According to Cushman & Wakefield, investment activity in the Russian market has reached a record level of $3.39 billion for the first quarter. This is almost half of $8 billion total investment volume projected for all of 2013 and was primarily due to 2 major 1M+ deals. Although investors continue to focus on more liquid assets, they are beginning to invest in quality assets in relatively developed regions as well, including those traditionally considered more risky in the warehouse and industrial sector.
The office property sector was preferred by investors and was a leader with $1.58 billion in total investments. White Square business center deal was record setting and it is now one of the best assets on the Russian market. Although a minor increase in vacancy rates was noticed across the market, trophy assets in A and B+ class continue to be highly demanded and are the main investment focus. The warehouse and industrial sector contributed with the second largest regional deal ever with Eurasia logistics portfolio. The expected delivery of 1.2 million sq.m. of space could significantly boost investment activity in the market.
Retail market has beaten its own record of Q1 2012 with Metropolis deal worth $1.2 billion. Rental rates remain high and continue to favor the property owner but this may change in the near future when1.8 million sq.m. of quality retail assets get delivered in the regions.
Capitalization rates in Moscow are 8.5% for offices, 9.25% for retail, and 11.5% for warehouse and industrial assets. The main players on the lending market (Sberbank, VTB, Alfa-Bank) dictate the rules of the game and remain a factor that limits potential newcomers from participating. Lending remains challenging. Estimation of capitalization rates in St. Petersburg are 50-150 bps higher and 150-300 bps higher in the regions. The Cyprus crisis does not appear to fundamentally alter investor perception of the Russian market.
Alexander Zinkovski, of Cushman & Wakefield research department commented: “Although the Russian property market keeps setting new records and there is a clear interest in the regions, the lack of new institutional investors and deficit in quality supply holds it back. Nevertheless, the investment potential of Russian commercial real estate market is high. We expect stable performance in 2013 with a projection of $8 billion in total investments but there should be increasing activity in 2014 when a large number of attractive projects, especially in retail and warehouse sectors, get delivered across Russia.”