Take-up in Moscow Office Market in 2017 broke the record of the seven-year period
CBRE Research Department indicated the key trends of Moscow Office Market in 2017 and give forecast for 2018.
According to the report, take-up in 2017 (1.28 mn sq m) broke the record of the seven-year period, becoming the highest value since 2010.
In 2017, 408,000 sq m were commissioned in the Moscow office market. Even though this volume exceeded the previous year by 29%, business construction activity remains low.
In 2017, overall vacancy rate was reducing by 0.4-0.9 ppts each quarter and by the end of the year amounted to 13.7% (2.7 ppts lower than Q4 2016 value).
Net absorption also showed a positive trend in 2017, reaching 675,300 sq m against 526,900 sq m in the previous year.
In 2017, financial sector representatives that were mostly companies with state participation or state companies (82% of take-up in the sector) remained active on the office market.
Interest in medium-sized office space (33% of take-up in 2017) is one of the indicators of the demand stability and less impact on it of the crisis period effects.
In 2017 a competition between large users for quality space occurred for the first time since 2007 on the office market.
Elena Denisova, Senior Director, Head of Offices CBRE in Russia, said: "The recovery process of both the national economy and the commercial real estate market is proceeding at a restrained pace. Nevertheless, for the office real estate market, 2017 was marked by several turning points in terms of further development. One of them is an increase in the activity of private companies for leasing and purchasing new office space. Private business demand, which has been strongly sagged in 2015-2016, coupled with a public sector interest in high-quality offices that is declining but still has significant impact on market indicators led to a record for the market take-up. In addition, the trend to reduce available supply of large office space (more than 10,000 sq m) in the best quality business centres, which began to appear in the middle of 2016, in 2017 for the first time caused the competition of large users for selected premises. This phenomenon has not been observed since 2007, and, like private sector companies’ restoring activity, is a prerequisite for the rental rates growth in 2018 and the beginning of a gradual shift of the balance towards "landlords" on the office market."
Russian real estate investment market with a total of $4.9 bln in 2017 has recorded a 3-year maximum with a 9% growth Y-O-Y. To compare, 2016 investment volume totaled $4.6 bln, 2015 - $3.3 bln.
Due to a number of large transactions closed in 2017 retail segment is responsible for a prevailing 32% share in the total investment volume, first time since 2013. Retail segment has experienced the largest in 2017, as well as one of the largest in Russian market transaction on the purchase of Immofinanz shopping centres portfolio. Office real estate segment was second in terms of investment share with 29% in the total investment volume. Industrial and hotel segments were responsible for 10% and 6% respectively.
The volume of overseas investments has reached $785 million in 2017 which is 16% in the total investment volume. Foreign investments has recorded a 4.4 times volume growth and 12 percentage points increase compared to the 2016 historically the lowest result in terms of foreign investors activity.
New construction grew 4 times compared to its Q2 value and amounted to 278,000 sq m. More than 80% of new space was leased before commissioning. 62% of new supply represents built-to-suit buildings.
161,000 sq m of warehouse space was taken-up in Q3 2017, which is 2.9 times higher compared to Q2. In Q1-Q3 2017 business activity of retailers continued to be a key driver for demand growth. FMCG & Food prevailed in take-up structure by goods type.
Total vacant space decreased to 450,000 sq m, accounting for only 7.1% of total stock.
Weighted average gross rental rate for A class warehouse reached 5,100 RUB/sq m/year exceeding its 2016 value by 4%.
In Q3 2017, 74,600 sq m were commissioned on the Moscow office market. This volume is the largest quarterly increase since the beginning of the year, however it is 9% lower than the value was in the same period of 2016.
The low new supply volume contributes to the continuing overall vacancy rate reduction. In Q3 2017 this indicator decreased by 0.8 ppts from 15.4% at the end of H1 2017 to 14.6%.
In Q3 2017, take-up is amounted to 255,000 sq m, which is 11% above the value in Q3 2016 and 21% higher than the volume in Q3 2015.
Ranges of asking rental rates remained stable in Q3 2017, but vacancy rate decrease and gradual equalization of the supply and demand balance in the Moscow office market will begin to influence the level of rates that may increase by 3-5% by the end of the year.
In Q1-Q3 2017 real estate investment volume amounted to $ 2.5 billion 35% of which accounted for Q3 2017. Thus, this indicator decreased by 27% compared to Q1-Q3 2016.
Foreign investors activity is increasing on the Russian market. In Q1-Q3 2017, the volume of investment transactions involving foreign capital increased 4.8 times compared to the same period of last year and leveled at $562 million that is 24% in the structure of investments, against 3.4% in January-September 2016.
Investment activity beyond the Moscow region was formed primarily by investment acquisition in St. Petersburg real estate market. Despite the much lower investment volumes compared to the Moscow region, in Q1-Q3 2017 the share of St. Petersburg and the Leningrad Region in investments structure increased up to 24% compared to 10% in the same period of 2016.
Capitalization rates in all segments of commercial real estate have adjusted compared to the beginning of 2017. The compression occurred due to Central Bank key rate reduction and real estate rental flows stabilization.