The BRICs or at least India and China have so far rather successfully negotiated the hazards of the downturn and now along with Brazil have generated substantial domestic-led expansion. Even the Russian market, the most severely impacted by the recession, is beginning to bounce back. In creating this impressive edifice of growth the BRICs have set themselves an interesting challenge - to make it both resilient to any further economic shocks and to ensure its architecture remains welcoming to the rest of the world.
Structural and cyclical boosts to the BRIC markets
A key feature of the current recovery is the strength of the BRIC countries, most notably China and India, a trend that is reflected in their real estate markets. China and India, home to some of the world's most dynamic cities and real estate markets, are both motoring strongly with annual GDP growth rates of 11% and 7% respectively. Aggressive stimulus plans and easing of monetary policy have been highly effective in boosting domestic demand, although this is beginning to create distortions and concerns about potential real estate asset price bubbles. Brazil, previously always the lagging BRIC, is benefiting from structural reforms, which have led to macro-economic stability and improving sentiment among real estate investors.
The BRIC governments are now beginning to withdraw stimulus measures to reduce overheating and ensure more sustainable growth paths. Russia, in contrast, has been deeply impacted by the recession (GDP was down nearly 8 percent in 2009), and with an over dependency on energy exports, it has struggled to regain its growth trajectory. But an upswing may come back swiftly and strongly, and an expected 3% to 4% growth rate will serve as a reassuring sign and underpin a real estate recovery.
BRICs leading the recovery
The BRICs are leading the global real estate markets into recovery. Their combined economies are projected to expand by 8 percent in 2010, reinforcing their position as the growing economic and real estate force. Domestic players have continued to dominate the BRIC investment and leasing markets over the past year. A return of foreign activity is likely in 2010 as risk appetite grows, at least for BRIC's Tier 1 and 2 cities, with Tier 3 and 4 cities considered too high a risk at present. Longer term, the much discussed burgeoning middle classes will fuel further real estate expansion, particularly for residential, retail and warehousing.
Russia: Markets are stabilizing
The Russian real estate market has been deeply affected by the recession. An 8% contraction in the economy during 2009 severely affected corporate occupier demand and also dented confidence among investors who were used to double-digit returns. Developers and owners became increasingly flexible, initiating a very sharp contraction in real estate prices to reflect the new market reality; prime office values fell by over 70% in Moscow between mid 2008 and mid 2009, among the highest corrections in the world. Despite the improvements, the markets remain vulnerable, and any faltering in economic growth could derail the recovery.
In Russia, the past year has been a challenging time for the investment market. Limited financing and uncertainty regarding prices and rents have continued to curtail investor activity, keeping lot sizes and transaction volumes down. But as the leasing market shows signs of stabilization, we expect investment activity to increase gradually in 2010. Domestic investors are likely to be the major force as the market is still perceived to have too high a risk by foreign investors. Portfolio adjustment will continue across Russian cities, with developers and investors preferring to deal in the more mature Moscow market, rather than the 'Millionniki', Russia's regional cities. While investors continue to be hesitant, tenants have started to buy assets for their own occupation as they perceive that markets have reached the bottom of the cycle.
Currently, the majority of banks are adopting a wait-and-s