The 2018 market analysis shows that the commercial real estate market in Moscow is slowly but surely recovering. The low rate of office premises construction has prodded many businesses to consider the existing supply, including in New Moscow – the most recently incorporated areas. The owners of retail properties continue trying new formats or gastronomic concepts, trying to entertain potential visitors. In 2019, we expect further development of these positive trends.
As of today, developers have announced the completion of 382,000 sq. m. of offices. It is possible that only half of the facilities will be used. Moreover, most of them are located outside the Third Transport Ring. The shortage of high-quality office facilities will persist in the center of Moscow, so the realization of demand is possible only through organizing co-working centers and rotation of tenants.
In general, the demand for offices in 2019 will remain at the 2018 level. Gradually, small and medium-sized companies will erode the supply that exists outside the Third Transport Ring, closer to the Moscow Ring Road, and in the New Moscow areas, thereby optimizing their office expenses. For example, in New Moscow, high-quality class A and B + office buildings with good transport accessibility (such as Rumyantsevo or G10 business centers) are offered at discounted rates. However, with the demand still high and the new supply low, the lease rates can grow by another 5%, according to our estimates.
Buying some 50 sq. m. of office space in one of the business centers and leasing it out could be a good deal for investors. With the cost around RUR 7 mio ($107K) – there are a lot of such offers on the market – the investor will have a monthly income of RUR80K-85K ($1,200-$1,300), at a rate of RUR20K ($305) / sq. m/year. The investment will begin yielding profit in 7-8 years, which corresponds to a yield of 12.5-14% per annum. It is even possible to find offers with a payback in 6 years (yield at 17% per annum).
Due to a change in consumer behavior, the trend to build smaller shopping centers in residential areas will continue in 2019; moreover, the city authorities are stimulating the development of this format, trying to involve all segments of the population in the urban cultural life. Modern small-size facilities do not just offer products or services, but try to stir feelings and emotions in their target audience. Therefore, these shopping centers include tiny farmers’ markets, host various exhibitions, workshops and performances. They also provide the local residents with public space for various events and subcultures. As for classic shopping centers, they will continue to fill their premises with interesting fashion operators, entertainment and gastronomic concepts.
As regards street retail, we expect a rent rate growth within 10-15% for commercially appealing locations, and a slight correction of up to 5% for locations with low traffic flow.
We advise you to pay attention to commercial premises located in residential complexes. At the beginning of new housing projects’ sale, a considerable discount is often offered at the construction stage, but here you should remember that a customer will be able to receive stable rental payment not sooner than in six months after the facility is commissioned. Yet, many housing complexes are built in locations where commercial activity is low, with future tenants having a chance to skim the cream off. High density premises with high traffic flow usually get a quick sale; most popular are those rented for beauty salons, pharmacies, food shops, and coffeehouses. Also popular are the formats potentially in demand among future residents, such as various shops, sports facilities, children’s development centers, dental and medical centers, and many others. Also, certain housing complexes offer commercial premises with existing tenants: for instance, the Krasnogorsky housing complex offers a premise of 35 sq.m. with a tenant and an existing rental flow of RUR 32K ($490) per months for RUR 3.2 mio ($48,750).
As can be seen, this year Moscow’s commercial real estate market is appealing both for investing and preserving money savings. However, before purchasing a premise, you should have a clear understanding of whether these investments are going to be long-term or short-term and see the degree of involvement in property managing. You should assess the current and prospective traffic and then compare the cost of the lot with potential rental income.
By Vadim Kashkin, head of commercial property department at NDV – Real Estate