Market Facing Lower Rents

Vladlen Voloshin
Veles Capital Development

This year we are seeing the following trends on the construction market: a reduction in the number of building projects, slump in demand and paying capacity, as well as cost saving. As result of these factors, rental rates are decreasing. In 2010 the market will also suffer problems with project financing, the amount of new projects will be reduced, some projects will be stopped; the turnover of developer companies will decrease (by 40 percent in average). However there will be one positive trend — a decrease in the competition on this market.

Because of the economic turbulence on Russian and foreign markets, it is hard to make strict forecasts today. That is why we need to analyze two possible situations — the optimistic and the pessimistic scenarios.

If the economic situation improves, the segment of office real estate will likely see some increase of the rental rates (up to 15 percent). This is the optimistic scenario. Unfortunately the possibility of the pessimistic scenario with the realization of all negative trends mentioned above, is today about 70 percent. This will cause a further decrease of the rental rates, likely up to 40 percent of their current level.

In the segment of retail real estate the situation will change gradually. Today the regional markets are developing and the strongest regional developers are trying to take the advantages of the crisis situation (rates decrease, free sales areas) and are making an effort to enter the Moscow market. Concerning our own projects, we may say that we overcame the low rental prices and today we see the rates increase ­because of the rental rotation. But, if the current problem with the financing of new projects is not solved, the market may suffer ­another decline. Now and in the near future, we will see the ­further rotation of the renters, change of development strategies of the ­largest ­retailers, renters will leave the less ­successful malls for the better

ones and new malls will be open in regions.

Further conclusions may be drawn at the end of 2010.