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Russian real estate market february 2014

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  • *Important* Please choose only one of these first four slides for the title slide of the presentation.
  • EBA Stress Tests – majority of banks passed the test as of mid 2012Tests are a pre-cursor to Basel III, reduce risk-weighted loans, increase tier 1 capitalUS savings and loans structural shiftNew funds emerging but won’t plug the gap
  • Similar to global/European shape showing peak in 2007, EE continued a bit longer than W Europe with a strong 2008 with many believing in the possibility of an economic decoupling, which was crushed in 2009. The market bounced back strongly in 2011 as latent demand aligned with hopes of an economic recovery, which were subsequently dented by well publicised troubles with the banks at end 2001 and 2012. 2013 looks like it will be another strong year in terms of volumes, but the number of deals being closed appears to be on the decline – this is because large deals are distorting the volume statistics.
  • Pre-crisis: Poland and even splitPost-crisis: big step change with Russia and Poland dominating
  • Similar to global/European shape showing peak in 2007, EE continued a bit longer than W Europe with a strong 2008 with many believing in the possibility of an economic decoupling, which was crushed in 2009. The market bounced back strongly in 2011 as latent demand aligned with hopes of an economic recovery, which were subsequently dented by well publicised troubles with the banks at end 2001 and 2012. 2013 looks like it will be another strong year in terms of volumes, but the number of deals being closed appears to be on the decline – this is because large deals are distorting the volume statistics.
  • Similar to global/European shape showing peak in 2007, EE continued a bit longer than W Europe with a strong 2008 with many believing in the possibility of an economic decoupling, which was crushed in 2009. The market bounced back strongly in 2011 as latent demand aligned with hopes of an economic recovery, which were subsequently dented by well publicised troubles with the banks at end 2001 and 2012. 2013 looks like it will be another strong year in terms of volumes, but the number of deals being closed appears to be on the decline – this is because large deals are distorting the volume statistics.
  • Couldn’t be a better time for CRE investment from a potential returns perspective relative to ‘risk-free’ bonds, equitiesThe advantage of an inflation hedge via index-linked rents.Investors seeking out strong yielding product, esp funds looking for assets to match longer term liabilities
  • Slide numbers can be manually deleted. Select the slide number box and click delete. But…Best practice for removing the slide number at lower right is:Go to the Insert tabIn the Text section, click the Slide Number button. The Header/Footer dialog will open.In the Slide tab, uncheck the Slide Number box and click Apply. To turn the slide number back on, follow the steps above, and at Step 3 make sure there is a check mark in the Slide Number box and click Apply. This works even if you have manually deleted the slide number box.
  • Slide numbers can be manually deleted. Select the slide number box and click delete. But…Best practice for removing the slide number at lower right is:Go to the Insert tabIn the Text section, click the Slide Number button. The Header/Footer dialog will open.In the Slide tab, uncheck the Slide Number box and click Apply. To turn the slide number back on, follow the steps above, and at Step 3 make sure there is a check mark in the Slide Number box and click Apply. This works even if you have manually deleted the slide number box.
  • Slide numbers can be manually deleted. Select the slide number box and click delete. But…
  • Similar to global/European shape showing peak in 2007, EE continued a bit longer than W Europe with a strong 2008 with many believing in the possibility of an economic decoupling, which was crushed in 2009. The market bounced back strongly in 2011 as latent demand aligned with hopes of an economic recovery, which were subsequently dented by well publicised troubles with the banks at end 2001 and 2012. 2013 looks like it will be another strong year in terms of volumes, but the number of deals being closed appears to be on the decline – this is because large deals are distorting the volume statistics.
  • MapBaltics - pale greenBelarus – yellowUkraine – orangeCC dots
  • EBA Stress Tests – majority of banks passed the test as of mid 2012Tests are a pre-cursor to Basel III, reduce risk-weighted loans, increase tier 1 capitalUS savings and loans structural shiftNew funds emerging but won’t plug the gap
  • How to read the numbers:e.g. 52% of the sample plan to maintain production capacity stable in Western Europe
  • EBA Stress Tests – majority of banks passed the test as of mid 2012Tests are a pre-cursor to Basel III, reduce risk-weighted loans, increase tier 1 capitalUS savings and loans structural shiftNew funds emerging but won’t plug the gap
  • EBA Stress Tests – majority of banks passed the test as of mid 2012Tests are a pre-cursor to Basel III, reduce risk-weighted loans, increase tier 1 capitalUS savings and loans structural shiftNew funds emerging but won’t plug the gap
  • Slide numbers can be manually deleted. Select the slide number box and click delete. But…Best practice for removing the slide number at lower right is:Go to the Insert tabIn the Text section, click the Slide Number button. The Header/Footer dialog will open.In the Slide tab, uncheck the Slide Number box and click Apply. To turn the slide number back on, follow the steps above, and at Step 3 make sure there is a check mark in the Slide Number box and click Apply. This works even if you have manually deleted the slide number box.
  • *Important* Please choose only one of these first four slides for the title slide of the presentation.

Transcript

  • 1. Russian Real Estate Market: CEE Context February 2014
  • 2. Outline « Russia in the Context of CEE « Investment Volumes/Deal-flow « Investors: Drivers of Activity « Sector Trends: Office, Retail, Logistics « Olympics: Long Term Legacy? « Summary 2
  • 3. Eastern Europe in Context West Europe East Europe Turkey Source: Colliers International 3
  • 4. Eastern Europe in Context West Europe Turkey East Europe 50% 41% 9% Population [843,744 million] 2012 2007 65% 34.3% 0.7% Office Stock [315 million m²] 81% 16% 3% 0.5% 77% 19% 4% GDP [US$20,924 billion] 8.9% 0.5% *Cross-border Investment Volume [€155 billion] 90.1% 34.5% Office Stock [350 million m²] GDP [US$20,134 billion] 90.5% 65% 88.4% 11.0%  0.5% 7.6% 0.3% * Cross-border Investment Volume [€57 billion] 9.5% 0.4% * Cross-border Investment Deals [2,899] 92% * Cross-border Investment Deals [1,190] *Investment volumes based on RCA aggregates, excluding development sites and apartments Source: UNCTAD/IMF/RCA/Colliers International « Long-term potential is very strong! – Russia is 35-40% of CEE 4
  • 5. Historic Transaction Volumes € Billion Regional Total (Volumes) Russia 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 « Up on 2012 by around 22% (€2 Billion) to €11 Billion « Europe up 17% to €178 Billion 5
  • 6. Deal Volumes by Country Pre-Crisis Volumes Post-Crisis Volumes 2% 1% 1% 1% 4% Russia 2% 3% Poland 28% 5% 2% 2% 2% 4% Czech Republic 4% Russia 40% 6% 7% Poland Hungary 17% Russia 16% Baltics Hungary Czech Republic 11% Czech Republic 16% Multi-country Portfolio Romania Slovakia Poland 26% Ukraine SEE Bulgaria Source: Colliers International « Post-crisis: Russia increasingly dominant – long-term split « Pre-crisis: Poland dominated: Czech Rep, Hungary & Russia about even, r/o Tier 2 locations „didn‟t quite get started‟. 6
  • 7. Deal Flow Dynamics Dynamics of Deal Size Distribution Breakdown of Real Estate Investments 4% Billion $ by Region 7% 26% 20% 30% 35% 41% 51% 21% 28% 43% 22% 37% 30% 25% 20% 6% Moscow SaintPetersburg 2008 7% 5% 2011 2012 2013 12% 11% 17% 9% 4% Other Regional Cities 16% 6% 15% 15% 89% 14% 16% 18% 2009 2010 <$50 million >=$50 million <$100 million >=$200 million <$500 million >=$500 million >=$100 million <$200 million Source: Colliers International « Big Cities Dominate (despite only being 15% of country population) « Moscow & St Pete‟s generate large lot size deals: product, debt, investors. 7
  • 8. Player Profiles: Who‟s Who? Purchaser name Residence Investor Type Rank Russia REIM 1 U.S. REIM 2 Austrian REIM 3 BIN Group Russia Banking 4 CPI - Czech Property Investment Group Czech REIM 5 VTB Capital Russia Banking 6 Germany Fund Mgmt 7 Blackstone Real Estate U.S. Fund Mgmt 8 Atrium European Real Estate Limited U.K. REIM 9 Holland REIM 10 Kazakhstan Pte Equity 11 France Insurance 12 Germany RE Investor 13 U.S. REIM 14 Austrian REIM 15 Heitman U.S. Fund Mgmt 16 Hines Global REIT U.S. REIM 17 Rockspring Property Investment Managers U.S. REIM 18 EPISO Lux REIM 19 Germany GOEF 20 O1 Properties Morgan Stanley Real Estate Investing CA Immobilien Anlagen AG Union Investment Real Estate GmbH Unibail Rodamco S.E. Verny Capital Axa Real Estate ECE HinesCalPERS (Russia Long Term Hold Fund) Immofinanz DEKA Immobilien « Some 63% of investors only completed 1 deal (CEE & Russia) « Of the post 2009 investors, 80 have completed more than one deal « Only 5% of investors have been active from 2006 to 2013…..new inst capital emerging Source: Colliers International 8
  • 9. Major Driver of Property Investment Prime Office Premium EU-Prime Office Yields 10-year German G'ment Bond 10% 8% « CRE investment only ca. 3% of fund allocations = €180 billion 4% « Direct CRE investment grows by around 2 – 2.5% (€ 3.5-4) billion per year 2% « A 1% shift in re-allocation = €57 billion, a 3% shift = 2013 volumes 0% « Indirect / JVs appears to be the biggest shift – already happening 6% -2% Q1-2013 Q1-2012 Q1-2011 Q1-2010 Q1-2009 Q1-2008 Q1-2007 Q1-2006 Q1-2005 Q1-2004 Q1-2003 Q1-2002 Q1-2001 Q1-2000 Q1-1999 Q1-1998 Q1-1997 Q1-1996 Q1-1995 Q1-1994 Q1-1993 Q1-1992 Q1-1991 Q1-1990 Q1-1989 Q1-1988 Q1-1987 Q1-1986 -4% Source: Colliers International 9
  • 10. Prime Yields: Russia 14.5 13.5 11.5 11 10.5 10 11 11 9.0 10.5 11 9.0 8.5 9.0 8.5 2012 2013 2014 10.0 9.5 9.0 8.5 8.0 2007 2008 Office 2009 2010 Retail 2011 Industrial « Yield stability expected in 2014 « Property tax policy for CRE at cadastral (market) value = transparency « Despite autocratic country politics, English law enables legal transparency 10
  • 11. Office Yields: Russia v CEE v Germany Tier 1 Cities Tier 2 Cities 300 bps enough? « Moscow Yields offer a discount to other competitor markets (Warsaw and Madrid) and Germany, allowing for country/liquidity risk 11
  • 12. Capital Value Indices: Moscow & St Petersburg St Petersburg Moscow Moscow - Office Prime Headline Capital Value StPetersburg - Office Prime Headline Capital Value Moscow - Industrial Prime Headline Capital Value StPetersburg - Industrial Prime Headline Capital Value Moscow - Retail Prime Headline Capital Value StPetersburg - Retail Prime Headline Capital Value 300 300 250 250 200 200 150 150 100 100 50 50 2006/Q1 2006/Q2 2006/Q3 2006/Q4 2007/Q1 2007/Q2 2007/Q3 2007/Q4 2008/Q1 2008/Q2 2008/Q3 2008/Q4 2009/Q1 2009/Q2 2009/Q3 2009/Q4 2010/Q1 2010/Q2 2010/Q3 2010/Q4 2011/Q1 2011/Q2 2011/Q3 2011/Q4 2012/Q1 2012/Q2 2012/Q3 2012/Q4 2013/Q1 2013/Q2 2013/Q3 2013/Q4 2006… 2006… 2006… 2006… 2007… 2007… 2007… 2007… 2008… 2008… 2008… 2008… 2009… 2009… 2009… 2009… 2010… 2010… 2010… 2010… 2011… 2011… 2011… 2011… 2012… 2012… 2012… 2012… 2013… 2013… 2013… 2013… 0 0 Source: Colliers International « Values in all sectors/markets have grown « Moscow logistics flat, v. interesting looking forward (MLP Portfolio US$900mn) 12
  • 13. Econ Trends 5.0 4.0 Growth Rate% 3.0 Prediction 4.1 Reality 4.2 3.8 3.4 3.3 3.2 3.0 3.0 2.0 2.5 1.5 1.5 1.8 1.4 1.0 2.0 1.5 1.2 0.9 1.4 0.8 0.6 0.3 0.1 0.0 -0.8 -1.0 0.4 -0.8 -1.4 -2.0 -1.2 -2.2 Slovenia Croatia Ukraine Bulgaria Hungary Slovakia Estonia Poland Czech Republic Source: Colliers International Russia Romania Lithuania Turkey Latvia -3.0 « Lower oil price has reduced the economic growth rate to around 1.5-2%..... long-term « Oil supplies up, US overtaking global position? ....need for new sectors to grow « IT & Telecoms, not Energy sector, driving take-up growth in recent years (Yandex) 13
  • 14. Country Summary Investment Retail Market Office Market Finance Macro-Econ Politics Romania ● ● ● ● ● ● Hungary ● ● ● ● ● ● Bulgaria ● ● ● ● ● ● Czech Republic ● ● ● ● ● ● Poland ● ● ● ● ● ● Russia ● ● ● ● ● ● Serbia ● ● ● ● ● ● Slovakia ● ● ● ● ● ● Ukraine ● ● ● ● ● ● Croatia ● ● ● ● ● ● 14
  • 15. Moscow & St Pete‟s Office Market: Moscow Office Stock Moscow Office Prime Rents & Vacancy Rate % 20 Thousands USD / month 120 20 18 16 14 12 10 8 6 4 2 0 112.9 Total Stock 18 100 16.5 16 75.3 80 76.2 78.4 12.3 68.8 63.3 60 14 75.4 10.6 52.0 8.4 9.2 6 5.5 3.5 10 8 40 20 12 4.2 4 2 0 0 2006 2007 St Petersburg Office Stock 2008 2009 2010 2011 2012 2013 St Petersburg Office Prime Rents & Vacancy Rate % 3,000 2,500 2,000 1,500 1,000 500 0 Total Stock USD / month 60 50 52 51.5 45.5 18.6 17.6 14.0 40 46.1 54.7 54.2 14.0 37.5 38 11.7 30 9.1 20 5.0 6.0 10 0 2006 2007 2008 2009 2010 2011 2012 20 18 16 14 12 10 8 6 4 2 0 2013 Source: Colliers International « Economic impact collectively felt in both cities, with demand falling « Vacancy rising, given new supply increases.....rents stabilising or falling slightly 15
  • 16. The Retail Market: Growth Capacity Traditional Shopping Centre Stock & Pipeline 2013 [per thousand capita, m²] 1,000 900 800 700 600 500 400 0 Source: Colliers International « « SC capacity remains, esp. Moscow – also driving logistics demand St Pete‟s going through a repositioning phase Belgrade Moscow Sofia Bucharest Budapest Kyiv Warsaw Prague Bratislava 100 Zagreb 200 St Petersburg 300
  • 17. The Retail Market: Growth Capacity Shopping Centre Distribution Moving East Size of SC Stock Source: Colliers International « « Growth in other „1Mn+‟ Cities..Nizhny Novgorod, Perm, Yekaterinburg, Volgograd Aura SC in Novosibirsk acquired for US$ 250mn in 2013
  • 18. The E-commerce Market: Growth Capacity Online Retail Sales Forecast: Russia 2020 « The likes of Ozon, KupiVIP and Lamoda leading the e-commerce business in Russia « Increasing demand for modern warehousing across Russia from retailers and 3PLs
  • 19. Multi-Channel Balance Essential Technology inventory/customer analysis requires capital investment In-store fulfilment can counter balance reduced „free shipping‟ Clicks or Bricks? Shipping & Returns customer loyalty costs up to 100 bp on gross margins Both! Space Rationalisation can be counter productive; less traffic = lower sales Fraudulent Claims costs money estimated US$8.9 billion (2012) US market to see more prototype stores opening in 2013 – wait & learn 19
  • 20. The Logistics Market: Growth Capacity A Comparison: Russian Modern Logistics Country Modern Logistics Stock m² (H1 2013) Population (UNCTAD 2012) m²/ thousand capita UK *57,400,000 65,347,252 878 Poland 7,553,920 39,670,133 190 Russia 13,500,000 147,099,939 92 Source: Colliers International *Estimated Modern A-Grade Stock; UK Total Stock = 321 million m2 « Russia remains „significantly‟ undersupplied on a per capita basis « Less than One Third of the UK « Half the Size of Poland
  • 21. The Logistics Market: Growth Capacity Russian Modern Logistics by City/Region City/Region Modern Logistics Stock m² (H1 2013) % of Modern Stock Rental Rate US$/m²/ year Moscow 9,000,000 66% 130 St. Petersburg 1,536,700 11% 115 Novosibirsk 703,400 5% 120 Yekaterinburg 677,200 5% 105 Krasnodar 355,500 3% 100 Kazan 351,300 3% 90 Rostov-on-Don 348,000 3% 110 Samara 340,000 3% 90 Nizhny Novgorod 264,400 2% 120 Source: Colliers International « Moscow dominates the market: but opportunities everywhere
  • 22. The future of manufacturing in Europe TECHNOLOGIC INNOVATION INFRASTRUCTURE + LOGISTICS IMPROVEMENTS + +/Deep sea water ports 3D printing + Source: Colliers International Cheaper robots and growing automation +/- Railway connections
  • 23. Offshoring + Re-shoring = “Best-shoring” DOMESTICALLY DRIVEN MANUFACTURING IS RESHORING NEXT? OFFSHORING Globalisation Economic & population growth Industrialisation 1850 1950 Source: Colliers International % manufacturing in GDP in Western Europe 2000 BEST SHORING Rising cost of labour
  • 24. “Hot spots” for manufacturing Intentions regarding production capacity in the next three years 52% 37% Western Europe USA / Canada 48% EE + Russia + Turkey 44% 31% Japan China 26% Africa & Middle East 37% India 33% 30% Rest of Asia Latin America Increase in production capacity Stable production capacity Decrease in production capacity Source: Colliers International
  • 25. Summary: a regional perspective Turkey Taking Advantage: New Infrastructure FDI in manufacturing 5,000 Manufacturing Istanbul 20th 2nd Izmir 30th 3,364 4,000 million $ Distribution 12th 3,000 2,000 1,000 0 2005 Teknopark (Istanbul) « « « 4 mln TEUs/year (Rotterdan 12 mln) Completion 2013/2014 2009 2010 150 million passengers/year Third Bridge Project (Istanbul) Ankara « Completion 2015 Izmir New logistics “Villages” « 16 across Turkey « 3 in Istanbul‟s region « Source: Colliers International 2008 6 runways « Capacity:1000 firms and 30,000 staff Istanbul « 2007 Third Airport (Istanbul) 700,000 sq m construction area Candarli Port (Izmir) « 2006 Built by Turkish State Railways Corporation 2011
  • 26. Russia: Rail Trade Routes to Europe? Russia Well Positioned on Trade Routes « « « The „Silk Railroad‟ capturing more and more rail freight « Arctic Shipping Route also set to capture increasing traffic 1.5 train a week in 2013 « Source: Colliers International Ships notebooks from plant in Chongqing to Duisburg via train (11,179 km-21 days) Transports components via train from Leipzig to Shenyang
  • 27. Sochi & The Olympics Intentions/Motivation: « Transform Sochi into a year-round tourist destination - both summer and winter tourism, « Develop Russia‟s first world-class ski resort, to create a national centre for winter sports, and What’s been built?: « Sochi did not have any competition venues in situ • Sochi Olympic Park (Coastal) and Krasnaya Polyana (Mountain ) • Eleven new winter sports venues,: International-quality alpine, ski jumping and sliding facilities, « • • • • • • • « Complete upgrade of existing infrastructure as a city – and „global‟ connections « Implement a philosophy for investing domestically. « Funded 60% by public sources and 40% by private investment. New infrastructure and transport systems: colossal A new highway and high capacity mountain railway corridor, Offshore terminal at Sochi airport – cruise and cargo 350 kms of new roads, 200 kms of railway lines, 55 new bridges, 22 tunnels Thermoelectric power station 17 electric power substations, Engineering and sewerage networks. « The city has been remodelled; • Numerous shopping malls, hotels, and commercial real estate, medical centres, schools and even a University 27
  • 28. Sochi & The Olympics City/Region Lillehammer Salt Lake City Nagano Turin Motivation Regional development, tourism growth Delivery Legacy Pros & Cons Pros: host 2016 Youth Winter OG), media building now used by Lillehammer College no Cons: legacy of debt, underutilised facilities, low tourism demand, hotels bankrupt Pros: new real estate (indirectly Gateway SC), mega-events, occupier demand (office, logistics) Environmental awareness, centre for winter sports partly Not specified / used it to promote technology n/a Urban regeneration (infrastructure), economic growth, new urban identity Cons: tourism branding, media sensationalism, political issues, reuse of venues uncertain yes Cons: majority of venues removed after OGs due to cost of maintenance, debt legacy (& legal issues) Pros: new real estate demand (Torino Wireless District), Olympic Village, underutilised brownfields now commercial/residential district, new logistic parks, tourism growth, mega-events Cons: democratic accountability / financial management, branding/media exposure Vancouver Social/cultural change, tourism growth, national centre for sports yes Pros: reuse of some sport facilities, Olympic Village now mixed-use neighbourhood, reuse of industrial brownfield sites, tourism, office occupier demand, sports, environmental, social & cultural legacy Cons: branding & media damage, high construction costs, Olympic Village housing placed in receivership after Games Sochi Tourism growth, national centre for sports, urban/infrastructural change TBD Pros: New Infra, Sochi on the map: Grand Prix, FIFA World Cup. Risk of under-used resort/facilities, legacy of debt, „tourism security‟ Source: Colliers International 28
  • 29. Russian Investment: Pro‟s and Con‟s Pro’s Con’s « Signs of economic diversity « National autocracy « Product availability – large scale « « Bank finance conditions strong Transparency/perception of market a barrier to entry « Institutional funds increasingly active « Economic growth slowing…long-term? « Clear title/English law. « Rental conditions slowing: office and retail values peaking? « Yield compression possible, driving values « « Lots of development potential in office, retail and logistics Significant infrastructure required to drive regional million plus cities « Will capital continue to flow out of Russia? « Regional cities a long-term prospect 29
  • 30. Damian Harrington Regional Director, Research & Consulting Colliers International, Eastern Europe damian.harrington@colliers.com +358 400 907972