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. Last Updated: 07/27/2016

Foreign Investors Set Sights on Local Property

Encouraged by a slew of positive economic data from Russia, foreign investors are showing a renewed interest in the property market, leading Moscow-based realtors said after attending two recent international conferences.

However, even as the mood is growing more optimistic, many investors are still waiting for further developments that would put the competitiveness of the Moscow market on par with the those in Eastern Europe, they said.

Colliers HIB managing director Preston Haskell, fresh from the U.S.-Russia Investment Symposium in Boston, said that it remains as difficult to attract substantial investments into the real estate sector as it is for the overall economy.

Symposium speakers declared land ownership and the protection of landowner rights as the two key areas where legislation must be enacted in order to minimize investor risks in the real estate sector, Haskell said.

He said the majority of foreigners at the symposium had been impressed with the growing investment by Russians in the local economy ? particularly the oil and gas sectors ? since the 1998 financial crisis.

"This will have a positive psychological effect as foreign investors will now think: ?Wait, if these local guys are investing these huge financial resources into their own economy, then they must be sure of their safety and security and, most importantly, they must know something about their economy that we do not know,?" he said.

But for the time being, many foreign investors are continuing adopting a wait-and-see attitude before committing more of their resources to the local economy, said Jack Kelleher, managing director at Noble Gibbons, the Moscow-based associate partner of CB Richards Ellis.

"They want to see some of the proposed policy projects talked about by [President Vladimir] Putin, concerning the overhauling of the financial market put into action. The investors, in effect, want to see the mid-term business track record of Putin and his new administration," he said.

Jones Lang LaSalle managing director Michael Lange, who recently attended the Expo Real trade fair in Munich, Germany, said investors were cheered by Russia?s economic developments but were still concerned about the risks.

"The primary concerns often mentioned in these seminars and symposia are in regard to the country?s risks and the overall lack of respect of investors? rights," Lange said.

Investors discussed at length the government?s attempts to improve the country?s tax and legal system.

"Supported by attractive yields, currently unmatchable by most other emerging markets, we are very optimistic in the establishment of a real estate investment market in Moscow, which will offer further expansion prospects to investors, willing to commit their financial resources to this promising market," Lange said.

Lange said speakers at the Munich fair had pointed to some basic macro-economic indicators as evidence that the overall situation is not as bad as it has often been portrayed.

Participants applauded the growth of gross domestic product from minus 4 percent in 1998 to an expected 4.5 percent to 7 percent in 2000, as well as a substantial increase in investment. Foreign investment grew from under $3 billion in 1998 to almost $4.5 billion so far in 2000.

"If you now combine the above positive economic indices with other positive market indicators such as undersupply of real estate facilities and a growing demand from lessees for them, then the market does seem to have a promising perspective," Lange said.

Still, as conference participants traded notes with each other, it became clear that Russia is continuing to lag behind the nations of the former Soviet bloc, real estate experts said.

Lange said Central and Eastern European countries are increasingly generating interest and demand among international property investors. Poland, Romania, the Czech Republic?s capital of Prague and Hungary?s capital, Budapest, are drawing the most attention, while Russia is trailing far behind, he said.

Noble Gibbons? Kelleher said Central European markets are more attractive largely because they operate under policies drawn up by governments eager to enter the European Union.

"The policy makers in these other markets formulate their market strategies in general alignment to those of the EU countries, a factor not taken into consideration in Russia as policy strategists here do not envisage Russia joining the EU in the nearest foreseeable future," he said.

A recent Jones Lang LaSalle study found that while Moscow, with about 12 million residents, is the largest city in Europe, it has quality office stock of only about 1.6 million square meters. In comparison, the nation of Luxembourg has a population of less than 500,000 people but an office stock of 1.9 million square meters.

"While quality office stock per 1,000 residents ? a comparative index that measures office density in a given market ? is around 180 square meters in Moscow, the same index approaches 570 square meters in Warsaw and approximately 600 square meters in Prague," Lange said.

Foreigners occupy about 26 percent of the total quality office stock, compared with 40 percent in Warsaw and 60 percent in Prague, according to Jones Land LaSalle.

Thus, the agency wrote in its report, the smaller markets are far more attractive than Moscow?s and offer an environment more conducive to major property developers and large portfolio investors.

"More important, when one takes a closer look at current market conditions, it can be seen that some markets in the Eastern European region are currently showing some oversupply especially in office stocks, with increasing vacancy rates and falling rental levels," the study said.

"In Moscow, however, we are of the belief that the property market has bottomed out, rents are at a more realistic level than pre-1998 and the projected vacancy rate will hover around only about 5 percent by the end of 2000 and the beginning of 2001. This could trigger potential rental growth acceleration in the not so distant future," it said.

The study also found that the Moscow property market trails far behind other countries in the retail and warehousing sectors.

The report concluded that Moscow is seriously underdeveloped in terms of quality office stock and therefore has a hidden potential for growth.