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FEDERAL STATE EDUCATIONAL INSTITUTION OF HIGHER EDUCATION NATIONAL RESEARCH UNIVERSITY HIGHER SCHOOL OF ECONOMICS

Saint Petersburg School of Economics and Management

Department of Management

Bachelor's thesis

In the field 38.03.02 `Management'

Educational programme `Management'

Increasing the Capitalized Value of a Business in a Commercial Real Estate Market

Sukhomlina Lilia Andreevna

Diasamidze Leyla Akhmedovna

Academic supervisor

Kaisarov A.A., Deputy Head of Department, Associate Professor

Saint Petersburg 2020

Abstract

Real estate has been making a significant contribution to the economy of the country. As a result, real estate has been a field of interest of many entrepreneurs, particularly commercial property. The current research is dedicated to developing the criteria system to assess the potential profit growth reserve of commercial property. The study is carried out within the framework of specific real estate facility in Russia: a business center in Ryazan city. The work consists of two key parts: exploring the current financial position of considered business center and finding the possible opportunities of business development and showing how the capitalized value will change according suggestions for improvement of particular commercial facility. The main method that underlines the study is called an Income Approach, which is based on the business valuation from the perspective of the ability to generate profit by the property. Assessing the current situation of the business center and highlighting the potential opportunities for its development, the following is proposed: to open a cafй, to install vending machines, tobuild the 5th floor, where a space for coworking and a recreation area will be organized, to provide tenants with cleaning services, to provide advertising services,educe electricity costs by installing motion sensors and presence. Results shows thatthe most beneficial improvements of the business center are a cafй and an additional floor, which relate to the factors of upgrading the infrastructure in combination with a change in the structure of the commercial property. There are financial confirmation and interpretation of the findings in the final part of the study.

Key words:commercial real estate, commercial property, real estate evaluation, commercial real estate investment, capitalized value.

business development commercial

1. Introduction

1.1 Background

Real estate is a unique, complex and the largest asset class in the world. This field plays a significant role a worldwide economy. An experience gained in the economic and financial sectors, as well as the instability that has been observed over the years and vague prospects in these fields, prove that the investment sector needs a pre-thought out, careful and reasonable strategy in order to generate profit. An understanding of such need has come only for the last 30 years. That is due to the fact that at that time investors began to perceive a commercial real estate as an actual asset and 10 years later started to include it in their overall portfolio (Shaukat, 2010). Nowadays, investment in real estate is considered an appealing one, and during the period of economic recovery it is possible even for investors with a non-property background to be attracted by the property sector (Wan, Martin, Alias, & Ali, 2010). To encourage the abovementioned statement, since stock and bond markets tend to fluctuate, investments in commercial real estate are considered more attractive, and are expected to remain the best investment option compared to stocks, cash and bonds (Deloitte, 2019).

These abovementioned statements are supported by the following statistical data. Global commercial real estate transaction volume increased by 13 % in the first half of 2018 compared with the previous one. Particularly, in USA the growth was 11%. 97% of the survey respondents (Deloitte, 2019) have an intention to increase their investments in commercial real estate (e.g., USA - 13%, Germany - 13%, Canada - 12%).

Regarding the statistics in Russia, in the total investment in 2016 amounted to $ 4.17 billion, which was 40% higher than the total volume of transactions in 2015. Such growth was marked due to gradual recovery of macroeconomic indicators, which led to a gradual increasing of investment attractiveness. (Colliers, 2017). According to the results of the first three quarters of 2019, the volume of investments in real estate in Russia reached 123.8 billion rubles. Thus, the growth rate compared to the same period last year amounted to 10% (Knight Frank, 2019). In the commercial real estate sector, such indicators are reflected, for example, in the increase in the total takeover of offices (+2% in 2019 in Moscow), a record high volume of transactions with warehouse space in Russia as a whole. It is also important to mention that in 2019 there is a significant increase in demand for development areas. According to Knight Frank Research (2019), during I - III quarters of 2019, the largest volume of investments fell on the segment of development sites, its share in the structure of demand was 36% against 10% a year earlier. That implies the fact that investors are actively looking for the new ways to generate profits in this particular market, and the above only strengthens the relevance of the current research. The second place in terms of the share of investments in commercial real estate is occupied by offices, and the third - by hotel property.

At the same time, the researchers note that over the past year (2019), in monetary terms the number of objects sold in the commercial real estate segment increased four times, while, on the contrary, a decrease of 58% was noted in the segment of land for housing. Thus, 85% of all transactions are contracts involving commercial real estate. According to the expert opinion, this was facilitated by the appreciation of the ruble and a decrease in the key rate. Moreover, in 2019, investment activity in the warehouse market increased three times as well, setting a historical record of 161.2 thousand square meters of space. At the same time, the warehouse market, for example, in St. Petersburg continues to experience a shortage of quality supply. It is connected with the fact that over the past three years, no more than 100 thousand square meters of speculative space were built per year (Knight Frank, 2019). Based on the opinion and expectations of the agency, in 2020, the trend of maintaining and increasing the activity in the commercial real estate market both from institutional and private investors will continue.

According to research conducted by the Knight Frank (2019) agency, due to the current trend of rapid development of the IT-industry, the demand for office space will most likely increase.At the moment, digitalization is developing very fast and is gradually capturing an increasing number of industries. Any business, in order to become successful and to show a worthy performance, has to adapt to the emerging ecosystem and its influence. Also, looking back, it should be noted that many markets have experienced and are still experiencing changes related to the impact of digital technologies, as it affected the transformation of activities on different levels of business processes. According to Doloitte's research (2016), the commercial real estate industry also depends on digital technology and its development. Back in 2016, Deloitte predicted that the traditional mantra, which was at the origins of the emergence of commercial real estate, “location, location, location”, would have been gone by the wayside, and “location, information, analytics” would become a new mantra. However, even at the end of 2019, these expectations were not accurate enough, because successful companies in the commercial real estate industry must follow three rules: location, experience, analytics. It was noted that investors tend to have a growing interest for the projects that are aimed at investing in technology in order to prepare real estate for the requirements of future realities. According to a survey conducted among commercial property executives in USA, the main changes are expressed by the following features. First of all, urbanization and globalization affect the market, the demand for labor, and the requirements for the workspace are changing. Secondly, the benefits of technology are unlimited in terms of tenant experience, and moreover, they can increase operational efficiency and optimize costs. More specifically, according to the results of the survey, it was revealed that 92% of respondents plan to invest in the development of digitalization related to the improvement of the tenant experience, and more than 70% intend to do this even in conditions of economic instability.

This subsector is devoted to the ultimate idea that in the field of commercial real estate there is a trend of increasing competition in the modern world. The main goal is to create conditions that are most suitable for tenants and allow them to rationally use the place and resources. This requires a clear understanding of what additional features the building can provide. Therefore, the current study is aimed at finding solutions that will create additional conditions for customers in the commercial real estate market, while generating profit for the investor.

There are three major elements in the real estate system. The first is the space market, which is the market for the occupancy and usage of built space. It is also called the rental market.

On the demand side of the space market are potential tenants looking to rent space. This is the fundamental reason why buildings exist: families need a place to live, organizations need office space to do their work, retail firms need a store to sell from, industrial firms need warehouse or manufacturing space, and so forth.On the supply side are the buildings, the stock of built space. Buildings are owned by landlords, who are, in fact, investors. Landlords want to rent their space to tenants to get income from their property, as a fundamental part of their return on their investment, and to create or enhance the value of their assets.The market balances the supply and demand. Many potential tenants compete for space, and many landlords compete for tenants. This results in the rental price and occupancy rate that prevail in the market when it is in equilibrium.

Occupancy refers to the percentage of the built space that is currently in use and generating benefits for the tenants and income for landlords. Vacancy is the opposite of occupancy; if a building is 95% occupied, it is 5% vacant.

The net rent (for example, per square foot per year) times the occupancy, equals the net operating income (NOI) generated by the property, per square foot per year. “Net rent” refers to the gross rent minus any building operating expenses the landlord must pay.

The second major element in the real estate system is the asset market. This is the market for the trading of the ownership of real estate assets. The ownership of such assets is real estate investment, and the owners are investors. Demand in the asset market comes from potential investors who want to buy property.Supply in the asset market comes from existing investors, or property owners, who want to sell their property.

Individual investors search for and compete for potential buyers and potential sellers. In real estate, this is generally a type of market referred to as a “private search market.” It operates notably differently from a “public auction market” such as a stock exchange. In the larger context of the capital markets, real estate assets compete for investors' money not only against each other, but against stocks and bonds, and other types of investments.

The real estate asset market tends towards equilibrium. However, identifying the market value of any given real estate asset at a given time requires investigation and analysis, as such price or value information is not nearly as precisely and publicly available as information on, for example, the stock market. The fundamental source and basis for such property asset value is the ability of the asset to generate future net cash flow in the space market. The development industry is the third major element in the real estate system. This is the industry that builds new physical assets. The development industry converts financial capital (money) into physical capital (buildings). This is the part of the system that has the most impact on the nature and quality of the built environment.

The development industry looks at the values of built properties in the asset market and compares those values to the cost of developing new buildings (including the construction cost, the land cost and sufficient profit for the developer).

The developer (and its financiers) perform a basic calculation. If the expected value of the to-be-built asset is greater than the total development cost (including necessary profit), after accounting for time and risk, then the development project presents a positive net present value (NPV). This means that the project's expected return on investment is at least equal to its opportunity cost of capital (OCC). In that case, it should be possible to attract sufficient investment to finance the development, and so the project should be able to proceed.

Once completed, a development project will have produced a new building - that is, new built space - which adds to the stock of supply in the space market.

If the project has a negative NPV, the developers should wait and not build (at least, they shouldn't build that project on that site at that time). It will probably be difficult for the developer to get financing for a project that has a negative NPV (if the NPV analysis is done correctly, and if the financier supplying the money is being careful).

1.2 Research object

The object of this study in a broad sense is the commercial real estate market. Commercial real estate includes office, warehouse and retail premises, land for their construction, water bodies, subsoil and green spaces, that is intended for use by individuals or legal entities. In general, these are buildings, structures or land used for commercial activities with the subsequent extraction of capital gains, constant profit, rental income or investment income.

There are two types of real estate assets for investors to consider:

Development projects: Capital is used to construct one or more new buildings.

Existing properties: These are properties that are already operational and form part of the stock of built space.

Investing in existing income-producing properties is the main type of real estate investment in most mature economies. These properties are also referred to as “stabilized,” meaning that they are fully operational, functioning at (or near) normal capacity, and generating cash flows accordingly. From a financial perspective, investment in stabilized properties is the underlying factor driving the development industry. If investors were unwilling to pay to receive income from stabilized assets, then these assets would have no value. If stabilized assets had no value, then development of new properties would be unprofitable and would not take place.

1.3 Problem statement

There is an intense level of uncertainty in commercial real estate market, which represents a problem in this particular sector. In modern realities of turbulent economies, it has become very challenging to undertake strategically proper and effective decisions. Hence, managers and analysts are seeking approaches to optimize investment strategies, but the condition of inefficiency dictates problems related to asset selection and, therefore, portfoliomanaging (Koіodziejczyk, Mielcarz, & Osiichuk, 2019). Baum (2017) posits that in order to efficiently manage the portfolio and carefully assess its full market value, real estate should be distributed among high-class specialists, capital investors or developers. Consequently, basing on the above statements the impulse for this study is the phenomenon which states that owners of commercial real estate cannot always correctly reveal the potential value of the business. Namely, the holders do not see the opportunity for improving or do not know how to use the available reserves. Thereby, commercial property becomes an undervalued asset that will make a profit which would significantly exceed investments being in the possession of a professional in the short term. Thereafter, the current study would help simplify the asset selection process for specialists who are not deeply involved in the operation of commercial real estate market, and to create a generalized system for orientation in this area. It is also expected that the paper will demonstrate example of theoretical solution in the framework of commercial real estate business from particular field of activity.

One of the perspectives from which the explanation of the relevance of the chosen topic one might be approached is the investor's view. Here it is worth starting with the determination of the objectives and concerns of the investor. Investors buy and sell assets, thereby simultaneously creating both demand and supply in the markets. During the process of buying and selling, the price of an asset is determined. And in the process of determining the price, investors take into account the main characteristics of the future cash flows that the asset will generate. Overall, investors can have two types of objectives: growth (or savings) or profit. The first option implies a long time period without the need to immediately pull out the money invested in the project and continue to invest the earned money back in order to maximize the capital growth. In the second case, the investor has a short time horizon for which the project should generate profit. However, it is worthwhile to understand the worried prospects of the development of events.

Further, it is worth considering that in addition to the objectives, the investor also has concerns that are of great importance in the process of decision making. According to (Geltner, Miller & Clayton, 2013) in relation to the commercial real estate market, such experiences are listed in the following order:

1) Risk. When investing, it is always worthwhile to consider the risk that future activities cannot be completely predicted and predicted, there is always the possibility of unforeseen circumstances that can disrupt the planned results;

2) Liquidity. This term implies the flexibility of a given asset in terms of its ability to be quickly sold at a market price without significant fluctuations. Evidently, the preference is most often given to more liquid assets, as this gives the investor the opportunity to be flexible in terms of managing his own invested capital and an investment portfolio. Liquidity is one of the main constraints in the commercial real estate market investment activities, since the process of selling property assets at its full value might take a long time;

3) Time. This refers to the time period during which the investor is interested in making a profit from the project. It should be noted that larger investors tend to have less liquidity of assets, however, at the same time, they have a wider choice of alternatives and opportunities;

4) Investor Expertise and Management Burden. It is worth paying attention to such a factor as investor participation in the project, his possible contribution to its development in terms of useful knowledges and abilities, and the desire to be part of the management team.

5) Capital constraint. It implies whether an investor is able to independently manage the entire project at his own expense or would have to resort to attracting additional funds from third-party investors, and if so, how complicated or easy this process would be, taking into account possible prospects and opportunities.

1.4 Significance of the problem

Based on the data given above, it becomes clear that, as in other industries, the commercial real estate market is gradually beginning to undergo changes. Therefore, it becomes important to understand how and in what direction it is worth acting in order to remain competitive in the market. One of the most important roles in this matter is the financial part, that is, forecasting the results and possible cash flows. Moreover, due to the fact that the Russian Federation has a wide geographical distribution, and the main development centers are Moscow and St. Petersburg, attention should also be paid to other regions, which are powerful centers of urbanization. That is, according to the article dedicated to business in Russian regions(Liuhto, Pelto, & Lipponen, 2004), Russia is experiencing an expansion of the enterprise sector and it seems very credible that the Russian small and medium-sized enterprises sector would expand. From this it is not difficult to conclude that the demand for commercial real estate would increase over time, and studies of the ways that will help improve results are an urgent topic to consider.

Also,this area is interesting for research because it is an exception if the market is considered through a supply-demand model. Supply in the space market does not follow the traditional pattern of most other products and services. Supply tends to be completely inelastic at the current quantity with respect to declines in demand, as buildings already in existence cannot simply be removed from the market. However, once the demand for built space in the market increases, resulting in an increase in market rent, developers will start adding stock to the market again. This could either result in rents increasing if it costs developers more to develop a new building than it did to develop the previous one, or rents may remain constant, in real terms, in the long run, if development costs do not increase. There's also a chance that rents may decrease, in real terms, if development costs have decreased compared to previous developments. The governing factor will likely be the cost of land.

On the other hand, if the demand for property in the space market decrease, rents will decrease by a significant margin. This is because investors cannot withdraw existing properties from the market, and an excess supply will result in business negotiating lower rents with property owners. There is thus an asymmetry in the space market. A decrease in demand will tend to cause a bigger drop in rent than the increase in rent that would be caused by the same magnitude of increase in demand, especially in the long run.

1.5 Research aim and research question

Therefore, the general aim of the research is to develop a criteria system to assess the potential profit growth reserve of commercial property. Further, in order to attain the main goal of the study the following research question is stated: which factors affect the increasing the capitalized value of a business in the commercial real estate market in Russia?

In a broader sense, this study is aimed at finding and analyzing ways to develop a particular commercial property in order to generate more profit for investors. The work involves the consideration of all the possibilities that will improve the performance of a commercial property. In order to achieve the goal of the research, an analysis of the facilityperformance will be used, as well as possible future indicators with and without taking into account suggested innovations will be predicted. It should also be understood that the forecast will be built on the basis of assumptions, which in turn will have a logical justification and be based on trends and marketing analysis of the market, which in turn will be carried out in the framework of obtaining relevant information. The literature review that follows in the next part of the study below is just designed in such a way as to cover all possible questions during the analysis and forecasting of the results.

1.6 Research objectives

Thus, to answer the abovementioned research question this paper is divided into several stages that represent the objectives of the study. Overall, the following objectivesare determined:

1) to analyze the theoretical framework, which includes exploring regulatory documents, the methods and approaches of commercial real estate evaluation, as well as aspects and features of the economics of commercial real estate;

2) to establish a methodology allowing to analyze the gathered data and to further identify probable factors to increase the capitalized value of a business in the commercial real estate market in Russia;

3) to collect data on commercial real estate in one specific category: an office center;

4) to structure the analyzed data into a system of criteria-based assessment for identification of potential reserves to increase the capitalized value of a business;

5) to describe the practical application of the developed criteria-based assessment system by the example of case from one specific category of commercial real estate (an office center);

6) based on the results to figure out ways for potential future research.

This paper is structured in accordance to the most logical scheme: following the introduction which includes all the information necessary to understand the purpose of the study and its relevance, the next part is presented as theoretical foundation with the explanation of key terms and containing review of previous studies on the topic.Going further, in the third section the methodology of the study is established, the part is devoted to the methods and procedures used to collect and to analyze data accompanied by description of objectives of the thesis, data sources and tools.The fourth part describes the results of the research and contains a discussion of the findings and an explanation considering analyzed case. The last part comprises of the conclusion, and then is followed by a list of references represented at the end of the paper.

1.7 Professional significance

Overall, the significance of the current study may be viewed from two sides: both as an applied and a basic research. Firstly, from a managerial (practical) point of view, the study is intended to make it possible to apply the system of criteria-based assessment in the field of investment in commercial real estate, thereby allowing the interested parties to maximize profit and extract the full value in a short period of time. Hence, the research will contribute to the overall development of a commercial property sector of the Russian economy. It is believed that in practice the current paper would help assess the potential of a commercial real estate for future profit generation and draw a parallel between the certain project and the analysis presented in the study. This parallel should be drawn taking into account the specifics of the implementation of projects in the field of commercial real estate, such as government regulation, marketing analysis, as well as the main objectives of the investor as well. Secondly, from an academic standpoint, the current paper is aimed at adjusting the existing models of commercial property evaluation. In addition, from an academic point of view, this work can be considered as a starting point for similar studies in other areas of the commercial real estate market (since the current research is limited in suchopportunity), as well as conducting analysis in different regions of the country and suggesting possible methods for improving the conditions in the sphere of commercial real estate.

1.8 Limitations

Despite the relevance of this study, there are limitations, which, in turn, can serve as an impetus for further research on a selected topic. The first shortcoming implies limited opportunities to gain maximum meaningful results of the study, because it considers only one sector of the commercial real estate. Secondly, at the moment, it is possible to study the research problem in sub-federal entity of the Russian Federation: the city of Ryazan. Therefore, there is a threat that the data obtained will not be fully applicable to the Russian commercial real estate market, as there is significant discrepancy in socio-economic development of Russian regions.

An important aspect is connected with the latter. Indicators of demographic and economic development of Russian regions play an important role in determining the attractiveness of these regions for investments. Indeed, according to an article written by Larionova, Maltseva and Kochetkov, 50% of investments are marked only in 10 regions of Russia out of 85. Those ones include Moscow, Moscow Region, Saint Petersburg, Krasnoyarsk Region, Tatarstan, Samara Region, Sverdlovsk Region, Bashkortostan, Krasnodar Region and Tyumen Region. This thesis is related to the theory put forward by the Russian economist N.V. Zubarevich and is called “The theory of four Russia", which implies that the first Russia is the cities of million population, the second Russia consists of the industrial cities with a population from 20 to 250 thousand people, the third Russia includes distant small towns and villages, and the fourth is the North Caucasus, Tyvy and Altai, which together make up only 6% of the country's total population (Larionova, Maltseva & Kotchetkov, 2016).

Overall, the conducted research is focused on the commercial real estate development. One example of specific type of commercial property will be analyzed. For creating a criteria system to assess the potential profit growth reserve it is necessary to sign out the influencing factors, that may be identified according the financial model and income approach method. Besides the consideration of real existing business, this research is based on the cogent theoretical foundation and previous studies. Literature review allows to find gaps concerning the topic of real estate and increase the relevance of the current paper. Except for the main designated aim to develop an assessing criteria system, it is significant that the ambitious goal is to help investors see the opportunities of the business and use these reserves for meaningful results. The alleged limitations might become a direction for the future research, that discuss the subtleties of the investing in commercial real estate and create clearer picture of this industry in a whole. Likely, considering all of the above it may be assumed that this study will be useful not only for practical application according particular case, but in an academic standpoint as well.

The introductory part is served as a tool to familiarize readers with the topic of the current research and understanding its relevance. In general, it touches on the general statistics presented in the reports of agencies that consolidate information on commercial real estate in Russia and the rest of the world. Also, three major elements of real estate system are mentioned. The subject of the study, the main question, its importance, hypotheses were also determined, and the purpose and steps that are necessary to achieve this given goal were described as well. In addition to the above, the introductory part also takes into account possible limitations that may affect the final result of the data received and their significance.To summarize, the given information should be enough to move on to the next part of this study - the literature review.

2.Literature review

For a better understanding of the topic, before stating the intention, aim and main goals, it is worth first to describe the key terms used for this research. More particularly, concepts such as investments, commercial real estate will be described below. It was also decided, that according to the direction of the study the literature review has to cover the several more topics: an explanation of some basic terms related to the real estate market, its classification, legislation established in relation to the market, property valuation and its existing methods, as well as risk assessment in the market of the real estate.

2.1 Theoretical foundation

2.1.1 Basic terms

First off, it's logical to start with exploration of the terms “investment” and “real estate”. Investment is the act of putting money aside that would otherwise be used for current consumption expenditure (Geltner, Miller & Clayton, 2013). The basic idea of investment is to have more money at a disposal in the future than what were originally invested today. Many investments will provide a steady stream of income, and many investments can also increase in value over time. At a fundamental level, it will be right to distinguish two different types of investment objectives: the growth (or savings) objectives, which implies a relatively long time horizon with no immediate or likely immediate need to use cash being invested; the income (or current cash flow) objective, which implies that investor has a short-term and ongoing need to use cash generated from the investment. Traditionally, four major asset classes are identified in the core of the investment universe for portfolio planning: cash (T-bills), stocks, bonds and real estate. When investing in real estate, investors envision getting more money back than what have been originally invested. This is called return on investment (ROI), which is how the profit in an investment is measured (Geltner, Miller & Clayton, 2013). It consists of two components: ongoing cash flows generated by a property in the form of rent and the growth in the capital value of the property over time.

Real estate may be described as land, and the buildings occupying that land. Real estate is also referred to as “property”. From the point of view of the Civil Code of the Russian Federation, the basic concept of “real estate” can be considered in the form of four categories of real estate:

1) real estate by its natural properties: land, subsoil;

2) real estate on the basis of an inextricable physical and legal connection with the land: buildings, structures and other objects, the movement of which is impossible without disproportionate damage;

3) real estate by law: aircraft and sea vessels, inland navigation vessels, space objects;

4) real estate classified by other laws as such: enterprises, property complexes used in entrepreneurial activity, which include both movable and immovable property, the use of which is subordinated to a single economic purpose, residential premises, condominiums, construction in progress.

According to Ariyawansa (2009), “real estate is defined as the land above and below the earth's surface, including all things that are permanently attached to it either natural or artificial”. In other words, “real estate” is a broad concept which includes not only land itself, but also all the man-made artificially created and improved transformations and features. Hence, any developed usable land with a building or construction is considered as the component of “real estate”. The term “real property” is a broader concept (Ariyawansa, 2009). In addition to the abovementioned features of “real estate”, “real property” includes “surface rights, subsurface rights and an airspace rights, all of which can be owned by different individuals.” However, these rights have limitations, such laws, governing the use and development of land, license, taxes, service lines, etc.

Another principal term that appears in the work is capitalized value. Capitalized value is an assessment of the value of an asset based on the income it earns and the interest rate on similar assets.

One more important term in the frames of the study is the Real Estate Management (REM). It includes management of property assets and portfolios, so that risks are minimal, and returns are, on the contrary, maximal. REM implies making strategically important critical decisions, such as acquisition, selling or demolishing of properties, reconstruction, changing, etc. Hence, “Property asset management” is about the use of properties in maximum level”. It is aimed at increasing the service life of a property, while maintaining and adding a maximum financial value of assets (Ariyawansa, 2009).

2.1.2 Real estate classification

The following types of real estate are distinguished: land (free land (for development or other purposes of land use), natural complexes for the exploitation of natural resources, etc.); residential properties (luxury, typical, urban, suburban housing); non-residential premises (offices, storage facilities, retail premises, industrial premises etc.). Along with the division into types, real estate is classified according to a number of signs, which contributes to a more successful study of the real estate market and facilitates the development and application of methods for assessing various categories of real estate and managing them.

By the nature of use:

1) Residential real estate: houses, cottages, apartments.

2) Commercial real estate: hotels, office premises, shops, restaurants, service points.

3) Industrial property: factories, factories, warehouses.

4) Agricultural property: farms, gardens.

5) Special real estate: schools, churches, monasteries, hospitals, nurseries, nursing homes, buildings of government and administrative institutions.

By ownership goals:

1) for doing business;

2) for the residence of the owner;

3) as an investment;

4) as inventory and wage;

5) for development and development;

6) for the consumption of exhaustible resources.

By degree of specialization:

1) specialized (by virtue of its special nature, it is rarely, if ever, leased to third parties or sold on the open market to continue its existing use, unless it is sold as part of its using business);

2) non-specialized - all other real estate for which there is universal demand in the open market for investment, use for existing or similar purposes.

By the degree of readiness for operation:

1) put into operation;

2) requiring reconstruction or major repairs;

3) construction in progress.

In reproducibility in kind:

1) not reproducible: land plots, mineral deposits;

2) reproducible: buildings, structures, perennial plantings.

Commercial property is a sub-category of the non-residential type of real estate and is intended to generate a profit either from capital gain or rental income (Ariyawansa, 2009). Overall, there are four basic groups under the category of commercial real estate: office, industrial, retail and multifamily (Formigle, 2017). Each of these groups can be divided into dozens of additional sub-categories.

The first group, office, vary by location and use, can be multi-tenant structures and single-tenant buildings. The group of industrial buildings includes manufacturing facilities, warehouses (storage and distribution of goods and facilities), research and development space.

Retail buildings include various property types, ranging from small shopping center tenants to big mega-malls that also offer entertainment activities. This group is distinguished by a high dependence on parking and traffic. Multifamily property includes various ones, such as resort complexes, fitness centers, swimming pools, etc. One more group which can be distinguished is hotels, which are divided into full-service ones, loaded with amenities (e.g., Ritz-Carlton), limited-service ones (e.g., Holiday Inn Express) and budget hotels (Formigle, 2017). Despite the fact that all these groups belong to the category of commercial real estate, different evaluation methods are applied to each of them. This is due to differing supply and demand in the market, lease terms, tenant credit. Overall, any end-to-end costs of operating commercial real estate vary significantly depending on the type of property. For that reason, forehanded investors tend to consider diversifying their portfolios among different property types in order to reduce the investment risk.

2.2 Legal issues

Investment activity in the Russian Federation is regulated by a system of laws and regulations. Actions related to real estate activities require strict compliance and abidance with the laws of the country in which they take place. There is a number of rules governing legal relations in the field of real estate. The documents on the basis of which the activity is conducted can be such regulatory acts as codes, federal laws and orders.

In general, there is a significant number of documents regulating the activities related to real estate in Russia. Among them, the Town Planning Code can be singled out along with the Constitution of the Russian Federation, the Civil Code of the Russian Federation (part one, part two and three), the Tax Code (part one, part two).

The Town Planning Code regulates urban development relations, that is, relations related to activities for the development of territories, including cities and other settlements, where the subjects of urban relations are the Russian Federation, subjects of the Russian Federation, municipalities, individuals and legal entities. The Town Planning Code considers issues concerning urban zoning, territorial planning, layout of the territory, capital construction facilities construction and reconstruction, operation of buildings and structures, landscaping and overhaul which affects characteristics of reliability and safety of capital construction facilities.

Among the principles, on which the legislation on urban development and regulatory legal acts issued in accordance with it are based, the following ones can be highlighted: ensuring integrated and sustainable development; consideration of economic, environmental, social and other factors; the implementation of construction and reconstruction on the basis of territorial planning documents, development rules, land use and planning documentation; implementation of urban planning activities in compliance with the requirements of technical regulations, the security of territories, engineering requirements, requirements of environmental protection and environmental safety; responsibility for violation of the legislation. (TPC of the RF, Chapter 1, Article 2).

When it comes to investments in projects involving the construction of new facilities, the article on the master plan of the city district (TPC of the RF, Chapter 3, Article 23) in the Town Planning Code becomes an integral accompanying document, as it is one of the main documents of territorial planning. The information on plans and programs are integrated into socio-economic development of the municipality. The master plan contains the provision on territorial planning, maps of the planned placement of facilities, the boundaries of settlements and the functional zones of a settlement or urban district. The plan also includes the information on the types, names and purpose of the planned facilities, urban district, their main characteristics, as well as characteristics of zones with particular conditions for the exploitation of territories. It is important to stress the significance of the functional zones, which are displayed on the master plan. The division of the entire settlement into functional zones is the main way to plan the Master Plan. The functional area determines which facilities can be built on the certain territory. For instance, there master plan may be divided into a an industrial, residential, recreation zone, etc. The purpose of any building within the zone should be strictly consistent with the master plan of the city. Functional zoning allows to visualize the future development of the settlement and its main changes, to weigh the volume of new buildings in the particular territory. In order to explain the significance of each zone, the master plan is presented not only in the form of a map but is also accompanied by documents in a text form. The text part interprets what is hidden behind the name of a particular zone. For example, what does “territory of public business purpose” mean. Materials on its substantiation are attached to the master plan in text form and in the form of maps.

According to the Chapter 4, Article 38 of the Town Planning Code of the Russian Federation, when constructing and reconstructing buildings, the limiting parameters of permitted construction and reconstruction of capital construction facilities as part of the urban planning regulations also has to be taken into account. This means that the legal side of the issue comes first, for example, when creating a plan for improving buildings, creating additional spaces or reconstructing them in order to increase the flow of profit generated by the building. This conclusion plays an important role in the current study as well, due to the fact that the Article 38 considers such items as the maximum number of floors or the maximum height of buildings; the maximum percentage of development within the boundaries of the land, that is, the ratio of the total area of ??the land that allowed to be built up to the entire area of ??the land. Accordingly, all of the above points should be carefully studied before deciding on new real estate investments. In addition to these points, in areas located within the boundaries of the territory of a historic settlement of federal or regional significance, there are also restrictions on construction and reconstruction, which are the requirements for architectural solutions of objects. They relate to such indicators as the color scheme of the external appearance of the construction object, building materials, volumetric, spatial, architectural, stylistic and other characteristics of the object, affecting its external appearance and (or) the composition and silhouette of the historical settlement as a whole.

However, the law also provides for exceptions if the construction or reconstruction of the facility does not strictly comply with the urban planning regulations. Article 40 of the Chapter 4 of the Town Planning Code indicates that interested parties have the right to apply to the commission for permission to deviate from the limit parameters of the permitted construction and reconstruction of objects, if such a deviation is necessary in order to change one or more limit parameters established by the urban planning regulations for a specific territorial zone, but not more than 10%. However, such a deviation from the limit parameters within the boundaries of the territories of historical settlements is not permitted.

Further, to start the functioning of the business, the object must be put into operation. In accordance with Article 55, this is achieved by obtaining permission to put the facility into operation, that is, a document that certifies the completion of construction, reconstruction of the capital construction facility in full in accordance with the building permit and design documentation.

The main source of regulation of real estate transactions is the Civil Code of the Russian Federation. Civil law establishes the specifics of regulation of contracts of sale, rental and pledge of real estate, the transfer of real estate from one category to another, state registration of property rights to real estate, privatization of housing. The Civil Code of the Russian Federation governs the conditions for the emergence, transfer and termination of property rights, types of property, rights of owners, which are applied, including when concluding a variety of real estate transactions. One of the significant legislative acts regulating real estate transactions is the Land Code of the Russian Federation.

The Tax Code of the Russian Federation establishes the rules for the payment of taxes and state duties when concluding real estate transactions. The sources of legal regulation of the right of transactions with real estate should include the procedural laws - the Civil Procedure Code of the Russian Federation and the Arbitration Procedure Code of the Russian Federation in the part that establishes the rules for resolving disputes on real estate rights.

2.3 Opportunities for profit generation

Investments in commercial real estate bears particular advantages related to other asset classes. These are a potential to offer absolute returns, diversification again stocks and bonds, income tax advantages and persistent cash inflow (Garay, 2016). The listed opportunities can be one of the auxiliary factors for generating profit. However, it is crucial to understand that these promises have a significance when taken with the right approach in assessing real estate and assessing its future value and capitalization. The calculation process of a properties' future value is a complicated task. In order to assess opportunities properly, it is important to take into consideration many aspects, such as a physical condition of a property, economic environment, lease structure, neighborhood, etc. Hence, the decision-making process is a crucial part in the future profit forecasting and is never precise, especially with a long-time horizon (Poorvu, 2013).

2.4 Real estate valuation

When evaluating real estate should distinguish between the concepts of value, costs and price. Value is a measure of how much the prospective buyer is willing to pay for the property being valued. Costs are a measure of the outgoings needed to create a property similar to the one being valued, or the money needed to reproduce property. Price is the money paid for the property. The cost of exchange is objective and intended for carrying out real estate operations on the market when buying, selling, pledging, including against loans, leasing and other functions. The exchange value includes: market value; salvage value; insurance cost; collateral value; rental value (Geltner, Miller & Clayton, 2013). Market value is the most likely price that can be obtained from the sale of property in a competitive and open market. Salvage value - is the net amount of money that the owner of an object can receive when it is forcibly sold. The insured value of real estate is calculated based on the full replacement cost of the property, which is at risk of destruction (or destruction). Collateral value - real estate valuation in the field of mortgage lending at market value. Rental value - the amount of rent for which a property can be leased at the date of valuation. In turn, the cost of use is based on the effectiveness of use of real estate in the form of income, utility or amenities. The cost of use (or consumer value) reflects the value of the property for a particular owner who is not going to put the property on the real estate market (Geltner, Miller & Clayton, 2013). Cost of use may include: investment value, book value and value for tax purposes.