Russian commercial property – resiliency and growth

Russia’s decade-long economic boom shows no signs of waning. In the first quarter of this year, real gross national product growth surged by 8% year on year, fuelled by a 20% rise in investments and a 16% increase in retail sales. It is not only that Russia is weathering the global credit crunch with relative ease, it is now viewed by credit rating agencies as one of the most resilient emerging markets, with strong growth prospects in the years ahead.

The commercial property market is the direct beneficiary of the country’s economic resurgence. With the end of yield compression in the core central and east European markets, and a much sharper focus on market fundamentals in the wake of the credit crisis, the appeal of Russian real estate has never been stronger.

An enviable combination of severe undersupply of quality product, huge growth potential in a dozen or so large regional cities, a two to three percentage point yield premium over the main west European capitals and a vibrant occupational market underpinning rental growth is creating a virtuous circle for development and investment.

Moscow dominates Russia’s property landscape. In 2007 alone, the office sector, with a record take-up of 1.5 million square metres amid a continued dearth of quality space, witnessed a 20% to 25% increase in prime rents. The attractiveness of the sector was underscored earlier this year when KanAm Grund became the first German open-ended fund to invest in Russia, with the forward purchase of four class A buildings in Moscow’s Paveletskaya district for $900 million.

Russia’s retail property sector has the added attraction of being driven partly by fast-developing regional cities where shopping centre density levels are expected to rise sharply in the next few years. Increased purchasing power and the consequent rise in modern formats – which account for only 30% of retail turnover across Russia – present significant opportunities for shopping centre development.

The outlook for Russian commercial real estate is very promising, supported by a buoyant economy and a persistent supply-demand imbalance that augurs well for development. The credit crunch could, ironically, provide a fillip to the market by restricting development financing to quality schemes, thereby reducing new supply and supporting prime rents. While the Russian market is still plagued by a number of inefficiencies, the investment case is more compelling than ever.