Year of Huge Demand and Insufficient Supply

MTAn apartment building going up near the Polezhayevskaya metro station in northwest Moscow. A spurt in apartment prices is slowing down, experts say.
In many ways, Moscow's real estate market resembles a rich teenager with a messy room, a few personal problems and not a lot of discipline.

The teenager's parents are high oil and gas prices -- which continue to fuel Moscow's explosive growth for a fifth year in a row -- and there is no reason to think that 2008 will be any different.

In all sectors of the city's real estate market, demand continues to far outstrip supply. As with oil and gas prices, no end to this is in sight.

Even the liquidity crunch and the subprime crisis -- terms scary enough to give nightmares to realtors from the United States to Kazakhstan -- seem to have had little effect on real estate in Moscow or the rest of Russia.

The "new oil" is how Sergei Riabokobylko, the Moscow director of realty firm Cushman and Wakefield, described real estate in an interview with Bloomberg in early 2007.


Retail property came in like a lion in 2007. In the first quarter of the year alone, the sector drew $322 million worth of investment nationwide, according to Jones Lang LaSalle. This figure made Russia the second-biggest market in Europe, after Germany.

Among the main developments in Moscow was the opening in September of Lotte Plaza, a 85,000-square-meter complex of shops and offices located at the intersection of the Garden Ring and Novy Arbat.

Following the realtor's mantra of "location, location, location," Lotte Plaza combines luxury goods with good transportation options -- two main streets as well as easy access to two metro lines.

Location is also credited for the success of the Yevropeisky Mall, a 180,000-square-meter shopping center that straddles two radial metro lines and the city's ring line.

"Yevropeisky Mall was successful particularly because of its location," said Jeff Kershaw, the director of the retail department at CB Richard Ellis Noble Gibbons realtors.

The success of the shopping center has driven hopes that two other large retail shopping centers -- one being built under Tverskaya Zastava Ploshchad near the Belorusskaya metro station and the other at Paveletskaya Ploshchad -- will be as successful.

In 2007, retail space in Moscow increased by 1.2 million square meters, according to figures provided by CB Richard Ellis Noble Gibbons. The firm projects that some 1.5 million square meters of shopping center space will be built in 2008.

However, even with the addition of the shopping space, the growth of retail properties remains capped by the limited amount of property in the city itself.

"There's not a whole lot of land in Moscow," Kershaw said. "There's not even a whole lot of underground land."

As a result, he said, investors and developers will have to be creative. "They're going to have to take over dilapidated office buildings and old shopping centers," he said.

For 2008, Kershaw said the growth of full line department stores such as Galeries Lafayette, Harvey Nichols and an expanded Marks & Spencer would be a growing trend.

Colliers also predicted further growth with the entrance of international retail chains, mentioning specifically H&M, Carrefour and Wal-Mart.


Offering some respite, the growth of prices in Moscow's residential housing market slowed down considerably in 2007 compared with the previous year. The slowdown is expected to continue this year.

"In 2006, residential prices increased 92 percent," said Yekaterina Thain, director of residential property at Knight Frank.

Prices for super-prime apartments -- those that cost $8 million or more -- soared by 40.9 percent in 2007, but the average rate of growth for elite housing was 23.4 percent, Thain said. She expected prices to grow by 18 percent to 25 percent in 2008.

As with the other sectors, demand is outstripping supply -- caused in part by people moving to Moscow from other provinces and neighboring countries.

Increasing prices have caused Moscow's neighborhoods to begin to homogenize along income lines, said Maria Litinetskaya, executive director of Blackwood real estate.

"The homogenization of neighborhoods will continue as a trend into 2008," she said.

In the economy-class sector of residential housing, Blackwood found that the growth in prices was also slowing down. Part of this is due to the fact that more than a million square meters of residential real estate is being built or is planned for the near term, with another 400,000 square meters already planned for 2011, real estate experts said.

In both housing and retail, Kershaw said, "they need to build past the MKAD, and people need to move out there to relieve congestion in the center."


From 2003 to the end of 2007, the total stock of both class A and B office space nearly doubled from 2.9 million square meters to 5.6 million square meters, according to Knight Frank.

Even with this figure, however, builders of office space cannot keep up with demand. The reasons for the shortfall in supply are high demand and delays in commissioning, issues that remain intrinsic to Moscow's office real estate market, Blackwood said. These factors have contributed to the intensive growth of rental rates and sales prices for class A office space. This has made Moscow one of the four most expensive cities to rent offices in the world, CB Richard Ellis said.

The Moskva-City business center development in the west of the city center is stepping in to fill the gap -- if not in price, then at least in space. Knight Frank estimates that the development will add 1.5 million square meters of office space to the market by the end of 2011.

Citywide, office space vacancy remained low, at 2.4 percent last year, Knight Frank said.

Also last year, a trend toward "bundled" projects advanced, and it looks set to grow in 2008, Blackwood said. While in mid-2006, projects of more than 100,000 square meters were a rarity, in the first half of 2007 more than seven developments of more than 300,000 square meters were announced.

Perhaps the most significant trend last year was the announcement of plans to build a number of major office projects in Moscow's suburbs, Blackwood said.

"This may result in the emergence of full-fledged business districts outside the MKAD," it said in a report. The Moscow Ring Road, or MKAD, is the outer ring road that encircles Moscow.


As the economy has expanded, trade has taken off and major foreign and local logistics companies, such as DHL, F4 and Unitrans, have moved into the market, greatly increasing demand for A class warehousing space.

Smaller firms, for their part, have shown increased demand for B class warehouse space.

Again, demand continues to outstrip supply.

"There is high and constant demand in the Moscow region," said Vyacheslav Kholopov, associate director of the industrial sector at Knight Frank. "But we need to not overestimate it at the same time."

This is partly caused by the fact that the market is growing sharply and that "year after year there are construction delays," Kholopov said. "Only half of the projects that are being announced are being completed on time."

Last year, more than 2 million square meters of warehouse space were announced, but only half of that was brought to market. For 2008, 2.4 million square meters have been announced.

"The amount of square meters announced for 2008 was quite high again," Kholopov said.

But he predicted that only around 1.2 million meters would be brought to market in the Moscow region this year.

Four large warehouse projects are currently under construction or partly completed in the Moscow region, including MLP Podolsk, Domodedovo, Severnoye Domodedovo and Yuzhniye Vorota. Together the projects, when all are completed near the end of 2008, will provide more than a million square meters of warehouse space.

Kholopov said warehouse space was being leased out nine months before completion in 2006 and just two to four months in advance last year. He said this trend would continue into 2008.

Rent values now stand at around $135 per square meter for class A warehouses, while class B stands at $115 to $110 per square meter.