Vedomosti

It is not just Sochi, but many other parts of the Krasnodar region that offer attractive investment opportunities.

With the announ-cement that Sochi will host the 2014 Winter Olympic Games arrived the promise of significant public investment in building facilities and related infrastructure for the Olympics, which in turn has boosted investor interest in Sochi and the greater Krasnodar region. Many investors and real estate developers are currently assessing the potential opportunities that have arisen in the local market.

Krasnodar’s regional lure

When they think of Sochi and the Krasnodar region, most foreigners imagine simply downhill skiing or sunny beach resorts on the Black Sea. But the region arguably has quite a lot more to offer.

The Krasnodar region is approximately equal in size to the Czech Republic, with the eponymous “millionik” city of Krasnodar as its capital. Krasnodar city is consistently rated as having one of the best business climates in Russia and over recent years has been a focus for a number of high-profile national real estate ventures. The prime tourist destinations of Sochi, Anapa, Gelendzhik and Adler provide some of the aforementioned seaside retreats and decent access to some of Russia’s top ski slopes. Equally, the regional ports of Novorossiysk and Tuapse are among the country’s busiest, each focusing on different types of cargo.

Development in the region, which is being sponsored at both the federal and regional governmental levels, encompasses building facilities for the Olympics, as well as promoting Sochi as a tourist center. Although activity has been massively slowed of late through the ban on Russian grain exports, long-term aims remain for the expansion of Novorossiysk’s port capacity to cater to expected general cargo growth.

Real estate market trends

The real estate market in the Krasnodar region is showing signs of stabilization following the crisis-driven decline in late 2008 and 2009. As a result of this stabilization, developers and investors are showing renewed interest, which so far is predominately focused on the cities of Krasnodar, Sochi and Novorossiysk. Moreover, the growing interest in real estate reflects each city’s individual profile and their future development opportunities.

Land price

Just as across the whole of Russia, the price of land in the region varies significantly depending on its planned usage. Agricultural land, when the total plot available for sale is over 100 hectares, is currently priced between 50,000 to 80,000 rubles ($1,600 to $2,600) per hectare. Nonetheless, agricultural land suitable for vineyards can fetch prices of up to 300,000 to 450,000 rubles per hectare, depending on the location and size of the plot. We have noted that land suitable for growing vines has started to attract the interest of foreign investors looking to establish a presence in Russia.

Since the announcement in 2007 of Sochi as the site for the Olympics, prices for Sochi land plots have more than tripled in value. With an improving economic climate and growing demand, land prices since early 2010 have increased by a further 5 percent to 10 percent.

Office properties

Consistent with other regions in Russia, commercial office space in the Krasnodar region is dominated by offices built either into or as annexes of existing residential buildings, Soviet-era administrative buildings, or the facilities of defunct or still active scientific research institutes. In the majority of cases, these types of facilities are rated Class C. The development of new commercial offices, which meet a definitively higher standard, has been limited to business centers, which are built on the whole by large Russian businesses to house their own employees.

Those real estate developers and investors who have brought new Class B and B-plus commercial office space to market in recent years have found only limited interest from among Russian companies. This is due to a range of factors, including the generally high rental income expectations of many property owners amid a market dominated by lower-quality properties, as well as the lack of pressure from employees for an improved working environment.

In Krasnodar city itself, depending on size and location, Class A offices are currently available for $220 to $550 per square meter and Class B offices for $130 to $260 per square meter. Sochi’s office environment looks very different, however, as the sector is largely considered undeveloped with most available office space still housed in outdated administrative buildings.

There has been no significant activity with regards to new real estate developments during the early part of this year. Commercial office space developers have almost universally focused once again on projects in Moscow and St. Petersburg, and the consensus in the market is that the Krasnodar region will not see any significant revival of interest in real estate development for at least another two to three years.

Regional retail

Prior to the financial crisis, retail properties represented the single fastest-growing segment within the region’s commercial real estate market. The segment attracted both regional and national-level developers who were active in building large-scale shopping and entertainment complexes in Krasnodar city. As a result, the city is now believed to have reached something of a saturation point for this type of shopping complex.

In the current market, retail space in Krasnodar city is being leased at annual rates of $200 per square meter to anchor tenants, $400 to $600 per square meter to mini-anchor tenants, and $600 to $1,300 per square meter to ordinary tenants, while for arcade locations it is $2,500 per square meter.

The cities of Sochi and Novorossiysk, however, are considered to be virtually undeveloped in terms of modern shopping center formats. The majority of shopping centers located in these cities are generally very small in size when compared to other similarly sized cities elsewhere in Russia. Based on experience in other regional cities, modern shopping center formats appear attractive to many shoppers, as well as domestic and foreign retailers.

Black Sea hoteliers

The cities of Sochi (and neighboring Adler), Anapa, Tuapse and Gelendzhik serve as the region’s main tourist resort cities. In addition, Soviet-era health resorts and sanatoriums located throughout the region are popular with tourists.

Similar to other real estate segments, the hotel sector is enjoying fresh interest thanks to the stimulus coming from the Olympics: New hotels are under development and new hotel concepts are being introduced. Currently, Sochi boasts more than 1,500 hotel rooms in the 4-star and 5-star categories. This number is expected to increase in the coming years following recent market announcements, predominately by Russian developers. In most cases, these additional rooms ought to come online in late 2011.

While new hotel development has boosted interest across a broad spectrum of real estate players, there are two main, opposing points of view. Some developers believe that the current wave of hotel development projects are essentially short-term in nature and will not be sustainable after the Olympics, given the current demand from tourism or business.

Other developers challenge this view, especially those who believe that the region will see a significant boost in overall investment, thus helping to sustain hotel demand even after the Olympics end.

Consistent with most of regional Russia, there is a lack of good quality hotel rooms in the Krasnodar region. For example, in Novorossiysk the entire city is served by only two hotels with a rating of three stars or higher.

Still wary over warehousing

The warehouse segment in the Krasnodar Region has seen little development, unlike Moscow and St. Petersburg. Most existing properties in the region are Class C or D facilities that do not meet the requirements of businesses expanding in the region. Rental rates for modern warehouse facilities are comparable to both Moscow and St. Petersburg with tenants paying on average $80 to $100 per square meter.

Currently, the greatest demand from tenants is for smaller spaces within a multifunctional complex, which offers both warehouse and office space in one facility. Within the region, the most promising location for development of a modern warehouse facility is Krasnodar city, reflecting the city’s convenient location for businesses as a hub serving the entire region.

Residential properties

Conversely — and good news for some developers — residential is currently a segment attracting interest among Russian developers, especially in Krasnodar city. In 2009, there were 800,000 square meters of residential space completed in Krasnodar city, albeit down from 1.2 million square meters in 2008. The residential market is recovering as prices stabilize and industry players see a reasonable probability of price increases in the short term. Currently, in Krasnodar city, the average prices for residential property are 37,700 rubles per square meter for economy class, 47,600 rubles per square meter for business class and 77,800 rubles per square meter for elite class.

Foreign investment returns

In the first half of 2010, the main foreign investors in the Krasnodar region came from Germany, the United Kingdom, the Netherlands and Cyprus, representing 92 percent of total foreign investment in the region. The total amount of foreign investment during the first half of 2010 was $254.5 million, or 40 percent higher than in the first half of 2009. This represents a positive sign for the region and its prospects.