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. Last Updated: 07/27/2016

Moscow: A Costly Place for Business

Western businesses in Russia know that in at least one respect, Moscow is one of the world's leading financial centers: Good office space costs more than it does in New York, and almost as much as in Tokyo.

The fact that most city buildings are shabby by international standards and lack modern business amenities does not seem to matter: A number of factors have combined to make post-Communist Moscow one of the most expensive cities in the world for doing business.

Reasons range from high demand for the low supply of quality office space available to unclear property laws and a profit-hungry city bureaucracy. In this two-part series, The Moscow Times takes a look at the present shape of the office property market in Moscow and its prospects for development in the future.

Office space in New York costs $500-$700 per square meter per year to rent; in Tokyo the figure is $1, 000-$1, 200. In Moscow, the average price for Western-standard space at 12 office properties within the Garden Ring is $800 per square meter per year, an informal survey for this article found.

Industry sources here agree that the high rents on commercial office property will probably not fall soon, while construction companies say they are counting on office rents staying at their current levels for two to five years.

In fact, with some developers predicting that rents will rise still further, the market is being driven up by new companies looking to find offices before this happens.

"They are too willing to pay very high prices", said Michael Oster, managing director at the real estate firm Oster & Co. "It's a result of desperation".

Real estate companies say that the main reason for Moscow's high rents is an imbalance of supply and demand. On one side of the equation, a growing number of foreign companies and successful Russian firms like banks and trading houses are looking for Western-style office space.

On the other, the supply of buildings and land to be converted into Western-standard offices is restricted because vague property regulations and mortgage laws combined with bureaucratic obstacles and inexperienced landlords are keeping potential office space off the market.

The lack of space and high demand has allowed building companies to charge extraordinarily high rents for space in new office developments as compensation for the risks of doing business here. They aim for a very quick return on their investments, within one to three years.

"The return has to justify taking that risk", said Ian Whiston, Moscow director of the real estate consultancy Ferguson Hollis.

One example is Perestroika JV, the first success story of Moscow's real estate market, which used to charge $1, 200 annually per square meter of office space, among the highest rents in the world. Marketing director Timothy Head said it had now reduced rents to $800 per meter.

The problem of high rents does not affect all businesses equally. Small offices of one or two rooms are widely available, while the biggest companies with hundreds of employees can negotiate a good deal for a whole building.

It is medium-size businesses needing office space of 100 to 1, 000 square meters that are the hardest hit. Finding a floor or two can take up to a year, Oster said.

One reason for the lack of space is that many Russian owners of property that could easily be converted for offices are holding it back in the hope of fantastic price rises. They prefer to wait months for a tenant who will pay a fortune rather than rent quickly for a reasonable fee, said Oster.

"Russians have never seen low prices - only no prices and high prices", Oster said. "Their psychology is that $300 a month is nothing".

Another restriction on supply is confusion over ownership rights. In many of the best buildings, ownership registration is vague, buildings are not privatized or are leased by a Russian firm that lacks the right to sublease, according to Whiston.

Other office sites are likely to stand idle for years because financing is hard to find in a country that has no mortgage law and where loans are largely unregulated, he said.

Even when the supply of sites increases, turning them into Western-style office space can take up to two years, and even then, some of the new offices may not be up to standards, Whiston said. Firms that have plans to build their own offices find that they are forced to rent for years because of long delays in construction.

According to some real estate developers, supply is also limited because the city is purposely keeping the best property to maximize its income on rents and permit fees. A single property may require 40 separate permits from the city for development.

"There is an artificially low supply", Oster said.

Kyosti Laitinen, Moscow representative for the Finnish builder Haka Oy, said that the delays in making building sites available reflected disagreement within the city bureaucracy privatization more than profiteering.