Guiding Lines: Third Way

Moscow commercial real estate consultants continue to insist that the market of offices is far from being saturated, with demand still far exceeding supply of properties and rental rates growing stably. However, these days, consultants are ready to determine the point of no return beyond which office developers will have to bid farewell to enormous earnings and the market situation will stabilize. The authors of a recent survey by the company Cushman & Wakefield / Stiles & Riabokobylko (C&W/S&R) expect this to happen by the year 2010; rates will stop growing and a new stage in the development of the market will begin. Developed Western European economies and Eastern European countries went their own ways to achieve that stage. Russia, it seems, has found a third way.

Medium- and long-term rental rates for class A and B offices in Moscow continue to grow, however rates are likely to stabilize by 2010, the survey says. One of the reasons for that, it transpires, is the solid inflow of foreign capital. Foreign investors have already accrued experience in the Russian market where the number of attractive investment projects is growing and institutional investors who have access to cheap cash or loans at lower interest rates have already established their presence, C&W/S&R analysts explain. Thus, whether they like it or not, namely foreign investors will help the Russian market stabilize.

Jones Lang LaSalle has reported that investment in Russian commercial real estate hit all-times high of 3.4 billion in 2006. Office real estate accounts for the largest share of investments. Namely that sector is the most attractive for foreign investors. However, although that figure is almost 10 times higher than the total amount of investment reached in 2005 Russia still falls behind Poland where 5 billion euros were poured into real estate projects last year, and Western European markets. Germany’s commercial property market is estimated at 50 billion euros; the British market at 80 billion euros.

But Jones Lang LaSalle believe that Russia’s future will be different from that of other Eastern European countries. Russian investors continue to play a significant role at home. Last year they accounted for 44% of all investment deals in commercial real estate. In Poland, the Czech Republic and Hungary that figure does not exceed 2,6 and 8% respectively. Perhaps, the UK is the only European country that is ahead of Russia in these terms, as domestic investors there account for 48% of investments. Even Germany and France are behind Russia, with 18 and 23% respectively. It transpires that there is a strong interdependence between the arrival of international investors and stabilization of the office market.