Dmitry A. Revin, Director for finance and business development Eurasia RED, Prospects for commercial real estate

Dmitry A. Revin,

Director for finance and business development

Eurasia RED, www.eurasiared.com

Prospects for commercial real estate development

in Kazakhstan – office and shopping real estate

Adam Smith conference – Construction and Real Estate in Kazakhstan

April 1-3, 2008

Almaty, Kazakhstan

http://www.eurasiared.com/

2

WHAT’S AHEAD…?

DEMAND

SUPPLY

RATES

PROFITABILITY

3

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.

4

5

Analysis of Kazakhstan commercial real estate market

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

6

Kazakhstan is the biggest dynamically developing country in Caspian region with attractive investment climate

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

7

Kazakhstan commercial real estate market passed through emerging market stage and is currently still in the stage of dynamic growth

Stage III. Maturity stage

Bu

sin

ess

cen

ters

Sh

op

pin

g

cen

ters

Kazakhstan regions Almaty, Astana

• 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

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

• Construction of new business centers of А, В+ and B class

• Share of old buildings in office real estate is significant

• Construction of shopping centers, in particular due to network retailer presence

• Share of Soviet period commercial buildings is still high

• Mainly construction of А+ and А class business centers

• MFC * with offices of premium class

• Segmentation of shopping space by types (trade center, shopping mall, neighborhood store, etc.)

• Construction of malls with GLA> 20,000 sq.m. outside of the city

• Insignificant share of markets/bazars in trade turnover

* MFC – multifunctional complex (offices, shopping center, hotels, etc)

Moscow

«АFC»Almaty, 2008

BC at Gagarina str, Almaty 2006

«Astana Tower»Astana, 2005

«Kendala»Almaty, 2005

Time

Regions of RF

Stage II. Growth stageStage I. Emerging stage

Exam

ple

s

8


• Overview of Kazakhstan commercial real estate market

• Business center real estate market

• Shopping center real estate market

9

With dynamic growth of GDP per capita, office real estate area in Almaty and Astana should significantly expand as well

R2 = 0,8847

0

700

1400

2100

2800

3500

5000 10000 15000 20000 25000 30000 35000 40000 45000

Offi

ce r

eal est

ate

availa

bili

ty p

er

1,0

00

cit

y inhabit

ants

, sq

.m.

Office real estate availability per 1,000 inhabitants in world cities and its correlation with GDP per capita

Source: OECD, JLL (Cities’ reports), Swiss Realty Group, Istanbul Metropolitan Municipality, CBRE, Knight Frank

Almaty(2006)

Moscow

Budapest

Warsaw

Prague

Istanbul

GDP per capita at purchasing parity index, USD

Bratislava

Sofia

Almaty (2012)

Toronto

Sidney

Paris

Madrid

Astana (2006)

Astana (2012)

10




• Almaty

• Astana


11Based 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

122 185280

426

646

980

0

250

500

750

1000

2007 2008 2009 2010 2011 2012

X

0

800

1600

2400

2006 2007 2008 2009 2010 2011 2012

900

1100

1300

1500

2006 2007 2008 2009 2010 2011 2012

Almaty city population forecast

Office space per 1,000 Almaty inhabitants based on GDP forecast

Thousand city inhabitants

Sq.m. / 1,000 city inhabitants

New demand growth forecast for office real estate in Almaty

Source: Agency of RK for statistics, Kazakhstan commercial real estate center, Deloitte estimate

Thousand sq.m.

Comments

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

1287 1301 1316 1330 1345 1360 1375

2090

1393

928

618412

275183

12

980

280

646

426

185

122

55

224

83 97

240

160100

340

0

300

600

900

1200

2007 2008 2009 2010 2011 2012

Economic forecast of new demand and planned supply of office real estate

in Almaty, thousand sq.m.

Source: Deloitte forecast

Economic forecast for office space demand shows that Almaty market is still far from saturation point

Economic forecast for new demand

Planned supply of office space taking

into account declared plans on AFC

Potential new supply taking into account

AFC

1 According to the plans declared by the market players and business center projects under development as of the end of 2007.

Comments

• 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.

13




• Almaty

• Astana


14

According to economic forecast, new demand for quality office real estate in Astana will increase eightfold from 2007 till 20012

52 79 120 182275

416

0

100

200

300

400

500

2007 2008 2009 2010 2011 2012

X

0

600

1200

1800

2006 2007 2008 2009 2010 2011 2012

400

600

800

1000

2006 2007 2008 2009 2010 2011 2012

Astana city population forecast

Office space per 1,000 Astana inhabitants based on GDP forecast

Thousand city inhabitants

Sq.m. / 1000 inhabitants

Sources: Agency of RK for statistics, Kazakhstan commercial real estate center, Deloitte estimate

Thousand sq.m.

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.

177255

369532

755

1109

1600

574602

632663

696730

766

New demand growth forecast for office real estate in Astana

15

51

78

181

277

119

423

162

227

266

0

150

300

450

2007 2008 2009 2010 2011 2012

Economic forecast of new demand and planned supply of office real estate

in Astana, thousand sq.m.

Source: Deloitte forecast

According to economic forecast, Astana office supply will considerably exceed demand in the next 2 years

Economic forecast for new demand

Planned supply of new BC¹ space

1 Based on market player plans and BC projects under development as of the end of 2007.

Comments

• 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.

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17

Analysis of major foreign city development shows that there is a strong correlation between city GDP and shopping space availability

Shoppin

g r

eal est

ate

availa

bili

ty p

er

1,0

00

cit

y

inhabit

ants

, sq

.m.

GDP per capita, thousand USD

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.

Source: Kazakhstan commercial real estate center, Agency of RK for statistics, EIU, OECD, Deloitte estimate

R2 = 0,8415

0

200

400

600

800

1000

1200

0 10 20 30 40 50

Paris

London

Almaty 2006

Prague

Bratislava

Warsaw

Moscow

Kiev

Almaty 2011Madrid

Berlin

650 sq.m. per 1,000 city inhabitants

Budapest

Astana 2006

530 sq.m. per 1,000 city inhabitants Astana 2011

Shopping real estate availability per 1,000 inhabitants in world cities and its correlation with GDP per capita

18





• Almaty

• Astana

19

Retail trade turnover in Almaty, billion USD

Source: Agency of RK for statistics, EIU

Experts forecast that Almaty retail market turnover will increase threefold from 2006 to 2012

2,3 2,83,8 4,3

5,46,5

16,1

0

3

6

9

12

15

18

2002

2003

2004

2005

2006

2007

2012

Retail trade turnover through different sale channels

70% 64% 58% 56% 53% 52%44%

30% 36% 42% 44% 47% 48%56%

0%

20%

40%

60%

80%

100%

2002

2003

2004

2005

2006

2007

2012

Markets, IE Trade Enterprises

Retail trade through trade enterprises* grows annually and may reach 56% by 2012

* 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

24%

20%

Kazakhstan The same period 20%

Almaty is the largest trade center of Kazakhstan with about 40% of total retail trade turnover of RK in 2006.

20

200 200 268 358479

642859

283

6891

121

162

217

0

300

600

900

1200

2006 2007 2008 2009 2010 2011 2012

X

133 183 252345

474650

865

0

200

400

600

800

1000

2006 2007 2008 2009 2010 2011 2012

900

1400

1900

2006 2007 2008 2009 2010 2011 2012

Almaty city inhabitants growth forecastThousand city inhabitants

Sq.m. / 1000 Almaty city inhabitants

200 268358

479

642

859

1142

Economic forecast of demand for shopping space in Almaty

Source: Agency of RK for statistics, Deloitte estimate

Thousand sq.m.

1287 1301 1316 1330 1345 1360 1375

890

650

477360

272206

160

Economic forecast for 2 scenarios of Almaty shopping space demand – using official and unofficial statistics on city inhabitants

15001575

16531736

18231914

2010

1

200 200 288 416 600865

1 247

523

88127

184

265

382

0

500

1000

1500

2000

2006 2007 2008 2009 2010 2011 2012

200 288416

600

865

1247

1770

Scenario 2Thousand sq.m.

Scenario 1

32%

37%

Scenario 1. Official statistics on Almaty city inhabitants

Scenario 2. Unofficial statistics on Almaty city inhabitants

Demand for new shopping space

2


Shopping space per 1,000 Almaty inhabitants based on GDP forecast

21

Almaty economic forecast shows that future demand for shopping space in 2008-2009 may exceed supply by 1.5 times

Economic forecast for new demand and planned supply of shopping real estate in

Almaty, thousand sq.m.

91

162

217

100

121

68

210

55

80

382

265

184

88

127

0

100

200

300

400

2007 2008 2009 2010 2011

• 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

Comments

Economic forecast for new demand for

Scenario 1

Developer plans for construction of shopping centers

Deficit ~1.5 times

Source: Company data, Deloitte estimate

Taking into account construction of 140 sq.m. MEGA center

(IKEA)

22





• Almaty

• Astana

23

Retail turnover in Astana, billion USD

Source: Agency of RK for statistics, Ministry of Economy and Budget Planning of RK, EIU

According to expert estimates annual growth of Astana retail market turnover will comprise 25% in the next 6 years

0,28 0,37 0,50 0,58 0,83 1,03

3,16

0,0

1,1

2,2

3,3

2002

2003

2004

2005

2006

2007П

2012П

Retail turnover through various sale channels

60%51% 47% 41% 38% 34%

13%

40%49% 53% 59% 62% 66%

87%

0%

20%

40%

60%

80%

100%

2002

2003

2004

2005

2006

2007

2012

Markets, IE Trade enterprises

Retail turnovers will be more and more through trade enterprises and share of open markets (bazaars) may decrease up to 10-15% in 2012.

31%

25%Kazakhstan for the same period - 20%

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.

24

Demand for new shopping space in Astana may be higher than in Almaty due to higher population growth in Astana

114 155 211287

390530

700

0

200

400

600

800

2006 2007 2008 2009 2010 2011 2012

0

500

1000

1500

2006 2007 2008 2009 2010 2011 2012

Astana city population forecast Thousand inhabitants

Sq.m. / 1,000 inhabitants

Sources: Agency of RK for statistics, Kazakhstan commercial real estate center, Deloitte estimate

574 602 632 663 696 730 766

80 80 111 155215

298414

161

3143

60

84

116

0

200

400

600

2006 2007 2008 2009 2010 2011 2012

111155

215

298

414

575

Economic forecast of demand for shopping space in Astana

Thousand sq.m.

1

80 80 120 179267

400

597

297

4059

88

132

198

0

300

600

900

2006 2007 2008 2009 2010 2011 2012

120179

267

400

597

894Scenario 2Thousand sq.m.

Scenario 1

39%

50%

X

700 770847 932

10251127

1239

721

530

427

323244

184130

Scenario 1. Official data on Astana city inhabitants

Scenario 2. Unofficial data on Astana city inhabitants

2

Shopping space per 1,000 Astana inhabitants based on GDP forecast



25Economic forecast for shopping space demand and supply shows their balance in 2008. However, shopping space deficit may be expected as early as 2009.

Economic forecast for new shopping space demand and supply planned by developers in

Astana, thousand sq.m.

60

84

116

3043

31

60 50

198

132

88

40

59

0

50

100

150

200

2007 2008 2009 2010 2011

• 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.

Economic forecast for new demand under Scenario 2

Supply planned by developers

Coments

Economic forecast for new demand under Scenario 1

Source: Deloitte estimate

Supply and demand stabilization period

Shopping space deficit growth period

26

Is Kazakhstan commercial real estate market competitve in terms of investment yield with other major CIS markets?

Source: Cushman & Wakefield Stiles & Riabokobylko, JLL, DTZ, Colliers, Renaissance Capital estimates

Investment yield Change YoY, bpts

2006 2007

Russia

Office 9.5% 8.5% -100

Retail 11.0% 9.25% -175

Warehouse 11.0% 9.75% -125

Ukraine

Office 11.0% 9.5% -150

Retail 13.0% 11.0% -200

Warehouse 14.0% 12.0% -200

27

What about profitability? By 2012 profitability of office real estate in Almaty and Astana may decrease to current profitability in Moscow

Source: JLL, CBRE, MC «Accord Asset Management», Deloitte estimate

13%

11%

18%

14,0%

10,0%

7,0%

24,0%

18,0%

10%9%

14,5%

5,5%

18%

6,6%7,8%

12,5% 12%

5,5%

9%6,5% 6%

4,8%4,9%5%5,5%6%

7%

14,0%

10,0%

0%

5%

10%

15%

20%

25%

2001 2002 2003 2004 2005 2006 2008F 2010F 2012F

Investment yield for office real estate investments

Moscow

Eastern Europe

Western Europe

Аstana5 years

3 years

Almaty

• 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.

Minimal office real estate profitability ~ 4,5-5%

Comments

28BRIGHT FUTURE FOR SELECTED MARKETS WITH CLEAR PROFESSIONAL PROJECTS! DEMAND

SUPPLY

RATES

PROFITABILITY

Documents

Dmitry A. Revin, Director for finance and business development Eurasia RED, Prospects for commercial real estate