‘We are likely to see an increase in rental rates in office real estate market of Kazan’

“This segment demonstrated stability in the first half of the year”

The office real estate market of Kazan has approached the current crisis with a shortage of supply, which has been observed over the past few years. Therefore, this segment demonstrated stability in the first half of the year, unlike, for example, retail real estate. Against the background of a nominal increase in rental rates (+13% compared to June of the previous year) and a decrease in the share of vacant premises in high-quality business centers of the city (-0,5%), owners report an indexation of rental rates. The average indexation rate was 8,5%, which, against the background of inflation since the beginning of the year at 15,39% (according to the Ministry of Economic Development as of 20 July, 2022), still indicates an actual reduction in rates.

The thing here is primarily in long-term lease agreements, for which the indexation amount is usually fixed, and not tied to the CPI. A much more important factor is that the rental rates for vacant premises in business centres are on average 25% higher than the rates for already concluded lease agreements. In the regional market, high-quality office space is mainly occupied by Russian and local companies. The share of international companies as tenants of business centres does not exceed 25%. At the same time, unlike the trading segment, these companies did not suspend their activities and by the end of May, most of them had registered as Russian. In Class A, only one termination with an international tenant was recorded, the place of which was almost immediately occupied by another tenant. There has also been an increase in demand from federal companies for the regional office real estate market: as part of cost reduction, offices from Moscow and St. Petersburg are being transferred to the regions.

“The average rate in Class A has reached 1,488 rubles/sq. m per month”

At the end of May 2022, a major transaction in the office real estate market took place in Kazan. The Kremlin Plaza Business Centre has been replenished with another tenant. More than 1,500 sq. m . m was rented by Avito. The owner of the building has started finishing works on the instructions of the new tenant and in early autumn Avito will moves into the new office. Another major transaction took place in the Victory Park business centre. There, an office space with an area of 400 square metres was leased to Voxel.

The total supply of high-quality offices in Kazan today is 558 thousand square metres, the leased area is 425 thousand square metres. The average rate in class A reached 1,488 rubles/sq. m per month (an increase of 8,2% by the end of last year); in class B+ — 1,223 rubles/sq. m per month (an increase of 7,2%); in class B — 793 rubles/sq. m per month (an increase of 1,3%). The vacancy rate in Class A and B business centres is 5.5% (a decrease of 0,6% by the end of the previous year). The current market situation is characterised by a shortage of quality supply, but there is no need to talk about the construction of new projects in the near future.

Class B and C business centres may be sold in parts

The increase in the rental rate does not keep pace with the increase in the cost of construction, which has been accelerated by the high rate of construction of residential projects in the last 5 years. Thus, the financial model of new projects does not fit into the requested return of investors and is below 10% per annum. Therefore we are likely to see an increase in rental rates in office real estate market of Kazan. The trend of market development in the next 2 years may be an increase in the number of offers for the sale of small office blocks in Class B and C business centres, where owners, wanting to get out of their paid-off assets, will sell objects not entirely, but dividing them into small lots for investors with a purchase budget of 3 million rubles or using tools collective investments. At the same time, the sale of objects in this way raises the average lot check and increases the pace of asset sales. The construction of new high-quality facilities in the office market is possible after the stabilisation of the economic situation and with a further increase in rental rates.

Summarising, among the key events and phenomena of the first half of 2022 in the office real estate market, we can note the preservation of a low share of vacant premises in the office market. At the same time, in all high-quality business centres, rates under existing lease agreements have been indexed by an average of 8,5%. In turn, rental rates for vacant premises are by 15-30% higher than the rates under existing lease agreements. Indexations under new lease agreements are equivalent to the inflation rate, but they are at least 10%.

If we talk about foreign companies, they continue to rent office space, having changed legal entities. Investors have adopted a wait-and-see attitude towards new projects.