Foreign Capital Helps Drive Big Transactions To Record Levels

Denis Abramov / Vedomosti

Retail investments continue to grow in popularity, accounting for more than half of all transactions by volume.

And while domestic investors continue to focus on offices and hotels, foreign investors are more active in retail. It's a sector that travels more easily, with investors more comfortable with exploring regional capitals.

"Generally, investors try to diversify, even if their strategy implies a particular sector to invest in. For example it is difficult find an investor/developer who would not be interested in residential high-end project projects," said Tom Devonshire-Griffin, Jones Lang LaSalle's Head of Capital Markets.

The geographical spread of international brands across the country means investors can and are looking for already operating shopping centers with experienced tenants, in areas of high footfall.

Key investors include Morgan Stanley, which this year bought, from Capital Partners, the 205,000 square-meters Metropolis shopping mall on Leningradskoe shosse and later sold half of it to Hines.

The difference is that the approach to risk management and the end product has changed.

RosEvrodevelopment bought Aura shopping center in Novosibirsk from Amstar of the US. Other investors include Immofinanz, Complexnie Investicii, RB Invest and Real Invest.

Immofinanz took 100 percent of Europe's biggest shopping and entertainment center Golden Babylon, on Prospect Mira, from co-developer Patero, for a price based on 2013's net operating income for the almost-fully-rented property.

Alexander Beloborodov, representative of Rusinkom, part of Bin Group, which is developing Galactica Park, an entertainment, shopping, business and hotel complex in southern Moscow, points out that in 1997 there were 15 shopping centers in Moscow. Now there are 50.

"We have a wide variety of brands but in every shopping center customers find more or less the same thing which means they attract customers just from the surrounding area. So from the point of view of the renting cost of the whole object, we want to surprise the customer. That's why there was a necessity to create something unique and something which will change the whole district. Something that they certainly cannot get from online shopping." The development will include an NBC Universal Studios park as well as sports and entertainment facilities.

The delivery of new retail space will accelerate in the next two years, according to CBRE, to more than 500,000 square meters per year, although 2013 is expected to see a more modest 280,000 square meters.

About 20 new international brands are expected to enter the Russian market in 2013, and 9 percent yields on prime retail property should continue to attract investors, says CBRE.


Retail development is also driving logistics and warehousing. Development outside the capitals is slow, and international investors tend to act as developers rather than investors. Deals are few, mostly featuring Raven Russia and Bin Group.

But for those chasing yield, warehouses continue to offer higher returns, according to Jones Lang LaSalle. In Moscow, warehouses command an average of 11 percent, and 13 percent in St Petersburg. That compares with office and retail in the range of 8.75 percent to 10 percent. CBRE expects investment in the sector to grow at around $6 billion per year.


The office market still suffers from a lack of demand from international companies — as tenants or investors. Despite this, transactions have set new records. Moscow's Central Business District still dominates the investment market in prime office buildings but with growing activity around the third transport ring.

The purchase of Moscow's White Square complex by O1 properties in March was the country's biggest-ever office transaction. It comprises three buildings on Lesnaya Street, near Belorusskiy train station, with 75,000 square meters of rented space. Developer AIG/Lincoln, and fellow consortium members TGP Holdings and VTB Capital completed the sale in March, which Jones Lang LaSalle described as one of the top-five global deals.

Tycoon Roman Abramovich's Millhouse Company bought the Four Winds business center at the start of the year, from AFI and Snegiri Development. It comprises 22,000 square meters of rentable space on 1st Tverskaya Yamskaya.

In a further development, Abramovich is now reported to be eyeing the White Gardens complex, next to White Square, according to sources at VTB Capital and Coalco, quoted by Reuters and Kommersant. At an estimated $800, it would be second only to the White Square transaction by value. It comprises 65,000 square meters of rentable space. Other active investors on the market include Hines, PPF and MR Group.

Foreign investors have not yet recovered to anything like the level of 2008, when they accounted for two thirds of the market (though some Russians purchasing from offshore would have accounted for the share). Today foreign investors account for about one-fifth of the market.

Market Overview

Across the market as a whole, international investors took part in a growing number of deals in the first half of 2013, accounting for just over half of transaction volumes, compared with a third in the same period of 2012. Deals over $300 million climbed to 12 per cent of transaction volume, twice the level of early 2012.

Devonshire-Griffin, of Jones Lang LaSalle, said, "Several deals with foreign capital participation have been closed in H1 2013. We expect several more in the second half of the year, about 30 to 40 percent of all investment deals will be closed by internationals in 2013. Bright spots are available financing, sectorial under supply and stability as well as trading at a premium to other European markets."

Overall, Jones Lang LaSalle says first half real estate transactions grew 31 percent over the same half of 2012, though second quarter investment was down 8 percent. Offices accounted for 49 percent, retail for 39 percent

"We see several deals under active negotiation process and expect them to close by the end of year. Unlike much of Europe, the market is not being constrained by a lack of debt, which is freely available. Comparatively higher prime yields in Moscow, at about 8.75 percent, are clearly offering a significant premium relative to other European markets — of 500 bps to London, of 450 bps to Paris, of 420 bps to Frankfurt, and 275 bps to Warsaw," said Devonshire-Griffin.

St Petersburg grabbed a greater share of second quarter real estate investment — accounting for 4.8 percent of total turnover according to Jones Lang LaSalle.


In terms of trends, David Whitehouse, Managing Director of Aecom for the Commonwealth of Independent States, Moscow, Russia, commented: "I don't see different trends. I see a different approach to investment. The trends we are seeing now are similar to what we saw in the mid nineties and the mid 2000s: as the bubble grows and bursts the next bubble starts. The difference is that the approach to risk management and the end product has changed.

"We have gone from, say, lower capital costs and short-term returns, in other words putting something up quickly so that you can make your money and get out, to long term investment grade buildings for pension funds. So the risk management to the market has changed but in terms of trends, where money is going, it is always going to follow retail and commercial offices.

"The other big trend that I see, and it has been happening for five years or more, is regionalization. It is a real challenge to build in Moscow city because of land prices and the permit process so a lot of investment is going to regional cities like Yekaterinburg, Vladivostok, and Rostov. And compared to the early nineties where 90 percent of investment was in Moscow, it's now 10 to 20 percent in Moscow and 80 percent outside. I think that is a very positive trend for Russia and for developers because in most cases it is an easier process outside."

Regional markets see lower demand for quality offices but manufacturing and retail is a different story. While investment in the major markets slowed in the second quarter, the regions saw the largest ever retail real estate transaction outside Moscow and St Petersburg. US-based Amstar sold the Aura Shopping Center in Russia's third-biggest city Novosibirsk, to RosEuro Development in August.

Amstar built the Aura Shopping Center with Renaissance Development, close to the city's main street, Krasniy Prospect. It covers 61,000 square meters of leasable area and 200 stores occupy four floors.

Aura is RosEuro's second up-and-running shopping center. RosEuro owns and operates Planeta Shopping Center, Krasnoyarsk and is developing three additional Planeta shopping centers in Ufa, Novokuznetsk and Perm.

Omsk, Nizhniy Novgorod and Kaliningrad saw hotel and retail transactions.

Investment in Russia's regions continued to grow in the second quarter of 2013 (capturing 13 percent of the total as measured by Jones Lang LaSalle.

The macroeconomic data behind retailing in Russia is mixed, but still more positive than many other markets, both established and developing. The Russian economy still leads its emerging market rivals, with Gross Domestic Product per head of about $17,000, almost twice the level of China. Forecasts for the growth of retail turnover in Russia are the second highest in the Europe and its borders, with only Turkey expected to grow faster, according to CBRE.

The issue of consumer credit has stabilized since the decline in the second half of 2012, growing at about 20 percent annually. Likewise retail sales, which are growing at about 3.5 percent. Unemployment of about 5 percent nationally, according to Rosstat, and lower in the capitals, underpins both borrowing and shopping. GDP growth stands at about 3 per cent.

Inflation and the exchange rate are the flies in the ointment: for most of the past 12 months inflation has outstripped wage growth. The ruble has dropped sharply this year. However the Russian government retains the ability to defend the currency. It has rebuilt national reserves of foreign exchange and gold, which are approaching the peaks seen before the financial crisis. Government debt is low by international standards and the budget is narrowly in surplus.