INVESTMENTMARKET

Russia

H1 2017

RESEARCH

INVESTMENT MARKET

2

Investment volume in commercial real estate / Capital outflow

Historical data of Brent crude oil prices and US dollar exchange rate

Source: Knight Frank Research, The Central Bank of the Russian Federation, 2017

Source: The Central Bank of the Russian Federation, 2017

InvestmentMarket

$1.7 billion

20

$85 million

THE TOTAL VOLUME OF INVESTMENT TRANSACTIONS

THE OVERALL NUMBER OF INVESTMENT TRANSACTIONS

THE AVERAGE TRANSACTION VOLUME

GENERAL FIGURES

The overall volume of investment transactions came up to $1.7 billion worth of deals changing hands in H1 2017 and exceeding H1 2016 results threefold. This figure highlights that the commercial real estate sector in Russia remains attractive to investors. The share of Q2 investment transactions is just shy of 60% of the total H1 transaction volume. At the same time, a deterrent continues to persist in the form of sanctions from the US and the European Union. In Q2 2017, Fitch agency confirmed Russia's credit rating at the investment level of "BBB-", stable outlook. However, the international rating agency S&P raised the outlook for Russia's sovereign credit rating from "stable" to "positive" in March, affirming the long-term credit rating in foreign currency at "ВВ +" level.

"The investment market has been performing actively in 2017: a number of major transactions has gone through from the beginning of the year, including a landmark deal involving Chinese capital. The investment market participants have been waiting for Chinese investors since 2014, and now they have come in sight, thus, perhaps opening doors to Russia for other funds from China. As for Western investors, new players have been only conducting market monitoring – it hasn’t come yet to real negotiations and transactions. Today investors in Russia are looking for assets that generate cash flow, development projects are practically irrelevant to anyone".

Alan BaloevDirector of Capital Markets Department at Knight Frank

H1 2017 was also marked by the key interest rate drop by 0.25 p. p. to the level of 9% per annum. At the same time, the real interest rates in Russia are among the highest in the world according to the international rating agency S&P. Besides, the Ministry of Finance announced the debut issue of sovereign bonds for 15 billion rubles and the placement of Eurobonds for $3 billion.

Office (47%) and retail (43%) segments traditionally dominate in the structure of transactions. The share of Moscow transactions in the total volume of investment transactions in Russia stayed on approximately at the same level against H1 2016, but there are prerequisites for its increase. Last year Knight Frank analysts registered a high share of transactions involving state-financed

RUR/USDBrent oil price

20

30

40

50

60

70

80

30

50

70

90

110

130

150$/barrel RUR/USD

2009 2010 2011 2012 2013 2014 2015 2016 H1 2017

-160

-140

-120

-100

-80

-60

-40

-20

0

Foreign investors Russian investors Capital outflow

47%17% 22%

34%29%

14% 20% 11%

53%

83%

78%

66%

71%86%

80%89%

bln $ bln $

0

1

2

3

4

5

6

7

8

9

10

2008 2009 2010 2011 2012 2013 2014 2015 2016

85%15%

39%

61%

H1 2017

3

RESEARCHH1 2017

Yield dynamics on 10-year sovereign bonds

Commercial real estate investment volume divided by segments

Source: Knight Frank Research, Investing.com, 2017

Source: Knight Frank Research, Investing.com, 2017

At the moment it is unprofitable for developers to construct new commercial properties in Russia, in particular in the office and retail segments. The preconditions for such a trend appeared already in 2014, when rental rates began to drop due to the volatility of exchange rates. They even switched to ruble currency, and there was a transition from fixed rental rates to turnover rents in the retail real estate market. At the same time, the fluctuated exchange rate led to the rise of the foreign expense part of the property construction, significant boost in the cost of borrowed funds, and the increase of general construction risks.

Thus, now the commercial real estate market evidences insignificant speculative supply of new facilities (both entering the market and being under construction). In particular, the main share of new office space appears mainly in multifunctional complexes that combine various segments, or in transfer hubs as part of the developers' obligations to the authorities. New properties in the retail segment also approach the market quite infrequently and they are small. The main motive for developers to construct new shopping centres is the doubtless perspective location within the above-mentioned transfer hubs or near other large transport hubs.

companies (VTB, Transneft, RSHB, AIZHK, etc.), the share of such transactions decreased substantially in H1 2017.

The activity of foreign investors advanced at the end of H1, as not a single transaction with their participation was recorded in Q1, but Q2 witnessed two major transactions involving foreign capital. First of all, we are talking about the purchase of Vozdvizhenka Centre by Chinese Corporation Fosun together with Russian partners, as well as the purchase of several facilities in St. Petersburg

(Kellerman Centre, Premium Business Centre, Gorigo Logistic Park) by a British corporation Raven Russia. Jointly, in H1 2017 the share of foreign investment reached 15% of the total investment transaction volume.

Provided that the overall economic stabilization trend in Russia will continue and the interest to Russian commercial real estate on the part of foreign investors will also last, 2017 indicators will rise above 2016 indices to $5 bln of total transaction amount according to the forecast of Knight Frank analysts.

bln $ bln $

0

1

2

3

4

5

6

7

8

9

10

2008 2009 2010 2011 2012 2013 2014 2015 2016 H1 2017 H1 2017

RetailHotelWarehouse

Office

Other

0.2

0.6

0

0.4

1.0

1.2

1.4

1.6

1.8

Yield dynamics on 10-year UK sovereign bondsYield dynamics on 10-year French sovereign bondsYield dynamics on 10-year German sovereign bonds

Yield dynamics on 10-year Russian Eurobonds

0

2

4

6

8

10

12

14

16%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Capitalization rate for premium office propertiesCapitalization rate for premium retail propertiesCapitalization rate for premium warehouse properties

H1 2017

INVESTMENT MARKET

4

$800.3 mln

$729.7 mln

$32.1 mln

$145.9 mln

$16 mln

10–10.25% 6

11–11.5% 6

INVESTMENT TRANSACTION VOLUME

INVESTMENT TRANSACTION VOLUME

THE AVERAGE TRANSACTION VOLUME

THE AVERAGE TRANSACTION VOLUME

CAPITALIZATION RATE

CAPITALIZATION RATE

OFFICE REAL ESTATE

RETAIL REAL ESTATE

WAREHOUSE REAL ESTATE

Investment volume dynamics in real estate and GDP growth dynamics

$66.7 mln

9.75–10% 6

INVESTMENT TRANSACTION VOLUME

THE AVERAGE TRANSACTION VOLUME

CAPITALIZATION RATE

RESEARCHOlga YaskoDirector, Russia & CIS olga.yasko@ru.knightfrank.com

CAPITAL MARKETS Alan BaloevDirectoralan.baloev@ru.knightfrank.com

+7 (495) 981 0000

© Knight Frank LLP 2017 – This overview is published for general information only. Although high standards have been used in the preparation of the information, analysis, view and projections presented in this report, no legal responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects.

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

RESEARCHH1 2017

* CCI is an indicator designed to measure consumer confidence, which is defined as the degree of optimism about the state of the economy that people express through their consumption and savings.Determined on the basis of quarterly surveys by Rosstat in all regions of Russia, CCI is the relative value of the number of positive and negative responses from the total number.

Source: Knight Frank Research, Ministry of Economic Development of the Russian Federation, 2017

mln $

Retail WarehouseOffice

GDP growth Consumer confidence index (CCI)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 H1 20170

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

197

1,679

2,357

2,749

3,901

3,527

3,370

2,900

2,165

1,2581,176

800

1,063

2,286

968

628

215

4,092

2,705

3,322

912694

1,189

730

285428

742

8

851

594 620

1,250

135

375274

32

-10%

-8%

-21%

-24%

-15%

-11%-12%

-15%

-18%

-26%

-18%

8.2% 8.5%

5.2%

-7.8%

4.3% 4.3%3.4%

1.3% 1.3%0.5%

-3.7%

-0.6%0

-5

5

-15

-20

-10

-30

-25

10%