According to Konstantin Demetriu, head of investment for Russian and CIS markets at Jones Lang LaSalle, both developers and investors are looking to expand their activity all across Russia. This widespread opinion is graphically illustrated by available statistics. According to Cushman & Wakefield Stiles & Riabokobylko, the total amount of investments in commercial real estate in Russia exceeds $4 billion. The company’s experts also say that that the volume of investments may nearly double in 2007 and reach $7.5 billion.
Experts say that such cities as St. Petersburg, Kazan, Novosibirsk, Chelyabinsk, Yekaterinburg, Ufa, Samara, Volgograd, Rostov-on-Don, Nizhny Novgorod, Krasnoyarsk and Kaliningrad are very actively developing in all segments of the commercial real estate market. The interest in regional real estate markets on the part of Russian and foreign investors is more than justified. In recent years the Russian economy has shown high rates of growth, which cannot but reflect on the well-being of urban dwellers. Hence the growing demand for quality retail, office and warehouse premises. However, the commercial real estate market is still in an embryonic state in the overwhelming majority of Russian cities, allowing pioneers to reap huge profits from their properties.
Knight Frank’s experts estimate that the supply on Russia’s regional markets can conventionally be divided into three segments: properties developed during the Soviet era; semiprofessional properties — premises that cannot fully meet the universal quality standards; and the rising segment of modern quality spaces.
As noted by experts, modern retail premises have appeared in almost all major Russian cities and their supply is swiftly swelling while office buildings attractive to investors are few and far between, and their development is an exception rather than the rule. As to the development of logistic properties, the development of the first quality projects has for the most part just been launched.

The west wind blows
St. Petersburg, Russia’s northern capital, stands out among all regional centers. This city set two Russian records for commercial real estate records in 2006. Firstly, according to IB Group, the city saw over 1 million sqm of retail space opened last year. Thus St. Petersburg set an absolute record in Russia in terms of GLA: 220 sqm per 1,000 residents.
The second Russian “record” is related to the hospitality market. It is in the northern capital that the greatest number of investment transactions were completed in this sector last year, namely five acquisitions. It should be noted that the St. Petersburg hospitality sector is one of the most well developed in the country. Thus, according to Heliopark Group, 311 hotels offering 17,300 rooms now operate in the city; 22 hotels with nearly 1,700 rooms are currently under construction. Altogether 125 projects that will add roughly 10,750 rooms to the city’s hotel stock are at the planning or construction stage.
The rapid construction of quality office buildings continues; the scale and quality of delivered properties have grown. IExperts say that the supply of quality office space grew more than by a quarter last year. As reported by GVA Sawyer, new class A office space totaled 43,000 sqm in 2006; as a result, the total supply in this class nearly doubled. Сlass B swelled by nearly 24% in 2006: 17 new properties and two phases in three existing facilities were comissioned, bring the 93,000 sqm of new class B office space to the market. The city’s market for logistics properties is still lagging far behind demand in terms of the number of quality projects delivered. However, over the next 2-3 years, when all planned projects will have come on line, specialists forecast a drastic change in the situation.
The markets of other cities in the Russia’s Northwest are still underdeveloped, except, perhaps, for Kaliningrad. Thus, from the mid-1990s until today, the main bulk of Murmansk office space comes by way of leased hotel rooms. In addition, premises in former research institutes and other organizations that went out of business upon after the end of the Soviet era are currently leased as office space.
For all that, Murmansk’s hotel stock comprises just 22 hotels built in the last century that are being constantly renovated. The retail market is the driving force of the entire commercial property market. The Turkish chain Ramstore, for example, built a shopping center outside the city center. National operators of electronics and household equipment — Eldorado, Expert and Mir — have also entered the local market.
Getting land is regarded by local specialists as one of the main problems on the Murmansk market. Market participants point out that it is next to impossible to obtain a plot in the city center without good connections with the local administration. However, to a certain extent, this tendency is typical of all Russian real estate markets.
Lack of modern retail format and diversity among retailers and shopping centers operating in the city are the main problems of Arkhangelsk, where it’s also difficult to get a parcel of land for development. The latter poses a major hurdle for the retail market in Arkhangelsk retail, experts believe. In view of the supply shortage of premises ranging from 600 to 1,500 sqm, retailers have to buy non-profile buildings — former warehouses, breweries, bread-baking plants — and then renovate them.
The city also suffers from an acute shortage of modern office space. Offices are presently rented in shopping centers (on second or third levels), former flats converted to non-residential stock, basements of apartment buildings and separate business centers.
The market for rented storage facilities in Arkhangelsk is estimated by one of the local market participants at about 150,000 sqm, but it is poorly organized and represents scattered properties owned by industrial enterprises and Soviet-era depots. Warehouses with good access are in very short supply and available space is almost impossible to find.

Closer to the center, closer to the sun
Quite a different picture can be observed in the big cities of Central Russia, the trans-Volga region and the South. Growing business activity, abundant natural resources and relative closeness to the capital spur local commercial property markets and has even led to their saturation in some places.
Describing the situation in central Russia, one cannot help mentioning the commercial property market in Kazan, the capital of Tatarstan. Several dozens properties have been opened in the city recently, which is causing experts to talk of over-saturation on the retail market in Kazan. Thus, as estimated by experts of Yedinaya Arendnaya Sistema (United Lease System), roughly 550,000 sqm of retail space for which there is no demand appeared on the market last year. “The local market is overheated in some segments; as a result, it takes a rather long time for projects to pay for themselves — up to 10 years,” says Andrei Gerotsky, the company’s deputy CEO. Yet every cloud has a silver lining. The turbulent retail boom awakened the market for logistic properties. In particular, RDS Developments launched construction on the 230,000-sqm class A logistic complex Q Park Kazan, 25 km from the city of Kazan. This is one of the largest regional projects in Russia.
According to United Rental System’s experts, the office real estate segment is also overheated, although forecasts do raise some doubts. In particular, office space in the city totaled 270,000 sqm as of the end of 2006, but majority of those premises class B- and C.
Retail real estate is also booming in another trans-Volga city, Nizhny Novgorod. Experts predict the delivery of around 400,000 sqm of new retail space here in 2007-08; as a result, the local retail space stock will swell by a third. According to the local analytic company Triumph, the city’s office real estate is on the brink of major changes as well. “The delivery of a large volume of quality office space in the near future may, on the one hand, bring about price stabilization in low quality facilities while, on the other hand, raising the average lease rates for the city,” say the company’s analysts. As estimated by SMT Developments, the city’s office market may grow by 60,000 sqm this year, provided the commissioning schedule is adhered to. The commercial property market of Rostov-on-Don is presently one of the most promising and dynamic not only in the South but across Russia. The great number of ambitious projects in all sectors, including the traditionally underdeveloped logistics segment, are making developers reconsider their chances for success in this city.
As in all other Russian cities, retail is the most developed sector here, according to ADM Group. Active construction on large-scale retail projects, such as a Mega shopping center by IKEA, is about to start in Rostov. The city’s office sector is mainly represented by class C and D premises, although some business centers are already positioned as class A. Furthermore about 20 new business centers will be opend for operation in the near future.
The development of logistic properties is boosted by large seaports on the Black, Azov and Caspian seas. The total warehouse space in Rostov is estimated by Knight Frank at 190,000 sqm. However, according to the Rostov Information Development Agency, over 700,000 sqm of quality storage space is due to be soon developed in the city.

Urals in the spotlight
Investors are looking closely at the Urals region: the number of projects initiated by national and foreign developers and the amount of investment in regional commercial properties may double or triple during the next 2 or 3 years. This will transform the market. Ural cities differ in terms of their attractiveness in the eyes of investors. Yekaterinburg and Tyumen are ranked highest by most experts. Thus, according to Ural-Hermes, the retail turnover exceeded 200 billion rubles in Yekaterinburg last year, up 25% year on year. The city has 21 shopping centers with the total floor space of 600,000 sqm, with roughly 390,000 sqm falling on sales areas proper. The company’s experts say that the market of quality retail spaces mainly consists of 13 major retail facilities with nearly 490,000 sqm. The Retail Hubs project was developed by the city administration with the assistance of Ural-Hermes consultancy as part of the strategic urban development plan. This urban plan identified 71 promising sites for retail businesses and services.
Tyumen’s macroeconomic indicators are not inferior to those in Yekaterinburg (some are even better), but competition is not so stiff as the market began forming at a later date. As of today, two large retail-entertainment centers with high-profile anchor tenants (about 70,000 sqm each) have opened — a remarkable achievement for the smallest regional center in the Ural Federal District with a population slightly exceeding half a million. Yet Marina Ustyuzhanina, director of Partner marketing holding, thinks Tyumen still has room for more shopping centers: “Their prospects are good: the market possesses great potential and is attractive to investors.”
As noted by major players, not all commercial property segments are attractive in Tyumen. While the retail and office markets are booming the logistic segment remains calm. Evgeny Kasyanchik, commercial director of the wholesale-retail shopping complex Sibirsky na Barabinskoi, says, “Demand outweighs supply on the market for logistic properties, so competition is almost lacking. The demand for warehouse space is very high and this segment will rapidly develop in the near future.”

Siberian hopes
The Siberian region is drawing increasing attention, with investors and developers generally focusing on two cities: Novosibirsk and Krasnoyarsk.
In the past three years 16 high-profile business centers totaling 86,000 sqm have been developed in Novosibirsk. Yet not a single class A business center has been built, according to representatives of the Novosibirsk-based analytic agency Rid Analitics. The first class A office center is set to be opened by RosEuroDevelopment this spring. Last year several large shopping malls opened their doors in the city: the first phase of Self-Center, Bolshaya Medveditsa (Ursa Major) and IKEA. It should be noted, however, that national and international operators do not hold sway, as the market is dominated by local operators:
In Krasnoyarsk the situation is the opposite: analysts are unanimous that there are no concept-based shopping centers, although more than 80 retail chains operate in the city. Incidentally, it is in Krasnoyarsk that the first Ramstore outlet in Siberia opened its doors. However, local retailers hold strong positions here. It seems clear that shopping center developers are not likely to wait long to launch projects here.
According to Astera Oncor, Krasnoyarsk has over 39,000 sqm of class B office space and 117,000 sqm of class C office space. Class A is absent in the city. However, the Krasnoyarsk-based Monolitholding is preparing to launch construction on a 45,000-sqm class A business center via a joint venture with Mirax Group.
Logistics remains the neglected commercial property segment, as the city lacks modern warehouse terminals. Storage space is mainly offered at old industrial depots and production facilities and no new logistic properties are being developed.

The Far East is too far out
The most distant Russian region, the Far East, is the most difficult for both developers and investors to access. Specialists note a haphazard development of the Khabarovsk real estate market and weak interest of investors in Vladivostok.
Experts explain the haphazard pattern in Khabarovsk by its remoteness from the capital, where the standards of development projects have already been shaped, and hence the inexperience of local developers. The most retail properties in the city do not correspond to the concept of a modern shopping center. The most widespread retail format is the lower floors of apartment buildings — the vigorous conversion of flats to the non-residential stock is going on in existing apartment buildings, whereas the lower floors in new residential developments are deliberately assigned to office and retail functions. Around 30% of the office space market falls on residential sector.
Yet construction of new properties is rather active in the city. AmurLex is presently developing the Dokhodnoe Mesto office center on Frunze Street and the Na Prudakh business complex at Ussuriisky Blvd. The Khabarovsk Investment Program Department is developing the Felix City business center while Novy Kvartal is erecting a business complex on Karl Marx Street.
The non-transparent policy of local authorities with respect to investors and arbitrary land allotments are mentioned by the real estate market experts as the main economic impediment to the Vladivostok market development. There are no class A business centers in the city and noteworthy class B office premises can be counted by the fingers. Representatives of RGS Nedvizhimost state that the best office premises in Vladivostok are quartered in the respectable hotels Hyundai, Acfes Seyo and Gavan.
The Vladivostok retail sector is mainly represented by properties lacking conceptual development, according to experts. “Shopping complexes in the city are virtually roofed outdoor markets, and no more than that,” says Aleksey Orlov, CEO of Birzha Nedvizhimosti. “The pool of tenants is similar in every shopping center and there is no such thing as an anchor operator.”
The commercial real estate market began developing in Russia a dozen of years ago. It would be unrealistic to develop such a vast territory within this short period of time. Hence it is found that “the farther from the center, the more primitive the market”. Yet Russia’s regions demonstrate very high development dynamics and it no longer surprises anyone that a number of high-profile retail operators, such as Castorama and international investment funds like Meinl European Land, start their business expansion in Russia’s regional cities rather than the capitals.