Prospects for commercial real estate development in Kazakhstan

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Prospects for commercial real estate development
in Kazakhstan office and shopping real estate
Dmitry A. Revin, Director for finance and
business development Eurasia RED,
www.eurasiared.com
Adam Smith conference Construction and Real
Estate in Kazakhstan April 1-3, 2008 Almaty,
Kazakhstan
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WHATS AHEAD?
DEMAND SUPPLY RATES PROFITABILITY
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Executive summary

• Kazakhstan is a rapidly developing market with
  strong GDP growth, significant foreign
  investments and stable political environment that
  presents exciting profitable opportunities for
  commercial real estate development.
• Astana - market will be mostly saturated for
  offices and shopping center space by 2009.
  Unsatisfied demand for modern shopping center
  space may arise in as early as 2010.
• Almaty - there is unsatisfied demand for offices
  and modern shopping center space.
• Regions offices and shopping real estate
  development projects present marginal opportunity
  in selected regions.

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Analysis of Kazakhstan commercial real estate
market
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• Sources for analysis of Kazakhstan commercial
  real estate market
• JLL
• Knight Frank
• CBRE
• Cushman
• DTZ
• Deloitte
• EIU
• OECD
• Kazakhstan commercial real estate center
• Agency of RK for statistics
• Ministry of economy and budget planning of RK

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Kazakhstan is the biggest dynamically developing
country in Caspian region with attractive
investment climate
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1. Territory 2,725 thousand sq.m. 2.
Population 15,514 thousand people 3. Yearly
GDP growth 9-11 a year (2000-2007, same growth
forecast for the next 4 years) 4. Average retail
turnover growth 20 a year (2001-2007, same
growth forecast for the next 4 years) 5. Average
salary increased 3,6 times during 2000-2007
Source Agency of RK for statistics
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Kazakhstan commercial real estate market passed
through emerging market stage and is currently
still in the stage of dynamic growth
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Stage III. Maturity stage
Stage II. Growth stage
Stage I. Emerging stage
Kazakhstan regions
Moscow
Almaty, Astana
Regions of RF
Examples
?FC Almaty, 2008
BC at Gagarina str, Almaty 2006
Astana Tower Astana, 2005
Kendala Almaty, 2005
Time

• Mainly construction of ? and ? class business
  centers
• MFC with offices of premium class

• Office real estate is comprised of facilities in
  old administrative buildings of Soviet period
  (i.e. Scientific Research Centers)
• Modern business centers are not constructed, just
  reconstruction of Soviet period buildings

• Construction of new business centers of ?, ? and
  B class
• Share of old buildings in office real estate is
  significant

Business centers

• Construction of shopping centers, in particular
  due to network retailer presence
• Share of Soviet period commercial buildings is
  still high

• Segmentation of shopping space by types (trade
  center, shopping mall, neighborhood store, etc.)
• Construction of malls with GLAgt 20,000 sq.m.
  outside of the city
• Insignificant share of markets/bazars in trade
  turnover

• Shopping real estate is comprised of old stores
  and soviet supermarkets, markets/bazars, stand
  alone shops, booths.

Shopping centers
MFC multifunctional complex (offices,
shopping center, hotels, etc)
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Analysis of Kazakhstan commercial real estate
market
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• Overview of Kazakhstan commercial real estate
  market
• Business center real estate market
• Shopping center real estate market

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With dynamic growth of GDP per capita, office
real estate area in Almaty and Astana should
significantly expand as well
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Office real estate availability per 1,000
inhabitants in world cities
and its correlation with GDP
per capita
Paris
Toronto
Sidney
Almaty (2012)
Madrid
Office real estate availability per 1,000 city
inhabitants, sq.m.
Prague
Astana (2012)
Warsaw
Bratislava
Budapest
Moscow
Sofia
Almaty(2006)
Astana (2006)
Istanbul
GDP per capita at purchasing parity index, USD
Source OECD, JLL (Cities reports), Swiss
Realty Group, Istanbul Metropolitan Municipality,
CBRE, Knight Frank
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Analysis of Kazakhstan commercial real estate
market
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• Overview of Kazakhstan commercial real estate
  market
• Business center real estate market
• Almaty
• Astana
• Shopping center real estate market

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Based on Almaty city population forecast and
existing office real estate, it is expected that
1,5 mln. sq.m. of office space should be
constructed to satisfy new demand by 2012
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New demand growth forecast
for office real estate in Almaty
Almaty city population forecast
Thousand sq.m.
Thousand city inhabitants
1375
1360
1345
1330
1316
1301
1287
X
Office space per 1,000 Almaty inhabitants based
on GDP forecast
Comments
Sq.m. / 1,000 city inhabitants

• Based on forecasted population of Almaty city,
  its expected that there will be on average 2
  sq.m. per citizen by 2012.

2090
1393
928
618
412
275
183
Source Agency of RK for statistics, Kazakhstan
commercial real estate center, Deloitte estimate
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Economic forecast for office space demand shows
that Almaty market is still far from saturation
point
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Comments
Economic forecast of new demand and planned
supply of office real estate in Almaty, thousand
sq.m.

• Declared volume of office space supply by market
  players lags behind economic forecast for new
  demand. In 2010 deficit could reach 300 - 500
  thousand sq.m.
• Taking into account completion of first phase of
  AFC in 2007, insignificant market oversupply is
  expected that may stabilize prices in 2008.
• Nevertheless, soon additional demand will create
  deficit and rent prices will further increase,
  unless market players will manage to supply
  additional office space.

Economic forecast for new demand
Potential new supply taking into account AFC
Planned supply of office space taking into
account declared plans on AFC
1 According to the plans declared by the market
players and business center projects under
development as of the end of 2007.
Source Deloitte forecast
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Analysis of Kazakhstan commercial real estate
market
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• Overview of Kazakhstan commercial real estate
  market
• Business center real estate market
• Almaty
• Astana
• Shopping center real estate market

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According to economic forecast, new demand for
quality office real estate in Astana will
increase eightfold from 2007 till 20012
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Astana city population forecast
New demand growth forecast for office real estate
in Astana
Thousand city inhabitants
Thousand sq.m.
766
730
696
663
X
632
602
574
Office space per 1,000 Astana inhabitants based
on GDP forecast
Comments

• According to the forecast, Astana office real
  estate could reach 1,2 million sq.m. by 2012.
• In the near future demand for Astana office space
  is unlikely to grow fast because Astana is still
  an administrative and political center rather
  than business center of Kazakhstan.

Sq.m. / 1000 inhabitants
1600
1109
755
532
369
255
177
Sources Agency of RK for statistics, Kazakhstan
commercial real estate center, Deloitte estimate
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According to economic forecast, Astana office
supply will considerably exceed demand in the
next 2 years
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Comments
Economic forecast of new demand and planned
supply of office real estate in Astana, thousand
sq.m.

• In the next 3 years massive completion of
  development projects and supply of office real
  estate is expected in Astana market. Taking into
  account business center projects under
  development and declared plans, more than 600
  thousand sq.m. of office space might be
  constructed till 2009.

Planned supply of new BC¹ space
Economic forecast for new demand
1 Based on market player plans and BC projects
under development as of the end of 2007.
Source Deloitte forecast
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Analysis of Kazakhstan commercial real estate
market
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• Overview of Kazakhstan commercial real estate
  market
• Business center real estate market
• Shopping center real estate market

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Analysis of major foreign city development shows
that there is a strong correlation between city
GDP and shopping space availability
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Taking into account GDP forecast, shopping space
availability may reach 650 sq.m. in Almaty and
530 sq.m. in Astana per 1,000 city inhabitants in
2011.
Shopping real estate availability per 1,000
inhabitants in world cities
and its correlation with GDP
per capita
Paris
London
650 sq.m. per 1,000 city inhabitants
Almaty 2011
Shopping real estate availability per 1,000 city
inhabitants, sq.m.
Warsaw
Madrid
Budapest
Astana 2011
530 sq.m. per 1,000 city inhabitants
Berlin
Prague
Bratislava
Almaty 2006
Moscow
Astana 2006
Kiev
GDP per capita, thousand USD
Source Kazakhstan commercial real estate center,
Agency of RK for statistics, EIU, OECD, Deloitte
estimate
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Analysis of Kazakhstan commercial real estate
market
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• Overview of Kazakhstan commercial real estate
  market
• Business center real estate market
• Shopping center real estate market
• Almaty
• Astana

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Experts forecast that Almaty retail market
turnover will increase threefold from 2006 to
2012
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Retail trade through trade enterprises grows
annually and may reach 56 by 2012
Retail trade turnover through different sale
channels
Retail trade turnover in Almaty, billion USD
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Kazakhstan The same period 20
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Almaty is the largest trade center of Kazakhstan
with about 40 of total retail trade turnover of
RK in 2006.
Trade enterprises include all kinds of modern
trade formats neighborhood stores,
supermarkets, hypermarkets, except for open
markets (bazaars) and small retail outlets
(stalls, stands) of individual enterprisers
Source Agency of RK for statistics, EIU
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Economic forecast for 2 scenarios of Almaty
shopping space demand
using official and unofficial statistics on city
inhabitants
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Scenario 1. Official statistics on Almaty city
inhabitants
Scenario 2. Unofficial statistics on Almaty city
inhabitants
Economic forecast of demand for shopping space
in Almaty
Almaty city inhabitants growth forecast
Demand for new shopping space
Thousand sq.m.
Scenario 1
1142
Thousand city inhabitants
2010
1914
1823
859
1736
32
1653
1575
642
1500
1
479
358
268
200
1375
1360
1345
1316
1330
1287
1301
X
Shopping space per 1,000 Almaty
inhabitants based on GDP forecast
Scenario 2
Thousand sq.m.
Demand for new shopping space
1770
Sq.m. / 1000 Almaty city inhabitants
890
1247
37
650
865
2
477
600
360
416
288
272
200
206
160
Source Agency of RK for statistics, Deloitte
estimate
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Almaty economic forecast shows that future demand
for shopping space in 2008-2009 may
exceed supply by 1.5 times
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Comments
Economic forecast for new demand and planned
supply of shopping real estate in Almaty,
thousand sq.m.

• In the next 4 years Almaty developers plan to
  construct about 300 thousand sq.m. of shopping
  space (based on the projects announced by
  developers).
• Taking into account current plans of developers
  up to 2010, potential deficit of shopping space
  in Almaty will potentially reach about 220
  thousand sq.m.
• It should be noted that in 2007 IKEA announced
  its plans for development of 2 MEGA centers in
  Kazakhstan one in Almaty and another one in
  Astana with area of 260-380 thousand sq.m.

Economic forecast for new demand for Scenario 2
Economic forecast for new demand for Scenario 1
Deficit 1.5 times
Taking into account construction of 140 sq.m.
MEGA center (IKEA)
Developer plans for construction of shopping
centers
Source Company data, Deloitte estimate
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Analysis of Kazakhstan commercial real estate
market
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• Overview of Kazakhstan commercial real estate
  market
• Business center real estate market
• Shopping center real estate market
• Almaty
• Astana

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According to expert estimates annual growth of
Astana retail market turnover will comprise 25
in the next 6 years
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Retail turnovers will be more and more through
trade enterprises and share of open markets
(bazaars) may decrease up to 10-15 in 2012.
Retail turnover through various sale channels
Retail turnover in Astana, billion
USD
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Kazakhstan for the same period - 20
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• Comments
• Retail turnover growth in Astana is the highest
  in RK.
• Total retail turnover in Almaty and Astana
  comprise about 50 of total retail turnover of
  the Republic of Kazakhstan.

Source Agency of RK for statistics, Ministry of
Economy and Budget Planning of RK, EIU
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Demand for new shopping space in Astana may be
higher than in Almaty due to higher population
growth in Astana
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Scenario 1. Official data on Astana city
inhabitants
Scenario 2. Unofficial data on Astana city
inhabitants
Economic forecast of demand for shopping space
in Astana
Astana city population forecast
Thousand sq.m.
Thousand inhabitants
Scenario 1
575
Demand for new shopping space
1239
1127
414
39
1025
932
847
770
298
700
1
766
215
730
696
663
155
632
602
574
111
X
Shopping space per 1,000 Astana inhabitants based
on GDP forecast
Scenario 2
Thousand sq.m.
894
Demand for new shopping space
Sq.m. / 1,000 inhabitants
721
597
50
530
427
400
2
323
267
244
179
184
120
130
Sources Agency of RK for statistics, Kazakhstan
commercial real estate center, Deloitte estimate
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Economic forecast for shopping space demand and
supply shows their balance in 2008. However,
shopping space deficit may be expected as early
as 2009.
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Coments
Economic forecast for new shopping space demand
and supply planned by developers in Astana,
thousand sq.m.

• Total shopping space planned for completion by
  developers in Astana during 2007-2009 is around
  150-170 thousand sq.m.
• Few large shopping complexes were launched in
  2007-2008.
• Total shopping space completed in Astana may
  exceed economic forecast for demand in 2008.
• Given growing competition among shopping
  complexes, in 2008 rent may get stabilized and
  grow insignificantly (close to inflation level
  and difference of KZT to USD rate).
• Nevertheless, given potential demand for shopping
  space as Astana inhibitant income grows in
  2009-2011 and absence of major plans by
  developers for construction of major shopping
  complexes (except for potentially Mega by IKEA),
  we expect that in 2010 there might be deficit of
  quality shopping space and rent may grow
  significantly.

Supply and demand stabilization period
Shopping space deficit growth period
Economic forecast for new demand under Scenario 2
Supply planned by developers
Economic forecast for new demand under Scenario 1
Source Deloitte estimate
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Is Kazakhstan commercial real estate market
competitve in terms of investment yield with
other major CIS markets?
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Investment yield Investment yield Change YoY, bpts
2006 2007 Change YoY, bpts
Russia Russia Russia Russia
Office 9.5 8.5 -100
Retail 11.0 9.25 -175
Warehouse 11.0 9.75 -125
Ukraine Ukraine Ukraine Ukraine
Office 11.0 9.5 -150
Retail 13.0 11.0 -200
Warehouse 14.0 12.0 -200
Source Cushman Wakefield Stiles
Riabokobylko, JLL, DTZ, Colliers, Renaissance
Capital estimates
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What about profitability? By 2012 profitability
of office real estate in Almaty and Astana may
decrease to current profitability in Moscow
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Investment yield for office real estate
investments
Almaty
Moscow
?stana
5 years
Eastern Europe
3 years
Western Europe
Minimal office real estate profitability 4,5-5
Comments

• Current office real estate profitability in
  Astana is close to profitability level in Moscow
  5 years ago.
• Office real estate profitability in Moscow in its
  turn is 3 years behind profitability in Eastern
  Europe, which has profitability very similar to
  profitability of Western Europe mature market.
• Analysis of worldwide profitability dynamics
  shows that for growing stage markets
  profitability is decreasing at approximately 2 a
  year, due to increase in new office space
  construction and decrease in the level of risk
  for investors. Having reached the level of 7 a
  year, profitability decrease slows down to 0.5-1
  a year and reaches 4,5-5 a year (current
  profitability in Western European countries).
• We forecast decrease of office real estate
  investment profitability in Kazakhstan by 2 a
  year till 2010, with slow down to 1.5 a year
  after that.

Source JLL, CBRE, MC Accord Asset Management,
Deloitte estimate
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BRIGHT FUTURE FOR SELECTED MARKETS
WITH CLEAR PROFESSIONAL PROJECTS!
DEMAND SUPPLY RATES PROFITABILITY