Hines Marches into Moscow

A Hines affiliate has invested in prime office assets in Russia.

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A Hines affiliate, the Hines Russia & Poland Fund, and Amsterdam-based PPF Real Estate Holding B.V. have jointly acquired Metropolis Office Buildings I and III in Moscow, Hines announced Monday. Financials on the deal were not released.

The two buildings total more than 56,000 leasable square meters (603,000 square feet) of Class A office space with “almost full occupancy,” according to Hines, which declined to comment further about the transaction or the property. They are part of the Metropolis Office and Shopping Complex, which comprises three office buildings and a shopping mall and was built in 2009.

The development is in the northern part of Moscow on the main route from Sheremetevo airport to the city center. The two buildings purchased by Hines and PPF reportedly are occupied by more than 40 prime commercial tenants.

“We view this transaction as a first step in establishing a long-term partnership between PPF Real Estate and Hines and exploring other investment opportunities within Russian real estate sector,” Jiri Tosek, CEO of PPF Real Estate Holding, said in a prepared statement.

Under the influence of weakening demand and extremely strong supply, Moscow office prices have declined by 35 to 40 percent since the beginning of 2014, Andrey Novikov, managing director of capital markets/Russia for CBRE, told Commercial Property Executive.

“However, as we look at it now in mid-2015, the situation seems to be stabilizing,” with the development pipeline decreasing through 2017, he added. “As a result, we view rental rates as near their cyclical low, with vacancy near a cyclical high.”

“Potential asset price growth is estimated at 50 percent or more in the next two to three years, which is pretty attractive for investors,” Novikov concluded. “The risks are still there: Oil price and geopolitical situation changes might lead to additional rounds of decline in rental rates. However, given the expected sharp decrease in supply, the potential of this decline is not perceived as very high.”

 

Moscow’s 37.7-million-square-foot Class A office market is averaging a vacancy of a whopping 27.3 percent, according to a first-quarter report from Colliers International. Worse, the report notes, tenant demand currently is focusing on Class B+ space. Colliers estimates the average sale price of Class A and B+ buildings in central Moscow at $6,500 to $7,500 per square meter, or about $600 to 695 per square foot.

A first-quarter report from Knight Frank warns of a pending recession in Russia, based in part on a forecast contraction of GDP by about 3 percent this year. The majority of office building sales in Moscow, the report suggests, will be driven by “[f]oreign investors with a high-risk appetite.”