In Q1 2016 new delivery volume has decreased to historically low level of 63 thousand sq m.

Vacancy rate has reached the level of 22.5% in Class A and 17.6% in Class B office buildings in sum indicating 2.9 million sq m.

Average asking rental rates has decreased by 2–3% to 24,726 rub./sq m/year in Class A offices and 14,613 rub./sq m/year in Class B.

OffICe mArketrepOrtmoscow

Q1 2016

reseArCh

hIghlIghts

Office market repOrt. mOscOw

2

New delivery volume dynamics for Class A and B offices

key indicators. Dynamics*

ʺFollowing shocks and uncertainties office market has experienced over the past year, more clear rules of interaction between landlords and tenants have been formed. The market has reached the balance in its lower point, as evidenced by the volume of already closed and pending transactions.

Today little doubt remains that the market is unlikely to return to the same conditions in terms of foreign currency applicability. Despite the Russian ruble strengthening and stabilization, the risk of currency fluctuations is still present, in this connection ruble lease rates have become a major prerequisite for both Russian and foreign companies operating in the Russian marketʺ.

Konstantin LosiukovDirector, Office Department Knight Frank

Office market report Moscow

Class А Class ВTotal stock, thousand sq m 15,602

including, thousand sq m 3,821 11,781

Delivered in Q1 2016, thousand sq m 63

including, thousand sq m – 63

Vacancy rate, % 22.5(-1.9 p. p.)*

17.6 (+1.1 p. p.)*

Average weighed asking rental rate**$/sq m/year 467

(-1.6%)*276

(-3.1%)*

rub./sq m/year 24,726(-1.7%)*

14,613(-3.1%)*

Rental rates range** $/sq m/yearrub./sq m/year

320–90010,000–45,000

320–5507,500–35,000

Average OPEX rate***,rub./sq m/year 4,000–7,500 2,500–4,500

* Compared to Q4 2015** Excluding operational expenses, utility bills and VAT (18%)*** OPEX rate does not consider change related to property tax rate increase

Source: Knight Frank Research, 2016

Source: Knight Frank Research, 2016

0

5

10

15

20

25

2000

400600800

1,000 1,2001,4001,6001,8002,000

2008 2009 2010 2011 2012 2013 2014 2015 2016F 2017F

Class А Class В Class A and B inventory growth

thousand sq m %

3

ReseaRchQ1 2016

Key office projects delivered in Q1 2016* and due to be commissioned in 2016

* Office properties that received the delivery act in Q1 2016The building class is indicated according to the Moscow Research Forum Office Classification of 2013

Source: Knight Frank Research, 2016

supplyThe total stock of Class A and B offices in moscow has totaled 15.6 million sq m corresponding 24% to Class A and 76% – to Class B office buildings.

63,1 thousand sq m of quality office space were delivered in Q1 2016 – 30% less year-on-year – a record low level in the history of Moscow office real estate market. While not a single Class A office building was delivered for the first three months of 2016.

Class A vacancy rate continued to decline to 22.5% due to falling volumes of new construction and completion of large transactions, which began in the middle of last year.

Class B vacancy rate also maintains last year's trend of fluctuations in the range of 2 p. p and reached the level of 17.6%.

Dynamics of take-up, delivery and vacancy rates of Classes A and B offices

Source: Knight Frank Research, 2016

Rublevskoe Hwy

Leninski

y Ave

Prof

soyu

znay

a St

Leningradskoe Hwy

Volokolamskoe Hwy

Altu

fiev

skoe

Hw

y

Dm

itrovsoe H

wy

Ryazanskiy Ave

Каширское ш.

Vars

havs

koe

Hw

y

ТТR

GR

MKAD

MKAD

MKADYa

rosla

vs

koye

H

wy

Concentration of office space

Class А Class ВExisting

Under construction

inside GR, 19%

outside TTR, 47%between GR and TTR, 34%

Knight Frank – exclusive/co-exclusive consultant

Pekin Gardens4,247 sq mFederation Tower (East)

82,610 sq m

VTB Arena Park (phase I)30,504 sq m

G10 (phase I) 38,000 sq m

Oasis39,493 sq m

Selectica16,000 sq m

NEOPOLIS52,700 sq m

Otradniy (phase II)37,000 sq m

Dekart28,125 sq m

Loft Ville (bld. 2)21,500 sq m

Seven One20,000 sq m

Novator20,000 sq m

NTC of RF (II phase)7,500 sq m

Imperial Park7,500 sq m

Pekin Gardens4,247 sq mFederation Tower (East)

82,610 sq m

VTB Arena Park (phase I)30,504 sq m

G10 (phase I) 38,000 sq m

Oasis39,493 sq m BC on B. Pionerskaya St

25,000 sq mBC on B. Pionerskaya St

25,000 sq m

Selectica16,000 sq m

NEOPOLIS52,700 sq m

Otradniy (phase II)37,000 sq m

Dekart28,125 sq m

Loft Ville (bld. 2)21,500 sq m

Seven One20,000 sq m

Novator20,000 sq m

NTC of RF (II phase)7,500 sq m

Imperial Park7,500 sq m

100

200

300

400

500

600

700

800

Take-up volume Delievery volume Vacancy rate

Class А Class Вthousand sq m %

2013 2014 2015 2016F 2013 2014 2015 2016F

16.2%

29.8%

24.4%21.5%

11.5%

15.3%

16.5%17.1%

0

5

10

15

20

25

30

Office market repOrt. mOscOw

4

DemandNet take-up volume of Q1 2016 amounted to 183,5 thousand sq m, five times higher than in the previous year. such sharp increase was due to the closure of two major transactions of about 142 thousand sq m.

According to the results of the first quarter the share of lease renegotiation transactions in the total transactions volume remained significantly high and amounted to 64%. In some cases, despite former renegotiations in 2014–2015, tenants got back to the negotiation process to fix new conditions for a longer period.

Today state-owned companies boost the market with the share of lease and purchase transactions increased from 5% in 2014 to 36% in 2015. In Q1 2016 their influence was also significant: due to several large transactions the figure reached 73% (149.8 thousand sq m). Their high activity was triggered due to the costs reduction, as well as recent initiative of the government to prohibit state-owned companies from constructing buildings for their offices.

Q1 2016 tenant mix structure was defined by two major transactions started in 2015 and completed only at the beginning of this year. Owing to the acquisition of Eurasia Tower by VTB Group and purchase of 55 thousand sq m of office space in OkO Multifunctional Complex by Moscow City Government, the share of financial sec-tor companies accounted for 43%, and the share of companies representing the government – 27%. These events affected the territorial structure of demand: 71% of leased and purchased office space were signed in facilities located in MIBC Moscow-City, while only 6% of the total volume fell on the share of the Central Business District.

key office space lease and purchase transactions closed in Q1 2016

Source: Knight Frank Research, 2016

tenant mix

* Fast moving consumer goods** Technology, media and telecommunications*** Business services / No data

Source: Knight Frank Research, 2016

Rublevskoe Hwy

Leninski

y Ave

Prof

soyu

znay

a St

Leningradskoe Hwy

Volokolamskoe Hwy

Altu

fievs

koe

Hw

y

Dm

itrovsoe H

wy

Ryazanskiy Ave

Каширское ш.

Vars

havs

koe

Hw

yТТR

GR

MKAD

MKAD

MKAD

Yaro

slavs

koye

H

wy

Concentration of office space take-up

between GRand TTR, 83%

inside GR, 7%

outside TTR, 10%

Class А Class ВOffice centres located on the outside of the transport ring within the 500 m distance belong to the proximate ring submarket

Knight Frank acted as a consultantof the transaction

Moscow City Government55,123 sq m

OkoEurasia Tower

Kuntsevo Plaza

Port Plaza

Sirius Park

Simonov Plaza

Vodniy

WTC

Four Winds

Delta Plaza

SkyLight

OkoEurasia Tower

Kuntsevo Plaza

VTB86,834 sq m

Port Plaza

Sirius Park

Simonov Plaza

Rusatom Overseas3,010 sq m

Tele2 Russia2,209 sq m

Vodniy

WTC

INTREK2,068 sq m

Imperial Tobacco1,679 sq m

Four Winds Urban Group 1,600 sq m

6 B. Yakimanka st6 B. Yakimanka st

Delta Plaza Smith & Nephew1,194 sq m

SkyLight

Philip Morris4,784 sq m

REA Kapitalnoye Stroitelstvo3,720 sq m

PIK-Comfort2,825 sq m

Stroytransgaz1,127 sq m

RUSAL15,351 sq m

Park PobedyPark Pobedy

43%

27%

8%

5%4%

4%

3% 3% 3%Banking / Finance/ InvestmentPublic administrationManufacturingFMCG* / PharmaceuticalOil / Gas / MiningTMT**Real estateEnergyOther***

5

ReseaRchQ1 2016

Average asking rental rates dynamics for Class A and B offices denominated in USD

Average asking rental rates dynamics for Class A and B offices denominated in RUB

Source: Knight Frank Research, 2016

Source: Knight Frank Research, 2016

Commercial termsToday the commercial terms are still a key pillar in determining the tenant sentiment. After falling to historically low level at the end of 2015 Class A rents remain almost unchanged from January to March 2016 at 467 $/sq m/year and 24,726 rub./sq m/year. At the same time, Class B offices witnessed the reduction by 3% – to 276 $/sq m/year and 14,613 rub./sq m/year.

Though over 78% of the vacant Class A supply is nominated in Russian rubles, the landlords of individual properties – especially with a premium location – still retain foreign pricing and are not willing to fix the exchange rate or define the exchange rate band for a long-term lease.

Companies are still interested in long-term agreements to fix the current lease terms, while the landlords waiting for the market recovery prefer 3–5-year lease agreements.

The most important point to negotiate in 2016 is rental rate indexation. the indexation of ruble rental rates – usually equated to the CpI of the russian federation (after reaching double-digit inflation by the end of 2015) – is now a subject for discussion. the restriction of the upper level can be applied as an alternative together with equating of indexation to other macroeconomic indicators or a fixed increase level of lease payments.

805

600

1,500

670 760830 833 800

590

850

400 455480 483 492

314

200

400

600

800

1,000

1,200

1,400

1,600

$/sq m/year $/sq m/year

$/sq m/year

Q1 Q1Q2 Q3 Q4Q42014 20162015

2014 20162015

Class А

Class В

474 460

285 273

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F

Class А

Class В

590

530

508 506

474 467

450

490

530

570

610

314309

297 294285

276

270

280

290

300

310

320

Q1 Q1Q2 Q3 Q4Q4

2014 20162015

2014 201620152007 2008 2009 2010 2011 2012 2013 2014 2015 2016F

37,311

21,284

23,08624,398

25,885 25,525

30,144

25,14921,143

12,70713,821 14,110

15,009 15,698

17,150

10,000

15,000

20,000

25,000

30,000

35,000

40,000

15,331

15,103

24,402

14,454

20,569

30,144

28,09327,321 26,670

25,14924,726

24,000

25,500

27,000

28,500

30,000

31,500

17,15016,769

15,73115,452 15,103

14,613

14,000

15,000

16,000

17,000

18,000

rub./sq m/year

rub./sq m/year

Class А

Class В

Class А

Class В

rub./sq m/year

Q1 Q1Q2 Q3 Q4Q4

Q1 Q1Q2 Q3 Q4Q4

Office market repOrt. mOscOw

6

ReseaRchOlga YaskoDirector, Russia & CIS olga.yasko@ru.knightfrank.com

OfficesKonstantin LosiukovDirector konstantin.losiukov@ru.knightfrank.com

+7 (495) 981 0000

© Knight frank LLP 2016 – This overview is published for general information only. Although high standards have been used in the preparation of the information, analysis, view and projections presented in this report, no legal responsibility can be accepted by Knight Frank Research or Knight Frank for any loss or damage resultant from the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects.

reproduction of this report in whole or in part is allowed with proper reference to Knight Frank.

forecastAccording to the baseline scenario of the updated forecast of the ministry of economic Development the signs of recovery from the recession of the russian economy are expected not earlier than in 2017. At the same time, the sanctions restrictions against Russia may be retained in 2016, still restricting the development plans of both Russian and foreign companies.

Due to decrease in development activity new delivery volume will not exceed 400 thousand sq m in 2016 and 300 thousand sq m in 2017 leading to a further reduction in vacancy rates in case of current take-up volumes. Thus, taking into account the potential demand recovery and the reduction of available office space volume, we can expect a rental rates increase in 2017.

We expect that lease extensions as well as the move to new offices due to lease expiration will prevail in the structure of total transactions in 2016. Lease renegotiations will gain still a significant market share in h1 2016.

The highly competitive office market will continue to adapt to changing internal and external conditions in the coming year. In particular, we expect a further strengthening of the market operating in the russian national currency. Despite some stabilization of the ruble against foreign currencies, the risk of currency fluctuations is considered as a key risk for companies in the search for a new office.

submarket

Lease area,

thousand sq m

class a class B

average rental ratesVacancy rate, %

average rental ratesVacancy rate, %$/sq m/

yearrub./sq m/

year$/sq m/

yearrub./sq m/

yearBoulevard Ring

Central business district 712 1,011 53,584 13.8 469 24,856 8.9

Garden Ring

south 918 487

546

25,810

28,913

21.5

17.4

462

458

24,460

24,298

14.0

14.2West 273 796 42,193 27.9 505 26,752 9.3North 660 695 36,854 5.2 – 27,505 15.5east 401 – 26,472 26.9 – 20,730 16.3

third transport Ring

Leninskiy 278 –

480

40,000

25,459

–

31.3

–

319

17,372

16,919

18.5

17.9

Tulskiy 921 – – – – 14,339 17.1Khamovniki 260 772 40,921 19.0 – 23,776 5.0Kievskiy 424 – 16,893 80.8 – 19,988 61.2Presnenskiy 357 – 28,022 9.1 – 20,244 16.1Prospekt Mira 162 – 19,818 29.1 – 20,136 31.7Tverskoy-Novoslobodskiy 752 679 35,975 16.2 376 19,913 8.0

Basmanniy 532 – – – – 16,729 12.1Taganskiy 234 450 – 82.9 247 13,089 17.7Volgogradskiy 432 – 20,399 48.0 – 15,339 14.4mIBC moscow-City 913 511 27,107 20.8 – – –

ttr-mkAD

North 700 511

371

27,094

19,637

1.6

21.8

–

250

13,684

13,244

21.9

18.0south 1,734 344 18,222 42.2 – 12,356 19.1West 1,144 509 26,860 12.4 – 18,592 10.8east 658 – 13,555 38.4 – 10,483 20.8

mkAD

North 545 –

279

–

14,811

–

28.0

–

191

6,370

10,098

12.2

21.4south 444 – 11,000 95.5 – 8,218 23.0West 1,900 300 15,905 23.1 – 11,523 27.7east 248 – – – – 7,072 10.1

Total 15,602 467 24,726 22.5 276 14,613 17.6Source: Knight Frank Research, 2016

Moscow submarket data. Key indicators