OVERVIEW - Knight Frank...investment-quality projects in Moscow, while -portunities outside the capital due to Moscow government policies, which have limited construction in the city.

OVERVIEW

ExEcutIVE SummaRy• TherewasmoderatepositivetrendintermsoflendingtotheconstructionsectorinQ32011.

• Investmentactivityremainedatthehighlevelsobservedsincethebeginningof2011.Internationalinves-

tors’activityrosesignificantly-foreigncapitalaccountedfor44%oftotaltransactionsonthecommercial

realestatemarketinninemonthsof2011.

• Retailkeptitsleadershipamongcommercialrealestatesegmentsbylevelsofinvestment,mainlyitwasdue

tolargevolumeoftransactionstypicalforthesegment.

Q3 2011InVEStmEnt maRkEt Moscow

Q3 2011InVEStmEnt maRkEtMoscow

2

Main events

• Moscowgovernmentplanstooffermore

than700lots(modestly-sizedrealestate

assetsandsharesininvestmentcontracts)

forsalebytheendoftheyearaspartofits

programmeofmunicipalassetsales.Thefirst

lotsforauctionwillbeapartofGostinyDvor

theOktaybrcinemaonNovyArbatstreetand

municipalstakesintheInternationalTrade

CentreandtheNovinskyPassazhmixed-use

complex.

• Anumberoftransactionsinvolvingwestern

investorswereclosedinQ3.Themost

significantwereasfollows:

HeitmanEuropeanPropertyPartnersfund

acquiredabuildingattheMetropolismixed-

usecomplex.Thiswasthefirsttransactionby

thefundsinceitenteredtheRussianmarket

in2007.

CapitalGroupcontinuedsaleofvarious

assetstoamasscashforimplementationof

largeprojects.UFGRealEstateboughtthe

PushkinskyDom(“PushkinHouse”)business

centreaswellastheConcordbusinesscentre

andMetromarketshoppingcentre(both

locatedinthesamebuilding),allfromCapital

Group.

OneofthelargesttransactionontheRussian

commercialrealestatemarketpromise

tobetheacquisitionofSCGalereyainSt.

PetersburgbyAmericanbankMorganStanley.

Thedealisestimatedatthelevelof$1.1bln.

InVEStmEnt maRkEt OVERVIEW

Evgeny SemyonovDirectorofInvestmentandSales

The third quarter of 2011 saw heightened

interest of many commercial real estate market

players in regional projects. Investors have

been drawn to regional projects by a lack of

investment-quality projects in Moscow, while

developers have been motivated to seek op-

portunities outside the capital due to Moscow

government policies, which have limited

construction in the city.

Foreign investors are more conservative in their

choice of investment projects, so their interest

has stayed focused mainly on the Moscow and

St. Petersburg markets.

Main indicators

Segment Office Shopping Warehouse Hotels1

centres 3-5Class A B A B

Newsupply,thousandsqm, 51.1 141.2 — 91.5 — —

Change,% (+2.2%) (+1.5%) (+2.1%)

Vacancyrate,%; 13.3% 18.3% 2.5% 0.6% 4.5% 66.7%

ChangefromQ2,p.p (-1.2p.p.) (-0.9p.p.) (-1.0p.p.) (-2.4p.p.) (-1.5p.p.) (-1.3p.p.)

Rates,$persqmperannum; 835 480 100-500/700-4,0002 130-135 100-120 167

ChangefromQ2,% (+2.4%) (+2.0%) (+5.0%) (+2.2%) (+4.8%) (+11.8%)

Yield3,%; 8.5-9.0% 10.5-11.0% 9.0–10.0%10.0-11.0%11.5-12.5% 12.0-13.0%

ChangefromQ2,p.p.

Averagesaleprice,$persqm 6,500-8,000 4,500-6,500 3,000-7,000 1,200-1,400 600-800 200-1,000

1Forhotelstherespectivelinesshow:numberofnewrooms;roomoccupancy(%);averagedailyrate($perroomperday);andaveragesellingpriceperroom

(thousand$perroom)2Figuresforanchortenantsandretailgalleryoperators3Estimatedcaprate

Source:KnightFrankResearch,2011

*Asof10October2011the24.99%municipalstakeinOJSC

NovinskyBulvar,31,whichownstheNovinskyPassazhshopping

andofficecentre,hadbeensold


3

Financing

Thefirstninemonthsof2011sawanupturnin

lending.Totallendingtotherealsectorofthe

economyinQ3was6475blnrubles,whichis

43%morethaninthesameperiodof2010.The

constructionsectoraccountedfor5-6%oftotal

lendingtolegalentitiesandtoself-employed

individualsin2010-2011.

BorrowingincreasedinQ3comparedwithQ2,

buttherateofgrowthwasmuchslower.Thiswas

primarilyduetoreductionofthemoneymassin

Russiaandalsotostabilizationofaveragebank

interestratesat8%followingaperiodofsteady

decline.

Asbefore,largeRussianandforeignbanksare

mainlyfinancingprojectsthatarealreadyatan

advancedstageofcompletion.Alargeshareof

lendingisforcompletionofexistingobjects,

Lending to the construction sector con-tinued to grow in Q3 2011, but the rate of growth was slower

Source:KnightFrankResearchbasedonCentralBank

data,2011

Money mass and interest rates

Source:KnightFrankResearchbasedonCentralBank

data,2011

bln rub. bln rub.

Average rates under credits

Monetary weight

,

,

,

,

,

Source:KnightFrankResearchbasedonopen-accesssources,2011

Main transactions for financing/refinancing of commercial real estate projects in Q3 2011

Lender Borrower Purpose Transaction details Non-renewable credit line

Arban Construction Company LLC for construction of an office 1.24 bln rubles

and hotel complex in Krasnoyarsk

RGI

Refinancing of a loan for construction of the

Sberbank Tsvetnoy Central Market shopping centre in Moscow $150 mln

Tashir

Loan for purchase and development of the Raikin

shopping and entertainment centre $220 mln

Credit line for construction of the 2nd

MLP Podolsk LLC phase of the class-A $143.8 mln

MLP Podolsk warehouse complex

VTB Adamant Non-renewable credit line for construction of

2 phase of Kontinent shopping centre 44 mln euro

City Palace LLC

Credit line for construction of Evolution Tower

mixed-use complex $345 mln

Gazprombank Credit line for financing

Stroitel and refinancing of construction projects 4.2 bln rubles

Stroitel

Credit for completion of

KIT Finance DVI Holding onstruction work at the KomsoMALL 1.65 bln rubles

Rosbank Immofinanz shopping centre in Volgograd $70-72 mln

Russky Kapital Dmitry Kulkov, Vladimir Razumnov, Partial financing for construction

Vyacheslav Shikulov of Vnukovo Outlet Village $20 mln

UniCredit Bank Credit line for the Ducat Place III business centre $205 mln

Nordea Bank with

Marfin Popular Bank Finstroy Refinancing of completed shopping centres in

Ufa

and Lipetsk1.1 bln rubles

Refinancing of a $143 million credit

Nordea Bank AFI Development and Snegiri Development line at MDM Bank for construction $170 mln

of the Four Winds business centre

Source: Knight Frank Research based on open-access sources, 2011

Hines


4

Retailremainedthemostattractivecommercial

realestatesegmentinQ3:itsshareincreasedby

7p.p.incomparisonwiththefirstquarterand

reached50%oftotalinvestmentsincommercial

realestate.

Office real estate

Relativelylowvolumeofinvestmenttransactions

intheofficesegmentwasmainlyduetoshortage

ofqualityprojectscapableofattractinginves-

tors,althoughforeignfundsshowedsomeinter-

estinthesegment.HeitmanEuropeanProperties

closedacquisitionofabuildingattheMetropolis

businesscentreandUFGRealEstateboughttwo

businesscentres(ConcordandPushkinskyDom)

fromCapitalGroup.

Growthofsupplyremainedsluggish:about

620,000sqmofnewqualityofficespacecame

ontothemarketinninemonthsof2011.Demand

wasrelativelystrongatabout650,000sqm,ac-

cordingtopreliminaryestimates.Weexpectsome

slowdowningrowthofdemandandstabilization

ofrentalratesifthecurrenteconomicuncer-

taintycontinuestoprevail.

involvingforeigncapitalwereclosedinthethird

quarter,includingpurchasebyHeitmanEuropean

PropertyPartnersofabuildingintheMetropo-

lismulti-usecomplexinMoscowfromCapital

Partners.

Foreigncapitalrepresented44%ofthevalue

oftransactionsinthefirstthreequartersof

2011.Inviewofthetraditionallyconservative

approachofwesterninvestors,thispointsto

loweringofrisksontheRussiancommercialreal

estatemarketanditsincreasingattractiveness

onglobalcapitalmarkets.

Duringthefirstninemonthsof2011theshare

oftheRussiancapitalsankto63%intotal

transactionvolume,whilein2009-2010more

than90%ofinvestmentswereinMoscow.This

wasaccompaniedbysubstantialgrowthinthe

shareofSt.Petersburg,whichaccountedfor34%

oftotalcommercialrealestateinvestmentsin

thefirstthreequartersof2011.Investorsalso

showedinterestinotherregionalcities(acquisi-

tionbyDVIGroupoftheprojectforconstruction

oftheKomsoMALLshoppingcentreinIrkutskis

oneexample).

constructionofsecondphasesandproject

refinancing.Newandsmall-scalecompanies,

developmentprojectshadtoattractfundingon

lessfavourableterms,whichconsecuentlyreduce

thebusinessprofitability.Someofthemdon’t

sustainthecompetitionandleavethemarket.

sThisledtotheexclusionfromthemarketof

weakplayersandconsolidationoftheconstruc-

tionsectoramongthemajorrealestatedevelop-

ersandbanks.

Asfortheterritorialdistributionoffinanc-

ing,therehasbeenanincreaseintheshareof

regionalprojectsintotallending.Thisisbecause

manydevelopershavereactedtolimitedoppor-

tunitiesinMoscowbyexpandingtheirbusiness

inregionalcities.

Supply and demand

InvestmentactivityremainedathighlevelsinQ3

andtotalinvestmentsinthefirstninemonthsof

2011werenearlydoubletheirlevelinthesame

periodof2010.

Increasedactivitybyinternationalinvestors

wasadefiningfeatureofcommercialrealestate

investmentsinQ3.Anumberoftransactions


The market is moving back to the situ-ation in 2007-2008, when more than half of transactions represented foreign capital

The share of Moscow in total commercial real estate investments declined signifi-cantly in the first nine months of 2011


Retail real estate was in first place by level of investments in nine months of 2011


Russian companiesForeign companies

Moscow Saint Petersburg

Other regionsHotel real estateWarehouse & Industrial real estate

Office real estate

Retail real estate


5

Main hotel real estate transactions in Q3 2011

Buyer Seller Assets Transaction value

(estimate)

MirtekGroupRosatomBaikalhotel$13.8mln

IndividualbuyerMoscowcityhallMoskvahotel(49%ofOJSCDekmos)$150mln

Individualbuyer-RushotelinSvetlogorsk$8mln

RegionalhotelchainIzhevskHotelLLCParkInnhotelinIzhevsk$23mln

Source:KnightFrankResearchbasedondatafromopen-accesssources,2011

Retail real estate

Transactionvolumesintheretailsegment

exceeded$3blninthefirstninemonthsof2011,

representingabout50%ofthetotalvalueof

commercialrealestatetransactionsinthepe-

riod.Thelargesttransactionforthreeyearswas

closedinthethirdquarterof2011whenMorgan

StanleyinvestmentbankboughttheGalereya

retailandleisurecomplexinSt.Petersburg.

InvestoractivityontheMoscowmarketwasalso

intense:TashirGroupboughttheRaikinshopping

andleisurecentreinMarinaRoshchadistrictand

UFGRealEstateacquiredtheMetromarketshop-

pingcentre.Anumberofotherlargetransactions

arealsobeingfinalizedatpresent,severalof

whichconcernstreetretail.

TheretailpropertymarketinMoscowisstill

experiencingverylowlevelsofnewsupply.No

shoppingcentreswereopenedinQ32011.Rapid

expansionbyretailoperatorshasthereforeled

toashortageofretailspaceinMoscow,which

isconfirmedbyloweringofthevacancyrateto

2.5%.

Hotel real estate

Investorinterestinthehotelsegmentwas

significantlygreaterduringthefirstninemonths

of2011thaninthesameperiodof2010.Market

developmenthasbeensupportedbythepolicy

ofMoscowcityhall,whichissellingoffits

non-coreassets.Cityhall’ssharestakeinOJSC

Dekmos,whichisrebuildingtheMoskvahotel,

wassoldinQ32011andcitystakesinvarious

hotels–theNational,RadissonSASSlavyanskaya,

30%ofsharesintheHiltonLeningradskaya,and

otherassets–willbeofferedforsaleinthenear

future.

Hotelscontinuedtoshowstrongoperating

indicatorsinQ3.Totalsupplygrewby770rooms

inninemonthsof2011despitepostponementof

severalscheduledopenings.Thisisarelatively

highrateofgrowthfortheMoscowmarket,

althoughitisbelowtheratesachievedin2010.

Weexpectthepositivetrendstobecontinued

incomingmonths,althoughsomeslowdownis

possible.

Main retail real estate transactions in Q3 2011


(estimate)

RomanovProperty

HoldingsFund — DreamHouse

—

MorganStanley — GalereyaS&EC $1.1bln

DVIGroup Retailquarter Projectforconstructionof

-Irkutsk theKomsoMALLSC$80mln

Tashir Opin Raikinshoppingand

entertainmentcentre$100mln

RMBInvest CapitalGroup 3Metromarketshoppingcentre $117mln

UFGRealEstate CapitalGroup Metromarketshoppingcentre $57mln


Main office real estate transactions in Q3 2011

Seller Buyer Assets Transaction value

(estimate)

UFGRealEstate CapitalGroup PushkinskyDomand

Concordbusinesscentres$243mln

Orcoproperty RadishchevskyBC —

SuttonHoldings Moscowcity 25%ofshares$47mln

Limited Hall inNovinskyPassage

O1Properties — EvokomPlaza $25mln



6

Warehouse real estate

Investorsinalargenumberoftransactionsinthe

thirdquarterof2011wereend-users.Twotrans-

actionswereclosedinvolvinglargeRussianretail

companies,whichinvestedtheirownmoneyin

constructionofwarehousesdesignedandbuilt

tomeettheirspecificneeds(build-to-suit).PNK

Groupwasthedeveloperinbothcases.

Foreigninvestmentfundsarestudyinginvest-

mentprojects.RavenRussiaplanstoinvestin

constructionorpurchaseofwarehouses,andthe

AmericanfundHinesGlobalREIThasannounced

itsintentiontoacquirethePNK-Chekhov

warehousecomplex.Valueofthecomplexis

estimatedat$450miln.

Warehousepropertyiscurrentlyinshortsupply:

vacancyintheclass-Asegmenthadfallento

0.5-1%bytheendofQ3.About770,000sqmof

newspaceisscheduledtoopenin2012,butnew

propertiesarealready70%lettotenantsbefore

opening.

Forecast

Weexpectcommercialrealestateinvestmentsto

exceed$7bln2011,whichwillbearecordlevel

fortheRussianmarket.Ifvarioustransactions

nowatthenegotiationstagearecompletedin

Q4,theshareofforeigncapitalcouldriseabove

50%ofthevaluealltransactionsin2011.How-

ever,theuncertaineconomicclimateandhigh

levelsofvolatilityonworldfinancialmarketscan

inhibitexpansionofinvestmentmarketin3-6

monthsterm.

Main warehouse real estate transactions in Q3 2011


(estimate)

Dixy PNKGroup Multifunctionalwarehouse

(44,000sqmtotalspace) $83mln

Largeretailer PNKGroup Warehousecomplex

(50,000sqmtotalspace) —


Cap rates in commercial real estate segments will remain at 3Q levels until the end of 2011

Source:KnightFrankResearch2011

Office Retail Warehouse & Industrial

OVERVIEW

EuropeAustriaBelgiumCzech RepublicFranceGermanyIrelandItalyMonacoPolandPortugalRomaniaRussiaSpainSwitzerlandThe NetherlandsUKUkraine

AfricaBotswanaKenyaMalawiNigeriaTanzaniaUgandaZimbabweZambiaSouth Africa

Middle EastBahrainUAE

Asia PacificAustraliaCambodiaChinaIndiaIndonesiaMalaysiaNew ZealandSingaporeSouth KoreaThailandVietnam

Americas & CanadaBermudaCaribbeanCanadaUSA

Office Real EstateStanislav TikhonovPartner [email protected]

Warehouse Real Estate, landViacheslav Kholopov Director [email protected]

Retail Real EstateSergey Gipsh Regional Retail Director, Partner [email protected]

Professional Consulting ServicesKonstantin RomanovPartner, Director [email protected]

Elite Residential Real EstateElena YurgenevaDirector [email protected]

Financial Markets and InvestingEvgeniy SemyonovPartner, Director [email protected]

Valuation ServicesOlga Kochetova Director [email protected]

Saint PetersburgNikolai Pashkov

General Director [email protected]

KyivMikhail YermolenkoGeneral Director [email protected]

Marketing, PR, Market Research, HRMaria KotovaPartner, Executive Director [email protected]

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© Knight Frank 2011

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Reproduction of this report in whole or in part is allowed with proper reference to Knight Frank.

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OVERVIEW - Knight Frank...investment-quality projects in Moscow, while -portunities outside the capital due to Moscow government policies, which have limited construction in the city.

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