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Retail Investment Market Russia Krasnodar, June 2008 Jeff Kershaw SCSM, Senior Director, Russia Investment Market Turnover in Europe *H1 2007 turnover was 17% higher than in H1 2006 250,000 € Million 200,000 150,000 100,000 50,000 0 2000 Source: CB Richard Ellis 2001 2002 2003 2004 2005 2006 H1 2007* Investment Turnover by Country Top Three Countries Account For 66% Of The Market € Million 45,000 40,000 H1 2006 H1 2007 33% 35,000 Total Size €119 billion 30,000 22% 25,000 20,000 11% 15,000 10,000 5,000 Source: CB Richard Ellis Russia Others Spain CEE Netherlands Italy Sweden France Germany UK 0 International Investor P&S H1 2007 € Million 25,000 20,000 Purchases 15,000 10,000 5,000 0 -5,000 Sales -10,000 Source: CB Richard Ellis, Property Data, VastGoedMarkt, KTI Australia Netherlands Austria France Far East Spain Middle East Ireland Germany UK USA -15,000 International Investment 250,000 € Million Cross-border transactions have quadrupled in € terms since 2000 * Proportionate figures for comparison only Cross-border purchasers 200,000 48% Local purchasers 150,000 41% 100,000 34% 37% 50,000 36% 57% 43% 38% 84% 0 2000 Source: CB Richard Ellis 2001 2002 2003 2004 2005 2006 H1 2007 H1 2007 Russia * International Investment By Investor Origin * Proportionate figures for comparison only 120,000 € Million Non-European Purchasers European Cross-Border Purchasers 100,000 41% 80,000 42% 60,000 47% 31% 40,000 24% 38% 20,000 0 2004 Source: CB Richard Ellis 2005 2006 H1 2007 * H1 2007 Russia Investment Turnover by Country 1998 – H1 2007 Aggregate CEE Investment; € Million 14,000 Total Investment Turnover = €31 billion 12,000 10,000 8,000 6,000 4,000 2,000 Source: CB Richard Ellis ro at ia C nt ry M ul tico u ar ia ul g B Sl ov ak ia a an i om R us s ia R H un g ar y . Re p ze ch C Po la nd 0 Russia 0 Ireland Norway Finland Denmark Switzerland Austria Sweden Portugal Hungary Belgium Czech Republic Greece 60 Moscow Netherlands Poland Spain Italy France UK Germany Russia Russia is a huge market! Million 160 140 120 100 80 Moscow – 15 million people 40 20 Russian economy today and tomorrow Key Economic Indicators 2001 2002 200 3 2004 2005 2006E 2007F 2008F GDP growth, real, % 5,1 4,7 7,3 7,2 6,4 6,3 6,4 6,3 Gross fixed investment growth, real, % 10,2 2,8 12,8 11,3 10,5 10,2 11 10,6 FDI, US$bn 2,7 3,5 8 15,4 14,2 21,5 19,5 20,1 Growth of real disposable income, % 8,7 9,7 13,5 8,1 10 11,2 10,6 9,5 Exchange rate RUR/US$ yearend 30,1 31,8 29,5 27,7 28,8 27,4 26,0 26,0 CPI, average, % 21,5 15,8 13,7 10,9 12,7 9,8 8,7 7,7 Source: Economist Intelligence Unit, Deutsche Bank, ING Who are the active International Investors? Austria UK North America Germany Russia The Yield Shift in Europe is Clearly Slowing EU-15 Index Rolling 12-month yield shift, bps 30 Retail 20 Industrial Office 10 0 -10 -20 -30 -40 -50 -60 -70 Jun-99 Jun-00 Source: CB Richard Ellis Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Source: CB Richard Ellis Q2 2007 Q1 2007 Industrial Q4 2006 Q3 2006 Q2 2006 Q1 2006 Shopping Centres Q4 2005 Q3 2005 Q2 2005 Q1 2005 Q4 2004 Offices Q3 2004 Q2 2004 Q1 2004 22% Q4 2003 Q3 2003 Q2 2003 Q1 2003 Russian Yield ‘Compression’ EU-15 Index 20% 18% 16% 14% 12% 10% 8% 6% 4% Modern Shopping Centre Stock in Russia’s Largest Cities The Changing Face of Russian Retail Moskva Department Store Moskva SC in Lyublino “Kalinka- Malinka” Rostov-on-Don Evropeysky Krasnodar Krasnodar Territory Population: 5,124,400 (2002 census) Capital: Krasnodar (population 644,800), 1,539 km from Moscow Other major cities: Sochi (328,800), Novorossiisk (231,900), Armavir (193,900) Federal district: Southern Economy: Investment cooperation with more than 60 countries, 773 registered companies with foreign capital. More than €7 bln had been invested in Krasnodar in the past three years, 40% of which went into resort development. On the 5th July 2007 the International Olympic Council awarded the 2014 Winter Olympic games to Sochi, in Krasnodar Krai. Key Trends and Outlook - Strong economic potential (The region ranks the first in the agricultural sector of Russia.) - Well-Developed Transportation and Logistics Infrastructure (Three international airports, 8 seaports, including the largest one in Russia, and one of the major railway centers in the South of Russia, are located in the region. The best in Russia motor roads are located on the territory of the region) - Favorable Investment Climate (In 2006 the international agency Standard and Poor’s awarded Krasnodar Krai an international credit rating of BB-stable) - Foreign-Economic Activity of the Region (Regional programs of economic and social development of Krasnodar Region have been elaborated and are successfully realized. ) Investment Highlights The rate of growth in investment of fixed capital through the Region for 2007 was 126% compared to the 2006 level (for Russia this indicator was 121%), and the amount invested totaled US $9 billion. 13% of this amount, US $715 million, came from foreign investors. Over the last six years approximately $2.8 billion of foreign investment have been made in the Region. Krasnodar Region consistently holds the first place in the Southern Federal District for volume of investment. At the international exhibitions and forums of 2007, the Region concluded 280 investment agreements to a total value of more than $28 billion. These agreements are being realized: in 2007 only, 1795 investment projects in the Region have been carried out, i.e. 341 more projects than in 2006. Retail Development OZ 207,568 –sq m shopping and entertainment center DVI Group 75,200-sq m shopping and entertainment center Mega mall “SBS” 160,00-sq m shopping and entertainment center Krasnodar City approx 150,000-sq m shopping and entertainment center “Kalinka- Malinka” 150,000 –sq m shopping and entertainment center Advantages/Drivers for South Federal District South Federal District is closer to Moscow than Urals and Siberia International investors have at least HEARD of Krasnodar! Most cities still offer low competition Opportunity to learn from Moscow, St. Pete and the Volga Region The Changing Face of Krasnodar Retail “OZ” “Gorbushka” Krasnodar’s “Centralny Rynok” “SBS” mega mall Two Tier Market? Russians Off market deals Personal relationships Higher risk – higher investment returns Russian tenants, shorter leases, non-institutional buildings Small transaction sizes but for higher volumes of deals International Investors Institutional or “Western” deals Good quality buildings Institutional lease terms Strong tenant covenants Larger transaction sizes in fewer deals Lower yields Key Investment Market Trends Demand exceeds supply of investment grade properties Better financing options & costs Russian vs international investors risk profile & approach Downward pressure on yields The Outlook for Retail Property Investment Fundamentals still basically sound Equity players will dominate Still equity looking to invest More conservative attitude to risk - assumptions on exit yield? Generally won’t be many forced sellers “Worse than we hoped, better than we feared” Key is the real economy and rental growth Key Investment Market Trends Demand exceeds supply of investment grade properties Improving financing options & costs, or just new lenders? New international investors entering the market Downward pressure on yields Conclusions International Investment still active Quality over quantity !! Structure is important Land Value??? Retail Investment Market Russia Krasnodar, June 2008 Jeff Kershaw SCSM, Senior Director, Russia