In his 2004 Chairman's Letter Warren Buffett, the famous American investor and stock-market guru, offered this advice on how to conquer markets: "Be fearful when others are greedy and greedy only when others are fearful." This sounds like fairly smart advice but, unfortunately, the CEO of Berkshire Hathaway offered no one-liner as to the course of action that should be adopted when the markets are both greedy and fearful.
Until recent years Russia's hotel industry, in particular the well-known international brands, has been primarily concentrated in the country's two main cities: Moscow and St. Petersburg. However, over the past few years Russia's millioniki have started attracting hotel chains and operators from abroad and recently even less populous cities, with more than 500,000 people, have been drawing attention.
The strong economic growth in Russia over the past decade resulted in a fast-growing demand from occupiers for quality office stock. Over the last five years the total stock of quality office space has increased fourfold to seven million square meters. Yet, despite steeply increasing development activities, the new supply was not sufficient to meet occupiers' demand until the third quarter of 2008. Vacancy rates have remained at low levels since 2003. The vacancy rate for Class A offices gradually decreased from 10 percent at the end of 2001 to 1.1 percent by the end of 2007. Over the same six-year period the vacancy rate for Class B properties dropped from between 8 and14.5 percent down to a 3.8 percent minimum. This has allowed landlords to increase rental rates and become less flexible regarding other terms and conditions of the lease. In other words, we have experienced a true landlord's market over the past several years.
For the relatively young and developing Russian real estate market, which is becoming increasingly turbulent every day, the current global financial crisis is its first real acid test. Despite the challenges that have been faced in the past, this adjustment is far different from any previous economic downturn, primarily because it is global and not local in nature. This changes the tools available to deal with its effects.
Until very recently a break away from Moscow, even for just a couple of months, usually meant returning to find an alteration in the cityscape: a development completed, the visible form of a building appearing from a construction site, or something new begun. So for Takuya Aoyama, who has been away for over a decade, the change must be monumental. Following a career of 15 years in real estate and hotel development with brands including Starwood and Holiday Inn, he moved to Hyatt last summer as vice president, development and acquisitions, responsible for Eastern Europe and the CIS. When he returned to Russia at the end of last year Sophie Cooper met him to discuss how the market has changed since his first time round and find out how the company's expansion plans for Moscow and beyond look in the current climate.
In May 2007 I wrote an article for REQ entitled 'Why housing bubbles burst', following which I received many critical comments debunking the article's main premise, predicting the imminent collapse of Moscow real estate prices caused by market forces and an inflated housing bubble. The chief argument was that I didn't understand the specifics of Moscow real estate economics. Although it is still early to say 'I told you so', as prices remain well ahead of projected levels, the time of reckoning is without doubt catching up with disbelievers.
While companies familiar with the swift price correction in the office sector of Moscow's real estate market may expect a similar situation in St. Petersburg, they would do well to consider the different opportunities each market can offer. In contrast to Moscow, which has been the focus of real estate observers, the St. Petersburg market has its own set of specifics, which make it both better poised to recover from the crisis on the one hand and more vulnerable to a drop in demand on the other.
A tour of the Moscow metro is a must according to most guidebooks on the Russian capital. Particularly on the circle line the city's residents encounter groups of foreigners being led on a tour of the most architecturally interesting stations. Or else, they have to avoid the individual tourist trying to surreptitiously photograph a hammer-and-sickle relief, a foreboding statue of a worker or a stained glass window before a policeman catches them. Annoying as they may seem to residents, perhaps these visitors to the city should be cut a little slack. A tourist stepping into the Moscow metro for the first time is more likely to appreciate the design of the stations and the artwork that decorates them than the average Muscovite or long-term expat who has often spent years being pushed and shoved onto trains only to then be sandwiched between the back and the armpit of two strangers before having to fight his or her way out onto a different platform.