Amid the lamentations and gnashing of teeth in the US in the wake of sub-prime mortgage market tribulations and the associated housing slump and credit crunch, it would be easy to forget that there are plenty of countries where a housing boom is only just beginning. Not least in Russia, where an economy turbocharged by oil prices around the $100 a barrel mark is helping to ensure that property developers and investors are feeling more than happy about the prospects for the coming years.
Across the country’s real estate market there’s a feel-good factor, which stands in stark contrast to the US. Thanks to a confluence of positive factors there’s a whirlwind of activity in the residential and commercial real estate sectors, with construction companies and developers overwhelmingly bullish.
Certainly at the top end of Moscow’s property market there’s little concern about recent events in the US. "In Moscow, nobody really cares about the US sub-prime mortgage problems and the credit crunch," says Emanuel Kuzinetz, director at RGI International, a property development and management company focused on high-end prime location office, retail and residential properties, in central Moscow and the surrounding areas. "Market conditions in Moscow and Russia in general are more driven by the price of oil and metals than by events in the US." Furthermore, Kuzinetz remains sanguine about the prospect of a sudden reversal in the price of commodities. "When the oil price was $50 a barrel people used to ask us, ‘What would happen if it went down to $20 a barrel.’ Now it’s at $100 a barrel." Given that, on the residential side, RGI caters to the growing legions of super-rich Russians, Kuzinetz is confident that the company would still thrive in the face of lower oil prices. "Our clients would still want somewhere nice to live," he says.
Ultra-high end
Even with town houses in the central Moscow district of Ostozhenka at $37 million apiece, there’s no shortage of takers. "The ultra-high end of the market has no connectivity to the credit crunch whatsoever," Kuzinetz says. "We’re talking very wealthy individuals – cash buyers who want to enjoy the same standard of accommodation in Moscow that they see when they travel to the likes of Paris, London or New York."
It’s not just somewhere nice to live – Russia’s new elite also wants to have upscale places to work and shop. RGI’s portfolio therefore includes such projects as the Tsvetnoy 15 retail centre, which is forecast to be worth $285 million at completion in 2010 and the Media City office development in Ostankino, which is set to be valued at much the same level when it is finished at the end of next year. It’s in the commercial real estate segment of its business where RGI has seen the most dramatic changes in ownership since the company was founded in 1991.
"In the 1990s, 100% of our clients were international companies but now it’s 60% Russian and 40% international," says Kuzinetz, adding that although in the immediate wake of the break-up of the Soviet Union the company fought shy of having untested Russian companies as tenants, 16 years later there are many local firms with long operational track records and strong financial profiles that are prime candidates to lease office space too.
Together with the ever-growing number of international firms that are setting up shop in the Russian capital, this local demand means that Moscow is now the most expensive destination in central and eastern Europe when it comes to rental levels on commercial real estate. Gunther Artner, co-head of central and eastern European equity research at Erste Bank in Vienna, says: "Moscow, with its exceptional economic position and overall low office stock, continues to see solid rent growth, in spite of the already high nominal levels compared with other cities." At around €650 per square metre per year, rent levels for prime class A office space are more than double the €250 average in such cities as Budapest, Prague and Warsaw. Only Kiev, which suffers from a similar lack of supply as Moscow, comes close, at €500.
Despite high prices there is no shortage of clients, says Artner. "We cannot seriously talk about any vacancy in Moscow, where A-class offices in good locations are usually fully let prior to completion and only class-B offices have some vacant space." Given the favourable demand/supply imbalance and high rent levels it’s no surprise that Moscow tops the league table for prime office yields at 9.5% – roughly 300 basis points more than the average in central and eastern Europe and almost double the level in western European capitals such as Vienna and Madrid. What’s more the yield spread on prime office space investments is more than 350bp over 10-year Russian government bonds, compared with a premium of 70bp in the Czech Republic and a discount of around 80bp in France.
Raging retail sector
There’s a similarly upbeat tone in the retail segment of the Russian market, where the move from small grocery shops to western-style shopping is still largely yet to happen. Although shopping centre rents in Moscow are relatively high – at around €75 per square metre for a 100 square metre unit they are more than 50% higher than in the rest of central and eastern Europe – they still lag well behind the €160 to €170 levels in such cities as Frankfurt and Paris. Furthermore, Artner at Erste Bank believes that there is still scope for rents to grow further as there is still a supply/demand imbalance in spite of the forecast 50% rise in retail stock in Moscow over the 2006-08 period. Given that rents will account for only 2% to 3% of forecast retail sales in 2008, Artner says: "As a rule of thumb we can say that there is big room for rents to increase or for building additional shopping malls in Russia in the mid term." Despite recent new developments, retail stock per capita in Russia is still forecast to be 0.05 square metres compared with 0.25 in Poland or 0.3 in the Czech Republic, where penetration levels are now close to western European norms. Once again given a positive backdrop the yields on retail property at 10% in Moscow are far higher than the roughly 6.5% average in central and eastern Europe and the 4.5% level common in western Europe.