Ben Aris in London -
Russia's property market has been recovering slowly from the 2008 crisis, but as Russians return to the shops and retail turnover levels pass their pre-crisis highs, a boom has taken off in the country's warehouse business.
"We just had our best year ever," says Tim Millard, general director of Cushman & Wakefield's (C&W) Moscow office. "The demand for new warehouses is at an all-time high."
The real estate business in the West is in the doldrums as many mortgage holders remain under water. Likewise, the economic slowdown in the developed world has depressed the office market. The upshot is that attention has shifted to emerging markets. In its global investment atlas published in December, C&W praised Central and Eastern Europe as the fastest growing real estate market in the world, up 60% in terms of investment year on year. "The traditional markets are all victims of the crisis, but the emerging markets are all growing," points out Millard. "Russia is particularly attractive, as it's large and right on the doorstep of the rest of Europe. It is the logical first step and the logistics of going into Russia are simple."
Millard says that means Russia is at the top of the list for many western companies looking to expand into the emerging markets. The economic growth outlook for Russia may now be significantly lower than in pre-crisis years, but it's still three-times above the average EU rate. Building on the already strong trade ties that have developed in the last two decades, German and Italian firms are already well established, but the UK is lagging behind due to poor diplomatic relations. "In the UK the perception of Russia is different from the reality," says Millard. "Doing business in Russia is not as difficult as most assume, but the gap is closing slowly.
Ironically, the current crisis in Europe should be a boon for Russia, Millard argues. With no growth on offer in the development markets for years to come, companies in the West have been forced to look to new markets if they want to expand. "The Kremlin's reforms are making a difference if you are selling something concrete," he claims. "The logistics of import are easier, customs and clearing has improved, and accession to the [World Trade Organization], which is now imminent, will only improve things further."
It's the effect of all these factors that has shown up in the warehousing sector, which remains badly undersupplied, says Millard. In the first nine months of the year, C&W has already seen $6.5bn worth of investment into real estate in Moscow, against the $5.8bn that was invested in all of 2008, the last boom year - and another $1bn-1.5bn of activity is set for the final quarter.
Warehouses are an attractive investment, as undersupply keeps the rents high. Prior to the crisis, vacancy rates in the industrial segment were 11%, says Millard, but today they have fallen to under 1% to push Russian warehouse rents to the second highest in the world, beaten only by the UK's Heathrow airport. At the same time, the volume of new warehousing going up remains limited by a lack of financing. "Project financing is still hard to get, but it is starting to come back," Millard says. "However, it's only the Russian banks that have started to lend again, and even then it's only senior debt for performing assets."
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