By Art Patnaude And Olga Razumovskaya
MOSCOW--The empty storefronts and for-rent signs that pockmark
the upscale shopping strip of Tverskaya Street illustrate impact of
the ruble's collapse and Russia's broader economic troubles on
commercial real estate.
But vacancies aren't landlords' only problem. Owners of retail
and office spaces also are being deluged with requests from
tenants--ranging from mom-and-pop businesses to major international
corporations--to renegotiate leases. And in many cases, tenants and
landlords say, the owners are acquiescing.
"Landlords are seeing the light," said Alexey Kandidov, senior
portfolio manager of real estate facilities in Russia for Microsoft
Corp., which he said is "in the renegotiation process" on four
leases. Facing the prospect of tenants walking away, landlords are
"very receptive," he said.
Falling rents and economic uncertainty already have curtailed
real-estate investment. Over time, analysts warn of pressure on the
banking system because falling incomes for landlords could make it
harder for them to service their debt. Already in 2015, Moscow
landlords have cut rent by more than $2 billion, according to
Alexei Filimonov, chief executive at Astera, a real estate
consulting company in alliance with BNP Paribas Real Estate.
The crux of the problem: the real-estate industry's practice of
denominating rents in dollars, which stems in part from owners
borrowing money in dollars. The ruble's fall from about 35 per
dollar in June to almost 70 at the end of last year amounted to a
near doubling of rent for tenants paying in the local currency.
In recent weeks, the ruble has rallied to about 57 per dollar.
But that has eased only some of the pressure on tenants, who also
are facing a weak economy due to a sharp decline in oil prices and
Western sanctions tied to the war in Ukraine.
The government expects gross domestic product to shrink by about
3% in 2015, the first decline since 2009. Some private economists
see a deeper contraction.
Hard-pressed tenants are asking landlords for rent reductions as
well as for new leases with rent denominated in rubles. These
negotiations are "not carried out easily" but "the majority of the
landlords are treating this issue understandingly," said Oleg
Karzhavykh, development director at O'KEY Group SA, a major Russian
retailer.
Earlier this year, O'KEY succeeded in renegotiating its lease
from dollars to rubles at Praktika Development's Riviera Mall in
Moscow, where it is the anchor tenant. "Everybody is switching to
rubles," said Bulat Shakirov, Praktika's chief executive.
For high-quality shopping centers, vacancy rates are expected to
surge to 6% this year from 1.5% in 2014, according to Cushman &
Wakefield. Average rents are expected to fall to $2,500 a square
meter this year, from $2,625 in 2014 and $3,900 in 2013, the firm
said. A square meter is about 10.77 square feet.
Rents for lower-quality properties are down in some cases by
more than 30% so far in 2015, said Vladimir Pinaev, chief executive
officer of CBRE Russia, adding that the pipeline for new office and
retail developments has slowed. Developers have announced plans for
850,000 square meters of retail space in Moscow, but a Tuesday
report by real estate services firm JLL projected only 450,000
square meters of these projects will be completed.
The pall over the market has put a damper on real-estate
investment. Only $3.3 billion of commercial property sold last year
in Russia, down 68% from 2013, according to data from Real Capital
Analytics Inc.
Numerous deals have been upended. Late last year, for example,
RB Invest, a Russian firm, was close to selling Karnaval, a
shopping center near Moscow, for $67 million, according to a person
who worked on the deal. But as the ruble plummeted, many of
Karnaval's tenants threatened to leave if their rents weren't
reduced. The owner obliged, but the cash flow of the property fell
and the sale collapsed.
In addition to contract changes, "it was the buyer's
understanding that the economic environment wasn't going to be the
same as before," said Stanislav Bibik, head of capital markets at
Colliers International Russia, which represented RB Invest. RB
Invest didn't respond to requests for comment.
Declining rents could have repercussions beyond the real-estate
industry. Part of the reason landlords preferred dollar leases was
because they "had taken out a loan in dollars," said Andrei
Protasov, managing director at Russian advisory firm ILM.
"If a lease is renegotiated in rubles, then the financials of
the landlord could deteriorate," he said. The longer Russia's
economic problems persist, the more the "pressure on property
owners and their ability to service their debt," he said.
There hasn't been a surge of foreclosures, but banks clearly are
getting more cautious about new real-estate loans. VTB24, the
retail unit of Russia's second-largest bank, VTB Group, "has become
more conservative in signing on property owners," said Ilya
Vasilyev, deputy head of VTB24's small and medium-size enterprises
department.
Mr. Vasilyev said the bank now will "conduct stress tests to see
how the landlord will be paying off the loan if his income
decreases" by a certain percentage.
Not all landlords are renegotiating with tenants. Dmitry Mints,
chairman of 01 Properties, a large office landlord, said his
company isn't agreeing to switch leases from dollars to rubles,
although in "extraordinary cases" 01 Properties will agree to fix
the exchange rate for a year or two for tenants who agree to
renew.
"Giving up on dollar leases fully in the end wrecks the
investment value of particular projects," he said.
Write to Art Patnaude at art.patnaude@wsj.com and Olga
Razumovskaya at olga.razumovskaya@wsj.com
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