Review of Almaty’s Office Space Market
Stanislav Glazkov, General Director of BG Consulting
A top profit generating sector over the past five years, office spaces have been the most attractive part of the Kazakhstani real estate market for investors. In this review, I will attempt to analyse how this sector is going to evolve, utilising the example of Almaty’s administrative spaces market over the first nine months of 2005.
For the sake of convenience, I have divided this type of real estate into four major categories: (I) uncompleted construction: administrative buildings or housing estates with offices on lower floors that are under construction; (II) business centres: specialised administrative buildings of the highest category (class A-B); (III) administrative buildings: specialised Soviet-era buildings (excluding business centres); (IV) spaces: built-in or free-standing spaces with an area of up to 200 m2.
We are not going to review uncompleted office estates in this part of the review, since they are impossible to rent.
The average rentals for offices have been increasing since 2004, coming to a maximum of US$45 per m2 as of the beginning of October 2005 (moreover, sometimes the rate reached the ceiling of US$50 per m2). The rented offices market reacts seriously to the location or class of office spaces on the offer, and each of these two factors influences it independently. That is, a potential tenant, as a rule, seeks spaces either with a specific location, or of a specific class.
It is clear from Tables 1 and 2 that, over the period in consideration, there has been a sharp increase, a surge in rentals for administrative Soviet-era buildings in the centre of the city (80-200%), and built-in spaces (65-200%). This is largely due to a higher demand for offices of this type and a constantly decreasing supply. Rentals for modern business centres of the A and B classes and those along Dostyk Avenue show a steadier increase (75-125%) with the highest rates of US$35-45 per m2; this is explained by the high prestige associated with these centres.
There is a certain degree of competition between the categories of offices: a lower category approaches a luxury category in terms of prices and the latter raises the prices to establish parity. At the same time, data for the past six months of 2005 demonstrate that the rentals for 'old' administrative buildings in the city centre and for built-in spaces seem to be nearing their limit, stopping at US$30 per m2.
Rentals for office spaces located in the lower city, that is, down from Ryskulova Avenue, demonstrate the lowest growth: averaging a mere 50%; this is due to objective conditions in the market. Tenants prefer having an office in the business area of the city (central and upper districts of Almaty); management of companies whose industrial facilities (warehouses and production facilities) are located in the lower city often prefer a more prestigious location for their head offices.
The lower margin of rentals for spaces located in the west of Almaty has stabilised throughout the past year: the growth was relatively moderate at 22-65%, with rates coming to approximately US$15 per m2. This is due to the relative remoteness of this area from the city centre and the permanently growing capacity of potential tenants to rent more expensive offices.
We estimate that today the actual general ratio between the demand and supply of offices for rent has shifted towards landlords (Chart 1). As such, administrative buildings of the Soviet era in the city centre enjoy a great advantage: an excellent location and affordable rates.
By preliminary estimates, the average supply of offices for rent in Almaty is around 83,000 m2; this indicator continues to grow because of incessant construction. As to demand, it fluctuates depending on the capabilities of potential tenants and their willingness to use the services of landlords. Our very careful estimates indicate that the actual demand for rented offices is around 60,000 m2. In fact, only some 25,000 m2 are in simultaneous turnover, due to high rates for first-class offices and an increase in long-term renting (over a year).
Over the past four or six months, the prevalence of supply over demand has been influencing rental rates. However, this by no means guarantees that office rentals will stabilise any time soon. They will continue to rise, but not so quickly. The expected, large-scale city redevelopment and the demolition of old buildings will also act as a restraining factor.
Purchase and Sale
The purchase and sale of offices and administrative buildings have been an increasingly popular type of investment over the past year. As I emphasised above, this is due to the high profitability of this market segment and a relatively high reliability of future reinvestment under conditions of ever-increasing prices for real estate.
Just as in the case of rented offices, the location and class of a building are the main price-shaping criteria. According to Table 3, the highest, but unsteady increase (70-150%) is shown by prices for spaces in administrative buildings under construction, located in the city centre. The trend is for the prices of offices in uncompleted buildings to approach those for Soviet-era administrative buildings, since potential buyers are willing to wait in their 'old' offices until they are able to have their 'new' property.
The prices for old administrative buildings in the centre of Almaty demonstrate the steadiest growth of 7-7.5% per three months. This is due to their convenient location and relatively affordable price as compared to similar spaces in other categories of corporate real estate. The lowest average increase in prices (a mere 25%) is for offices located in business centres. This is because the price for these spaces is already high: today offices in certain business centres of A+ class are offered and sold for up to US$4,300 per m2.
Therefore, the average price for 1 m2 of office area in Almaty (except for rather unpopular spaces in the lower city) is around US$1,600 per m2, the optimum market figure.
Presently, around 178,000 m2 of administrative buildings, offices and spaces that may be used as offices are for sale in Almaty (Chart 2). Administrative buildings with an area of 1,000-2,000 m2 and freestanding buildings of 200-400 m2 account for the majority. The supply-demand ratio in the market in offices for sale is not significantly different from that of rented offices. The growth rates indicate that potential buyers are especially interested in spaces in administrative buildings under construction and old buildings in the city centre. An analysis of the sales market development demonstrates that major investors have been vigorously purchasing land lots with old housing estates (in certain cases they do it under the guise of 'public' needs) to construct administrative and housing complexes. This is not surprising: having spent US$2,000-3,000 per m2 of built-up land, an investor may receive gross revenues that surpass the costs tenfold. As to the outlook for this market segment, BG Consulting estimates that the structure of demand and supply will not change seriously over the next two years.
In summary, the market in office (administrative) real estate in Almaty has seen the following tendencies recently:
First, there is higher supply and demand for office spaces in administrative buildings under construction, but not for these buildings as a whole.
Second, there is a permanent, steady increase in prices for administrative buildings and Soviet-era spaces.
Third, land with old buildings and facilities is being actively purchased with the purpose of building new administrative and housing estates.
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