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. Last Updated: 07/27/2016

Real Estate Investment Finally Turns a Corner

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The investment climate for Russian real estate projects, devastated by the 1998 crisis, is improving at last. A number of positive trends are contributing to this development.

First of all, of course, political stability and the unusual degree of political concord prevailing since President Vladimir Putin was confirmed in office last March have allayed many fears. It's hard to imagine now, but in 1998 to 1999, it was fashionable to talk about the failure of capitalism and the imminent reversal of reforms. The Putin government continues to be popular and has forged an effective consensus in the State Duma for continuing market reforms. Investors are beginning to believe again in political stability.

Even more auspicious for investment is the general macroeconomic situation. During the 1995-97 boom, the overvalued ruble kept money out of the real economy and devastated manufacturing. Moscow real estate was red hot, but razor-thin, driven by a few companies with money. The regions languished.

Today, the situation is different. The ruble's devaluation has created a manufacturing boom, and money is flowing into the real economy. Tax collections are up, and the Duma has balanced the budget. Retail sales are exceeding all predictions, and retail experiments have proven people's purchasing power. Russian banks are flush again and are starting to figure out how to make project loans. Office market rents remain well below their pre-crisis peak, but the tenant base has broadened and the volume of transactions is higher.

In short, the Russian economy is starting to look more like a normal market economy, disproving Russian exceptionalists of both the optimistic and pessimistic varieties. Western institutional capital is still not quite back in the market and will likely be more cautious this time around. But meanwhile, other sources of capital have developed: Russian banks are involved in an ever-greater proportion of development projects. Specialized real estate investors are now active, particularly in hotel and retail sectors. Russian retailers with capital are putting up shopping centers to compete with European hypermarkets. Russian residential developers are raising billions of dollars a year for new housing projects.

Russia is still not considered an investment-grade market for institutional investors, but as other kinds of investors show the way, that day is drawing closer.

Cameron Sawyer is president of GVA Sawyer property advisers.