged in such large scale projects - their realization will take no less than five years, and the lowest level of profitability is not below 15-25 percent per year, Dyachkov estimates.

In the next few years the activity of foreign players will grow and expand, Elena Yermolaeva, director of analytical agency RID Analytics, predicts. As a result on the market there will be a sufficient number of good quality projects with a good concept, which will force out of the market the share of premises badly thought over by developers. Such premises will appear not in demand and will lose their former profitability, she believes.

Year by year complex projects in Novosibirsk become more large scale. One of the largest and most expensive is being built by AEON Corporation to which owns a 49 percent share in Tolmachevo airport. On a territory of 200 hectares near the airport it plans to construct a 620,000 sq.m complex, from which 200,000 sq.m will be used for trading, 100,000 sq.m for warehouses, 150,000 sq.m for an expo center and 170,000 sq.m for offices. The project is calculated to take approximately five years to complete and $800 million in investments will be required.

The airport will provide a constant stream of clients and buyers so the project will be in demand, Zafar Umarov, director of Akropol, considers. According to him, developers have a greater aspiration to build premises far from the city center. In his opinion, in the next few years the number of projects in the suburbs and in industrial zones will grow.

The realization of large complex projects were earlier started by RosEvroDevelopment and Mossibinvest. However both companies have come across difficulties in their realization.

Construction of a social-business center at the Opera theatre is stuck in so far as receiving approvals from the Russian organization for the protection of culture. And RosEvroDevelopment needed to reconsider the concept of an IT park in an academic town after protests by the neighboring inhabitants who were not concordant with the chosen site for the premises. The forest area of the academic town should not suffer as a result of the huge construction, the townspeople have declared and they have now got for it to be moved. As a result the cost of the project has increased 12 percent.

The realization of a techno park by RosEvroDevelopment, in which a lot of office space has been assigned, will automatically result if not in a decrease then in the stabilization of rental rates of office space," director of Delta Vladimir Zatrimailov hopes. Now, he says, rates at the institutes of the academic town classified as offices, hardly corresponding to class C, are from 800 rubles per sq.m per month. For this money it is possible to rent an office in a business center in the city center, he complains.

The largest project for a complex by local developers is the office-shopping complex on Vatutina Street, which measures 80,000 sq.m. It is a working suburb on the left bank of the city. Within the complex there will be a car showroom and a class B business center. The volume of investments will total more than 2 billion rubles. The car showroom will measure almost 5,000 sq.m and the business center 70,000-75,000 sq.m.

Offices: competition

Currently there is almost 1.6 million sq.m of office space on the Novosibirsk business center market, of which, according to DSO Consulting, the share of class B offices total 130,000 sq.m. Almost half of them are located in buildings of former project institutes and establishments, etc.

In the last few years in the business center sector an increased level of investment activity has been observed. There is currently almost 300,000 sq.m of office space under construction, according to Sextons. Earlier it was planned that they would be put into operation from the end of 2006, however the dates of when these new complexes will enter the market are chronically not observed.

"Until now it was possible to consider the Novosibirsk market as developing, where profit was earnt on practically any projects," Yermolaeva says. However, if all the announced projects of office centers will be realized the owners of many existing office buildings should resign to the fact that the profitability of their premises may decrease, and for some that there will be an outflow of tenants. In her opinion, to a great degree this is fair for class C and below offices.

The niche of class C offices and lower in Novosibirsk is still the largest. DSO Consulting estimates there to be 1.4 million sq.m. The market is filling up with all new premises of this category, overwhelming the share of the market that is made up of offices in reprofiled premises, including, in particular defensive industry factories, the majority of which have been silent since the 90s, says Umarov. New proprietors have taken a great interest in development: after small renovation factory buildings turn into offices, warehouses, shopping space, etc.

Rates for class C offices are 700-800 rubles per sq.m per month, which corresponds to the level for good quality offices in the city center, says Yermolaeva. For class B offices, she says, monthly rates are from 900 rubles per sq.m. For example, for this price you can rent premises in the business center on Derzhavin Street. For class A offices the highest rates are 1,500 rubles per sq.m per month.

In the class B office segment small local companies are active while in the class A segment, the largest developers and Moscow players are most active.

The first class A business center is the RosEvroPlaza (developer RosEvroDevelopment), which measures 27,000 sq.m and cost almost $35 million to build. The annual rent rate is from $440 per sq.m and more than half of the space has already been leased, the company says.

СТ Group Region has also decided to test its strength in this area. A new class A office complex called ST Plaza will measure 30,000 sq.m, and will be constructed on a land plot measuring 0.34 hectares on Kondratyuk square. Investments in the project will total no less than $27 million. Construction is planned to be finished in 2008. The possible rental rate is $400-450 per sq.m per year.

In July 2007, Transervis plans to put the Greenwich business center with an area of 34,000 sq.m into operation. The first rental agreements have already been concluded at a rate from 1,350 rubles per sq.m. Trud development company plans to put the Kobra business center with an area measuring 20,000 sq.m into operation in 2008. Ekoplast Service will manage the constructed centers and be part of Trud.

Developers are sure that their projects will be demanded by tenants. "Novosibirsk as a business centre requires offices of the highest class and saturation of demand is still a long way off," Dmitry Shmelev, sales manager of СТ Group Region, is assured. "The great demand for good quality office premises is connected with the general increase of business activity in the region, and also with the arrival to the region of nonresident companies," Nikita Nekipelov, manager of development at Transervis, agrees. In the opinion of Natalia Korotaeva, sales manager at RosEvroDevelopment, no more than 130,000 sq.m of class A office space is needed, with annual demand increasing approximately one third.

In the opinion of Dyachkov, the realization of all announced projects will lead inevitably to saturation of the market. Therefore the majority of landlords will be compelled to fix rates, and a number of business centers will experience offices being on the market far longer and even an outflow of tenants. "Demand for class A offices in Novosibirsk is limited, and in the future landlords will need to provide competitive levels of service, as well as prices," Anatoly Pastushenko, deputy director of Trud, agrees.

Though the majority of announced projects have not been put into operation yet, the first signs of saturation are already visible, says Yermolaeva. According to her, since the start of 2007 the growth in rental rates has been no more than 5 percent, and the increase in sales prices for office premises has not exceeded 10-15 percent. The recovery of outlay now takes 4-10 years, and profitability stands at 10-13 percent for investors who have purchased small areas, and up to 20-25 per cent for development companies which have constructed the project from zero.

Analysts speak of a fast saturation of the market, whilst Novosibirsk authorities hold another opinion. The city's demands for good quality business centers has not yet been satisfied, governor of the Novosibirsk region Viktor Tolokonsky considers. A source of new space from the construction of new premises, in particular business centers, will be the removal of industrial companies from the city. The authorities are creating an industrial zone near Novosibirsk where they will be moved. The freed up areas in the city will be offered under business centers and housing of raised comfort.

Analysts invite Small investors to invest in the ground floors of built premises, reprofiling them as offices. Demand for such premises is extremely high from companies whose business is built on active work with clients: realty offices, banks, beauty salons, educational establishments, etc. The cost of construction of such premises is comparable with residential buildings, but the sales prices are at least two times higher, says Umarov.

Warehouses: demand

Investment funds Raven Russia Limited and Mirland Development (a subsidiary of Fishman Group), have announced their intention to win the warehouse niche in Novosibirsk and have already realized the International logistical partnership project.

Raven Russia intends to construct a class A warehouse in Novosibirsk. The date of completion or the also possible parameters of the project were not disclosed by the fund. The project is part of the investment strategy of the fund to construct about 1 million sq.m of class A warehousing in the largest cities of Russia and Belarus.

Mirland Development is already looking for a site for the construction of a class A warehouse terminal with an area of 180,000 sq.m. The estimates of market participants put the volume of investments into the construction at $200 million.

In 2006 International Logistical Partnership announced its intention to construct a 100,000-sq.m class A complex worth $100 million class, however it is only just looking for a site.

Until recently professional complexes have been built by large manufacturers and trading chains (Krasny Vostok, Baltika, Inmarko, Sibirsky Bereg) for their own needs. Last year in the vicinities of Novosibirsk several large European level logistic terminals started to be constructed.

Eurasia Logistics is building the class A Tolmachevo park that will measure 500,000 sq.m and will cost $350 million. The whole project will be ready by 2010. Also in the Tolmachevo area Eldorado is building a warehouse complex with an area of 250,000 sq.m. The volume of investments will total almost $125 million. Sib-agro center, a division of St. Petersburg's Evrosib-Developemt intends to create a chain of class A logistic complexes. Within the structure of the Novosibirsk class A complex measuring 30,000 sq.m will be a container terminal and heated warehouses with shelved storage.

For investors putting money into warehouses, it is obvious that the potential of Novosibirsk as a distribution center of Russia has not yet been realized.

According to consulting company KIA-Center, the city's demand for modern warehouse space totals 1.2 million sq.m. City authorities are more modest in their estimations. "There is currently almost 700,000 sq.m of warehousing in Novosibirsk, and the effective demand of the city without taking into account growth of the class A logistic complex market is another 700,000 sq.m," estimates Vladimir Epimahov, head of the department of transport of the administration of the Novosibirsk region.

Investors have only recently started paying attention to this area, Evgeny Novikov, director of the Novosibirsk office of Tablogix, says. The reason, in his opinion, is the length of time it takes to recover your investments (7-8 years) and the necessity to adjust projects for specific logistic operators.

Completed projects will not end the existing need for warehouses, believes Novikov. Auchan and Metro AG are ready to enter Novosibirsk and will need significant volumes of warehouse space. The greater part of the announced premises will be put into operation no earlier than 2009, he explains. Warehouses do not make as high returns as high-class office centers, but it is the least risky investment in commercial real estate premises and with a deficit in warehouses both small firms and large companies are being compelled to consider the option, argues Novikov.

According to RID Analytics, rates for logistics services grew about 10-15 per cent in 2006, with the rental rate of a good warehouse costing almost 200 rubles per sq.m per month.

Trade: Hit of the season

The largest trading and shopping and entertainment center projects in Novosibirsk are being realized by IKEA and RosEvroDevelopment. The Mega IKEA shopping center measuring 130,000 sq.m will open in the autumn. RosEvroDevelopmet plans to put the Planeta shopping and entertainment center (150,000 sq.m) into operation in 2008.

The largest scale project by local developers is the Novosibirsk-City shopping complex, which measures 77,000 sq.m (developer - Avtoyarus, part of Uspekh).

According to DSO Consulting, there is currently 1-1.5 million sq.m of trading space worth a total of 1.7 billion rubles under construction or being designed in Novosibirsk. "Investors understood that for 2006 the rise in prices on trading areas averaged 50-70 percent, and for a number of premises reached 100 percent," says Dyachkov.

"The city is very interesting for realtors. Federal players (clothes, grocery, DIY, chemist chains) are ready to open shops here at any cost, " director of real estate agency BrokerKom Alexander Nazarov says. According to him, street-retail premises in the city center are currently offered at $18,000 per sq.m." However, this does not mean that transactions will made with such prices," he admits.

The profitability of trade real estate now stands at about 25 percent per annum, and the standard time for the recovery of outlay for shopping centers is 4-5 years, says Dyachkov. However with the introduction of announced areas rental prices will decrease, and the time for the recovery of outlay will increase, he thinks. Thus, trading areas are interesting to investment in for the short-term future, the analyst believes.

Hotels: few players

British fund London and Regional Properties (L&RP) has chosen the hotel real estate segment in Novosibirsk for the realization of development projects. A 4*complex with 190 rooms is under construction on a 0.5 hectare site in the center, close to the Youth Theater. Protea will act as the hotel operator. The total area of the complex will be 26,870 sq.m, with 10,000 sq.m of office premises and a conference hall, and more than 16,000 sq.m for the hotel. The volume of investments is almost $40 million, and the project will be completed in March 2008. L&RP's interest in the hotel segment is explained by the high demand in the city for such services. "The reason we are interested in this business is simple: the demand for hotels in Russia is great," David Dzhovanis, managing director of L&RP in Russia, emphasizes.

Practically the only competitor for the future complex will be Sky City on Kirov Street. The Sibakademinbest project will include a 25-storey 5* hotel to be managed by the Swedish chain Swissotel and a 30-storey class A business center measuring 65,000 sq.m. The volume of investments will total $130 million, and construction is planned to be completed in 2008.

The projects of other market participants are going not so smoothly. In particular, Tursib intended to construct a 4* hotel with 350 rooms on Vatutina street in 2006, and has not begun construction. The reason is a disagreement over the demolition of a site with the construction company in the neighborhood with Tursib social-business center.

Sextons thinks that the projects of Sibakademinvest and L&RP will actually completely end the need for high-class hotels in the city. For others there is the almost empty, but less profitable niche of hotels of a level of 3*.

In this sector private investors will now become more active. Basically they are building small hotels, where the price for a room is from 2,000 rubles per night. According to Lyudmila Romanova, director of the North Star hotel, because of the deficit in hotel rooms in the city such hotels do not have problems with fillability, and the period of recovery of outlay of similar projects will be less than the average on the market.