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Moscow – Europe’s New Real Estate Investment Hotspot?

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real estate market  Russia  real estate assets  Kazakhstan  Dmitry Medvedev  Jones Lang LaSalle  CB Richard Ellis  Moscow  Moscow Times  Hines Global REIT  AIG European Real Estate Partners  Tom Devonshire Griffin  Astera  Verny Capital Partners  Sheremetyevo Airport  Ritz Carlton Hotel  Alexei Filiminov  Vladimir Putin  Charles Hazen  Valentin Stobetskiv  International Real Estate Investors  Kremlin 

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By - Friday 02 December 2011

Moscow – Europe’s New Real Estate Investment Hotspot?

Amid the climate of economic turmoil fuelled by the ongoing Eurozone sovereign debt crisis, the Moscow real estate market is attracting an increasing number of investors looking for an alternative to the erstwhile traditional Western European property hotspots of the likes of Spain, Greece, Italy and Portugal.

Evidence of the city's continued growth potential is highlighted by LaSalle Investment Management's latest annual European Regional Economic Growth Index (E-REGI), which places Moscow at the top of the table, outranking London this year. The report, which provides guidance as to what can be expected of the European property market, identifies cities that look poised to provide the best medium term prospects for occupier demand.

A record volume of Russian real estate market investments in 2011

The Russian real estate market has bounced back with a vengeance after the 2008-2009 global financial crisis that left many new construction projects unfinished due to a lack of funds.

Several leading international real estate firms with offices in Moscow, including CB Richard Ellis and Jones Lang LaSalle have reported a record volume of Russian real estate market investments this year, with Moscow remaining the focus of the large majority of the completed transactions, primarily in the hotel, office and retail sectors.

In their Russian Investment Market View, CB Richard Ellis (CBRE) cited a total reported volume of deals for the first quarter of 2011 as being 1.77 billion euros in 13 deals, whereas the second quarter 2011 saw 1.6 billion Euros transacted in 11 deals. According to the report, even during the high-growth years of 2005-2008, the largest amount transacted in any one quarter (Q2008) was 1.3 billion euros (20 deals). Further figures released by CBRE, as reported in the Moscow Times in September, saw this trend continuing, with the company citing a staggering 18 real estate deals completed during that month alone, amounting to over 2.2 billion euros.

In their October webinar (interactive internet conference), "Moscow 2020. Numbers, forecasts, development models", Tom Devonshire-Griffin, Head of Capital Markets, Jones Lang LaSalle Russia and CIS, estimated that the total volume of investment in the Russian real estate market in 2011 could reach a record high of around $8.5 billion with estimates for 2012 predicted at this stage, to reach around $6 billion.

Increased interest from major International Real Estate Investors

Although domestic investors have predominated in Moscow's spectacular investment surge, - with the largest deal so far this year being the purchase of the Ritz Carlton Hotel in central Moscow by Verny Capital of Kazakhstan from Capital Partners for an estimated 424 million euros - major international investors are beginning to jump on the bandwagon.

In May of this year, FM Logistic Industrial Park, a 9-building industrial/warehouse complex of 750,000 square feet located 2 miles from Sheremetyevo Airport, was bought by Hines Global REIT, a Houston–based, non-listed real-estate fund sponsored by Hines, from AIG European Real Estate Partners, for an estimated 55 million Euros (according to CBRE).  The complex was constructed in 1992-2004 by FM Logistic, as the primary hub for the firm's third party logistics operations in Russia.

In 2006, FM Logistic completed a sale-leaseback with AIG.  The property is fully leased to FM Logistic through to 2016.  Commenting on the deal, Charles Hazen, President and CEO of Hines Global REIT, said: "FM Logistic Industrial Park is a special acquisition for Hines Global REIT because of the opportunity to invest in our first asset in Russia. Hines Global REIT should benefit from the performance of this well-located, fully leased quality asset and the portfolio diversification it provides"

A further deal in August by Hines Global Moscow GII Holdings, saw the acquisition of the full share capital of Maxrange and Fibersoft Limited, for the sole purpose of acquiring Gogolevsky II, a 9 storey office building located in Moscow with a rentable area of 85,740 square feet that is 100% leased to six tenants. The net purchase price was $96.1 million less transaction costs, financing fees and working capital reserves.

"Income-producing assets remain the primary focus for investors" (Tom Devonshire-Griffin – Jones Lang LaSalle Russia and CIS)  

As is highlighted by the type of transactions that have dominated the Moscow investment scene in 2011, key concerns for investors are sound long-term cash flow prospects and high rental revenue from a mix of corporate tenants.

Major real estate agents based in the capital coincide with this opinion, according to the Moscow Times (Sep 2011). Alexei Filiminov, General Director of Russian Real Estate broker and adviser Astera, said his clients were only interested in Class A and Class B properties in Moscow and "only want a high-liquidity property, one that can attract a large number of well-financed potential buyers when the investor tries to sell it"

Demand outweighing supply in all Moscow Property Sectors

The problem Moscow faces in the short-term is that availability is outweighed by increasingly high demand as both domestic and international companies flock to set up base in the capital. This is inevitably leading to soaring prices for all the in-demand sectors within Moscow. Lang LaSalle Russia and CIS's Valentin Stobetskiv said "..the current average leasing rate of Moscow class A offices amounts to $750-800 per square metre a year; the rates of properties located in the very centre – in the Kremlin district – reach $1,200". As to the prime residential market in central Moscow, average prices have soared from around $900 per square metre in 2003 when mortgages first became available, to $5,000 per square metre in June 2011, according to website irn.ru.

A long-term solution - The “New” Moscow

Experts agree that the only way forward to meet this pent-up demand and thus sustain continued growth would be if the size of Moscow were to double.

A report published in Russia's bilingual business journal "The Russia Corporate World" in October presents an in-depth report of the Kremlin’s plans to do just this. The decision to expand the borders of its capital beyond the Moscow Outer Ring Road, first announced by President Dmitry Medvedev in June of this year has the full support of Prime Minister Vladimir Putin who is quoted as saying "Moscow, as everyone knows, is suffocating in its current borders … this long overdue decision to expand the city's boundaries will provide it with new opportunities for a faster rate of development" According to proposals, the total area of the capital will increase approximately 2.5 times, from the current 109,100 hectares to 253,100 hectares. Around 60 million square metres of new residential properties and almost 45 million square metres of commercial real estate assets are also planned.

The project however, will take around 20 to 30 years to come to fruition.  In the meantime and for the immediate future, investment in Moscow's real estate market looks set to remain exclusively within the reach the very wealthy, as prices continue to soar in the face of ever-decreasing availability. 

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