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. Last Updated: 07/27/2016

Financing Problems Bedevil Real Estate

In the past year, Moscow has seen a plethora of cranes and scaffolding rise to meet a high demand for office space which has driven rental prices to some of the most expensive in the world.

But financing continues to bedevil large-scale growth, keeping traditional long-term international investors such as pension funds and insurance companies at bay, brokers say.

Coupled with the blows to local development dealt by the summer banking crisis, the images put forth by prognosticators for construction and office growth in 1996 is one of a construction and office market holding steady at a time when demand could be driving it forward.

"The market still suffers from a lack of financing," said Jason Meads of Kolb Levins Associates. "Until that solves itself, there's not going to be really serious development in Moscow -- office or retail."

In a recent report, the brokerage firm Stiles & Riabokobylko estimates that by the end of 1996, Moscow will have 750,000 square meters of Western-standard office space, about 275,000 of which will be new to the market.

By comparison, total demand for the year is estimated at 825,000 square meters, of which 200,000 will be new.

The firm's research indicates that new supply has grown consistently at about 40 percent of total supply for the past three years, according to Mark Stiles, a partner in the firm. Most analysts interviewed agreed that if last month's parliamentary elections and June's presidential poll have an impact on development, it will be to stymie the business development and growth which feeds the young market. It will not, however, scare from the field current developers, who have faced more threatening events in the past and will continue unperturbed.

"I think the elections are disruptive rather than destructive," Meads said. "This is a country where, every nine months, with monotonous regularity, something happens that the average investor would be frightened off by."

Instead, experts point to Russia's absence of an infrastructure for protecting capital investments.

Whether it is obtaining a secure title, finding a civilized interest rate for loans or developing a legal mechanism for transferring buildings from a defaulted builder to its investors, developers can count on headaches that frighten away most of the world's big-time spenders.

The banking crisis was also felt in 1995, brokers said, bringing new property to the market that otherwise would not have arrived. However, others say that many buildings owned by banks were undeveloped, rendering them useless to tenants.

Another phenomenon hurting new builders is a drop in the average prepayments required of tenants. Costing some businesses up to 18 months in rent this year, these rates have fallen to as low as three to six months, some brokers said.

The drop is the result of the market's veteran builders recouping funds from their first investments and reinvesting them into new ones, but it is also a marketing tactic which hits hard at some start-up developers.

"People with two or three buildings in the market and some cash flow are lowering preleasing requirements ... squeezing younger builders out of the market," said Sergei Riabokobylko.

Another broker who works closely with one of the city's major developers, the Turkish firm Enka, also predicted trouble for some developers who have not planned their construction well.

"I think there is a lot of construction underway right now," said Oleg Myshkin of HIB Ltd. "I anticipate that a lot of projects will not be finished because full budget financing is not available. A lot of projects will have to freeze."

But the impact of hard times and an increase in the number of vacant or unfinished buildings would be unlikely to have an impact on rents, brokers say, as a lack of long-term financing forces developers to charge high rates.

"When you're putting 100 percent equity into a project, you're not looking at 10 years' payback," Myshkin said. "You've got to be able to get your money back quick" through high rents. Normally in the West, developers can plan on a 15- to 20-year financing rate, knowing that their investments are safe.

Currently, rents in Moscow average about $850 per square meter per year. Stiles estimates that prices could drop to $800 in 1996. But he points out that even factoring in the large-growth years, rents over the long-term have remained relatively flat since 1990 after adjusting for a drop in the length of prepayments.

"I think in 1996, tenants will have to sign deals about the same as they're doing now," said Tamara Kushwaha of DTZ. "What I know is happening is that, although the base rental may hold, tenants are looking for more ... of a tenant fit-out package" which involves building out the shell office space into a livable environment with telephones, lighting, carpeting and other necessities.