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. Last Updated: 07/27/2016

2004 a Landmark Year for Moscow Real Estate

APIKEA's new 230,000-square-meter Mega mall in the Moscow suburb of Khimki is the largest retail complex in Eastern Europe.
Editor's note: This the first of two articles on the major events in Moscow's real estate market in 2004.

Nothing, it seems, can slow Moscow's property boom. While Russian historians will remember 2004 for the Beslan hostage tragedy, the decision to end direct gubernatorial elections and the state-sanctioned dismantling of the once mighty oil giant Yukos, realtors will remember it as a benchmark by which all future years will be measured.

"It was a fantastic year for real estate. It exceeded 2003 by far and eclipsed everybody's initial expectations," said Michael Lange, managing director of real estate agency Jones Lang LaSalle.

Several of the most ambitious real estate projects ever finally came to fruition in a 12-month bonanza that led to further consolidation and sophistication of a market just 15 years old.

Among the highlights was the October completion of the first stage of Turkish Enka's 17-story Naberezhnaya Towers, flagship of the capital's premier office project Moskva-City, and the December opening of Eastern Europe's largest retail complex, Swedish home-furnishing giant IKEA's 230,000-square-meter Mega mall in the suburb of Khimki.

It was also a year of consolidation in the high-end advisory market. In August, Alfa Bank's investment division, Alfa Capital Partners, bought a blocking state in Noble Gibbons, while in December, another "big four" consultant -- Stiles & Riabokobylko -- was bought by its longtime international partner Cushman & Wakefield.

"The market is quickly evolving and becoming more sophisticated and professional," said Olga Arkhangelskaya, head of real estate advisory services at Ernst & Young.

Institutional Investment

Although still rare, the city started to see more institutional investment deals such as the purchase of the Berlin House office and retail center by Switzerland's Eastern Property Holding investment trust in May.

Also, in the first deal of its kind, EPH, jointly with ENR Russia Invest, a Swiss investment company, was behind the acquisition of a stake in local hypermarket operator Mosmart in April.

Large Russian investors -- such as Interros' Open Investments real estate fund, which raised $69 million in an initial public offering in November -- also showed signs of becoming increasingly active.

For MT

Swiss-based institutional investor Eastern Property snapped up Berlin House in May.

For example, Perm Financial & Industrial Group, which acquired the Ericsson building at 12 Ulitsa Vosmogo Marta and the Samsung business center in late 2003 for $58.7 million, made its third Moscow purchase last spring when it acquired an unfinished class A office center on Ovchinnikovskaya Naberezhnaya for an estimated $50 million from Platina Holding.

However, while investment activity is growing, investors are being held back by the lack of investment-grade properties on the market, Arkhangelskaya said.

Another problem that is slowing down "the emerging investment market" is concern about property rights in the country, which has been highlighted by the Yukos affair, said Stephen Wilson, managing director at DTZ Zadelhoff Tie Leung in Moscow.

"Investors are very nervous about Yukos and waiting to see how the situation turns out," Wilson said.

Retail Still Rules

Retail remained the market's hottest sector, despite the political risks that even major multinationals like IKEA continue to face. The company made international headlines when it was forced to postpone the opening of its $300 million mall for what the company suggested was its policy of not paying bribes.

Mega was eventually allowed to open, but not before the Swedish government and the governor of the Moscow region intervened.

"I was very disappointed with the trouble that Mega had -- the issue should not have been there in the first place," said Jeff Kershaw, director of retail at Noble Gibbons in association with CB Richard Ellis. "We as a country need to have a better PR campaign."

Other major complexes completed in 2004 include the 12,300-square-meter Vesna on Novy Arbat; the 71,000-square-meter Waypark on the outer ring road, or MKAD; the 90,000-square-meter L-153 in the southwest suburb of Lyublino; the 26,000-square-meter Mosmart on Dmitrovskoye Shosse; the Novinsky Bulvar 31 office and retail center; the 31,000-square-meter Boom on Ulitsa Pererva, and the 20,000-square-meter Alexander Land on Ulitsa Prishvina.

Despite the growing number of projects in the capital, however, experts say development activity is gradually shifting to the regions, where returns are higher and competition is much lower.

"Retail chains are growing much faster than the Moscow construction market," said Maxim Gasiev, head of retail at Colliers International.

"This was the beginning year of true regional expansion," Kershaw said. "The year was average for Moscow, but truly exceptional for the regions."

In March, IKEA opened its first Russian store outside Moscow and St.Petersburg -- in Kazan -- and is planning to open stores in 10 other cities with a population of more than 1 million.

Turkey's Ramenka, which owns Ramstore supermarkets, in addition to opening several stores in Moscow, entered the St. Petersburg market in 2004 and is now also present in such regional cities as Krasnoyarsk, Rostov-on-Don, Kazan and Nizhny Novgorod.

Large Moscow-based supermarket chains such as Perekryostok and Kopeika also moved aggressively into the regions and beyond. Perekryostok is now present in such cities as Voronezh, Yaroslavl, Lipetsk and Volgograd, while Kopeika, the country's largest supermarket chain by sales, became the first to expand outside Russia's borders when it opened stores in Kazakhstan and Ukraine.

And Western retailers not yet present on the Russian market are also rushing to secure a piece of the pie.

British-based DIY giant Kingfisher, which operates the B&Q and Castorama retail chains, opened a Moscow office in 2004 and announced ambitious expansion plans, with its first store scheduled to appear by the end of 2005.

Meanwhile, the biggest of them all, the United States' Walmart, as well as European majors Mediamarkt and Carrefour, are said to be preparing to enter Russia, although none of them has announced any firm plans.