Prospects for commercial real estate development in Kazakhstan – office and shopping real estate Dmitry A. Revin, Director for finance and business development Eurasia RED, www.eurasiared.com Adam Smith conference – Construction and Real Estate in Kazakhstan April 1-3, 2008 Almaty, Kazakhstan

WHAT’S AHEAD…? DEMAND SUPPLY RATES PROFITABILITY

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.

Analysis of Kazakhstan commercial real estate market 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 5

Kazakhstan is the biggest dynamically developing country in Caspian region with attractive investment climate 6 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

Stage III. Maturity stage Kazakhstan commercial real estate market passed through emerging market stage and is currently still in the stage of dynamic growth 7 Stage I. Emerging stage Stage II. Growth stage Stage III. Maturity stage Kazakhstan regions Regions of RF Almaty, Astana Moscow Examples «Kendala» Almaty, 2005 «Astana Tower» Astana, 2005 BC at Gagarina str, Almaty 2006 «АFC» Almaty, 2008 Time 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 Construction of new business centers of А, В+ and B class Share of old buildings in office real estate is significant Mainly construction of А+ and А class business centers MFC * with offices of premium class Business centers Слайд за Максом Shopping real estate is comprised of old stores and soviet supermarkets, markets/bazars, stand alone shops, booths. Construction of shopping centers, in particular due to network retailer presence Share of Soviet period commercial buildings is still high 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 Shopping centers * MFC – multifunctional complex (offices, shopping center, hotels, etc) 7

Analysis of Kazakhstan commercial real estate market 8 Analysis of Kazakhstan commercial real estate market Overview of Kazakhstan commercial real estate market Business center real estate market Shopping center real estate market 8

With dynamic growth of GDP per capita, office real estate area in Almaty and Astana should significantly expand as well 9 Office real estate availability per 1,000 inhabitants in world cities and its correlation with GDP per capita Paris Toronto Sidney Almaty (2012) Office real estate availability per 1,000 city inhabitants, sq.m. Madrid Prague Warsaw Astana (2012) Bratislava Budapest Добавить города не успел Moscow Sofia Almaty(2006) Istanbul Astana (2006) GDP per capita at purchasing parity index, USD Source: OECD, JLL (Cities’ reports), Swiss Realty Group, Istanbul Metropolitan Municipality, CBRE, Knight Frank 9

Analysis of Kazakhstan commercial real estate market 10 Analysis of Kazakhstan commercial real estate market Overview of Kazakhstan commercial real estate market Business center real estate market Almaty Astana Shopping center real estate market 10

Based 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 11 Almaty city population forecast New demand growth forecast for office real estate in Almaty Thousand city inhabitants Thousand sq.m. 1360 1375 1330 1345 1316 1287 1301 X Office space per 1,000 Almaty inhabitants based on GDP forecast Comments Sq.m. / 1,000 city inhabitants 2090 Based on forecasted population of Almaty city, it’s expected that there will be on average 2 sq.m. per citizen by 2012. 1393 928 618 412 275 183 Source: Agency of RK for statistics, Kazakhstan commercial real estate center, Deloitte estimate

Economic forecast for office space demand shows that Almaty market is still far from saturation point 12 Comments Economic forecast of new demand and planned supply of office real estate in Almaty, thousand sq.m. 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. Economic forecast for new demand Potential new supply taking into account AFC Planned supply of office space taking into account declared plans on AFC 1 According to the plans declared by the market players and business center projects under development as of the end of 2007. Source: Deloitte forecast 12

Analysis of Kazakhstan commercial real estate market 13 Analysis of Kazakhstan commercial real estate market Overview of Kazakhstan commercial real estate market Business center real estate market Almaty Astana Shopping center real estate market 13

According to economic forecast, new demand for quality office real estate in Astana will increase eightfold from 2007 till 20012 14 Astana city population forecast New demand growth forecast for office real estate in Astana Thousand city inhabitants Thousand sq.m. 766 730 696 663 632 X 602 574 Office space per 1,000 Astana inhabitants based on GDP forecast Comments Sq.m. / 1000 inhabitants 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. 1600 1109 755 532 369 255 177 Sources: Agency of RK for statistics, Kazakhstan commercial real estate center, Deloitte estimate

According to economic forecast, Astana office supply will considerably exceed demand in the next 2 years 15 Economic forecast of new demand and planned supply of office real estate in Astana, thousand sq.m. 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. Planned supply of new BC¹ space Economic forecast for new demand 1 Based on market player plans and BC projects under development as of the end of 2007. Source: Deloitte forecast 15

Analysis of Kazakhstan commercial real estate market 16 Analysis of Kazakhstan commercial real estate market Overview of Kazakhstan commercial real estate market Business center real estate market Shopping center real estate market 16

Analysis of major foreign city development shows that there is a strong correlation between city GDP and shopping space availability 17 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. Shopping real estate availability per 1,000 inhabitants in world cities and its correlation with GDP per capita Paris London 650 sq.m. per 1,000 city inhabitants Shopping real estate availability per 1,000 city inhabitants, sq.m. Warsaw Madrid Almaty 2011 Budapest Astana 2011 530 sq.m. per 1,000 city inhabitants Berlin Prague Bratislava Almaty 2006 Moscow Kiev Astana 2006 GDP per capita, thousand USD Source: Kazakhstan commercial real estate center, Agency of RK for statistics, EIU, OECD, Deloitte estimate

Analysis of Kazakhstan commercial real estate market 18 Analysis of Kazakhstan commercial real estate market Overview of Kazakhstan commercial real estate market Business center real estate market Shopping center real estate market Almaty Astana 18

Experts forecast that Almaty retail market turnover will increase threefold from 2006 to 2012 19 Retail trade through trade enterprises* grows annually and may reach 56% by 2012 Retail trade turnover in Almaty, billion USD Retail trade turnover through different sale channels 20% Kazakhstan The same period 20% 24% Надо подтвердить цифры по КЗ Almaty is the largest trade center of Kazakhstan with about 40% of total retail trade turnover of RK in 2006. * 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 Source: Agency of RK for statistics, EIU 19

20 Economic forecast for 2 scenarios of Almaty shopping space demand – using official and unofficial statistics on city inhabitants Scenario 1. Official statistics on Almaty city inhabitants Scenario 2. Unofficial statistics on Almaty city inhabitants Economic forecast of demand for shopping space in Almaty Almaty city inhabitants growth forecast Thousand sq.m. Scenario 1 Demand for new shopping space Thousand city inhabitants 1142 2010 1914 1823 1736 32% 859 1653 1575 1500 642 1 479 358 268 1345 1360 1375 200 1287 1301 1316 1330 X Shopping space per 1,000 Almaty inhabitants based on GDP forecast Thousand sq.m. Scenario 2 Demand for new shopping space 1770 Sq.m. / 1000 Almaty city inhabitants 890 37% 1247 650 2 865 477 600 360 416 272 288 206 200 160 Source: Agency of RK for statistics, Deloitte estimate

Almaty economic forecast shows that future demand for shopping space in 2008-2009 may exceed supply by 1.5 times 21 Comments Economic forecast for new demand and planned supply of shopping real estate in Almaty, thousand sq.m. 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 Economic forecast for new demand for Scenario 1 Deficit ~1.5 times Taking into account construction of 140 sq.m. MEGA center (IKEA) Developer plans for construction of shopping centers Source: Company data, Deloitte estimate

Analysis of Kazakhstan commercial real estate market 22 Analysis of Kazakhstan commercial real estate market Overview of Kazakhstan commercial real estate market Business center real estate market Shopping center real estate market Almaty Astana 22

According to expert estimates annual growth of Astana retail market turnover will comprise 25% in the next 6 years 23 Retail turnovers will be more and more through trade enterprises and share of open markets (bazaars) may decrease up to 10-15% in 2012. Retail turnover in Astana, billion USD Retail turnover through various sale channels Kazakhstan for the same period - 20% 25% 31% Надо подтвердить цифры по КЗ 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. Source: Agency of RK for statistics, Ministry of Economy and Budget Planning of RK, EIU 23

Demand for new shopping space in Astana may be higher than in Almaty due to higher population growth in Astana 24 Scenario 1. Official data on Astana city inhabitants Scenario 2. Unofficial data on Astana city inhabitants Economic forecast of demand for shopping space in Astana Astana city population forecast Thousand inhabitants Thousand sq.m. Scenario 1 575 Demand for new shopping space 1239 1127 1025 39% 414 847 932 700 770 298 1 730 766 215 663 696 155 574 602 632 111 X Shopping space per 1,000 Astana inhabitants based on GDP forecast Thousand sq.m. Scenario 2 894 Demand for new shopping space Sq.m. / 1,000 inhabitants 721 50% 597 530 427 2 400 323 267 244 184 179 130 120 Sources: Agency of RK for statistics, Kazakhstan commercial real estate center, Deloitte estimate

Supply planned by developers Economic forecast for shopping space demand and supply shows their balance in 2008. However, shopping space deficit may be expected as early as 2009. 25 Coments Economic forecast for new shopping space demand and supply planned by developers in Astana, thousand sq.m. 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. Supply and demand stabilization period Shopping space deficit growth period Economic forecast for new demand under Scenario 2 Supply planned by developers Economic forecast for new demand under Scenario 1 Source: Deloitte estimate

Is Kazakhstan commercial real estate market competitve in terms of investment yield with other major CIS markets? 26 Investment yield Change YoY, bpts 2006 2007 Russia Office 9.5% 8.5% -100 Retail 11.0% 9.25% -175 Warehouse 9.75% -125 Ukraine -150 13.0% -200 14.0% 12.0% Слайд за максом Source: Cushman & Wakefield Stiles & Riabokobylko, JLL, DTZ, Colliers, Renaissance Capital estimates 26

Investment yield for office real estate investments What about profitability? By 2012 profitability of office real estate in Almaty and Astana may decrease to current profitability in Moscow 27 Investment yield for office real estate investments Almaty Moscow Аstana 5 years Eastern Europe 3 years Western Europe Minimal office real estate profitability ~ 4,5-5% Comments 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. Слайд за максом Source: JLL, CBRE, MC «Accord Asset Management», Deloitte estimate 27

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