Foreign Investment into the Russian Real Estate Market Off To Weak Start

John Harrison

RK rarely looks at the real estate market. This is going to change as real estate is, everywhere, one of the main indicators of what is happening in the economy. An article about this sector once in a while may be of interest to readers outside of Russia as well as those in Russia engaged in this market. JH

2017 was the best year for three years for both domestic and foreign investment in Russian real estate, but this year has so far been lacklustre. Investment has basically stalled. According to CBRE’s annual report, investors invested 60 billion rubles ($1billion) in Russian real estate in the first half of this year, (residential and commercial). That’s a massive 41% lower than the same period last year.

The investors haven’t gone anywhere, but they aren’t doing much with their money either. The fall is due to the investors’ apprehension in investing  funds on the eve of such important events as the World Cup. Negative influence on investment sentiment was also influenced by the expansion of the sanctions list and the subsequent depreciation of the ruble.

Irina Ushakova, Senior Director of Capital and Investment Markets, CBRE, explained to Vedomosti that the fall in investment activity in the Russian real estate market this year “was due to a decrease in the volume of transactions in the segments of commercial real estate. Office real estate accounted for 46% of investment and retail 51%,” she said. “In its turn, residential real estate seems to be being held back by amendments to the law on shared construction. Developers wish to have time to buy and agree on a project before the law came into force. Compared to the first half of 2017, the volume of transactions for the purchase of plots for construction and residential real estate projects increased by 43%,” so the present fall in investment could well be a temporary phenomenon whilst developers and investors reorientate themselves to the new situation.

Investors are not actually leaving the Russian market and the share of foreign capital is also comparable to the level of the first half of 2017 — 34% of the total volume of transactions, the CBRE report says. 

This year there have been only two major deals in which foreign investors took part — the purchase of French Leroy Merlin stores in the K-Rauta trading network, and the purchase by the American Hines Fund together with the Czech PPF Real Estate of the Metropolis office complex. The K-Rauta deal put St. Petersburg, for the first time, at the top of the real estate investment list; at 48%, with Moscow taking second place with an investment share of 46%.

Domestic investors now dominate Russian real estate. “We believe that the share of foreign investment in Russia in the coming years will not exceed 20%, until the market again opens up for foreign capital,” experts of the consulting company Cushman & Wakefield noted earlier. Office and retail real estate accounted for 29% and 25% of investment funds, respectively (against 34 and 32% in the first half of 2017). The development of warehouses attracted the smallest volume of investment — only 10% of funds.

Jeff Kershaw, the CEO of Jeff Kershaw of Shopping Centres International Ltd. commented:

“The lack of access to foreign capital and financing has put a crimp on the market. Until foreign investment and lending return, it is likely that most development will be undertaken by local investors/developers, using local financing. With bank financing at local banks being expensive, (but rates are falling) this increases the cost to developers and reduces their return, thus limiting their appetite for risk. Combine this with a market that in part still hasn’t realised that some maturity has come to the market, in terms of land costs, and developing in Russia is less attractive than it was in years past. I remain hopeful, that as large Russian pension funds continue to invest into quality real estate, the markets will again become more attractive. I see things in retail terms and while retail sales are growing slightly, I would like to see higher consumer confidence levels (currently at -8.00) and hopefully that will get us into +4-5% annual YoY retail sales increases, which, while not explosive, is healthy. I think that one piece of good news on the retail front is that some grocery chains are still competing for market share and looking to expand rather aggressively.”