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. Last Updated: 07/27/2016

Real Estate Market Close to Bottoming Out

Charles Boudet
Managing Director, Russia & CIS
Jones Lang LaSalle

The Russian real estate market has gone through a dramatic decline in the past year. Yet, as the economy begins to show signs of stabilization, strong fundamentals will underwrite the recovery.

Lets take the office market in Moscow, for example. There was a critical shortage of office space two years ago. Developers were racing to deliver new buildings to satisfy the needs of occupiers, but were barely able to keep up with demand. In the space of less than 12 months, we have seen more than a 50 percent reduction of occupier demand as companies now try to shed office space in the drive to reduce costs. As a result of this, and other factors ­including a trail of new building ­completions in 2009, the vacancy rate has increased by 20 percent. The current picture does not look pretty.

However, while the supply and demand equation has swung 180 degrees, the total vacant office space in Moscow is still below the level of last year’s take-up. Even with demand at less than half of the pre-crisis take-up levels, this space can be absorbed in about two years. When we also factor in that there is going to be no new construction during this period, it is not inconceivable that        Moscow could run out of Class A office space again by 2012 and we see a reversion to similar dynamics to those we saw before September 2008.

In the retail sector, Russians remain conspicuous consumers and their spending power is supported by a low income tax and personal debt burden. Overall, while off their peak, retail sales in Russia are holding up relatively well. A lot of the store closures and rent renegotiations we are seeing is more attributable to retailers refining deals made in haste in the race to expand coverage into Russia in an undersupplied market, than a paradigm shift in retail sales. This is all part of the normal market cycle.

As far as the supply of retail space is concerned, the sector remains in its infancy. Existing development has been sporadic, often project-led rather than strategic, and much of it low quality. The flow of new centers being opened today has slowed to a trickle and almost dries up completely by the end of 2010. However, when you look at the statistics, the retail space market in Russia still needs to triple in size, just to be on a par with its counterparts in Western Europe.

Further illustrations could be made about other sectors, but the indicators will all be the same.

No-one can deny the damage the global crisis has made on the Russian real estate market. Events last year stopped the party in full swing and the hangover has been painful. Money has been lost, values wiped out and for some, the lessons have been fatal. However, we need to remember, this is Russia with all its underlying potential, and the market still remains underdeveloped in all sectors.

It is still too early to start talking of a market recovery. We are still in decline, but its slowing now and the bottom is just around the corner. When this happens, we will see the fundamentals kick in once again and the market will start to remind us all just how much potential it still has to offer.