Research & Forecast Report Office market Supply The rate of new construction is still declining, which is confirmed by quarterly figures for new completions. During January-September 2016, 44% less space was delivered compared to the same period in 2015 (252,200 sq m against 467,900 sq m). Contrary to the traditional uptick in activity in Q3 2016, only five business centres with a total leasable area of 82,000 sq m were completed, which is 66% less in comparison with the figures for Q3 2015. Since the beginning of the year, completions have been represented mainly by Class B+/- properties, the share of which accounted for 87% of total new supply. The Class A segment increased by 34,000 sq m and was composed of the G10 and Krasina 3 office buildings. The Central Business District (CBD) saw most new properties – it accounted for 50% of total completions from the beginning of the year. Around 19% of new facilities were completed in the Leningradskiy submarket and in the south of Moscow. The main volume of new premises delivered in Q3 2016 was formed in the Leningradskiy submarket (50%) and in the Tulskiy submarket (31%).

Key market indicators INDICATORS

Q1-Q3 2015

Q1-Q3 2016

16.4

16.9

Total stock, m sq m Class А

3.7

3.9

Class В

12.7

13.1

Completions, thousand sq m

467.9

252.2

Take-up, thousand sq m

760.2

608.3

Vacancy rate, %

15.0

13.3

Class А

26.5

18.5

Class В

11.6

11.7

531

428

Class А

661

576

Class В

372

303

Weighted average rental rates in CBD*, $/sq m/year

*Central Business District Source: Colliers International

Completions 1,6 1,4

Buildings completed in Q3 2016 PROPERTY

CLASS

DEVELOPER / OWNER

OFFICE AREA, SQ M

Arena CSKA

B+

CSKA

40,900

Danilovskaya Manufactura, building Meshcherin

B+

KR Properties

25,800

Krasina 3

A

Union

8,500

Pekin Gardens

B+

HalsDevelopment

4,300

18 bldg 4 Nagornaya St

B+

n/a

2,600

m sq m of GLA

1,2 -50% 1,0 0,8 0,6

-42%

0,4 0,2

Source: Colliers International

0,0 2011 Q1

2012 Q2

Q3

Source: Colliers International

2013 Q4

2014

2015

Q4 2016 Forecast

2016

After an active previous quarter, demand became more limited in Q3 2016. The volume of leased and purchased office space decreased in the quarter by approximately 11% compared to April-June and amounted to 201,000 sq m. A similar decrease was also observed in annual data (in Q3 2015 – 227,600 sq m). Renewals and renegotiations of lease terms continued in Q3 2016. At the same time, we can see the activity of large companies moving to new offices on more favourable terms (including the expansion of occupied space). Also, since the beginning of the year public companies and financial institutions remain strong demand drivers. Current demand by the type of transaction shows a higher level of acquisition of offices compared to the previous year. The regularity of such transactions is certainly lower than during pre-crisis periods, but since the beginning of 2016, 20% of transactions were in the sales segment, while the share was no more than 6% in the same period in 2015. In Q3 2016, 25% more office space was purchased than in Q3 2015.

Take-up by type of deal 600 500

thousand sq m

Demand

400 300 200 100 0 Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3 2011

2012

2013 Lease

2014

Source: Colliers International

Take-up distribution by sector in Q3 2016 1% 13%

1% 1%

In Q3 2016, manufacturing companies were the most active and they accounted for the largest volume of demand for office space – 33%. IT&T companies formed 19% of take-up, while companies from the retail and professional services sectors each accounted for around 12% of the total new take-up.

33% 8%

12% 12%

19%

The territorial structure of demand maintains the distribution of recent years, with the exception of MIBC Moscow City, the popularity of which significantly increased in 2016. Thus, the greatest demand was in the CBD, which accounted for 32% of the total volume of transactions from the beginning of the year, which is comparable to the share of the CBD in 2014-2015. Due to the high demand, this area has the lowest vacancy rate in the market. The next most popular location is the west of Moscow and MIBC Moscow City, where 14% and 10% were leased and purchased respectively.

Source: Colliers International

Vacant premises

Take-up distribution by submarket

Manufacturing IT & Telecoms Retail Professional services Banking, Insurance & Investment Pharmacy and life sciences Construction/Development Energy/Industrial Other* *Other sectors include individual entrepreneurs, media

250 200

thousand sq m

Significant changes were observed in the vacancy rate. The average rate declined by 1.6 percentage points Q-o-Q from 14.9% to 13.3%. Nevertheless, the market remains at an imbalance of supply and demand, resulting in a high volume of available space for rent.

150 100 50 0

Q1 2016

Source: Colliers International

2

2015

Sale

Office Market Overview | Q3 2016 | Moscow | Colliers International

Q2 2016

Q3 2016

2016

The main volumes of available vacant space are distributed in CBD submarkets to the west and southwest where more than 46% or 1 million sq m of vacant space is concentrated. The highest vacancy rate was observed in the south-west (29.7%) and west (22.2%) outside the CBD. Within the CBD, vacancy rates decreased compared to Q2 2016 from 9% to 8%. Despite the fact that over three quarters vacancy declined substantially from 32% to 19% in MIBC Moscow City, this submarket is still second in Moscow after the CBD in terms of the volume of available Class A offices and has about 160,000 sq m of space available.

30%

27.3% 25.3% 24.6%

25%

20%

17.6% 16.4% 14.8%

18.5%

15.1%

15% 14.3%

11.6% 10.0%

9.6%

10%

11.7%

11.6% 7.2%

7.0%

4.0%

5%

4.1% 1.1%

0%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

In Class B+, the vacancy rate amounted to 14.2% while in Class B- this was 7.6%. The average decrease for the quarter was 1 p.p.

Vacancy rate by Class

2007

2008

2009

2010

2011

2012

Class A

2013

2014

2015

Vacant space distribution by submarket 500

35%

450

30%

400 25%

350 300

20%

250 15%

200

The significant amount of vacant space gives potential tenants a wide choice, but a reduction can be observed in the segment of large offices (with over 15,000 sq m), which is most evident in the search for ready-to-move-in facilities in quality business centres with a good location.

150

10%

100 5%

50 0

0%

Sale prices After the fall in prices in September 2014 and re-formatting to the rouble, asking rouble prices are about the same level.

In Q3 2016, client demand was concentrated in specific office segments and can be divided into three groups according to the most popular office sizes: 200-500 sq m, 1,000-2,000 sq m and 8,000-12,000 sq m.

A

B-

B+

Average vacancy rate, %

Source: Colliers International

Average sale prices by Class 10000 9000 8000 7000

$/sq m

Class A offices today cost around RUB240,000-350,000 per sq m depending on the distance and location. The average price for Class B+ varies in the range of RUB150,000-190,000 per sq m and for Class B- – RUB110,000-130,000 per sq m.

6000 5000 4000 3000 2000 1000 0

Class A

Source: Colliers International

3

2016

Class B

Source: Colliers International

thousand sq m

The current volume of vacant space is 2.3 million sq m, which includes 1.5 million sq m available in Class B+/and 0.7 million sq m in the Class A. The share of vacant Class A premises was 18.5% by the end of September 4 p.p. lower than the previous quarter. The reduction in the vacancy rate is due not only to the low growth of new supply and the absorption of premises against a background of lower rental rates, but mostly because of the transfer of large real estate assets to banks. Before the transition, buildings remained empty for a long time, but now they are regarded by their new owners as offices for their operations.

Office Market Overview | Q3 2016 | Moscow | Colliers International

Class B+

Class B-

More attractive prices are available further away from the CBD, near the Third Ring Road (TTR), where the average asking price was RUB180,000 per sq m for Class A and RUB150,000 per sq m for Class B+/-. Properties located between the TTR and the Moscow Ring Road (MKAD) are currently being offered at an average of RUB170,000 per sq m for Class A and RUB115,000-130,000 per sq m for Class B+/-.

Average sale prices by distance from the centre thousand RUB/sq m

The leading position in terms of price levels is taken by submarkets in the city centre at an average of RUB315,000 per sq m for Class A and RUB265,000275,000 per sq m for Class B +/-. The towers at MIBC Moscow City are offered in the range of RUB245,000450,000 per sq m.

400 350 300 250 200 150 100 50 0 BR-GR

In the current crisis, a distinctive feature of the sales market is the reduction of the number of options for enduser companies. The lack of quality supply is due to a number of factors, such as the "washout" of liquid supply during the pre-crisis period, the low volume of completions for sale and the withholding of certain assets by owners who are not ready to launch them in the current market conditions.

GR-TTR

A

830 830 855

830 790 785 760 750 700 650 560 560 471 410

The shift of asking rental rates from dollars to roubles continued: in the last three months the ratio of Сlass A supply priced in roubles vs dollars was 63:37, whereas this distribution had a proportion of 45:55 at the end of 2015. More than 95% of Class B+/ offices was priced in roubles. Besides, the rental rates in contracts signed in the pre-crisis period have still adjusted approaching the current market values.

370 370 406

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016

24 370 27 300 26 470 25 410 24 900 27 120 25 600 25 650 27 050 25 260 27 370 30 100 32 700 29 380 31 181 28 000 27 280 25 470 26 137

RUB/sq m/year

$/sq m/year

Source: Colliers International

Base rental rates for Class B offices 380 395

> The weighted average rental rate recalculated into dollars for Сlass A was $406/sq m/year and for Сlass B+/- premises it was $201/sq m/year.

430 430 490 470

> The weighted average rental rate recalculated into roubles for Сlass A was RUB26,137/sq m/year and for Сlass B+/- it was RUB12,935/sq m/year.

500 480 460 470 450

The majority of property owners are fixing the upper limit of the exchange rate band at the internal rate when concluding new lease contracts, which in fact means a further dollar rental rate decline by 15%.

355 295 300 245 210 190 200 201

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016

$/sq m/year

Source: Colliers International

4

B-

Base rental rates for Class A offices

800

In general, during the past three months asking rental rates denominated in US dollars and roubles have stabilised for new tenants. A slight increase in the weighted average level was recorded for Class A, but it is not a general market trend and only due to vacating previously occupied expensive offices.

B+

outside MKAD

Source: Colliers International

830

Rental rates

TTR-4TR Moscow-City 4TR-MKAD

Office Market Overview | Q3 2016 | Moscow | Colliers International

11 120 12 390 13 260 12 970 15 170 15 240 16 110 15 840 16 450 15 710 17 570 19 400 16 850 15 805 15 800 14 500 13 865 13 230 12 935

RUB/sq m/year

The rescheduling of completion dates for a number of large projects has corrected the expected completion volume in Q4 2016. Thus, the annual rate of completion growth will be lower than previously forecast, and will not exceed 450,000 sq m, which is 42% less than the volume of new construction in 2015. During last quarter the main activity will be concentrated in decentralised submarkets – 55%. The remaining 45% will be completed in the CBD. Although Q3 is widely accepted as a season of growth in business activity, companies are still sensitive to the current economic situation, which is confirmed by a decrease in demand. No recovery is expected for the rest of the year – the annual volume of closed transactions will be 25-30% lower than in 2015, i.e. about 650,000 sq m against 930,000 sq m.

Office space in Moscow City

In Сlass B+/-, we expect the preservation of rouble market dominance. Rental rates recalculated into dollars will remain dependent on exchange rates. Demand remains the main potential for rate growth, while the recovery of demand is determined by the rate of economic growth. Regarding the sales market, we do not expect office prices to increase at least until mid-2017. We also expect the formation of a more balanced market in terms of supply and demand, although the number of acquisition transactions will be moderate.

OFFICE AREA, SQ M

11

910,240

Class А

8

793,440

Class В+

3

116,800

4

466,200

Class А

3

365,200

Class В+

1

101,000

15

1,321,300

Completed

Under construction

Total Source: Colliers International

Vacancy rate, take-up and completions 3

At the current active level of demand and low volume of new supply, the vacancy rate will likely not exceed 13.4% in the Moscow market up to the end of 2016. Regarding vacant space in submarkets, it will depend on large tenants rotating and moving to new locations.

18 16.5 14.2

13.4 12

10.6 8.4 1

9.2

9 6

5.5 4.2

3 0

0

Take-up, m sq m Completions, m sq m Vacancy rate, %

Source: Colliers International

Top business centres expected for delivery in Moscow in Q4 2016 №

PROPERTY

CLASS

DEVELOPER

OFFICE AREA, SQ M

1

Neopolis business district

А

A-Store Estates

63,200

2

Oasis

B+

BIN Group

33,000

3

BC on 1/17 B. Pionerskaya St

A

JSC Helicopters of Russia

31,800

4

Kvadrat

B+

Lenhart Global

9,500

*Business centres are marked on the map, p. 5 Source: Colliers International

6

15 13.9

12.3

2

m sq m

We do not expect a significant change in rouble asking rates in the short term (until the end of 2016). In general, the correction of rates will be in the range of 5% for the year. Asking rental rates denominated in US dollars also will not change significantly.

NUMBER OF BUILDINGS

TYPE OF BUILDING

Office Market Overview | Q3 2016 | Moscow | Colliers International

%

Trends and forecast

554 offices in 66 countries on 6 continents United States: 153 Canada: 34 Latin America: 24 Asia Pacific: 231 EMEA: 112

$2.5

billion in annual revenue

185.8

million sq m under management

16,000

professionals and staff

Colliers International Russia 10 Presnenskaya Embankment BC Naberezhnaya Tower, Block C, 52 floor 123317 Moscow, Russia +7 495 258 5151 3 Volynsky Lane, 11th floor BC Northern Capital 191186 St. Petersburg, Russia +7 812 718 3618

Nikolay Kazanskiy Managing Partner [email protected] Vladimir Sergunin Partner [email protected] Stanislav Bibik Partner [email protected] Anna Nikandrova Partner [email protected] Amel Djerroudi Executive Director, Project Management&Building Consultancy [email protected] Vera Zimenkova Regional director of the departments of corporate solutions and office real estate [email protected] Andrey Kosarev General Director, St. Petersburg [email protected] Vladislav Nikolaev Regional Director, Strategic Consulting [email protected] Dmitry Romanov Regional Director, Valuation [email protected] Eleonora Bogdanova Business Development Director, Warehouse&Industrial [email protected] Kermen Mastiev Director, Sales&Acquisitions, Offices [email protected] Francois Nonnenmacher Director, Occupier Representation [email protected] Ekaterina Podlesnykh Head of Street Retail, Russia [email protected] Ekaterina Fonareva Director, Residential Moscow [email protected] Sayan Tsyrenov Director, Capital Markets [email protected] Olga Kozlitina Regional Director, Marketing&PR [email protected] Veronika Lezhneva Director, Research [email protected] Colliers International Group Inc. (NASDAQ and TSX: CIGI) is a global leader in commercial real estate services with more than 16,000 professionals operating from 554 offices in 66 countries. Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include brokerage, global corporate solutions, investment sales, project management and workplace solutions, property and asset management, consulting, valuation and appraisal services, and customized research and thought leadership. Colliers International has been ranked among the top 100 outsourcing firms by the International Association of Outsourcing Professionals’ Global Outsourcing for 10 consecutive years, more than any other real estate services firm. Colliers International opened its office in Russia in 1994, today the offices in Moscow and St. Petersburg has more than 250 employees. Colliers International in Russia is a member of the Russian Guild of Property Managers and Developers (RGUD), Russian Council of Green Building and Russian Council of Shopping Centres (RCSC), Russian Managers Association.

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Copyright © 2016 Colliers International The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

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