Commercial Real Estate

Vyborg is one of the largest cities in the Leningrad Region. However, the commercial real estate market of the former capital of western Finland has not developed enough to allow the city to lay claim to the position of an international business center on the Russian and Finnish border.

Interconnected Transport Junction
Vyborg is located in the northwest of Karelian Isthmus, on the Gulf of Finland, 130 km from St. Petersburg. The main section of the city lies on a peninsula cut by a deep valley, while the rest is located on several small islands. The city has a population of 80,000.
The city was founded in 1293, and it quickly became one of the major ports in the eastern section of the Baltic Sea. In the second half of the 19th, the city was linked by railroad to St. Petersburg, Helsinki and Keksholm, and to northern Finland a bit later.
The city once again today is connected to the port which is located at the confluence of the waterway between the Gulf of Finland, the shipping system of Lake Saimaa and the Vuoks River. As a result of its location, the city is the largest transport passage connecting Russia with the countries in the European Union. There are only three seaports operating along the territory, with Vyborg and Vysotsk specializing in processing lumber freight, coal, coking coal, mineral fertilizers, and the oil-loading port in Primorsk is the end terminal for the Baltic Pipeline System.
ROSA Holding in 2007 sold Vyborg Port to Oslo Marine, which plans to invest 170 million euros in its development. “Vyborg’s prospects are very good, but the first task is to bring the port in line with development and freight processing levels from the Soviet era. The port is an end point and efficient production complex; however, it requires some serious modernization,” says Vitaly Arkhangelsky, president of Oslo Group.
The port also is nestled with the city’s boundaries, so it is not possible to develop it extensively; therefore, the environmental problems with pollution and dirt, for example, coal, in the future could be redirected to the Ust-Lugi and Vysotska ports, while Vyborg prospectively could become a transfer point for containers, perishable foodstuffs, or a passenger transfer area.

Industrial and Parking Zone
According to Arkhangelsky, the construction of the Northern Flow gas pipeline and the continuing development of the border business should give a boost to the city’s economy. So far, shipbuilding is the city’s second most important industry, with Vyborg Shipbuilding Factory – specializing in the construction and modernization of oil platforms, as well as small- and mid-sized tonnage ships – is one of the largest shipyards in the northwest. In addition, according to plans on the part of the Russian Energy Ministry, there should be one of the three Russian shipyards here capable of producing 150,000-200,000 tons of current vessels. At the same time, there are plans to create a Vyborg industrial park in the region on 10 ha, totaling 10 million euros and specializing in metalworking. Lappeenranta Сity Holding Company Ltd. and the Vyborg region Administration are the investors. According to Tom Hultin, executive director at Lappeenranta Сity Holding Company Ltd., the project is being completed as part of the Northern Initiative and is part of the Interreg-Tasis Cross Border City program, in which Vyborg, the Vyborg region, Lappeenranta, Imatra and Joutseno are participating.

Roadside Market
“The city’s close proximity to Finland and the presence of a seaport are the significant prerequisites for developing the warehouse segment,” believes Evgenia Vasilieva, director of the marketing department at Astera Oncor.
However, there are no modern warehouse complexes today in Vyborg. Nikolai Pashkov, director for professional activities at Knight Frank in St. Petersburg, believes that investors do not see a basis for developing the warehouse terminals here, given that the main processing and sorting of freight and cargo takes place today in St. Petersburg.
Nevertheless, Vyborg is a border and port city with huge transit. According to data provided by the Vyborg Municipal Settlement, there is three-fold more retail space per capita in the city than the norm set for municipal populations. The overall retail space in the city today is around 65,000 sqm, but the main retail thus far is concentrated on the ground floors of residential buildings, and the main tenants are local independent businesspeople who import goods from Finland.
The 1,000-sqm Alisa shopping complex, the 1,450-sqm Vyborg, 2,400-sqm Radius and the 4,600-sqm retail and office center on Moskovsky Prospect are considered large by local standards. However, national chain operators are not interested in retail space of such small dimensions, so the city’s retail real estate market is stagnating. “Deals do take place in Vyborg,” says Lyudmila Meteleva, a specialist in the commercial real estate department at MIEL-Nedvizhimost, St. Petersburg. “Previously, the development of the city’s infrastructure was connected to the flow of Finnish tourists, when plans were drawn up for the construction of a large entertainment complex; however, Finns now prefer to go to Sweden.” “Lease rates in Vyborg have frozen, as, although they are not rising, lessors are in no hurry to lower them; however, they are willing to offer discounts, depending on who the tenant is, yet there are very few queries in regards to Vyborg,” says Natalia Maleeva, director of the consulting department at Praktis CB.
“Prices and lease rates for commercial real estate in Vyborg, on the one hand, lag behind those of St. Petersburg, but, on the other hand, they are still too high vis-a-vis the average price in the Leningrad Region,” says Pashkov. According to his data, leasing retail premises in Vyborg in 2006 cost an entrepreneur 25% less than in St. Petersburg, while the sales price was 1.5 times lower. Additionally, lease rates for first floor space in residences cost from $240 for the outskirts of the city up to $600-$800 per sqm on the central highway. Lease rates on the city’s main square can reach $1,200 per sqm.

Self-Made Stores and Offices
Large retail companies usually build their own stores, given the lack of appropriate premises. Indeed, the 8,600-sqm Panorama retail and office center, with 8,000 sqm of shopping space and 1,300 sqm of office space, will be delivered to the market in 2009-10 in Vyborg at the intersection of Lenin Prospect and Leningradsky Prospect, as developed by Vyborgstroirekonstruktsia. In addition, Temp Pervy plans to build a two-story, 2,000-sqm shopping complex, while there are plans to construct an O’Key hypermarket and the Lenta shopping center. The construction of a sports and spectator complex with a pool, on Primorskaya St. is another important project, with Peterburgregiongaz as the developer with plans to invest 160 million rubles in the project. Retail turnover in Vyborg by 2010 is expected to reach 5.85 billion rubles, or 1.5-fold higher than in 2007.
The major area of the city’s office retail, says Pashkov, is located in the ground floors of residential buildings as well as in stores, as Vyborg thus far have not had a business center format. Therefore, there is a definite dearth of quality office space. “There is only one business center in Vyborg, MDC Viktoria, and lease rates are $380/sqm per year. Another retail and business center, Panorama, is under construction, and office premises are being offered for $450-$460/sqm per year,” says Sergei Federov, director of the development and marketing department at Praktis.
Basically, companies lease premises rarely exceeding 200 sqm on the first floors of residential buildings at comparable rates. “Large St. Petersburg players are showing interest today in the city, and there is also growing interest on the part of Finnish developers,” says Pashkov. For example, Kvartal is set to construct two retail and office buildings at the intersections of Mir St. and Mosckovsky Prospect (4,600 sqm) and at 15 Sadovaya St. (1,020 sqm).

Counting on Tourism
The strategic plan for the social and economic development of the Vyborg region, Leningrad Region, includes cultivating tourism as one of the priority directions of the economy. However, Vyborg can only boast of three hotel complexes: the 200-room Druzhba, the 187-room Vyborg-Karelia and the 160-room Chaika in Sovietsky village. There are also five mini-hotels with 171 spaces and five motels with 60 spaces. In addition, a 60-space hotel is slated for opening in 2008 in the Viktoria international business center, and reconstruction is continuing on the Letuchaya Mysh hotel earmarked for opening in 2008, as well as 16 new rooms are expected in the Atlantic hotel. The development of tourism and the construction of hotels will positively improve the city’s image and below-average infrastructure.
“The first wave of tourists from Finland was those people who had previously lived in the city or those who had relatives living in the city, such as former Vyborg residents,” says Ilkaa Lampinen, a member of the board of directors for Finnish REIM. “This established a definite flow of tourists which has attracted other Finnish guests. However, Vyborg has missed the opportunity to be Russia’s window, as today, given the city’s untidiness and low service level, Vyborg is most likely an anti-advertisement of “new” Russia. Indeed, once many of those Finnish tourists have visited Vyborg, they advise others not to bother visiting Russia.
Moreover, the city’s tourist industry could improve in the run-up to and following the 300th anniversary of Peter the Great capturing Vyborg to be celebrated in 2010. Specifically, the city’s old section is earmarked for reconstruction prior to the celebrations, with Krepostnaya and Petrovskaya Square streets, respectively, slated for special attention.
However, Vyborg thus far has served as a transfer point for the majority of foreign tourists, just as during the days of Goskominturist (state tourism agency), on their way from Helsinki to St. Petersburg. Therefore, when planning for the flow of tourists, operators in the tourist industry adhere to the same principle of the trucking industry: “welcome them to Vyborg, process and ship them off to St. Petersburg.” As for tourists, of course they spend the night in hotels. “In addition, large cities effectively pilfer businesspeople from small cities within a 300 km radius and farther,” says Marina Smirnova, deputy director for the consulting department at Colliers International. “Business travelers prefer to return to hotels in Moscow and St. Petersburg rather than spend a night in the Moscow or Leningrad regions, respectively.”
Having analyzed the commercial real estate market in Vyborg accordingly, one can conclude that the city is not in any sort of rush to gain a position as an international business center on the border with Finland, although there are some objective prerequisites leading in this direction. In fact, the Finnish border town of Lappeenranta and others have successfully taken the initiative. Therefore, if Vyborg wishes to compete with its neighbors, private initiative just is not enough now – the state must lend a helping hand.