According to Cushman & Wakefield research, the total volume of investments into commercial real estate was $4.63 billion in first half of 2013 which was 82% greater than volume in second half of 2012 and almost identical to first half of 2012 (5% lower).
Moscow is still the core market for Russian property investments, absorbing 80-85% of total capital. The decentralization trend away from Moscow towards the regions saw a pause and slight reversal during the crisis years. In pre-crisis 2007 for instance, regions received 25% of all investments. We are seeing a return to decentralization. “Demand for commercial real estate is higher than the offered supply especially in retail, warehouse, and hospitality sectors and we see a transfer of investor interest towards the regions”, said Alexander Zinkovski, senior analyst of Cushman & Wakefield research department.
In 2012, big demand for regional investment appeared, however the scarcity of quality supply was still a holding factor with investors interested in economically developed cities with a population of over a million in the European part of Russia. With the expected delivery of 1.6–2.8 million sq. m. of shopping centres across Russia within the next two years, the investment pattern will change.
Retail market has gained the momentum since the end of 2011. In the first half of 2013, retail was the most attractive real estate sector for investors and half of all investments went towards it ($2,063 million). For comparison, annual retail investment volumes accounted for $2.04 billion in 2011 and $2.59 billion in 2012. “If all planned deals are concluded, then 2013 will become a record year for volumes in retail real estate”, commented Alexander Zinkovski. Developers’ expansion plans are backed by solid rising individual consumption. In 2012, Russia became number one retail market in Europe, being fourth just 2 years ago. Russia now has a huge consumer market with constantly rising real personal incomes about 70% of which go towards consumer spending. The most successful shopping centres in Moscow enjoy daily average football of 40,000-80,000 and average vacancy rate is about 1%.
Although the office segment is slightly behind with $1.71 billion invested in first half of 2013, this year saw the biggest office transaction in the history of Russian office market. All quality office assets have rental rates nominated in foreign currency with yearly indexation unlike in other BRIC countries where this is banned. Moreover, continuity of financial flows from quality assets is protected by long-term leasing agreements. Thus, in volatile economic conditions and with potential volatility in the ruble, the quality office sector becomes extra attractive.
Investment into warehouse and industrial real estate was $600 million and may reach over $1billion towards the end of 2013 which will be a repeat of the extremely successful results for this sector in 2011 ($1.08 billion).
The current yields for prime assets in Moscow are 8.5% for offices, 9.25% for shopping centers, and 11.5% for warehouse and industrial space. The spread is about 250 bps for the European average and about 450 bps for best European markets (London and Paris). The market has largely matured in the post-crisis period thus the spread is now less volatile compared to 2007-2009.
According to Cushman & Wakefield forecasts, by the end of 2013 the volume of investment deals will real the level of $8 billion. In 2014 the market expects a mild slowdown with volume remaining at similar level of $7.8 billion. The leading share on the market belongs to Russian investors (71%) and is similar to 2012 yet the share from international investors has doubled since 2010-2011.
As 2014 Winter Olympics and subsequent World Cup are coming closer, there is a rise in disputes about their influence on the property market. Both events will take place in European Russia and much closer to its financial and economical centers. However, the analysis of international experience shows that the event itself creates the opportunity whereas the post-event period is the cornerstone for successful property market growth in the regions. Thus if the government will share the driving role with other investors, that will be the key point for regional property market development.
The St. Petersburg average yields are estimated by 100–150 bps higher and the regional markets are 200–250 bps higher than Moscow. In developed cities of Russia, the combined risks are not significantly greater than in developed European markets. Russian market continues to grow quantitatively and qualitatively. Moreover, when comparing Russia to other emerging markets like Brazil (where rental rates can’t be USD indexed and the long term leases are generally difficult), or China (where the economy and property markets are overheated and currently slowing down), or undersupplied India, we see that the Russian market has much better investment opportunities both in terms of liquidity and investment return.
“Unfortunately, Russia is still largely underestimated by many investors. As the Russian market becomes more transparent, we expect more investors to come in the next 2-3 years”, added Alexander.