What`s Next?
» The Russian modern history once again proved that those who were not Lucky to produce oih`n Russia, decided to make oil out of real-estate, during a relatively short period of time they advanced the prices to unreal levels, making this country, which is in the 41st place in terms of average income per capita, the most expensive country in the world in terms of real-estate prices. On October 29, the Commercial Real Estate magazine organized the conference called - «What`s Next»?
Market players from all commercial real estate sectors of the country gathered in the Holiday Inn Suschevsky: investors, developers, consultants, property management companies, retailers, bankers and representatives from the mass-media. In four hours they tried to develop a sort of common anti-crisis strategy for the next 3-4 months. The historically inevitable question in Russia is «Who is to blame?» After the introductions of all participants of the round table the discussions started, and talked soon turned to the logical question «What to do?»
To risk or not to risk? Having had an opportunity to express their views, the speakers became divided into several camps. None of the participants challenged the fact that the country`s real estate market was at a standstill and all players were afraid of taking risks in uncertain directions. However as for the strategy of their companies for the next few months, their opinions were quite different. One group claimed that people should not be afraid of starting new projects in order to gain leading positions on the market in two to three years to come, the other group was very cautious, considering that it is necessary to freeze projects, especially those at the stage of pre-development, at least until the first signs of stabilization are seen.
«The existing market-situation does not cancel the market itself. I do not think that it makes sense to freeze projects at early stages in order to see further changes of the market» -these were the comments of Vera Setskaya, the President of GVA Sawyer. «Our company, to the contrary, considers that the prebuilding stage of a development project is the least capital-intensive. Pre-design and design preparation is quite affordable for the majority of developers. And companies need about two years for product creation .The shortage of credit capital according to forecasts, will end in 1.5-2 years and then the winners will be those that have prepared well in advance. But it is quite another question as to what type of product should be developed. I consider that it is necessary to build offices in the most prestigious places - however these should not be huge offices located in one building. As for retail it makes sense to be guided by the concrete operator who already sees the concept and is ready to go with the developer to the end of the project. The same situation also applies to hotel operators. If a hotel operator is ready to sign a management contract for a hotel today, then why not to do it today? The situation seems much more difficult for those who are already at the construction stage and are seeking the credit capital. But as for projects that are at earlier stages of development there is no need to waste time and it is necessary to keep working and moving forward»..
Ms. Setskaya was supported by Cameron Sawyer, the Chairman of the Board of GVA Sawyer. «I would like to add that these are not just words: next week we are going to purchase a land site, and also invest our own money to start a new project. It will be our biggest investment in 17 years. This project will be completed in 3-3.5 years, and then many companies that are now playing a waiting game will understand that they had missed the boat. We consider that the best time for investment is right now. Based on logical conclusions, we consider that the rental rates in Russia will not experience a considerable drop. The world financial crisis will affect the supply while the demand will be only slightly lower. As a result of the crisis only the foam will disappear from the real estate market by that I mean the unfairly high rental rates charged in some buildings. Russian developers should come down to Earth and realize that a 10 year period for recouping an investment in a development object is standard for developed markets. It is not the 5-7 years as we have gotten used to in Russia».
But not all the experts agree with this opinion. Many players are convinced that it is necessary to freeze projects right now. «This means projects at all stages of completion, including pre-development» says Vyacheslav Kaminski, the President of DVI Group. According to him the greatest risk today is large-scale projects. «There is a danger of simply having no tenants.» Many of those taking part in the discussion had already noticed that tenants have started to refuse to move to new offices or retail premises - these can be called the first signs of a decreasing demand. The managing partner of Blackwood, Konstantin Kovalev, considers that the financial sector companies will be the first to face the strongest decrease in demand. «Recentlyitwasin this sector, where all transactions practically stopped, the only exception being premises which are sub-leased. The volume and the quantity of transactions closed in the 4th quarter will decrease substantially, though traditionally the 3rd and 4th quarters are the most profitable for us as consultants, because the majority of transactions in the market are usually closed towards the end of the year. Now even security deposits on transactions at the last stage cannot guarantee their closing - we no longer feel confident in transactions even when there are deposits exchanged. Now the transaction can be considered final only after tenants complete payment. The companies quite often change their mind about moving into new office or retail spaces and leave their deposits. «If we compare the current situation with the one during the 1998 crisis, the experts recalled that at that time rent for office premises was the first to react to the economic collapse. The same situation, most likely, is happening now, therefore, in my opinion, we can expect significant corrections in prices in the next few months», is what Kovalev believes.
Who will suffer the most?
The Russian version of the current world crisis has affected all market players just like in other parts of the world. Banks were the first to «fall down». Development companies followed the banks because the banks stopped crediting them. Consultants are somewhat further down this chain because of the significant amount of projects that are at the realization or completion stages. However, according to participants of the round table, it is difficult to estimate the situation precisely since everything depends on each individual project and each individual consulting company.
Darrell Stanaford, the Managing Director of CB Richard Ellisin Russia, thinks that the crisis is only a transition period in market development. «Actually nothing has been happening on the market for about two months. People are trying to work out their future strategy and are not making serious decisions. Today it is still difficult to define the future generaltrends of development of the Russian economy, will the GDP growth be 5%, 2% or no growth at all. The oil prices dynamics are also unknown. The only thing we can say fro sure is that the subleasing market will define the future trends in the development of the office market. The market will never be the same as in the first half of this year. The tenants now have the advantage in negotiating long term rental agreements with landlords once again.
Vladimir Pinaev, managing directorfor owner and occupier services, Russia and CIS, at the company Jones Lang LaSalle, also noted that bank interest rates have reached such a level that it is now more profitable to freeze projects than to continue financing them. «2009 will not be an easy year for consultants. But facing the difficulties of any crisis helps a company make an investment into its future. «We must still be reliable advisers to our clients in order to achieve new levels in business after the crisis. We have learned that the real estate market in every country, including Russia, develops cyclically, and now during its decline period, we should build the foundation for successful activities in the future. Talking about a crisis strategy we should not think «narrowly», I just thinking about 3-4 months. The true business strategy usually covers 5-7 years».
According to the Managing Partner of Colliers International Sergei Gipsh, the most problematic sphere of consulting during the crisis is evaluation services, because as a rule this concerns the first stages of a developer`sj project. «I think, that the next year will be rather problematic for the advisers, and I think that we see a decrease in profits, down to the level that , they were in 2006. There will be a great decrease in the number of objects at the stage of commissioning. The experience of the last two months demonstrates that more and more often tenants are restating their needs. The retail sector faces, the most shaky situation,» - thinks Gipsh.
«The Director of Meinl European Land, Annal Ivannikova, expressed the following opinion: «We, as investors, developers and landlords have recently started receiving letters from our tenants with requests to reduce rental rates. Of course they are taking advantage of the general macroeconomic situation, but there is certainly some logic in their actions. Many of them have already experienced decreased sales volumes, and this is a fact. The market has responded very quickly, and many landlords will soon see it for themselves. Speaking about new development* projects - if funds allow, then why not?»
Автор: Vladimir Kolosov
Commercial Real Estate, 15 November 2008
