SUPPLY

At the beginning of July 2007, the total office space in class A and B business centres amounted to approximately 480 000 sq. m. In the first six months of 2007, new high-class office space totalling approximately 60 000 sq. m. was put into operation.

Table 1. Business Centres Put into Operation in First Six Months of 2007 (with area of more than 3 000 sq. m.)

Source: Colliers International

The period under review was marked with the delay of the opening dates for more than 100 000 sq. m. of office space announced to have been opened in the first six months of 2007. The first six months of 2007 saw the opening of over 10 000 sq. m. of class A offices and about 50 000 sq. m. of class B business centres, which highlights a slowing in the rate of putting new space into operation in comparison with the same period of the previous years ( see Table 1).

Figure 1. Increase in Class A and B Office Space, thousands of sq. m.

Source: Colliers International

When compared to the market structure as at the year beginning, the shares of class A and class B office space increased in equal proportions.

The market structure as at the end of June 2007 is shown in Figure2.

Figure 2. Distribution of Existing Business Centre Space by Class (as at End of June 2007)

Source: Colliers International

The Central District and the Petrogradsky District maintained their leading positions in terms of business centre supply. All in all, the four downtown districts (Centralny, Admiralteisky, Vasileostrovsky and Petrogradsky) accounted for more than half of all business centres in St. Petersburg.

Figure 3. Distribution of Existing Business Centre Space by District, %

Source: Colliers International

In 2007, a shift of construction activity towards areas outside the central core of St. Petersburg tends to continue, which can be explained by a lack of available land and congested traffic in the downtown area. This full futrherspur the development of business embankments - Vyborgskaya, Petrogradskaya, Sinopskaya, Aptekarskaya, Pirogovskaya, Sverdlovskaya and Ushakovskaya, providing tenants with new, less expensive and more comfortable office.

Figure 4. Distribution of Business Centre Space under Construction by District, %

Source: Colliers International

The trend of building class A business centers outside the downtown area of the city is worth mentioning. These are mostly office buildings integrated into such large-scale projects as New Quarter, Clover Plaza, and the development of the Pulkovo-3 business area.

Table 2. Certain Business Centres Scheduled to be Opened in the Second Half of 2007 (with space of more than 4 000 sq. m.)

Source: Colliers International

By the end of 2007, new class A and B office space of more than 270 000 sq. m. is expected to enter the market.

RENTAL RATES

The market for office real estate is characterized with the trend of separating operating and utilities expenses into a variable part of the rental rate. Among the existing office centres using a triple net system are such complexes as House of Sweden and River House. Operating expenses are also separated by a number of business centers under construction, such as Avenue and Austrian Business Centre. The Senator chain, the management company Bekar, Nobel, XIX Century and Severnaya Stolitsa are considering a switch to a triple net.

Against the background of increasing rental rates, the average vacancy level in high-class office centers remains low (below 4%), while business centers being at the final stage of construction often have a portfolio of potential tenants before the opening date.

Class A

For the first six months of 2007, asking rents for class A offices grew on the average by 3.3%. Asking rents for offices located in class A business centres range from $500 to $940 per sq. m. per year (including OPEX, net of VAT).

Figure 5. Average Vacancies and Rental Rates for Class A Offices

Source: Colliers International

Class B

For the period under review, asking rents for class B premises increased on the average by 3.6%, mainly due to the opening of new business centres. Rental rates for class B offices range from $300 to $580 per sq. m. per year (including OPEX, net of VAT).

Figure 6. Average Vacancies and Rental Rates for Class B Oficces

Source: Colliers International

It should be noted that most business centers continue to denominate their rental rates in Russian Roubles or conventional units, equivalent to the domestic currency, their share amounting to 57% (see Figure 7). A fairly large number of owners and management companies (32%) quote rents in US Dollars. As compared to the same period of the previous year, the number of lessors denominating rents in Euros went up, reaching 8%. Part of the lessors (3%) are still using the weighted average between a US Dollar and a Euro when determining rental rates.

Figure 7. Distribution of Business Centre Space by Denomination Currency of Asking Rents (classes A and B)

Source: Colliers International

DEMAND

Against the background of the ongoing demand for office space of 100-200 sq. m., there was an increase in the number of claims for larger blocks (from 1 000 sq. m.). This is partly connected with a search for available space by companies planning a relocation from class C business centres to be closed for reconstruction. Attention should be paid to the high level of tenant rotation renting offices in the downtown area. This is explained by the fact that their operating expenses are not always paid off by their businesses.
Large tenants include financial, insurance, legal, consulting and IT companies.
A number of large deals were made during the period under review.

Table 3. Major Leases in First Six Months of 2007

Source: Colliers International/ "St. Petersburg Real Estate and Construction 2007"

SIGNIFICANT EVENTS

• An important milestone was the signing of an agreement for the construction of Nevskaya Ratusha between ZAO "M", an affiliate of VTB Bank, and the City administration in March 2007. The project provides for the development of a 6 ha site at the place where the former Smirnov tram park was located. It will accommodate 300 000 sq. m. of class A and B offices.
• Bank Saint Petersburg and the developer Setl City announced a joint project - Business Quarters, providing for the construction of about 150 000 sq. m. of class A office space at 62 Malookhtinsky Prospekt.