Guiding Lines: The Effect of War

The world financial crisis is more important than geopolitical games for the Russian real estate market. There is less money and it is rising in price. Many western and even large Russian banks, such as VTB, Sberbank, and Gazprombank, are not prepared to finance construction. It is not officially spoken about, but potential borrowers receive refusals, both directly and indirectly, in the form of an infinite tightening of decisions to provide credit. And, of course, all banks have revised their conditions of credit: in the last year interest rates have risen on average by 2-3 per cent. Today they reach 16-18 per cent. "Under such conditions there is no sense for construction companies to realize projects. They are selling land plots and projects are frozen," complains Avdeyev. At the same time the political risks are compelling American, English and other investment and banking companies to demand greater profitability from projects.

In terms of the war with Georgia there has been no influence, in particular unanimity among its participants, on the commercial real estate market as a whole and the presence of foreign participants. "Influence, of course, in the medium term future may become extremely negative," predicts Vladimir Avdeyev, partner at S.A. Ricci in association with King Sturge. “Our foreign partners and clients often do not mention the military conflict in the Caucasus during negotiations at all," says Vladimir Pantyushin, director of Russia and CIS at Jones Lang LaSalle.

Of course businessmen take into consideration the political ambitions of the two states, but it is not a defining factor. For example, investment-construction company Trimo (Slovenia) is investing 140 million euro in the Technopark Vyazniki industrial complex in the Vladimir region. Damir Kochan, general director of Trimo, says that like for any businessman, political and economic stability is desirable, but this incident does not influence the realization of the park in any way. Moreover, the company already has plans for a second phase of the project.

Everything is bad

In connection with the war in South Ossetia investors have withdrawn from Russian markets, according to various data, from $20 billion (UniCredit SpA in Moscow) to $35 billion (BNP Paribas). But it is possible that the war is only a pretext. According to Alexander Svyazhin an expert analyst at GVA Sawyer, external economic conditions are the reason for the outflow of capital from the Russian market: while the economy is gradually starting to calm down, in Europe a slowing in economic growth is being felt more and more. "Many assets have started to be considered overestimated,” notes Svyazhin. “And assets are being sold in order to buy them later for cheaper." This explanation is particularly relevant to commercial real estate. "Since last year the real estate market has come to a standstill due to too high prices for assets, a lack of funds for credit, and because of the reassessment of investment risks by investors in real estate," continues the expert. Interesting offers have appeared, but only for funds, which have enough funds or sufficient reputation. And by the estimations of GVA Sawyer, there are no more than 10 of these. For funds working with large credit instruments, the situation until now has been adverse. "With the creation of a fund the managing company incurs some obligations in terms of profitability and the period of the return of investments, which in the developed conditions cannot be fulfilled. And the situation in Georgia is a convenient explanation to not invest or even to extract investments without loss to reputation," he summarizes.

The Caucasian conflict has influenced all funds, which have not yet entered the Russian market, negatively, says Avdeyev. "Political risks have considerably increased, and new players are not coming to Russia," he explains.

The financial crisis and the Georgian conflict are far from being the only things affecting the mood of foreign investors. For example, in Russia the situation with the owner of multinational corporation ВР Robert Dudley passed practically unnoticed while in England this incident has caused a huge resonance. The Russian market has too many disadvantages to be attractive to foreigners: opaque business, administrative obstacles, high chance of bribing, instability, high inflation, etc. At the same time there are a number of interesting regions in Eastern and Western Europe and the US. In Avdeyev's opinion, the markets of Hungary, Romania, Bulgaria, etc. are more attractive than the Russian market to western investors.

Everything is good

The volume of global transactions in the sphere of commercial real estate, according to Jones Lang LaSalle (JLL), in the first half of 2008 decreased 41% in comparison with the same period in 2007 to $236 billion and have almost returned to the level of that in the first half of 2005. At the same time in Russia the volume of foreign investment in the commercial real estate has increased. According to JLL, in the first half of 2008 they totalled $4.4 billion (this figure was $1.3 billion in the same period of 2007). By the end of the year it is expected that total investments will considerably exceed last year's sum of $5 billion. Nothing can stop investments from increasing; experts do not yet observe the flight of foreigners.

In the opinion of Pantyushin, the Russian market doesn’t look bad against a background of falling European and US markets. The profitability rate of the best premises in Eastern Europe are at a level of about 5 per cent, and in Russia are 8-10 per cent. The number of investment transactions is also growing. In the long term, Svyazhin thinks the demand for commercial real estate will slow down, "but this will be caused by saturation of the market, rather than a crisis in the market."