How the commercial real estate market of Ukraine has changed since the beginning of the crisis, what happened to the rental rates, what is the share of free space, what formats will be in demand in the next few years, the portal “Capital real estate” said Maria Shkarpetina, analyst of the Department of economic and strategic research of Jones Lang Sallee.
Less than 30% of the commercial real estate projects announced for commissioning will be implemented in Kiev until 2010.
Maria tell us what is happening today in the commercial real estate market, in particular in the commercial sector?
First of all, under the influence of the financial crisis, rental rates have significantly decreased. The transition to their mixed form (a fixed amount plus a percentage of turnover) is gaining popularity. However, the non-transparency of accounting for turnover of trade operators is the main reason for the unwillingness of many owners to move to a percentage of turnover. Instead, they are ready to cancel the indexation of the rental rate for several years, and offer a diversified rate (step rent), that is, fixing a certain amount of rental rate for each year.
Increasingly the tenants are trying to lock in rents with the purpose of minimizing fluctuations in the exchange rate. Often tenants can also get from the owners to reduce the guarantee payments from 3 to 1 month.
With the decrease in income of the population there is a reorientation of consumer preferences from the expensive segment (imported goods of the premium segment) to the cheaper segment (goods of economy class, domestic products).
All this makes the trading operators change their development strategy, including prices and range of products. For example, many operators have started to produce goods under their own brand, which significantly reduces the cost of logistics and distribution of goods and reduces the cost of production.
Also note the trend of mergers and acquisitions among trading operators who prefer to consolidate and consolidate their assets to improve efficiency.
What are the rental rates today?
If before the crisis, back in mid-2008, the maximum annual rate was $ 2,200. It is $ 1,080 per sq m, but today it does not exceed $ 1,080 per sq m. USA. Thus, the decrease was more than 50%.
How many fell yield shopping centers?
From the point of view of cash flows of owners, the fall in rental rates has caused a decrease in their income and profitability of the shopping center.
If we are talking about capitalization rates, for the most quality objects the rate increased from 10.5% in Q3 2008 to 15% in Q2 2009, and as a result the investment value of retail real estate decreased by 2-4 times.
What shopping centre projects can be implemented in the next few years?
Most of the planned projects of shopping centers will remain such until at least 2012. At the same time, the majority of developers will carry out project re-conception taking into account new market trends.
If to speak about projects that have a high probability of implementation in 2009, this second phase of the shopping center “Dnipro Landing” (leasable area: 45 000 sq. m), Dream Town – phase 1 (50,000 sq m), 4Room (22 of 230 sq. m), Rainbow (15,800 sq m).
In the first half was entered first “Domosfera” – specialized center of furniture and home products (20 000 sqm).
Thus, the total leased area of the new proposal in 2009 will be about 133 thousand square meters, which will exceed the same figure in 2008 more than twice.
In 2010, we expect the commissioning of two projects: “the Esplanade” (33,000 sq m), “Domosfera” – phase 2 (64 500), which amount to just 30% from stated output for this period volume.
How will the formats of shopping centers change taking into account the new realities of the market?
The crisis resulted in the disappearance of a number of projects and a more attentive attitude of developers to the location of shopping centers and the development of the concept.
In the short term, the most popular formats will be those that represent a cross between traditional markets and modern shopping centers. For example, such market, or, as called by the owners, “Eurobase”, recently opened on Osokorki. The market consists of modern trays arranged by product groups. The rental rate in such trading units is low, and, accordingly, the goods for consumers are offered at an affordable price. Great popularity will use the shops discount goods. At the same time, these formats will not become market standards in the long term.
The advantage will still be in modern shopping centers with the presence of entertainment component.
What is happening with the entertainment part of shopping centers today?
The entertainment sector is still one of the key parts of the shopping center. Despite the crisis, the entertainment sector of shopping centers remains attractive to visitors. Despite the decline in income, the population has not stopped spending money on entertainment. Naturally, as for the rest of the tenants, the rates for the entertainment sector have significantly decreased by about 20%.
What is happening with office real estate today?
In this segment, as in all the others, there was a temporary easing of conditions of rent: rental rates decreased, there was a transition to the calculation in UAH. In addition, the terms of lease agreements to a year and Deposit payments to two months were reduced.
Now the interest of tenants has also shifted to the premises with finishing, because such offices are the least capital-intensive. Today, more than 60% of the office space is offered with a basic finish.
There is a reorientation of market participants from projects on paper to ready-made projects: the share of preliminary contracts has significantly decreased – almost everyone wants to rent premises in already built business centers.
There is a growing interest of office space owners to management companies that can stabilize cash flows and increase the investment value of buildings.
What square footage of office space is the most popular today?
In 2007, the greatest demand space of size 150-200 sq m, in 2008 – already up to 500 sq. m. Today popular or small area (about 200 square m), or Vice versa large (2 sq m).
There are a number of companies on the market that want to consolidate their units in one building at affordable rental rates or buy it (at our request, these are companies from the automotive industry, the media, FMCG, which request an area of more than 2,000 square meters).
Companies that enter the Kiev market or move to other office centers are interested in premises with an area of 200-250 sq.m. at the same time, there are enough requests for small premises.
Companies from which business sectors are forming the demand for office space today?
The tenants who showed the greatest demand for rental of premises before the crisis – banking, financial and construction companies. At the moment, production companies dominate the demand, as they are less dependent on other industries than service companies. Companies from the pharmaceutical and IT industries are particularly active now.
If before the crisis the greatest demand was shown by companies that first entered the market, now it is, basically, moving from one office to another in search of more favorable conditions.
How have rental rates changed?
If the maximum annual rate in Q3 2008 was $ 1,200, the maximum annual rate would be $ 1,200. USA per sq ft, while today the rate has decreased approximately three times – up to 420 USD. We forecast a slight decrease in rents by 10-15% by the end of 2009.
What is the current level of vacancy in business centers?
Today, the share of free office space in Kiev is more than 23%. For comparison, in Q3 2008 this figure was less than 5%.
Recently, it was reported that some office space rent almost free of charge, the tenant is required only to pay maintenance costs. Is that so?
There is no such practice in high-quality business centers. However, the owners of the business center have made serious concessions: reduced rental rates, offer free Parking spaces, rent offices with a basic finish. Conditions for tenants are quite interesting, but owners are unlikely to rent premises for free.
Will there be a shortage of office space in a few years due to the suspension of the implementation of a number of projects?
Fundamentally, the office real estate market is unsaturated, but due to the crisis, supply exceeds demand. If we compare, for example, the Kiev office market with London, as the most developed, the total volume of high-quality office space per capita, Kiev is 5 times behind. Therefore, it is expected that the deficit will be high enough, but its level will depend on the overall economic situation. We expect demand to increase from the second half of 2010 after the economy stabilizes, but it will be lower than supply until the end of 2011.
In 2009, it was planned to put into operation 50 business centers, which of them will be completed?
We expect to release only 16 business centers, with a total rented area of 134,000 square meters, which will be only 20% of the declared volume of space.
What changes have occurred in the warehouse real estate segment?
The main lull in the commercial real estate segment is in warehouse real estate. If at the end of 2008-beginning of 2009 a large number of areas were declared and put into operation, now almost all new projects are frozen at least until 2012. Projects that can be implemented are objects that are built according to the built-to-suit scheme (construction for the needs of a particular tenant – approx. Yu. V.).
How have rental rates decreased in this segment of real estate?
If before the crisis the maximum annual rate was $ 150. USA per sq m, it has now dropped to 96 dollars. US (fall was 36%).
What is the vacancy rate of warehouse real estate today?
In Q3 2008, the share of free warehouse space was less than 3%, today this figure exceeds 28%. Such a significant increase in vacancy was mainly due to the output of a large number of new areas at the end of 2008 (290 000 sq. m in 3-m and 4-m sq).
Who forms the demand for warehouses today?
Today, the most active are logistics operators and manufacturers. Previously, they were supplemented by retail operators, but due to the significant drop in retail turnover, representatives of these companies are now the least active. In General, the demand for storage facilities fell by 2-3 times.
There is an opinion that the demand for warehouses was artificially “inflated”, which was the reason for the current level of vacancy…
At a time when the economy was actively developing and a large number of both international and national operators were entering the market, the demand for warehouses was high. This is evidenced by the share of free space last year (less than 3%). At the same time, high-quality class a warehouses began to appear only in 2006, before that, there were only non-professional warehouses on the market. So, to say that the demand was “blown out of proportion,” he said. As soon as the economic indicators start to grow again, the demand for quality space will resume again, and the free space will be filled.
What is the situation in the regions?
In regions, the warehouse market is mainly represented by the premises of Class C. In the pre-crisis period developers, especially international, is actively eyeing regional markets. Began construction of several major projects in the cities with the largest number of them in the Odessa area. Now, as in other sectors, the planned projects are postponed until 2012 and later.
The highest probability of commissioning in 2009 is Odessa logistics Park – phase 1 (leased warehouse area: 47 000 sq m).
If we talk in General about the commercial real estate market, were there significant transactions for the sale of objects over the past six months?
Now almost all companies are ready to sell their assets in order to optimize resources and raise funds for more profitable projects. Companies are actively looking for strategic investors and partners. But there have not been any significant transactions yet.
On what conditions are investors ready to enter the project today?
First of all, it should be high-quality projects with full permits for construction, or with a high stage of readiness, with a good selection of tenants and entertainment component. Today, such projects are few. There are interesting objects, but many of them are at the concept stage without permits, so they are unlikely to receive investment.
Is Kiev still the most attractive for the implementation of commercial real estate projects?
Kiev remains the most attractive city for investment. However, million-plus cities are also considered by investors, especially the trade segment.