Russian Real Estate Investment Interests International Funds
By Daniel Demytrie, Senior Research Analyst and
James Corrigan, Associate Director, Capital Markets,
Jones Lang LaSalle
Russia has succeeded in making considerable progress in achieving macro-economic stabilization in 2006. Robust economic growth, supported by high raw materials prices, a consumer boom and rising investor confidence is making Russia a preferred destination for investment capital. A stable economic outlook reflects a balance of strong financial ratios and political risks.
Russia’s GDP growth in 2006 was 6.7% compared to 6.4% in 2005 and was largely propelled by global oil prices, along with an increase in labor and industrial productivity.
Inflation in 2006 was 9.7%; 3% down from the 2005 level. Falling producer price inflation also indicates easing inflationary pressure.
As of February 2007, Russia had the world’s third-largest currency reserves: $304.6 billion, a stabilization fund of $99.7 billion, and an investment fund for strategic projects of $2.6 billion.
Foreign direct investment volume for the Russia Federation in 2006 was $33 billion, which is more than the last two years’ cumulative average. We expect the economy to continue to benefit from this inflow in 2007 as economic fundamentals remain strong and political stability remains.
Current investment ratings for Russia are stable and attractive: Standard & Poor’s (BBB+), Moody’s (Baa2) and Fitch (BBB+).
Investment activity in the real estate market in 2006 demonstrated significant growth. Investment volume grew by more than 800%, compared to 2005. Foreign investors have focused on Russia due to substantially higher yields than in their core markets. The leading foreign interest has come from Austria, Germany, UK, US and Scandinavia. Russia remains notable among the emerging real estate markets in the substantial inflow of investors from varied locations along with strong local investment.
In 2006 the focus of investment activity was the retail sector due to the constant growth of personal incomes followed by retailer demand for shopping centers. The share of investments into retail property assets in 2006 amounted to 40% of total investment volume. The retail market was the most attractive sector of the regional investment market in 2006. Prime yields in the regions are approximately 150-200 basis points over prime yields in Moscow. We anticipate all sectors to continue a high rate of investment growth through 2007, particularly in retail, warehousing and office space.
In 2006 the commercial real estate investment volume in Russia reached 3.4 billion euros ($4.2 billion) setting an all-time high market record. While this is nearly nine times more than in 2005, the figure is still behind Poland with 5 billion euros and well behind Western European markets like Germany (50 billion euros) or the UK (80 billion euros), suggesting room for significant growth for years to come.
While Russia is traditionally compared to its Central and Eastern European neighbors as an emerging market economy, it is now demonstrating a trend in commercial property acquisitions and sales that suggests that the Russian investment market is on track to develop in a fundamentally different way. For an emerging property market, the Russian investment horizon is looking distinctly long term and mature.
The property investment market in Russia continues to maintain a very strong domestic component. Local investors accounted for at least 44% of investment transactions by volume in 2006. Similar figures for Poland, the Czech Republic and Hungary were a meager 2%, 6% and 8% respectively. Western European markets demonstrated a distinctly different composition, with domestic capital taking a healthy market share of 18%, 23% and 48% (Germany, France and UK respectively).
In European markets strong domestic capital seems to signal market maturity and healthy competition between international and domestic capital. For the Russian property market this means that market practice and investor expectations will mature alongside yield compression and capital value appreciation.
The short term capital injections and withdrawals commonly associated with more volatile markets will play an insignificant role in Russian property investment, leaving the market more sustainable and attractive for the long term.
In Russia investor confidence stems from the country’s long term potential. Long term, low risk players such as pension funds, mutual funds and insurance companies (institutional capital) are becoming aware of the shift in wealth that is occurring on a global level, in particular in relation to the so-called BRIC countries (Brazil, Russia, India and China).
As the accumulation of capital, global shift in wealth, and growing sophistication of the Russian financial sector continues, we expect Russian investors to hold on to a sizeable market share of investment even as the Russian market becomes increasingly exposed to western institutional capital.
This material is taken from the Moscow City Profile published by Jones Lang LaSalle in March 2007 and reproduced with permission.