The chilly weather that began this year’s summer did not extend to the real-estate market, which continued to heat up.
The uncertainty over the dollar’s outlook has led many people to convert their greenback savings into more profitable investments – and commercial real estate is one of the best around. Prices are rising, and demand continues to outstrip supply, both in the rental and sales markets.
A key question for companies looking for office space is whether to buy a building or to rent space. Either way, the market is booming now, although some experts say that prices could drop next year as more property comes onto the market.
Andrei Petrov, marketing and advertising director at Property Marketing Consultants & Research Group, says that there is still a great deal of money floating around in investors’ hands that is ready to be invested into the sector.
"Moscow's economy can expect another $1.5 billion to flow in before the end of the election-campaign season," Petrov said, adding that demand from the regions is also having an impact on the Moscow market.
"All the 89 regions want to be present in the capital," Petrov said. "Whether we like it or not, Moscow is the central and dominant economic region, and the elites in the other regions all think they should invest in Moscow."
He adds that the capital is also a popular and relatively safe place for investments from other C.I.S. countries. "All of this definitely has an impact on solvent demand for commercial real estate, and prices are rising all the time," he said, "so a lot of Russian companies are buying real estate at the moment."
A current trend in the office market has customers buying space with an eye on renting it out. According to Yevgeny Goltsov, executive director of Norman Estate, units selling for up to $2 million are particularly hot items now and that demand is outpacing supply.
"Purchase-and-renovation work can pay for itself within three to five years, on average," he said. "One company bought a building for $2 million, invested another $1 million in doing it up, rented it all out and then sold it for $10 million as a ready-made business."
Companies not willing to invest in an entire building are occasionally investing hundreds of thousands of dollars to purchase a single floor in a residential building with an eye on redesignating it and converting it for nonresidential use.
Petrov says that large sites, such as buildings with 6,000-7,000 sq. meters of space, are often sold en bloc. "It is usually energy companies that buy these kinds of premises," he said. "Smaller companies sometimes buy old buildings and do reconstruction work. They usually keep just the facade, because older buildings need heavy interior renovation to make better use of the space."
According to Norman Estate’s Goltsov, the market value of a square meter of Class A office space stands at $3,000-$4,000, with Class B going for $2,000-$3,000 and Class C at $1,000-$2,000. Standard office renovation and finishing work costs $150-$200 per square meter. This includes a split system, Armstrong ceilings, a laminate or covroline floor and, often, plastic-frame windows.
Russian companies are the most frequent buyers of office space, experts say. Foreign companies usually prefer to sign long-term rental agreements rather than buy. But even Russian companies have been turning to renting in recent months.
According to Petrov, before 2000, the proportion of foreign companies to Russian ones renting premises was about 70/30. Today, it is closer to 50/50. Russian companies account for slightly fewer rent agreements, but they rent more space. Many Russian companies today rent closer to 5,000 sq. meters in a typical transaction. A typical Class A deal is for 1,000-3,000 sq. meters, double the average figure a year ago.
Yulia Budnik, commercial director at Realtex Management Group (RMG), says that the average office-rental agreement is for three to five years, mainly because most agreements do not take into account indexation of rental rates – making it in a tenant’s interests to have a longer rental period. Landlords also find long-term agreements convenient from a planning point of view and for selling occupied premises as a business.
"This system of long-term rental agreements that do not allow the tenant to pull out can often be used by the landlord as security for obtaining loans," Petrov said. "The risks on such investments are seen as virtually nil."
Companies are debating whether it is more profitable to rent out a building or sell it. Budnik says that, if developers are looking for quick profits, it is better to sell completed buildings or ones under construction.
But, if construction and profits from renting are seen as a business activity, then it makes more sense to rent, all the more so if the developer moves from site to site according to a certain scheme and has, either within the company or through long-term partners, all the necessary departments, such as an architectural-design bureau, technical and administrative operation services and a broker’s office.
Petrov says that Class A office space of 6,000-10,000 sq. meters is usually rented out, mainly because legal arrangements for selling space in large office centers are complicated.
Office space in Class A buildings is usually sold only through co-investment agreements at the construction stage that give the co-investor company-ownership rights over part of the building.
Goltsov notes that, in the case of already-completed office centers, there are two schemes for renting offices.
In the first, "shell and core," the office space is not divided up, because each tenant has its own space demands. The tenant makes a three-month deposit and three-month rent payment when signing the agreement. After that, the landlord organizes the interior and finishing work depending on the tenant’s demands.
Under the second scheme, the tenant pays for the interior work and is usually interested in signing a long-term rental agreement.
According to price forecasts for the end of this year and the beginning of the next, prices in dollar terms will continue to rise. Many owners now prefer to set rent payments in euros, though the fact that the euro's value has begun to slide could change the trend. This situation, along with the expected arrival of a large amount of new office space on the market soon, could see commercial real-estate prices stabilize. Petrov says that this could start happening as soon as later this year.