Quantity of office market supply growing in Minsk

Last year was perhaps the most successful for the office market in the Belarusian capital. According to Colliers International, one of the leading international real estate firms serving the Minsk market, out of the 360,000 sqm of office space claimed to be commissioned (in terms of gross leasable area, or GLA), there were actually 212,000 sqm in 19 new sites commissioned, or about 60 percent of the declared areas. This is a marked improvement. Previously, the share of commissioned commercial property totaled 35-40 percent of the total declared area.

In 2014, the commercial real estate market grew in general by more than 30 percent. The market capacity (in terms of GLA) at the beginning of 2015 exceeded 750,000 sqm. At the same time, Colliers International analysts say that more than 50 percent of the commissioned GLA was for Class B1 office space, which is markedly dissimilar from the situation in the new office building market in previous years when Class B2 property dominated. The qualitative growth in the market was primarily the result of growth in the number of projects implemented by developers using their own capital rather than using the money from future owners.

Lack of quality offices

Despite the increase in supply last year, there is still a need for certain categories of offices in Minsk. The office market situation is in stark contrast to the situation with hotels (see our article). Right now, there are too many luxury hotels in Minsk for the market, but the city needs more modest accommodation. For offices, it is the other way round. Minsk still has only a few Class A office buildings but a huge number of Class B structures.

This situation, however, is changing in 2015. “It is possible that there will be new Class A structures,” said Denis Chetverikov, a Director of the Consulting and Analysis Department of Colliers International in Minsk. "In any case, according to the preliminary statements made by the developers, the need for this class will be met by the ‘Dana Mall’ business center (near Metro Uschod), and the ‘Kempinski’ complex (near Metro Ploshcha Pyeramohi). There’s a chance that this class will be found also in the ‘Kiroff’ business center (at Dinamo Stadium near Metro Ploshcha Lyenina), but the developer refused to disclose the detailed parameters of the project, so it’s difficult to confirm or refute the info."

Risk of devaluation

In addition to the market dominance of Class B2 structures, another Minsk trend, according to analysts, is an impending office market slowdown. This will be the result of recent, and still ongoing, devaluation of the Belarusian rouble and euro against the US dollar.

Why is this a problem? As Denis Chetverikov explains, rents in Belarus are linked to the euro, while developer liabilities are mostly payable in US dollars.
There is also another consideration for developers, and that is the intention of Belarusian state financial authorities to link rental rates to the current value of the Belarusian rouble in order to remove market dependence on the US dollar. However, according to the analysts of Colliers International, this could create significant issues in the financial management of projects.

First, investors will be unable to adequately assess the prospects for long-term investments in Belarus. Typically, payback periods for office real estate projects range around 8 - 13 years. This means that, given the time for the construction and commissioning, the investor should have an accurate financial projection for at least the next 10-15 years.

"At the moment it’s impossible to predict inflation and changes of rental rates in roubles even for the 1-3 year range,” experts note. “As for any 10-to-15-year forecast, such prognoses are devoid of meaning."
Second, in the current situation, given the ruble’s instability and the period of repayment required for development projects, local banks are unlikely to lend funds for real estate projects.

As a result, lease agreements are most likely to be signed for short periods only because of unstable rates resulting from inflation and the frequent need for indexation. This might be the reason that major international operators would rather delay their projects at the moment, which means that the market will be dominated by small lenders in the near future.

Prices will drop

According to Colliers International data, as of the end of January, the rates for Class A office space ranged up to €30-34 (per 1 sqm without VAT) and for Class "B1" (B+) offices - €18-24. For Class "B2" (B), the rates vary even more, which is understandable as it is the most represented class in terms of volume and geography, and these rates range from €8-17 per sqm without VAT. There are even instances when Class "B2" properties become rate-competitive with "B1" space owing to the facility’s favourable location.

These rates will reduce if there is further weakening of the euro, as has been mentioned earlier, and this will have a negative impact on the profitability of construction projects for commercial real estate. This also may affect the implementation of new projects in general.

Currently, there are quite a large number of projects on the market in Minsk that have come into existence with the assistance of foreign currency loans. This factor may prevent future sharp declines in rental rates. However, owners of low-quality structures and properties in less-profitable locations will still be faced with lowering their rates significantly to stay competitive.

Denis Chetverikov says that he has observed already, just in the month of January, a downward change in commercial rental rates. "The rents (or at least, the offering price) in some buildings are the same as they had been previously,” he said, “but in other buildings of the same class of quality, the rent has already been adjusted downward, based on new conditions that are prevailing in the market.”

Natalia Novikova, project manager for commercial property at real estate agency “Tvoya Stolitsa”, also noticed that the owners of both new and old business centres have already lowered their rates, provided rent-free periods to entice clients, and offered a convenient payment schedule.

"Lessors who are unwilling to put up with the market realities face the risk of a higher level of vacancies," Novikova observed.

Outlook for 2015

During the upcoming year, it is predicted that around 130-170,000 sqm of new office buildings will be put into operation in Minsk. Such forecasts are made by analysts who evaluate market prospects in the context of the Belarusian ruble weakening and other reductions in investment attractiveness. If the forecasts are correct, the total area of new office space will be 30-40 percent less this year than 2014.

However, despite the qualitative growth of the commercial real estate market, office facilities built using schemes for participatory construction will continue to dominate this year. Their share in the total volume still will exceed 50 percent. As such, Class B2 offices will continue to dominate among structures commissioned in 2015.

Novikova predicts that the office property market in Minsk might even increase this year by more than the 170,000 sqm that others have predicted. But other specialists doubt this.

Chetverikov, for instance, thinks that “in the current situation, the risk of commissioning dates being postponed increases considerably: it’s become harder for developers to obtain loans and investments, and given the fact that many projects are being implemented with the involvement of shareholders in participatory construction of buildings, the discipline of payments in such projects is even more vague.”

As a result, even taking into account the fact that a large percentage of new buildings are in the final stages of construction, the market in 2015 will still only barely produce about 130,000 sqm of new office space, Chetverikov predicts.

Article published on 09.03.2015
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