January 1999

by Kendra Cartwright

Renting or purchasing suitable office space is a key issue for U.S. companies interested in establishing a presence in St. Petersburg, Russia. The question of finding real estate is not a complex one in St. Petersburg, even in light of the current economic crisis. The St. Petersburg real estate market has more than adequate options for any company, large or small. In addition, there are several new developments providing class "A" space for those companies requiring a high prestige location and office space. Less visible business centers also offer space for those companies that do not require Western standard refurbishment or a prime location.

Location, Location, Location
When describing location for St. Petersburg commercial real estate, there are two broad categories: the center and outside the center. The center generally refers to Nevsky Prospekt between the Admiralty and Ploshad' Vosstaniya and the side streets nearby. The real estate on Nevsky Prospekt is among the most expensive, with prices declining as one moves farther from the center into greater St. Petersburg. Western companies tend to prefer to place their offices in the center; as a result, the market is concentrated there, and there is a lack of quality office space further away from Nevsky Prospekt. Currently, the business centers that offer office space near Nevsky offer only rental terms.

Most Western companies in St. Petersburg rent, as opposed to buy, office space, primarily due to the perceived political instability in Russia. Some companies, generally those with large investments and holdings in Russia, do prefer to purchase their real estate. Coca-Cola St. Petersburg Bottlers, RJ Reynolds Tobacco International, and Wrigley St. Petersburg have all either purchased or built factories and established manufacturing facilities just outside of St. Petersburg.

Unlike the residential housing market, which has suffered due to the Russian economic crisis, the commercial real estate market at this point does not differ greatly from its pre-crisis state. While rent prices have come down slightly, the top three class "A" sites, Nevsky 25, Moika 36, and White Nights House, have not reduced their rents. These three premises offer all the amenities of a high-end business center found in the West. Yearly rents for such prestigious property range from US$600 to US$800 per square meter (US$60-80 per square foot). An office of 100 square meters (1,000 square feet) costs between US$5,000 and US$6,000 per month. The advantages to these properties include a prestigious location, high-quality construction, Western management and a completely legal and above-board way to pay rent. While White Nights House and Moika 36 are zoned only for office space, Nevsky 25 offers excellent retail space as well. Yearly retail rents on Nevsky Prospekt, the city's main thoroughfare, usually range from US$1,000 to US$1,500 per square meter.

Recently, there has been increased interest in class "B" office space. These business centers are often Russian owned and managed and do not offer the high quality, western refurbishment of class "A" sites. These properties are also generally located slightly farther away from the city center. The large supply of such spaces, combined with the current economic crisis, have driven prices for these spaces down to US$300 - 500 per square meter per year. In addition, payment requirements and lease terms on class "B" properties tend to be more flexible than those in class "A" buildings. As a result, nearly all these premises are leased to a mix of Russian and Western companies.

Factors to Consider
In the past, offshore payment on Russian real estate was common practice. Today, a Russian company cannot receive payments offshore for property rented in Russia. A Western owner, however, can receive payments into an offshore account, provided that the 20 percent withholding tax has been paid. This tax is generally paid by the tenant. If the rent is paid in Russia in rubles, there is a 20 percent value-added tax (VAT) charged, again to the tenant. (If the tenant has representative office status, the rent is exempted from VAT.) The key difference between withholding tax and VAT is that a company can reclaim VAT. However, a company should keep in mind that rents are generally quoted excluding VAT. Another common extra charge not always evident from the outset is "communal services." This somewhat Soviet-sounding term may or may not include electricity, security services, cleaning and upkeep of the premises, or anything else the owner decides it includes. Much like in the West, a tenant should be sure to ask specific questions about the availability and quality of power supply, communication lines, and parking. Generally, in class "A" facilities, these issues are never a problem. Class "B" sites are somewhat more restricted in what they can offer to companies.

For a company new to St. Petersburg, it is wise to work with an experienced property agency and Western law firm familiar with Russian law and the commercial properties available. Working with such firms can provide much assurance that they will find suitable space with the least amount of complication. Another advantage to this approach is that the prospective tenant will have one contact person instead of having to contact many owners of various sites.

Companies tend to look to Moscow first when entering the Russian market, but one should not forget that St. Petersburg offers many advantages over Moscow. St. Petersburg rents tend to be lower; the local government is actively planning tax incentives for foreign investment; and St. Petersburg is a port city, making for easy shipping access. These advantages, along with the availability of quality offices and standard rental practices, make St. Petersburg a relatively friendly environment for foreign companies wishing to do business in Russia.

For more information on doing business in St. Petersburg, visit BISNIS OnLine at www.mac.doc.gov/bisnis/country/regions.html#Northern.

Kendra Cartwright is a senior property consultant at Atlantic ONCOR in St. Petersburg, Russia.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)