 In Moscow and St Petersburg, international investors are pursuing undersupplied property sectors. MARK FAITHFULL reports
Russia’s property market is dominated by its two most famous cities – capital Moscow and cultural heart St Petersburg – and Russian real estate companies raised €2.1bn in initial and secondary stock offerings in 2006. They are aiming to do the same in 2007, with a dozen real estate funds already active in St Petersburg alone. RREEF, the real estate arm of Deutsche Bank, plans to invest €375m in new residential property, and Swedish fund Ruric has €75m to invest. In Moscow, prices are higher than in St Petersburg but rose less sharply last year. The average price per m2 of residential property rose almost 90% last year, according to IRN, an index of real estate prices used by Russian brokers. Although residential property is now hot on the tail of institutional money, the importance of retailing to the upsurge in property prices in Russia cannot be underestimated. Foreign retailers have been casting a covetous eye over Moscow for some time, and 49% of Russian commercial real estate investment remains in retail. Among those that have taken early steps into the market are Swedish furniture and homewares giant Ikea, which, unable to find suitable malls to occupy, decided to build its own and has become something of a property player in the city and beyond. It has been joined by German supermarket giant Metro, UK consumer electricals market leader DSG International (through a tie-up with Russia-based Eldorado), French supermarket chain Auchan, Spanish fashion giant Zara and Italian rival Benetton, among others. Even UK perennial Marks & Spencer has admitted to an interest in a Turkish-franchise-led entry to the city.  German institutional money has circled potential commercial developments, and Turkish developers have staked out plots in the country, with the focus on Moscow first and St Petersburg second.
International agent Cushman & Wakefield says that the retail property market remains buoyant, with vacancy levels in Moscow’s shopping malls at less than 1%. This has created annual rental vales of €2,197 per m2, not far off the rates achieved along the prime shopping streets of Milan and Madrid. Furthermore, property agents are forecasting that these high rates will remain at least until the end of the decade. Over 600,000 m2 of retail space was added in 2006 at malls such as Lotte Plaza, retail and leisure centre Europeysky, Hypercentre-7, Mossmart and Mega Belaya Dacha. For 2007, Russia tops the European shopping centre pipeline on a country basis, with nearly another million m2 of new schemes due to open this year. Natalia Oreshina, senior director at Cushman & Wake-field’s Russian affiliate Stiles & Riabokobylko, adds: “Russia is a booming market and we are very optimistic about the future, as demand from both occupiers and consumers remains strong. We are also seeing leisure as an increasingly important anchor.” “Russia is a very rich country, and Moscow and St Petersburg are attractive for every one of the top 200 European retailers,” adds Bob Stevenson, European managing director for property consultant Donaldsons. His practice has opened offices in Moscow and St Petersburg, although he warns that property investment yields are already compressing from 14% to nearer 10%. “That said, growth will be led by disposable income. The cost of living remains very low,” he stresses. That view is borne out by agent Jones Lang LaSalle, which reports 7%–10% growth in real incomes annually and believes the trend will continue “for the foreseeable future”. Office buildings are in short supply, with Jones Lang LaSalle citing Moscow as second only to London for European prime rental rates. Over 377,000 m2 of retail space was taken up in 2006, with 34% of the class A office space taken by international businesses. At 2.6% across class A and B office buildings, vacancy rates remain below all other major European cities. The under-construction Moscow City, Park City, Metropolis and White Square office centres will add more office capacity with larger units than many of those currently available, although Jones Lang LaSalle believes that the supply/demand balance will not change until 2009. However, Andrei Barinsky, president of real estate owner/developer Forum Properties, sounds a note of caution over the current raft of large-scale schemes: “The advent of a large number of Moscow companies that could justify head offices similar in size to those in London is a matter more for the future than the present,” he warns. To the north of Moscow, St Petersburg has enjoyed a similar if less dramatic retail renaissance and has joined the capital as one of two key city starting points for foreign retailers entering Russia. Steeped in history and a major tourist destination in its own right, its residential development has surprisingly failed to keep pace with the booming commercial activity currently taking place. Analysts place the blame for this on two years of new-build and price slow-down due in part to a waiting game during 2004 and 2005 while new legislation regulating the real estate industry passed through the statutes. Once this was out of the way, in 2006, the five main construction companies – LenSpetsSMU, LEK, IVI-93, Lenpromstroy and DSK Blok – all reported up to 15% increases in property prices. Because of the previous stall in new construction, demand for residential real estate from investors and private purchasers in St Petersburg is expected to outstrip supply at least in the medium term. Indeed, average residential property prices in St Petersburg had already reached their predicted highs for the whole of 2006 by April and doubled by year end, the increase in demand also fuelled by the improving availability of mortgage finance in Russia. This increase in affordability (although Russian mortgages remain notoriously complex) has boosted the number of buyers. Private property certainly looks like being a sound investment if the city’s ambitious slew of property and infra-structure developments – under the umbrella of St Petersburg Open City – comes off. The strategy, initiated by St Petersburg’s political leaders, seeks to establish the city as one of the top five tourist destinations in Europe, joining London, Paris, Rome and Amsterdam, and to attract 5 million visitors annually by 2010. The plans include the grand opening of a modern building and a new stage for the Mariinsky Theatre; the New Holland Island, a development project that will feature cultural attractions and commercial and residential spaces; the Seaport Passenger Terminal and construction of commercial and residential properties on the shore of the Gulf of Finland; the 205-hectare mixed-use Baltic Pearl development; and a new football stadium, improved transport links and a programme of hotel construction to boost available beds to 34,000 by 2009. |