HSH Nordbank: investment volume soars on Russia's real estate market (RU)

Investment volumes on Russia's commercial real estate markets have perked up sharply in 2007, too. By the end of the year, the total investment volume is likely to top $4.5 bln. This translates into a 41% increase compared to last year's figure of $3.2 bln.

The growth manifests itself on the office market as well as on the retail and logistics property markets. In addition to the traditionally favoured locations of Moscow and St. Petersburg, other major cities with populations of more than a million are moving increasingly into the focus of investors. These are the findings of the survey 'Real Estate Market Russia - More Opportunities than Risks?' that was just published by HSH Nordbank.

About 20% of this year's entire investment volume are earmarked for major Russian cities other than the metropolises Moscow and St. Petersburg. Last year, these cities accounted for a share of just 8%. "The catch-up need in these regional markets is particularly high. We expect that office space will double by 2009, going up to 2 mln. m². However, even this increase will do little to satisfy an estimated demand of 8 mln. m². We seen the greatest potential in the cities of Samara, Yekaterinburg, and Novosibirsk," says Claudio Lagemann, Global Head of Real Estate at HSH Nordbank. An even faster growth rate has been forecast for the retail sector. Driven by surging consumer demand, the shopping centre floor-space is expected to nearly triple between 2006 and 2011. In this segment, experts have noted above-average growth in the cities of Yekaterinburg, Samara, and Nizhniy Novgorod. On individual markets, such as Kazan, however, there is a chance of short-term saturation setting in.

Risks Sufficiently Compensated by Higher Returns
Initial net yields in Moscow dropped from between 17 and 20% in 2001, down to between 8.5 and 11% last year, depending on the sector. Outside the Russian capital, returns were about 1 to 1.5 percentage points higher. The IRR level, still high compared to Central European countries, is offset by a concomitant higher risk. Due to government intervention in the political and economic arenas, Russia does not compare to democratic market economies in Western Europe. Also, the real estate market continues to show a comparatively low transparency despite signs of progress. Frequently, long-term real estate usage remains subject to speculation, especially outside Moscow and St. Petersburg. "Our analysis suggests though that the heightened risk is adequately compensated by the comparatively high returns," argues Claudio Lagemann.

Moscow the Key Real Estate Market
Notwithstanding the increasing importance of other large Russian cities, Moscow continues to be the country's most important real estate market. Here, extant prime office stock totalled about 6.4 mln. m² at the end of last year. In 2006 alone, 1.1 mln. m² in new floor-space were completed. Add to this another 1.2 mln. m² that are scheduled for completion by the end of this year. The vacancy for prime space is a mere 1.5% because of the high demand. Unless the Russian economy loses is growth momentum, demand for high-end office space will
linger on a high level through 2010.

Over the past two-and-a-half years, the retail floor-space in Moscow almost doubled, now up to 3.3 mln. m². Before the background of a major catch-up need in this segment, even the increased supply was unable to satisfy demand. Accordingly, last year saw rent hikes between 15 and 20 percent. Considering new retail floor-space that will be completed before the end of 2008, the growth in rent rates may indeed slow, but it will still be in the two-digit range.

The market for logistics properties is developing at a similarly dynamic pace as the other two segments discussed. Estimates for the existing supply in class A floor-space range from 1.4 mln. to 1.7 mln. m² for last year. "In 2007 alone, another 1.2 to 1.9 mln. m² in floor-space will reportedly be added. As the supply in attractive logistics space has remained underdeveloped, the newly created spaces will

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