Commercial Director of Stone — about the risks and prospects of investing in offices

What is happening with the office market in Moscow? How balanced is the demand for offices with the supply? Is it worth considering buying offices as an investment in the current economic situation?

 Коммерческий директор Stone — о рисках и перспективах инвестиций в офисы

Developer Stone, which holds the leadership in the RBC office real estate sales ranking for the third year in a row, recently announced the construction of a new business center on Khodynka Field in Moscow. In addition, the developer recently announced the creation of Stone Realty — in fact, a commercial real estate agency, a year earlier — on housing construction. Kristina Nedrya, Director of Commercial Management at Stone, spoke about market conditions, investments in offices and diversification of the project portfolio in an interview with RBC-Real Estate.

— What do the main indicators of the Moscow office real estate market say?

— Last year, the demand for offices in Moscow and the volume of investments in the segment became record over the past ten years. If we talk about the takeover, then it was the purchase for the end user that won back most of the demand. The drivers were representatives of government agencies, the financial and IT sectors. So, in the first quarter of 2024, we continue to observe a decrease in vacancies and a technical increase in rental rates. At the same time, the commissioning of facilities remains in short supply, and this is an important factor that affects the further development of the market. Moreover, the trend will continue in the future for at least the next two years. The main volume of office real estate is just beginning to be built, and the facilities that will be commissioned in the 2024-2025 perspective are already actually filled by 70%.

— In other words, will sales continue to grow?

— I would not predict another record by the end of 2024. There are new factors constraining demand, such as the impact of the Central Bank’s high key rate. Nevertheless, now we see that companies that slowed down in 2020-2022 are returning to long-term planning and are ready for development. I believe they can provide demand and activity in the office market.

— How do high loan rates affect your market?

— High interest rates on loans have become a deterrent for many companies that build with bank funds to withdraw new facilities. Therefore, despite the fact that we regularly see news about new promising office projects, some of them are highly likely to be postponed until the base rate changes and the corresponding reduction in project financing rates.

A high key rate has quite a strong effect on the economy of the project as a whole. Office real estate for many developers is a non—core area. Additional pressure is exerted by the increase in cost, which is noted every year.

Given the combination of all factors, we predict that not many new projects will enter the market — rather, those that are currently under implementation will be completed. Such dynamics cannot be called favorable for the market as a whole. But if we talk about our company, we initially chose a more stable financial model for ourselves. Stone office projects are built primarily with our own funds and the capital of our partner investors. We also have our own internal tools, thanks to which we maintain stable sales rates: you can enter into a deal with a small down payment and go into a paid installment plan, the rates for which are lower than the key one, there are also deferred payment programs.

— Does the office market remain globally interesting for corporate and private investors in connection with the above?

— Offices for sale are initially an investment product that is very stable in terms of maintaining attractiveness. The projected increase in the cost per square meter during the construction period is 40%. Moreover, in the context of a reduction in alternative investment tools, the flow of investments into the office segment has only intensified. Of course, with high deposit rates, many people carry funds to banks. But the profitability of deposits is always limited by a time period, and the rate is constantly moving. Real estate is a more reliable and stable asset, where the growth of the price of a meter is predicted, depends on the construction site and exceeds the income from the deposit by a multiple. But this is a long-term game.

The investment strategies of the majority of investors have also changed in recent years. If people used to look for stress assets, today most investors choose less risky strategies with clear and predictable income. They no longer seem so attractive, for example, GABs (ready-made rental business. — RBC-Real Estate), when the tenant can move out and the obsolete premises after his departure will require repair, and this is additional costs for the investor and forced downtime of the premises. Projects under construction are a product of a different quality, which in the long term will be in demand in the rental market. Interesting entry conditions and installments before the end of construction allow buyers to calculate their cash flows and distribute payments without withdrawing all capital from the business turnover. Buying an office is also an investment for the company. Organizations that have not previously thought about acquiring office space are changing their strategies and acquiring an office as a capital preservation tool. An office in the property works in the same way as an investment in an HR brand, and increases the company’s status in the eyes of banks and partners.

— Your company has been a leader in the RBC rating for the third year. And are there any plans for the future — what volumes of construction are you laying?

— First of all, a wide range of offers at different stages of readiness and with a large geography allows us to maintain leadership among competitors. We have offices from 40 sq. m. m to blocks of several floors and buildings in their entirety, in established business districts and in new locations. Also, there is always a reserve in the Stone portfolio that we can offer to large companies: a large volume of offices at an early stage. Today we have seven business centers under implementation, and we are preparing for the launch of the eighth flagship project. All this corresponds to the strategic development plan of the company. We are continuously looking at land plots to increase the volume of office real estate in the portfolio, as we want to maintain our leadership in the office market. But at the same time, we understand that the time has come to diversify our portfolio. We have already announced our plans in residential real estate, so we will develop both office and residential real estate in parallel.

We really understand that there are locations where there are not enough office facilities with the active development of transport infrastructure and housing in the environment. As a company that hears the request of the city authorities for the polycentricity of the metropolis, we are ready to build offices in established residential areas. Moreover, we see a request to live and work in the same area. This also corresponds to the concept of our projects, when we plan to develop both office and residential functions within the same location.

— Let’s talk about housing. What is the stage of readiness of your projects now? What trend do you see in pricing? Market experts believe that housing prices are in equilibrium due to a correction in demand. How promising is it now to invest in housing for retail buyers? Offices and even apartments feel better…

— We have already talked a lot about the fact that the company has four residential projects in its portfolio. One of them will go on the market in April — this is a residential complex in Sokolniki. We have not had any housing starts for a long time, and a large number of our regular customers who have invested with us in offices and apartments are waiting for new offers.

Stone has established itself as a developer who offers investment properties to its clients. Therefore, in the residential direction, which is just being launched, we are relaying all the values that we have been laying down in the office segment for years. We are focused on investment starts: firstly, as I said, this is an understandable model for our clients, secondly, we are entering a highly competitive market and we are expected to offer the best prices at the initial stage. If we talk about our real estate strategy in general, then, as a rule, we do not give big discounts and do not change the characteristics of the product during the construction process towards simplification. Therefore, our buyers are confident that by buying real estate now, their investments will recoup due to an increase in the cost per square meter, and the product will not lose quality at the exit. All these dynamics are embedded in a financial model that is based on real numbers. We see prospects for our offer to become an investment in the housing market.

— Let’s return to the near term — to the offices. The other day you announced a new project on the Khodynka field. How do you rate this location and the project? How is he progressing?

— Taking into account the increased demand, which was noted in the first Stone office project in Khodynka, I can say with confidence that this is the location that will always be relevant. Moreover, today it is one of the most dynamically growing business districts. It is a continuation of the geographical business cluster on Belorusskaya and the Leningrad Business Corridor. Very convenient transport accessibility and a lot of requests for offices from end users — business owners who live in the area. To date, Khodynka is a well—formed modern residential area of business and premium class, there are also promising sites, the development plans of which are already known. In short, it is interesting for real estate investments.

Realizing that the location has not yet absorbed all the pent-up demand, we are bringing out a second site for office construction, which is located in close proximity to the CSKA metro station and our Stone Khodynka office block. Moreover, we are also working on the third phase, because the potential has not been exhausted. This will be a building for the headquarters of a large company (about 50 thousand square meters). That is why we are laying such an area of infrastructure – about 8 thousand square meters, in Stone Khodynka 2.

— Tell us more about the new project.

— I can say that this will be a fundamentally different product both in terms of architecture and positioning. This is the first time we have collaborated with the Kleinewelt Architekten bureau on this project. An important element of the quarter will be a through-floating glass gallery uniting three towers. Stone’s eighth flagship office will combine all the company’s accumulated experience in commercial real estate development. Investments in the project will amount to about 25 billion rubles. The request “to work, live and relax in one place” is one of the most striking trends in the industry. And Khodynka is one of those points on the map that has concentrated the synergy of three components. There are quite a lot of large companies that are expanding, and they attract other businesses, various satellites.

— You have also announced the Stone property service. Is it developing today? Why would a large developer need a function that brings many times less income than selling and renting… Wouldn’t it be easier to hire a contractor?

— We initially understood that we did not want to leave our investor clients alone with an office block in concrete. Especially those for whom this is the first investment in commercial real estate and do not have asset management skills. Therefore, it became a logical decision for us to launch a separate line for renting out premises and recommendations for repair work. Considering that we are now preparing for the commissioning of the second stage of Stone Towers at Belorusskaya, it is time to actively work on property services. Development remains Stone’s core business, and we have engaged an exclusive partner, Stone Realty Agency, to provide services. The main purpose of his work is to provide a range of services for comfortable asset ownership for our clients. Together we will work on customer loyalty and their desire to enter into repeat transactions. Now the agency’s key task will be to find tenants for Tower B, C of the Stone Towers office block. In a business center with a large number of owners, it is important to maintain a balance of tenant profiles and maintain proper rotation. With the help of Stone Realty, we will be able to monitor these processes. Moreover, we understand that small rooms with finishing are rented out faster. And there is no such product in the new Class A business centers. Therefore, more experienced and far-sighted investors will make repairs so that their lots go first. And Stone Realty will offer our clients such an option.

Returning to your question about why we do it ourselves: because it is our reputation, and we are focused on building long-term relationships with customers. Our rental partner area will meet Stone standards in terms of service level. The company already has experience in this: together with our partners, we filled our B+ class business centers with tenants and did it as quickly as possible. Another important point is the rental rates. In the new level of facilities, the rates will be higher than the market average, and Stone Realty’s task is to take into account the interests of our investors in this matter.

— And what product trends would you call formative for the office segment today?

— One of the main trends in office real estate, as I said, is the request for work and rest in one place. From people who devote a lot of time to work, spend most of the day in the office. Especially if we are talking about high—quality offices – these are companies that look at the future, development and growth of their employees, and employees are very motivated to be active. But in order to spend a lot of time at work and not burn out, additional options are needed, such as infrastructure facilities, where we can not only order a service at the moment, but also have the opportunity to get out into the fresh air, relax and reboot.

Therefore, we pay a lot of attention to the improvement of our office facilities, and those where there is already a natural green landscape nearby and at the same time high transport accessibility remain truly unique sites for office construction. A green environment has a positive effect on a person and helps to relieve stress. Sports and art are also becoming anti-stress factors for residents of the megalopolis: the trend for a healthy lifestyle has been developing for years, and cultural facilities in a big city consistently attract the attention of the audience. Therefore, if earlier the infrastructure of business centers was focused on restaurants, canteens, cafes and services, now it is impossible to imagine a sought-after facility without sports studios, art galleries, and entertainment. A modern office must support the lifestyle of its users, which is why the trends of offices and housing are so closely intertwined, and the course towards work-life balance among advanced developers will only intensify.


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