IN

V ES

TO

D IL

M
V

IT TE U A R -S L LS O -T TA EA EN D

R CY K D IN ET YNA CA VE H V MICS R P S 1 A IT T TE A M IE S LI E 2 ZA N 0 T 1 W TI O N 2 A
CA N
O FF ER

E IC ET FF K O R A S M

S IC M D TY O N LI N A TI CO L LA E A O O RI S V CR ST IC A U T SE M D IS IN G LO

Y OU IT H ID RE U A q W LI


HOT TOPICS

Unless economic problems in Europe and the USA trigger sharp medium-term drop in oil prices, Russian economy is expected to outperform the majority of counterparts.
Valentin Gavrilov Director Research Department

MACROECONOMICS

In Q2 Russian economy faced a shock decrease in oil prices. At the lowest point Brent prices were 25% below peak levels. Major reaction to this shock was ~12% ruble depreciation versus USD. Central Bank and Ministry of Finance provided adequate response to banking system liquidity problems. Starting from Q1, growth of mid-term interest rates was successfully curbed. Fiscal balance is sustainable and is not expected to damage real sector performance. Real sector performed well with a 4% GDP growth. According to IMF forecasts, in terms of GDP growth Russian economy will outperform most European economies. Russian economy demonstrates good ability to resist high volatility of financial and commodities markets. Negative mid-term changes in existing trends are expected to occur only if Urals prices will hit USD 90/barrel level and stay below it, at least, for a few months in a row.

EXTERNAL SECTOR
In Q2 the markets saw a further round of eurozone problems and a US Federal Reserve decision to postpone a 3rd round of quantitative easing despite the anemic economic situation in the United States. Pessimistic market sentiments, caused by worsened perspectives of world economic growth and a lack of solutions to the severe fiscal issues of the eurozone, triggered strong downward pressure on oil prices. The price of Brent crude dropped approximately 25% right after reaching a post-crisis high. The Ruble exchange rate reacted to the crash in oil prices by depreciating both versus USD (11,9%) and EUR (5,5%). The Russian Central Bank did not undertake significant interventions to support the exchange rate. International reserves changed very little from the beginning of Q2, increasing by 130 USD 800 million up to USD 514,3 billion. Brent price, USD/Barrel, end of period

130 125 120 115 110 105 100 95 90 Dec 2011 Jan Feb Mar Apr May Jun July, 18th

34 33 32 31 30 29 28 27

50 40 30 20 RUR/USD exchange rate, end of period Current account 10 Financial account 0 Q1 Q2 Q1 Q2 Q1 Q2 -10 125 34 2010 2011 2012 -20 120 33 Therefore, Q2 sent an explicit message to investors -30 115 32 110 the service cost of FX-nominated debts might be that 31 105 much higher compared to the interest rate. 12 30 100 29 11 95 The stock market also continued on a downward 130 28 90 10 path with the RTS index falling Apr more than 25% at by May Jun July, 125 27 Dec Jan Feb Mar 34 9 120 Jan Feb Mar Apr May Jun 2011 18th the lowest point. 33 Ruble 115 8 32 Source: CBR 50 110 FX 7 31 A significant drop in oil prices contributed to a 105 40 30 6 decrease in the current account surplus from USD 100 30 29 39,3 billion in Q1 to USD 19,2 billion in Q2. At the 95 Current and Financial accounts balance, 20 28 Current same time, it should be mentioned that seasonalaccount 90 bln USDDec Jan Feb Mar Apr May Jun July, 10 27 Financial account factors also contributed to lower surplus. Financial 0 2011 18th Q1 Q2 Q1 Q2 Q1 Q2 account, reflecting capital inflows and outflows, in -10 2010 2011 2012 50 6 turn, improved from a deficit of USD 23,4 billion in -20 40 -30 to a surplus of USD 2,6 billion in Q2. Although, Q1 5 30 this kind of behavior of financial account position 4 20 2010 Current account is 12 rather common in times when current account 10 3 Developed Financial2011 account proficit decreases. 11 0 2 2012 Q1 Q2 Q1 Q2 Q1 Q2 -10 10 2010 2011 2012 1 Nonetheless, if the financial account position will be -20 9 able to stay positive for a sustainable period, it could -30 0 Ruble 8 Jan Feb Mar Apr May Jun

Source: Finam

be a good signal for foreign investors.

7 6

FX

12

Source: CBR

11 10 9 8 Ruble FX
Eurozone UK France

6 5 MarketView H1 2012 4

7 6

1600

2000 1800 1600 1400 1200 1000 800 600 400

-20 -30

2010

2011

2012

MONETARY SECTOR 12 130

125 11 120 In Q2 an ongoing trend of tightening liquidity in 10 115 9 the banking system met a strong reaction from the 110 regulators. The Ministry of Finance expressed its Ruble 8 105 readiness to restart deposit auctions, which FX were 7 100 an important source of liquidity at the beginning of 95 6 2012. The Bank of Russia decreased the interest 90 rate on the currency swap with the ruble leg being Jan Feb Mar Apr May Jun Dec offered for 6,5%. 2011 506 Altogether, these measures are expected to improve liquidity in the banking system and enhance its 40 5 lending ability. 304 20 3 10 2 0 1 Q1 Q2 Q1 Q2 Q1 Q2 -10 2010 2011 2012 -20 0 Weighted average interest rates onJun loans with Jan Feb Mar Apr May -30

105 100 95 90 Dec 2011 34 Jan Feb Mar Apr May Jun July, 18th

31 30 29 28 27

After a 33 surge of mid-term interest rates on loans 50 for non-financial sector in FebruaryMarch 32 40 2012, we witnessed stabilization in Q2. In April 31 30 2012 the weighted average interest rate on FX30 20 Current account nominated loans decreased from 8% to 7,4%, on 10 29 Financial ruble-nominated loans from 11,5% to 10,9%. Inaccount 0 28 Q1 Q2 Q1 Q2 Q1 Q2 May-June lower oil prices and a depreciated ruble -10 27 2010 July, 2011 2012 triggered another round of increases in interest rates. -20 Jan Feb Mar Apr May Jun 18th
-30

Besides the above-mentioned regulators actions, Eurozone banks themselves initiated net inflows of capital, 12 UK having Franceforeign assets. In Q1 banks invested cut 11 Germany 2010 approximately USD 10,1 billion into foreign assets, 10 Current account countries Developed 2011 while in Q2, in contrast, net sales of foreign assets 9 Financial account CEE for USD 6,5 billion. 2012 accounted USA
8 7
World Russia

Ruble

FX
5

term more than 1 year, %

Banks liquid assets and money market rates, -1 0 1 2 3 4 6 RUR bln, %

bln

12 11 10 9 8 7 1600 6 1400
1200 1000 800 600 Source: CBR 400 200 6 0

Ruble FX

2000 1800 1600 1400 6 1200 5 1000 800 4 600 3400 200 2 0

23 18 13 8

2010
3 2011

Develop

2012 -2
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May 2011 2012

1
2011 2012

0 Jan Feb

Banks' liquid assets (End of Period) Liquidity coefficient (right scale) MIACR (right scale) Eurozone
France

Mar

Apr

May

Jun

FISCAL SECTOR
5 4

Jan

Feb

Mar

Apr

May

Source: Complex Strategic Research Institute UK

In 2012 we observed much faster growth in 3 Developed countries 2011 consolidated budget spending compared to revenue Consolidated budget and extra budgetary funds CEE 2 proficit, cumulative, RUR bln 2012 generation. In JanMay 2012 revenues increased USA 1 World 15% compared to JanMay 2011, while spending Russia 1600 by 24,3%. Consolidated budget surplus reached 0 1400 Jan Feb -1 0 1 2 3 RUR 1,05 trillion. Mar Apr May Jun Fiscal balance looks sustainable with budget spending supporting economic growth, which is currently facing downward pressure from expectations of a new wave of world economic crisis.
1200 1000 800 600 400 200 0
bln

2010

Germany

2000 1800 1600 1400 1200 1000 800 600 400 200 4 0

2011 2012

MarketView H1 2012

2000 1800 1600 1400 Jan Feb Mar 1200 Source: 1000 Roskaznacheistvo CBR, 800 600 400

Apr

May

July, 18th

34 33 32 31 30 We have not witnessed any negative trends as 29 a response to the shocks in the external and 28 monetary sectors. 27 Jan Feb Mar Apr May Jun

REAL SECTOR

130 125 120 115 110 105 100 According to CBR estimates, consumer prices 95 in H1 2012 increased versus the end of 2011 90 by 3,2%, which is Feb Mar Apr May Jun July, much lower compared to Dec Jan 2011 periods in 2010 and 2011. Even with 18th the same

34 33 32 31 30 29 28 27

According to the Ministry of Economic Development estimates, in Q2 real GDP grew by 3,94,0%. In connection with robust Q1 results these figures provide a sound base nt account to increase the 2012 GDP growth forecast cial account figures from 3,4% currently up to a range of 3,74,0%. According to the recently revised IMF economic growth forecast, Russia is expected to outperform developed countries and CEE counterparts. In addition, positive signals are evident from investment activity figures. According to H1 2012 data, investment into fixed capital was 10,2% higher than in the respective period of 2011.

the expected inflation increase in July (more 50 than 1% growth), both the Ministry of Economic 40 30 Development and Central Bank of Russia see an 20 opportunity to meet the 2012 inflation target of 6%. Current account

10 Financial account 0 Minimization of Q1 Q2 Q1 Q2will help inflationary fears Q1 Q2 -10 develop a2010 argument for2012 sound 2011 a decrease in the -20 CBR refinancing rate. Together with stabilization -30

in liquidity in the banking system, this may help to decrease long term interest rates in H2 2012, 12 although insignificantly. 11
10 9 8 7 6 Ruble FX

2012 real GDP growth forecast, %

Inflation (consumer prices), cumulative, %

Eurozone UK France

6 5 4 3 2 1 0
0 1 2 3 4 5

2010 2011 2012

Germany Developed countries CEE USA World Russia -1

2010 2011 2012

Develop

Jan

Feb

Mar

Apr

May

Jun

Source: IMF
bln

Source: CBR
23 18

1800 CONSLUSION

2000

1600 1400 Since the 2nd half of 2010 weve observed high 1200 volatility of market sentiments. Expectations of one 1000 or several countries leaving the eurozone, or the 800 600 beginning of a recession in Europe and/or the 400 United States are followed by states of euphoria 200 from 0 next round of quantitative easing or new the 2011 2012

problem countries bond purchase programs. Meantime, Russian GDP grows by 4% or more
2011 Banks' liquid assets (End of Period) Liquidity coefficient (right scale) MIACR (right scale) MarketView H1 2012

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

for the third year in a row. Russian economy 13 demonstrates a rather good ability to resist the high short-term volatility of financial and commodities 8 markets. Unless Urals prices hit USD 90/barrel 3 mark and continue going down, we do not expect a 1600 turnaround in the current positive economic trends in 1400 -2 Russia. 1200
1000 800 600 400 200 0 2011 2012

2000 1800 1600 1400 1200 1000 800 600 400 200 0

2012


HOT TOPICS

We see substantial investors appetite for quality assets in Russia, but transaction activity remains constrained by global macroeconomic uncertainty, most notably the situation in the eurozone. The limited supply of true investment-grade assets further limits this activity. Nevertheless, we expect to see several sizeable transactions in 2012.

Ivan Gubochkin Managing Director Capital Markets

INVESTMENT

Volume of investment deals decreased by 44% compared to H1 2011. At the same time the Russian market performed better than that of the other countries. Foreign investors show long-term interest in investments in the Russian commercial real estate. Office and Retail are the most sought after investment sectors. Capitalization rates stabilized and exceed other European market rates by 200500 bps. In H2 2012 investment activity is expected to increase with total investment volumes in 2012 reaching USD 44,5 bln.

QUICK STATS
As compared to previous periods

H1 2011 H2 2012

Investment volume Capitalization rates Foreign investments

MARKET OVERVIEW
Investment in Russian commercial real estate decreased by 44% versus H1 2011 figures. In H1 2012 investment volumes reached USD 1,523 million versus USD 2,707 million in H1 2011. The market volume would have been greater by 3035% if the sale of MFC Summit closed in H1 2012. The main drivers for decreased market activity include an ongoing instability in eurozone; the presidential elections in Russia, producing a series of large-scale political protests in Moscow; tightened financing conditions due to a lack of competition in the banking sector, and banks requirements to decrease investor leverage ratios. Nonetheless, the Russian commercial real estate market demonstrated quite strong resistance to the eurozone uncertainty and performed better than most european markets. Investment volumes in Russia in 20112012 increased by 35% 4000 compared to 20102011. We consider this to be 3500 a clear evidence of relative strength in the Russian 3000 market. Such long-term factors as the undersupply 2500 of quality assets and relatively high rental rates 2000 develop a sound base for market growth. As the 1500 eurozone crisis becomes mitigated, increases the 1000 probability for the Russian market to be among the 500 growth leaders in Europe. 0
H1 H2 H1 H2 H1 H2 H1 H2 H1 2008 2008 2009 2009 2010 2010 2011 2011 2012

Investment volumes, USD mln

4000 3500 3000 2500 2000 1500 1000 500 0 H1 H2 H1 H2 H1 H2 H1 H2 H1 2008 2008 2009 2009 2010 2010 2011 2011 2012

CEE w

Source: CBRE
80 70 Investment volumes index, period to period 60 Q1 2010Q2 2011 = 100% 50 40 30 Spain 20 Italy 10 Great Britain 0 Germany 2008 2007 2009 2010 2011 H1 2012

CEE w/out Russia

15 14 13 12 Source: CBRE

France Russia 0 0,5 1 1,5

80 70 60 50 40 30 20 10 MarketView H1 2012 0 2007 2008

11 10 9 8 7 Q2 2010 Office Q2 2011 Shopping centers Q2 2012 Industrial

2009

2010

2011

H1 2012

Professional foreign investors realize this fact and confirm their long-term interest in the Russian market. For example, Immofinanz Group and Raven Russia have formed rather large investment portfolios in Russia. Their recent acquisitions in H1 2012 included Golden Babylon Rostokino shopping center (increased their holding from 50% to 100%) and Pushkino logistics park, respectively. Also, at the end of 2011 Morgan Stanley Real Estate Fund made a high caliber transaction in Saint Petersburg, acquiring the Galeria shopping center for USD 1.1 billion. At the end of H1 2012 Hines announced the closing of HRPF (Hines Russia & Poland Fund), which has been formed to invest more than EUR 900 million (total leveraged capacity) into Russian and Polish real estate investments. Approximately 80% of the fund is allocated for investments into Russian development. Capitalization rates have plateaued and stand at 200500 bps higher than respective rates in other European markets. The current gap in capitalization rates is comparable to the country risk premium paid for investments in Russia. Curbing the risk of a second wave of world economic crisis will create better opportunities for Russia, compared to other countries. We expect that in this case capitalization rates in Russia will decrease more slowly due to a structural deficit of quality supply. Retail and office are the most popular sectors for investments.

3500 H1of foreign investorsH1 total investment H1 H2 H1 H2 Share in H2 H1 H2 3000 2008 2008 2009 2009 2010 2010 2011 2011 2012 volume, % 2500 Gr 2000 4000 1500 80 3500 CEE w/ 1000 70 3000 500 60 2500 Great B 0 2000 50 H1 H2 H1 H2 H1 H2 H1 H2 H1 Ger 1500 2008 2008 2009 2009 2010 2010 2011 2011 2012 40 CEE w/out R 1000 30 Fr 500 20 0 80 R 1070 H1 H2 H1 H2 H1 H2 H1 H2 H1 2008 2008 2009 2009 2010 2010 2011 2011 2012 060 2007 2008 2009 2010 2011 H1 2012 50 80 40 Source: CBRE 1570 30 60 20 14 50 10 1340 0 Capitalization rates, % 2007 2008 2009 2010 2011 H1 2012 30 12 20 1110 15 0 10 14 2007 2008 2009 2010 2011 H1 2012
9 13
158 12 14 11 7

1000 500 4000 0

CEE

Q2 13 10 2010
12 11 10 9 8 7

Q2 2011 Office Shopping centers

Q2 2012 Industrial

9 8 7 Q2 2010

Q2 2011 Office Shopping centers

Q2 2012 Industrial

14 Source: CBRE 3 Q2 2010

Office

32 Q2 2011
Shopping centers

Shopping centers, RI
Q2 2012

Shopping centers, FI
Industrial

While the office sector accounted for more than 3 34 5565% of market volumes in 2009-2010, in 2011 office and retail segments became almost equal, 14 largely due to the Galeria transaction. In H1 2012 3 the retail sector was significantly ahead of the 34 offices but, taking into account deals in the pipeline, we expect that by the end of the year the balance between these two sectors will be restored. 3000
34

Investment structure by sector, % Office, RI 14 RI = Russian Investors, FI = Foreign Office, FI Investors

32

Shopping centers, RI

17
32

Shopping centers, FI Office, RI Shopping centers, RI Office, FI Shopping centers, FI Industrial, FI Office, RI
Office, FI

Industrial, FI

17

20 15 Moscow Regions
2010 15 5

2500 2000
3000 2500

17

Industrial, FI

Source: CBRE 1500

2000 3000
MarketView H1 2012

1000

1500 2500

500

0 1000 2000

20 10 0 Moscow Regions 15 5

H1 2011

H1 2011

H1 2012

12

An interesting tendency is observed in the industrial sector. Although Russian players are very active as developers, Russian investors activity is negligible there. Vacancy rates in the industrial sector are currently at 1.3%, which is very low. Demand for qualitative warehouses is high, especially in the north-west of Moscow. In a typical market the combination of such fundamentals would generate high investment demand not only from foreign investors but from domestic investors, as well. However, this is presently not the case. Possible explanations may include: Large share of build-to-suit projects (almost 30% of delivery) Widespread practice of leasing agreements, which include the right of further purchase of leased space Increased investment activity of foreign players Expectations that in the light of future market growth the rate of increase in the office sector capital value will outstrip that of the industrial sector.

50 40 30 Investors are once again starting to pay more 20 attention to the regions, especially to shopping 10 0 centers. Investment in the regions in H1 2012 2007 2008 2009 2010 2011 H1 2012
15

reached USD 288 million, which is 2,5 times more, than in the same period in 2011.
14 Shopping centers are the primary regional investment targets. Investments in industrial and 13 office sectors are negligible, as they are not well 12 developed outside Moscow and Saint Petersburg. 11 10 9 8 7 Q2 2010 Office Q2 2011 Shopping centers Q2 2012 Industrial

2 2012

s, RI

14 3 32 Shopping centers, RI Shopping centers, FI Office, RI Office, FI 34 17 Industrial, FI

s, FI

Vacancy rate, %, end of period

Investments in Moscow and regions, USD mln*

20 15 10 5 0 2008
Office

3000 2500 2000 1500 1000 500 Moscow Regions

20 15 10 5 0 H1 2011 H1 2011 H1 2012

scow

gions

2009

2010
Shopping centers

2011

H1 2012

Industrial

Source: CBRE

* Galeria deal in Saint Petersburg excluded Source: CBRE

MarketView H1 2012

INVESTMENT DEALS*
In H1 2012 we observed 13 large-scale investment deals with prime assets, which is just one deal less, than in H1 2011. The average deal size decreased from USD 193 mln to USD 117 mln. The top five deals accounted for 74% of investments volume. Top 5 transactions included: 1. 1 Group, ltd acquisition of Ducat Place III business center from Hines. The size of the deal was approximately USD 360370 mln; 2. Austrian group Immofinanz purchased the additional 50% stake in Golden Babylon Rostokino shopping center and become the sole owner of the object. The size of the transaction was not disclosed; 3. Raven Russia acquisition of Toros company, owning Pushkino logistics park in Moscow region. Announced size of the transaction was USD 215 mln; 4. Romanov Property Holdings Fund acquisition of a 40% stake in Vremena Goda shopping center; 5. Promsvyaznedvizhimost sold its 50% stake in a leading Rostov-on-Don Megacenter Horizont shopping center to Real Invest . Other regional deals, except the one mentioned among top-5, include: 1. Hals Development acquisition of partners 50% stake in Leto shopping center in Saint Petersburg (estimated deal size is about USD 8090 mln); 2. Bashkirian group Trilistnik acquisition of Torgoviy Center Management Company, Ltd, owning Bashkortostan shopping center in Ufa. Estimated deal size is more than USD 30 mln; 3. Trinity Russian Retail Partnership acquisition of londike DIY hypermarket in Rostov-on-Don for USD 11,2 mln. *Note: According to CBRE methodology, we do not include in investment deals the following transactions: sales of land plots; sales of projects in development stage; acquisitions for own usage; deals, which are not closed; some other transactions.

OUTLOOK
Issues stemming from the eurozone crisis do not have quick solutions. For investors, it means that the market will be experiencing uncertainty for some time to come. The probability of the second wave of the world economic crisis will support investors risk averse behavior. At the same time, risk averse behavior does not mean zero investment. Investors are looking for assets which are able to resist downward pressure in a crisis scenario and will be able to recover quickly afterwards. Through the recent crisis the Russian property markets have shown the ability to support such risk profiles.
MarketView H1 2012

Long-term trends of the fundamental commercial real estate market in Russia prove that qualitative supply will meet high demand for a long time. The market is far from saturation in almost all segments both in Moscow and other regions. If macroeconomic conditions do not deteriorate considerably, investments in Russian commercial real estate may reach USD 44,5 bln by the end of 2012.

10

The demand for the Central Business District keeps stable and will remain such though large-scale users will be a much rarer case in the CBD onwards. Taken decentralization trend as well as consolidation plans with lack of product in the CBD to match the requirements, big occupiers (from 20,000-30,000 sq m) are likely to settle their office needs beyond the TTR and possibly through build-to-suit approach.

Elena Denisova Director Head of Office Agency

OFFICE MARKET
HOT TOPICS
The volume of newly delivered office space for H1 2012 was 217,000 sq m. The volume of deals, closed in H1 2012, is similar to that, transacted in H1 2011. According to the analysis of done deals in Q2 2012, we continue to observe decentralization tendency. In Q2 2012 the overall vacancy rate fell to 11%. The vacancy in Class A buildings was 13%, in Class B 10%. During Q2 2012 rental rates were stable.

The office market remained fairly balanced during the 1st half 2012 with rents and demand stable. At that international occupiers have been majorly holding off decisions while Russian business keeps good pace leasing and acquiring office space. We acknowledge there is reasonable potential for rental growth in the long-run which is yet being held up by macroeconomic conditions and another downturn looming.

DURING Q2 2012 THE MAJOR TRENDS ON THE MOSCOW OFFICE MARKET WERE:

Low volume of new supply Stable demand Decreasing vacancy rate Stable rental rates.

NEW SUPPLY
The volume of newly delivered office space for H1 2012 was 217,000 sq m (42% of the new supply for H1 2011). According to announcements from developers, we expect the total volume of new delivery by the year-end to be around 700,000 sq m Q2 2012 15% 40% 18% 27% (1015% more than in 2011).
41% 22% 35% 2% 500 Q3 2011 22% 40% 20% 400 Just several18% buildings entered the market in office 2% 48% 25% 25% Q2. The volume of new supply was 106,084 sq m 300 0% 46% 19% 35% which is similar to Q1 results (111,300 sq m). 24% 40% 36% 0% 200 100 0 38% 35% 25% Q1 2010 23% 27% 36% 30% 35% 43% 34% 28% 27% 4% 3% 5% 7%

In H1 2012 the total volume of newly delivered Class A (38.5%) and Class B (61.5%) office space was 217,384 sq m (as of H1 2011, this volume was 513,500 sq m of Class A (44%) and Class B (56%) space). By the end of 2012 the following projects are to be delivered: Alcon, Park Pobedy, Aquamarine Phase III, Country Park Phase III, Premium West. Most of the new delivery (94%) took place in the zone between the Third Transportation Ring (TTR) and MKAD. Only two office mansions (1,200 sq m and 720 sq m) were delivered in the Central Business District (the area inside the Garden Ring plus Belorussky railway station area).

Q4 2010

0% 20% 40% 60% 80% 100% Significant projects delivered in Q2 2012: CBD 30% CBD>TTR TTR>MKAD Beyond MKAD Class B Class A

Project SkyLight 25%

20% 15%

Office 30% Towers

25% 20%

area, sq m

61,252

BC at Pyrieva Str., 2 Plaza

17,470 15%
10% 5%

10% Dezhnev 5% 0%

11,000

0%

TAKE-UP
The volume of deals, closed in H1 2012, is similar TTR>MKAD Beyond MKAD to that transacted in H1 2011. According to our forecast, by the year-end the total volume of takeup will reach the level of 2011 and will be equal to 11.2 mln sq m. The total take-up volume for Q2 2012 was 280,500 sq m (6,500 sq m more than in Q1 2012 and 15,500 Class A sq m less than in Q2 2011). Class B
CBD CBD>TTR Class A Class B

Annual supply by class, mln sq m

1,5

0,5

0 2009 2010 Class B 2011 Class A 2012F

Source: CBRE
120
MarketView H1 2012

14%

12

0 2000 2001 2002 2003 2004 2005 2006 Class A 2007 2008 2009 Class B 2010 2011 2012F Class A Prime

In Q4 2011 and Q1 2012 we observed an increase Annual take-up by geographic submarket in transactions in Class A office buildings. The Q2 2012 results showed a decrease in Class A share in take-up volume (24% of the total). Such volume Q2 2012 15% 40% 18% 27% of Class A deals can be explained by low activity of 2% 35% 22% 41% international companies in the market who are the 22% 40% 18% 20% major tenants pool in Class A buildings (in Q2 2012 Q3 2011 2% 48% 25% 25% the share of international companies was 32% of the total take-up figure, in Q1 2012 57%). Due 0% 46% 19% 35% to the volatility of European markets,2005 international 2007 0% 36% 24% 2000 2001 2002 2003 2004 2006 2008 2009 2010 40%2011 2012 companies exercise caution in their long-term Q4 2010 4% 28% 30% 38% development and, as a result, prefer to prolong their 27% 3% 35% 35% current lease agreements rather than search for new 5% 43% 27% 25% office premises.
Q1 2010 23% 36% 34% 7%

500

400

300

200

100

According to the analysis of done deals in Q2 2012, 2,0 we continue to observe decentralization. 1,8
1,6 1,4 Due to the lack of lease options for large tenants 1,2 1,0 inside the TTR, the share of deals signed for the office 0,8 premises beyond the TTR increased. Geographically, 0,6 0,4 the take-up (55%) took place mainly outside the TTR. 0,2 Almost all of the large deals (more than 5,000 sq m) 0,0 .

0% CBD

20% CBD>TTR

40%

60%

80%

25%

100%

TTR>MKAD

Beyond MKAD 20%

15% 10% 5% 0%

Source: CBRE 30%

25% 20% 15% 10% 5% 0%

were done in the decentralized office buildings (see the table).

Take-up, delivery and vacancy rate, mln sq m

CBD
2,0 1,8 1,6 1,4 1,2 mln sq m 1,0 0,8 0,6 0,4 0,2 0,0 10% 15% 20%

CBD>TTR Beyond MKAD

25%

TTR>MKAD

Class A
5% 0%

Class B

Supply

Take-up

Vacancy rate

Source: CBRE

120 100 thousand sq m 80 60 40

14% 12% 10% 8% 6% 4%

MarketView H1 2012

13

Company

Office area sq m

Property

Address Lease

Location

Class

Merlion Novartis
Evraziyskaya Ekonomicheskaya Commission

16,600 15,900 6,850

BC Myakininskaya Stroitelei Blvd., 4 Poima Alcon Leningradsky Av., 72

Beyond MKAD + R>MKAD +

BC at Yakovoapostolskiy Lane, 12 CBD Yakovoapostolskiy Vivaldi Plaza Preo 8 Vivaldi Plaza Greenwood White Square Letnikovskaya Str., 2 Preobrazhenskaya Sq., 8 Letnikovskaya Str., 2 69 km MKAD Butyrskiy Val Str., 10 Purchase CBD R>MKAD CBD

Roche Diagnostics 3,850 VTB 24

John Deere Agricultural Holdings

3,600 2,760 2,290

Elko Group

Beyond MKAD + CBD

DeltaCredit Bank 2,270

Raiffeisenbank Alfa Bank

24,900 23,000

Nagatino i-Land Nagatino i-Land

Andropova Av., 18 Andropova Av., 18

R>MKAD R>MKAD

+ +

At the project stage, Nagatino i-Land was marketed as a technopark for small innovation companies. Due to the acquisitions of office buildings by large banks, this project can be positioned as a cluster of banks back-offices. Other large banks are likely to have their back-

offices in the technopark as well. In spite of a number of large-scale deals closed in Q2 2012, the most popular office size was from 500 sq m up to 1,500 sq m (50% of the total number of deals).

VACANCY RATES
In Q2 Q2 20122012 the overall vacancy rate fell to 11%. The 15% 40% 18% 27% vacancy in Class A buildings was 13%, in Class B 2% 10%. 35% 22% 41% A decrease25% in vacancy rates was registered in Class B Q3 2011 2% 48% 25% buildings (declined by 1% compared to the Q1 2012 0% 46% 19% 35% results). The vacancy in Class A buildings was stable.
24% 40% 36% 0% Q4 2010 20% 18% 40% 22%

Take-up by class, thousand sq m

500 400 300 200 100 0

Geographically, the only Moscow office submarket, 27% 3% 35% 35% which saw a significant decrease in vacant space, 5% 43% 27% 25% was the one beyond MKAD. Taking into account the Q1 2010 7% 34% 23% small amount of quality36% space beyond MKAD, office a few large-scale deals influenced the vacancy100% 0% 20% 40% 60% 80% level in the area. As a result, by the end of Q2 the CBD CBD>TTR TTR>MKAD Beyond 17% vacancy rate reached 13% (compared with MKADin Q1 and 18% in 2011). Other office zones saw more 30% or less stable level of vacant space.
25% MarketView H1 2012 20%

38%

30%

28%

4%

Class B

Class A

Source: CBRE 30%

25% 20%

14

Q1 2010 0%

23% 20%

36% 40% 60%

34% 80%

7%

41%

22%

35%

2%

500 400 300

22% 40% 18% 20% 100% Q3 2011 2% 48% 25% 25% Considering the uncertain macro-economic SkyLight Towers, a newly delivered business center, CBD CBD>TTR TTR>MKAD Beyond MKAD Class B Class A 0% 46% 19% 35%

landscape, the current level of vacant space plus was put into operation in the area between the TTR 0% 36% 24% 30% 40% be and MKAD. Nevertheless, such a large-schemeQ2 2012 the projects, announced to40% delivered by the end 200 15% 18% 27% 30% Q4 30% 38% do of vacancy to fall project did not influence the vacancy rate in the area 2010 the year, we25% not expect the 35%28% 2%4% 500 22% 41% 25% 27% 3% 35% 35% 20% significantly. According 40% forecast, the vacancy 100 to our (just 0.6% growth). This can be explained by a pre22% 18% 20% 20% tower (29,900 sq m) by [Link] in 2011. 400 rate will be about 27% by the end of the year. 10% lease of one 5% 43% 25% 0
15%
Q3 2011 Q1 2010

10%

Vacancy rate by class

0% Class B
Class A 30% 25% 20% 15% 10% 5% 0%

5%

2% 48% 25% 25% 15% 7% 34% 36% 23% 300 0% 46% 19% 35% 10% 0% 60% 36% 80% 0% 100% 40% 24% 20% 5% 40% 200 Q4 2010CBD 4% 28% MKAD 30% 38% Vacancy by geographic submarket CBD>TTR 0% TTR>MKAD Beyond 100 27% 3% 35% 35% 27% 36% 40% 43% 34% Class A 60% 80% 5% 7% 100% 0

CBD TTR>MKAD

30% 25% Q1 2010 23% 25% CBD>TTR 0% 20% 20% Beyond MKAD CBD 15% CBD>TTR 10% 30% 5%
25% 0% 20% 15% 10% Class A 5% Class B

Class B

TTR>MKAD

Beyond MKAD

1,5

Class A

Class B

CBD

CBD>TTR Beyond MKAD

Source: CBRE

TTR>MKAD 0,5 0% Source: CBRE

0

Supply, take-up and vacancy by geographic 1,5 submarket Q2 2012

1 120 0,5 100

CBD Supply TTR>MKAD

2009 CBD>TTR

2010

2011 Class A

Class B Beyond MKAD

14% 12% 10%

2009 2010 Class B 2011 Class A

Class A Class B

thousand sq m

80 0 60 40 20 0
CBD CBD>TTR TTR>MKAD Beyond MKAD

18%
Class A Class B

8% 2012F 6% 4% 2% 120 0%

82%

14% 12% 10%

100 thousand sq m

Take-up

Delivery

Vacant Space 80
12060 10040 8020 60 0 40
CBD CBD>TTR TTR>MKAD

Source: CBRE

Source: CBRE

thousand sq m

8% 14% 6% 12% 4% 10% 2% 8% 0% Beyond 6%

MKAD

MarketView H1 2012

Take-up

Delivery

4% Vacant Space

15

RENTAL RATES
During Q2 2012 rental rates were stable: USD 1,200 per sq m for Prime Class A buildings, USD 750 for Class A buildings and USD 450 for Class B buildings (net of operating expenses and VAT). We expect the rents to be stable throughout 2012.

Average asking rates, USD

2 000 1 800 1 600 1 400 1 200 1 000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 Class A 2007 2008 2009 Class B 2010 2011 2012F Class A Prime

Source: CBRE

OUTLOOK
We expect the situation in the Moscow office market to remain stable until the end of the year. The major moderate factor for the market growth is the volatility of European markets. So, being aware of the second wave of the financial crisis, 2001 2002 2003 2004 2005 2006 2007 the market players take caution in their long-term plans. On the other hand, tenants actively consider current lease options in the market and close deals despite low business activity characterizing summer time.
2,0 1,8 1,6 1,4 1,2 1,0 0,8 0,6 0,4 0,2 0,0

2000

Taking into account the above, we expect stable rental rents till the end of the year. Developers, in their turn, realizing the current market situation and the volume of vacant space, are ready to be flexible and give tailored offers2012 to secure tenants. 2008 2009 2010 2011

25% 20% 15% 10% 5% 0%

MarketView H1 2012

16

The Moscow I&L market remains heavily undersupplied (especially in the northern part of the region), with a vacancy rate is lower than 2%. By late 2012/early 2013, over 880,000 sqm of big box logistics space has been announced for delivery. Build-to-suit/turn-key projects are becoming much more of a common trend, rather than an exception, and are expected to consist of up to 35% of new stock in the coming years. Based on CBREs estimates, we can forecast intense growth in demand for warehouses, with the market absorbing up to 650,000700,000 sq m per annum from 20122016.

Lance Pilant Director Industrial & Logistics Agency Services

INDUSTRIAL AND LOGISTICS MARKET

HOT TOPICS
320,000 sq m of Class A warehouse premises were commissioned in H1 2012, that is equivalent to the total area of development in 2011. Delivered properties were leased due to strong take-up. Take-up came mainly from retail and logistics companies. Vacancy rate is still lower than 2%. Average rental rate remained at USD 135/sq m/year. Nontheless, in some areas of the region rents exceeded USD 150/sq m/year. Share of build-to-suit projects in total take-up is more than 30%. Majority of completions in H2 2012 and in 2013 will be introduced in North-West of Moscow. More than 880,000 sq m of warehouse premises to be delivered in the Moscow Region. Boost of supply in 2013 may cause opportunistic growth of vacancy rates up to 5-7%. Nonetheless, it will be temporary upturn.

400 350 300 250 200 150 and only by late-2011early-2012 the figures Stable demand during 2011 and H1 2012 has 100 equalized. In H2 2012 stable take-up kept vacancy boosted the volume of new development: total 50 rates at 2%, like in Q1 and Q2 2012. The majority area of warehouses delivered in Q1 and Q2 2012 0 of vacant premises are represented by warehouse Inside is equal to that of the whole 2011. Moscow complexes located in the southern part of the North-West Moscow Region due to a high level of supply and Looking at the key warehouse market indicators West a big share of projects here. In terms of the deficit in the Moscow Region in H1 2012, we observe a South-West of vacant space and supply, the northern part of considerably higher level of completions. During South more than 320,000 sq m of quality the Moscow region is hit hard. As for commercial this period, Total area of H2 2012-2013 deve South-East space came in the market that is almost terms, it should be noted that base rental rates are warehouse higher here than in any other parts of the Moscow equivalent to the total area of development in East Total area of 2011-H1 2012 deve Region and reach USD 157/sq m/year, while the 2011. Sustainable demand from tenants had a North-East average rental rate in other districts USD significant influence on the development pace. In North 135/sq m/year. 2010-2011 this demand considerably exceeded the volume of newly delivered warehouse space 000 000 0 1 000 000 2

KEY MARKET INDICATORS OVERVIEW

Existing stock New development New supply, take up, vacancy rate
350
Thousand, sq m

300 250 200 150 100 50 0

2012 .

2%

16%

20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Vacancy Rate

Source: CBRE

New Supply

Take Up
42%

40%

Vacancy rate

DEMAND

Take-up by business sectors

Due to the long-term deficit of high quality premises we observed steady demand from tenants. Take-up came mainly from retail and logistics companies.
USD / sq m / year

160 140 120 100 80 60 40 20 0

Source: CBRE
Retail 42%

Other 2%

Stable take-up of 2010-2011 continued to grow in H1 2012. The main players of the retail sector which accounts for a significant share on the warehouse market continue their expansion in various regions of the Russian Federation. This fact gives cause to expect strong demand for new warehouse space which will business sectors be represented through the expansion of both logistics companies which provide their services for the retail sector and those representing the retail sector.
MarketView H1 2012

Production 16% Logistics/3PL 40%

18

North North

COMMERCIAL TERMS
Thousand, sq m Thousand, sq m

0 1 000 000 2 000 000 0 1 000 000 2 000 000 Existing stock New development Existing stock New development

350 Low vacancy makes rental rates remain at the same 350 300 level. Nevertheless, in some parts of the Moscow 300 250 Region the highest possible rental rates are more 250 200 than USD 150/sq m/year. 200 150 150 100 By the end of H1 2012, the average rental rates 100 50 were USD 135/sq m/year while the highest base 50 0 rents in the north of the Moscow Region were over 0

20% USD 150/sq m/year. Operating expenses for 20% 18% modern logistics parks located within 50 km from 18% 16% 16% MKAD remain in the range of USD 14% 30-40/sq m/year 14% 12% for dry warehouses. For chilled/frozen Class A 12% 10% 10% warehouses the OpEx rates might 8% reach USD 8% 6% 53/sq m/year. The base rents for6% office space in 4% 4% 2% warehouse complexes of the Moscow Region vary 2% 0% from USD 250 up to USD 400/sq m/year. 0%

Vacancy Rate Vacancy Rate

Prime Yield, %
30 25

New Supply New Supply

Take Up Take Up

Average base rent, vacancy rate

160 160 140 140 120 120 100 100 80 18% 18% 16% 16% 14% 14% 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0%

Vacancy rate Vacancy rate

30 25

20

20
15

USD / sq m / year USD / sq m / year

15
10

10
5

80 60 60 40 40 20 20 0 0

5
0

0
Average base rent Average base rent Source: CBRE Vacancy rate Vacancy rate

Source: CBRE

BUILD-TO-SUIT FORMAT ON THE WAREHOUSE MARKET

Growing demand for build-to-suit properties. The share of build-to-suit delivery is likely to increase. Many retail companies choose to purchase or lease build-to-suit warehouse premises which they can purchase in future rather than lease them for a certain period of time. The beginning of 2011 witnessed a big deal closed by Raven Russia and X5 Retail Group in the course of which nearly half of the premises were equipped in accordance with tenants needs. Moreover, starting from Q3 2011, there were many build-to-suit deals done: DIXY and PNK Group signed an agreement to develop a distribution center in Vnukovo with total area of 44,000 sq m, and early this year PNK Group sold a build-to-suit distribution center in
MarketView H1 2012

Vnukovo with total area of 50,000 sq m to the TsenterObuv Company. Build-to-suit transactions for H1 accounted for more than 30% of the total leased space. Such a feature is common not only in Russia but in other Eastern European countries, for instance, in Poland where the share of build-to-suit projects totaled approximately 40% in 2011. The main retail companies, such as X5 Retail Group, along with their expansion plans also tend to use their own logistic services in order to increase their supply chains efficiency and this, in its turn, results in necessity to develop a great number of distribution centers which may fully meet landlords requirements. Such development of the retail sector may lead to further increase of build-to-suit projects in the Russian market.

19

SUPPLY
In H2 2012 and 2013 total new delivery might achieve 880,000 sq m. Most of them will be introduced in North-West of Moscow, which currently suffers from deficit of qualitative warehouses. Major developers are PNK Group, Infrastroy, and TGC Group. All players have extensive experience in this segment. Development of Class A qualitative warehouses is concentrated in a narrow circle of specialized players. It is them who already delivered all the largest objects during last few years and will do it in H2 2012 and 2013. List of major players consists of PNK Group, Infrastroy, and MLP. Relatively small projects of other companies account for only 15-20% of delivered volumes. Despite economic turbulence in eurozone Russian market remains quite active. In the next 1,5 years we expect to see the growing volumes of a new delivery, which may reach 880,000 sq m. Development in Moscow and Moscow Region by companies in 2011-2012 and forecast up to 2014, thousand sq m
400 350 300 250 200 150 100 50 0

Total area of H2 2012-2013 development (F) Total area of 2011-H1 2012 development
Source: CBRE

Current pipeline from market leaders includes completion of the next construction phases in such projects as000 000 0 1 South Gates industrial park (Radius 2 000 000 Group), Klimovsk logistics park (Raven Russia), Existing stock New development and Dmitrov logistics park (Ghelamco). Secondtier developers also announced a number of new projects, including Radumlia logistics complex (TGC).

20% 18% Big Box Projects delivered in Q2 2012 16% 14% 12% Total area Location Project 10% sq m 8% 6% Dmitrov Logistics park 61,601 30 km from MKAD on Dmitrovskoe Highway 4% 2% 0%

Vacancy Rate

Developer Ghelamco Istra Logistic Gruenestadt

Vnukovo Logistic Gruenestadt

20,000 15,183

20 km from MKAD on Borovskoe Highway

New Supply

Take Up

16 km from MKAD on Leningradskoe Highway

Vacancy rate

160 140 SD / sq m / year 120 100 80 60 40

MarketView H1 2012

18% 16% 14% 12% 10% 8% 6%

20

Geographic structure of a new delivery follows demand migration. Currently major projects are realized in the southern part of the Moscow Region. But in 2013 we expect considerable growth of construction activity in the North. A number of leading players explicitly demonstrated their interest to the northern part of Moscow. E.g. PNK Group acquired a 140 ha land plot for construction of warehouses, Raven Russia is actively looking for interesting opportunities and already purchased a warehouse in Sholokhovo and a land plot on Novorizhskoe Highway also for warehouse development . With these facts in mind we can conclude that the leading players are sensitive to demand evolution and ready to meet market expectations.

Existing stock & new delivery in H2 2012 by directions, sq m

Inside Moscow North-West West South-West South South-East East North-East North 0 Existing stock 1 000 000 2 000 000

New development

Source: CBRE
350 250 200 150 100 50 0

Project PNK-Vnukovo PNK-Chekhov 2 Infrastroy Bykovo

Total area sq m 210,000 136,080 94,983

Location

Thousand, sq m

Significant Big Box Projects announced as due for delivery in Q3Q4 2012 and Q1 2013 300 Developer PNK Group PNK Group Infrastroy Radius Group Raven Russia
USD / sq m / year
Take Up

20 km from MKAD on Borovskoe Highway 50 km from MKAD on Simferopolskoe Highway 19 km from MKAD on Novoryazanskoe New Supply Highway 30 km from MKAD on M4 (Don) Highway
30

South Gate Industrial park 51,886 Klimovsk Logistics Park Atlant park 16,000 15,000

21 km from MKAD on Simferopolskoe Highway 25

160 140 120 100 80 60 40 20 0

26 km from20 MKAD on Gorkovskoe Highway Atlant-Metalloplast

15

OUTLOOK

10 5

Boost of supply in 2013 may cause opportunistic 0 significant increase in vacant space, although some increase in vacancy rate may take place. In this growth of vacancy rates up to 5-7% as relatively situation average rental rates will follow flat trajectory large new supply will not be absorbed by demand with minor deviations from current level. quickly enough. Nonetheless, this possible increase Further announced additional new supply in H1 2013, in vacancy rate due to it temporary character will not which is expected be as high as 480,000 initiate significant downward pressure on rental rates. sq m, may cause temporary market saturation and possible growth of vacancy rate up to 5-7%. In this In H2 2012 we expect more than 400,000 sq m of case some downward pressure on rental rates will be Class A warehouses to be delivered. This supply will reasonable. be met by high current demand and will not lead to

MarketView H1 2012

21

o D ff

Vasiliy Grigoriev Analyst of Industrial Research [Link]@[Link]

Service lines:

Ivan Gubochkin Managing Director Capital Markets [Link]@[Link] Elena Denisova Director Head of Office Agency [Link]@[Link]

V A CA N

Claudia Chistova Head of Office Research [Link]@[Link]

YN er A M

IC

Valentin Gavrilov Director Research Department [Link]@[Link]

CY

CA R P A IT ES TES AL I

IN

Disclaimer 2012 CBRE Information herein has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy and completeness. This information is designed exclusively for use by CBRE clients or potential clients and does not constitute any part of an offer or contract. Information and recommendations shall not be used for commercial purposes like sale, publication in mass media or distribution in Internet, and cannot be reproduced without prior written permission of CBRE. CBRE shall not be liable for any projections, opinions, assumptions, estimates or decisions made by any third parties on the basis of information provided herein. 2012. CB Richard Ellis, LLC. All rights reserved

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Lance Pilant Director Industrial & Logistics Agency Services [Link] @[Link]

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