Slow Recovery Predicted for Commercial Real Estate in Russia

While the Russian economic situation is fraught with tension to say the least, experts are predicting a turnaround in the commercial real estate market, albeit a slow one...

While the Russian economic situation is fraught with tension to say the least, experts are predicting a turnaround in the commercial real estate market, albeit a slow one. According to a new report in the Voice of Russia (VoR), real estate firms including Knight Frank and CBRE are finding that demand is high, particularly in the office sector, but that there isn't sufficient supply of the kind of prime assets investors are looking for to meet this demand and bring more sales.

Both CBRE and Knight Frank are predicting a turnaround by the end of this year, CBRE goes for the full commercial real estate market, while Knight Frank stops short at the office sector, predicting rising office rents by the end of the year due to limited delivery of new space.

The Russian economy is almost entirely built on exports of raw materials, with oil exports accounting for well over 40% of GDP. As a result plummeting oil prices led to its being one of the hardest hit by the financial crisis. The GDP fell by 7.8 percent and the number of unemployed increased from 4 million in the summer of 2008 to 7 million (or 9.3 percent) at the beginning of 2010. The Voice of Russia report attests that the commercial real estate market was among those hit particularly hard by the 2008 world financial crisis.

Growth prospects in Russia are "significantly impeded by uncertainty surrounding the European debt crisis worries, with investors clearly focusing on prime property and risk avoidance," the Voice of Russia reports.

However, according to CBRE and Knight Frank the main problem hindering the recovery is the lack of availability of the kind of prime assets risk averse investors are looking to buy into, leading to a new trend of investors buying into the construction of such assets.

Valentin Gavrilov, research director at CBRE Russia, told the Voice of Russia by phone, "The main problems are volatility and lack of investment grade assets in Russia currently. One emerging trend that we see is related to foreign investors' readiness to enter projects on early stages of construction. They are trying to develop high quality properties themselves, rather than search for completed assets."

Gavrilov added, "The process allows us to speculate about a transition that is presently happening in this segment. As a result, foreign players become more accustomed to building high grade objects themselves with the aim to either sell them later on, or keep them for investment purposes."

According to VoR this trend was also highlighted by Knight Frank earlier this year, when the firm concluded that increasing foreign investment and activity in the development of office premises could help to resolve what they called "the most pressing" issue for the segment, namely the lack of supply of high quality assets.

Knight Frank stressed this problem poses "one of the toughest constraints for the growth of the commercial real estate market in Russia", the Voice of Russia said.

- Monday 05 November 2012

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