Commercial Real Estate

The Novosibirsk market of commercial real estate rouses the interest of both local, national and multinational players. Developers duly appreciated the stable growth of prices and market potential. Large-scale projects are being implemented in all real estate segments. Shopping and retail-entertainment centers ensure maximum yields but experts point out that warehouse and hospitality complexes also look good.

Novosibirsk’s main advantage is fortunate geographical location at the intersection of major transport routes. One of the other values is highly skilled research personnel, an outcrop of the city’s bias towards science&technology. Novosibirsk is unevenly developed: until recent large centrally located plots have remained empty. Those grounds will be the “points of growth” in future.

Municipal land auctions have been held in Novosibirsk since 2005. The secondary land market has also been formed. Development spots in the center and along the thoroughfares are naturally priced higher than at outskirts. As reported by the Siberian Evaluation Institute, the ceiling price is $3 million per hectare.

In addition to locals, a number of Moscow-based and multinational players are active on the market, such as London & Regional Properties, Morgan Stanley and Raven Russia. The structures of Lev Levaev and Oleg Deripaska also declared their interest in Novosibirsk. Already operating here are RosEuroDevelopment, AEON Corporation, ST Group Region, MLP and NLK.

Novosibirsk Plazas and Cobras

The market of office realty has been rapidly developing during the recent 5-7 years and is more saturated than other segments. It was spurred by the coming of large Moscow-based companies. They are the main consumers of office space in class B and higher segments.

As estimated by DSO Consulting, there was about 1.6 million sqm of gross office space in Novosibirsk early in 2007 including 1.4 million sqm of class C premises on industrial campuses, 130,000 sqm class B and 15,000 sqm class A space, mainly build-to-suits. In 2006 they commissioned 178,000 of office space including premises on ground floors and redeveloped industrial facilities.

Sales have so far prevailed on the office market. At least 60% of space in class B centers under construction is now acquired by small investors for sublease. In 2006 only 15,400 sqm of class B office buildings were put into operation — a 7,000-sqm BC at 80 Frunze Street, 4,500-sqm Magnat and 3,800-sqm Voskhod.

They began constructing speculative business centers 3-4 years ago. The first 14,000-sqm class B Derzhavin 28 BC developed by ISK Zaeltsovskaya was commissioned in February 2003 followed by the 10,000-sqm Lenin 52 BC developed by Transservice and delivered in October 2004. Rental rates for class B office space now range from $370 to $390 per sqm per year while selling prices fluctuate between 90,000 and 100,000 rubles per sqm.

The 6,630-sqm BC Golden Plaza developed by Sibakademinvest received first occupants early in 2005. The 5,500-sqm Novograd with office space occupying five out of seven floors began functioning in 2005. The rental rates start from $460 per sqm per year. Lacking guarded parking is the main blight of now operating BCs.

The nearly 80,000-sqm complex now realized by ISK Transservice at Vatutin Street will be the largest office facility. The overall investment exceeds 2 billion rubles.

Class A was originally represented by build-to-suit facilities developed by Moscow-based firms, for their own needs. These are the offices of Novosibirskenergosbyt, Novosibirskenergo and the Branch of the Bank of Russia.

A number of projects, being currently constructed, fall under the class A niche including the 27,000-sqm RosEuroPlaza built by RosEuroDevelopment, the 45,000-sqm ST Plaza developed by ST Group Region, the 34,000-sqm BC Greenwich erected by Transservice, the 64,000-sqm Sky City raised by Sibakademinvest, the 20,000-sqm Cobra constructed by Trud and the 28,000-sqm office-hotel complex built by L&RP.

The 27,000-sqm RosEuroPlaza turned over for operation in December 2006 became the first class A office building in Novosibirsk. The project cost neared $35 million while the annuity starts from $440 per sqm.

Projects delivered by local developers, such as the 50,000-sqm BC Kronos built by Stroitel, the 34,000-sqm BC Greenwich built by Transservice and the 22,000-sqm Cobra developed by Trud, compete with those constructed by Moscow-based developers.

As estimated by DSO Consulting, the gross floor area of the declared high-end business centers is well over 170,000 sqm while the city’s current demand for class A office space does not exceed 130,000 sqm.

Analysts point out that the rent growth rate has slowed down and stabilized at 5-10% this year while at some properties charges have not changed. Office space selling prices also go down: while prices rose by 30-40% in 2006, they have not risen more than by 10% since the turn of 2007. The payback period has extended from the former 4-5 years to at least 6-7 years, on average.

After the declared space is delivered to the market, competitive struggle between BC landlords for occupants will toughen.

Retail Perspective

Retail realty holds the lead among other cre segments in terms of investment inflow. Demand for retail space is so high that prices grew by 100% for the previous year, on average, and the growth is expected to accelerate to 50% till the year’s end.

As reported by DSO Consulting, 500 sqm of retail space fell on 1,000 Novosibirsk residents early in 2007. In the year 2006 about 150,000 sqm of retail space was commissioned, of which malls over 10,000 sqm accounted for 40%. The 24,000-sqm SC Alpi, two Lenta supermarkets, 12,000 sqm each, and the 10,300-sqm REC Kalina opened in the city last year.

The gross floor area of retail premises now under construction nears 1.5 million sqm, of which at least 800,000 sqm falls on malls over 20,000 sqm.

Most expensive are street-retail premises along major retail routes – Krasny and Marx prospekts as well as Sovetskaya and Vokzalnaya streets. Small premises are offered here at the price of 6,000-7,000 per sqm, whereas the offer’s upper bound rose to $10,000 per sqm. Rental rates grew by about 50-70% YoY and now the upper ceiling has neared $2,000 per sqm per year.

The delivery of malls is expected in Novosibirsk from the end of 2007 onward. The 144,000-sqm TC Mega developed by IKEA must open in autumn while the 77,000-sqm mall Royal Park developed by Avtoyarus is expected to open soon in the area of Kalinin square.

The local developer Trud scheduled the delivery of the 1st and 2d phases of SC Manhattan with the gross area of 48,000 sqm for 2007, and RosEuroDevelopment is implementing the 150,000-sqm riverside mall.

The dearth of retail space compels the retailers in need of new shops to develop them on their own.

This is the way chosen not just by nationwide retail operators, such as Lenta, by also by local and regional retailers Alpi, Siberian Giant and Maria Ra. The trading holding company Siberian Giant that opened the 22,000-sqm Giant hypermarket late in 2005 carries forward construction on the 28,000-sqm SC at Mostovaya Street near to the bus station and plans to build a similar shop in Zaeltsovsky district.

In spite of numerous declared projects, retail realty remains a paying investment instrument. The monthly rates in shopping centers vary between 2,000 and 2,500 rubles per sqm for the boutique zone. Now the developers who build a retail property “from scratch” may count on at least 20-30% of yearly proceeds from letting this space. In case of buying a property on the secondary market the lease revenues are reduced to 10-15%.

The market saturation is still the remote future, since in terms of per capita provision with retail space Novosibirsk lags far behind Moscow.

Storing Profusely

As reported by Knight Frank, the gross warehouse area in Novosibirsk nears 700,000 sqm; most of it is class C and D complexes built in the 1960s - 80s. No more than 50,000 sqm can be ranked with class A. Analysts estimate the demand for up-to-date storage facilities at 0.5–1.0m sqm. The rates at modern warehouses start from $120 per sqm less operating expenses.

Talking of speculative class A terminals, very few projects are under construction at present. Siberia terminal developed by National Logistics Company affiliated with RosEuroGroup Consortium near Tolmachevo airport became the first robin. Out of the planned 40,000 sqm the developer delivered 10,000 sqm in spring 2006. Another 15,000-sqm class A storage facility worth $7.5 million was built by Bee Logistic.

Petersburg-based Sibagrocentr is constructing a 30,000-sqm class A terminal in the east of Novosibirsk. The total investment nears $40 million while delivery is slated for 2008. Eurasia Logistic owned by the Kazakh Bank Turanalem intends to build a 500,000-sqm logistics park near Tolmachevo for $350 million before 2010. AEON Corporation, holding a 49% stake in Tolmachevo airport, also plans to construct a complex in the vicinity. Out of 620,000 sqm of aggregate space 100,000 sqm will be dedicated to storage while the rest - to offices and retail. The project delivery will last five years and call for $800 million of investment. Mirland Development (affiliated with Israeli Fishman Group) and MLP are also going to construct warehouses in Novosibirsk, looking for suitable development land. The British L&RP, in a joint venture with VVV Company, plans to build a 100,000-sqm class A terminal. The project will call for investment to the tune of $75 million.

The regional administration plans to surround Novosibirsk with high-end logistics complexes. The largest industrial-logistic park is projected in the area of Chik community along the federal route Novosibirsk – Omsk, where about 1.5 million sqm of warehouse space will supposedly be developed.

In recent years demand for upscale warehouses has been stably rising — above all, on the part of retail and distribution companies — whereas the existing offer is absolutely inadequate. It makes the warehouse sector attractive for investors, despite rather long payback periods (from 7 to 8 years).

Guests in Anticipation

Today Novosibirsk has 29 hotels with 3,048 places, about a third of them being departmental properties. The largest hotels include Novosibirsk (448 beds), Ob (416 beds), Siberia (357), Tsentralnaya (300), Severnaya (289) and Zolotaya Dolina (190). The occupancy rate varies between 65% and 100%, and not single upscale hotel!

The project of Bazel-owned Russian Hotels to raise a 16,000-sqm 80-room office-hospitality complex on Krasny prospekt slated for delivery in 2007 has not been launched yet. RGS-Nedvizhimost, looking to construction on an office-hotel complex in Narymsky public garden is now looking for a new site. The court cancelled the City Hall’s allotment of 0.8 hectares in this area.

Sibakademinvest is implementing a 65,000-sqm, $130-million-worth complex to comprise a BC and a five-star 200-suite hotel. Swissotel will operate this hotel to be delivered before 2009.

L&RP is building a four-star 190-unit hospitality complex on a 0.5-ha plot near TYuZ Theatre. The gross floor area is 26,870 sqm, of which 10,000 sqm will be occupied by office facilities and a conference hall and more than 16,000 sqm by the hotel. The investment to the tune of $40 million is anticipated.

France-based Accor Group also announced its intention to deliver a 3-star 200-unit project under the Ibis brand. Construction works will be carried out by Novosibirsk-based Stroimaster.

Investments are booming on the Novosibirsk commercial real estate market, offices being the most developed and competitive segment. Retail realty provides highest yields, whereas the warehouse and hospitality segments boast the greatest market absorption.