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. Last Updated: 07/27/2016

City 'Not Ready for Investors'

MTThe Ducat II was sold at the end of 2001 and no class A deals have been made since.
Buildings suitable for institutional investors will have to be built in Moscow before large-scale investment comes to the local market, according to Sergei Riabokobylko, partner at Stiles & Riabokobylko.

"Institutional investors will not enter the market soon unless they are tied to development projects," he said at a recent Russo-British Chamber of Commerce seminar on investment in Russian real estate.

Few properties suitable for institutional investors have been built, he added.

"Most buildings built today were not designed to earn money after five years," said Riabokobylko, whose firm is the local affiliate of Cushman & Wakefield Healey & Baker. "New projects will be designed for 15 to 20 to 30 years and investors will look at that part of the market."

Competition between those hoping to sell to investors will drive up quality, especially of investors' prime target -- class A office space -- in the next five years and the market may resemble more mature markets in 10 years, Riabokobylko predicted.

Investors are still cautious, and even those involved in developing new projects would be unlikely to build more than one building at a time. In addition, the construction cycle from planning to sale is likely to be longer in Moscow than in Eastern Europe -- about three years compared to one to two years -- so achieving a pool of appropriate buildings for investment will take time, he said.

Adrian Moore, real estate partner at law firm Baker & McKenzie, said creating funds and running them is expensive and high-profile institutional investors are highly regulated.

The existing stock of investment properties in Moscow is too small for this sort of fund. They are expensive to create and run, highly regulated to protect the investment, and generally require more than $100 million in investment, he said.

The type of funds likely to invest in Moscow are those that are less regulated and cheaper to run, but are also likely to be smaller.

"One of the problems that you have here is not enough of a track record to encourage people," he said. "It's still a fairly small group of people that have got the appetite for any kind of investment where the target is real estate."

The first two investment sales for class A office buildings were struck in December 2001 and no further such sales have been recorded since.

Then Samsung Construction & Engineering sold the 11,590-square-meter Samsung Business Center on Bolshoi Gnezdnikovsky Pereulok to international private equity investment fund Capital Investments, and Western Realty Development LLC sold Ducat II, a 14,000-square-meter building on Ulitsa Gasheka, to foreign private investment company Andante.

Moore said potential investors had still not forgotten the 1998 financial crisis or that the fledgling real estate investments before the crisis had not been successful.

"They were judging Moscow by the standards of the markets they came from," he added.

Riabokobylko said his company expected the market to broaden and deepen in the next decade.

Real estate professionals will expand into the regions and take investors with them, while the underdeveloped warehouse and industrial market will begin to expand.

"In 10 years, we expect a very high level of activity by equity funds and companies that have experience in Eastern Europe," he said.

"We see a significant shift toward quality products in the office, retail, and warehouse markets, and that will lead to many investment sales."