Moscow's Best Offices Beat The Financial Blues
- Mar. 11 2013 18:41
Maxim Stulov / Vedomosti
Analysts see some positive impact from Europe's economic turmoil as investors take advantage of low bond yields to satisfy their growing appetite for risk.
So far, the contraction in Europe has had some positive impact on the Russian commercial real estate market.
By the end of 2012, European economies were shrinking at their fastest rate since the collapse of Lehman Brothers four years ago. A 0.6 percent contraction in the Euro zone in the fourth quarter of 2012 contrasts with Russia's 2.2 percent gain in the same period.
The two regions are key trading partners: Europe imports Russian oil and gas and exports industrial and agricultural products to Russia. So far, oil prices have remained high, while the money-printing efforts of central banks around the world, with Japan soon to join the US and Europe, keep bond yields low.
CBRE's Director of Market Research in Russia, Valentin Gavrilov, notes that interest in risky assets showed an increase, which may continue into 2013, and become one of the drivers of the increase in prices. "However the basic macroeconomic indicators in the euro area remain weak.
Consequently, interest in high-quality assets in the so-called Class A second tier segment remains weak, but may be activated towards the end of 2013." He expects investors to continue to focus on retail and offices.
The perceived appetite for risk depends whom you ask. Four of the top five cities selected by members of the Association of Foreign Investors in Real Estate (AFIRE) as the top global cities for investment were in the US. Moscow was the only Russian city on the list and it came in at 25th. This is a decline from 2012 when Moscow was ranked 13th and 2010 when it was ranked 10th.
For the first time Turkey emerged as one of the top four markets for capital appreciation, along with Brazil while India and China joined them in the in the listing of the top four emerging markets. Russia, however, did not show up either as a country providing the best opportunity for capital appreciation or as a country providing a stable and secure investment.
Investors who are actually in the Russian market are familiar with this negative image and call it a perception gap, contrasting with the positive experience that they have on the ground. (For more on international investment see Inside View, P11, and Emerging Markets, P26).
Money and mouth
Looking at where investors actually put their money, analysts at Jones Lang LaSalle found that global investment in commercial real estate was $443 billion dollars, up 2 percent. Much of that came in the final quarter. Analysts expect global commercial property transactions to be between US$450 to 500 billion in 2013.
David Green-Morgan is Global Capital Markets Research Director at Jones Lang LaSalle wrote in a research note that while 2 percent seems little, for most of 2012 they had feared a decline of 10 percent on 2011. The surprise jump in the final quarter, 50 per cent above the third quarter, approached levels seen at the peak of the market in 2007. It was partly due to the Congressional tax and spending debate in the US, which led sellers to accelerate disposals to avoid any changes to capital gains tax.
Europe's recession is expected to depress transaction volumes according to JLL. Commercial property prices are still 20 percent below their peak, although secondary assets bear most of the brunt, according to the IPD global index.
Maxim Stulov / Vedomosti
CBRE found that total investment in commercial real estate in Central and Eastern Europe fell 35 percent in 2012. Russia and Poland were the leading destinations among CEE countries, only because they saw the smallest decline, of about 20 percent.
International investors accounted for about 13 percent or $345 million of office real estate on the Russian market in 2012, as domestic investors built their portfolios. The total volume of investment fell 22 percent from 2011, to $4.98 billion, though CBRE's Valentin Gavrilov points to evidence of appetite: If all negotiations begun in 2012 had been concluded, it would have been a record year, he wrote.
The office segment accounted for 52 per cent of investments, and volumes remain at a historic high. Notable transactions included Ducat Place III, Four Winds, Silver City, Summit and Galleria Actor.
More than 1.8 million square meters of office space is slated for delivery in 2013. Cushman & Wakefield expects a more modest out turn of 600,000 square meters: About 70 percent of projects will be constructed but not operational. Projects in Moscow City will account for almost 40 percent of delivered stock, among them Eurasia Tower and Mercury Tower. Another arrival, in the Belorussky district, will be White Gardens.
An average class A office went for $790 per square meter per year, up 5 percent on 2011, according to Cushman & Wakefield. Moscow has a shortage of high quality buildings that are not just of high architectural appeal but also convenient and integrated into the surrounding urban environment.
As for vacancy rates, CBRE says these remained at about 9 to 10 percent in Class A office buildings in Moscow's central business district in 2012.
Jones Lang LaSalle has analyzed the volume of construction of shopping centers in Russia says 2013 may be a record year.
High quality retail space could pass 2 million square meters, an increase of 46 percent from 1.58 million square meters. The amount in Moscow could be three times the figure for 2012 and twice in the case of St. Petersburg.
Moscow developers will introduce 10 new shopping centers, including Vegas Crocus City, totaling 111,000 square meters lettable, and River Mall in Avtozavodskaya with 91,000 square meters lettable. Others include Vegas at Kuntsevo, Spring on the Altufiev Highway and Gudzone on Kashirskoe
Moscow remains the most attractive location in Russia for large international investors, according to Cushman & Wakefield, and the third biggest investment market in Europe behind London and Paris.
The retail sector contributed about 45 percent of transaction volume in 2012; the office segment about 30 percent; hospitality, 15 percent; and warehouse and industrial, about 7 percent in total.