COMMENT: Moscow now outpacing New York and London in construction volumes

COMMENT: Moscow now outpacing New York and London in construction volumes
Moscow's construction volumes are now higher than in New York or London.
By Max Smetannikov of MVG September 19, 2016

The last time Moscow experienced an outsized jump in real estate prices, rentals and housing starts was in 2003. International service industry conglomerates and oil companies such as BP and ExxonMobil helped the city live up to its nickname of the Third Rome. The market is poised for another boom, as the politics and economics stars are aligned once again for frontier investors with the capital to invest.

The Russian government is fully backing efforts to attract foreign investment in the country’s infrastructure, with a special eye on investors in the US. As Moscow’s mayor since 2010, Sergei Sobyanin has prioritized the construction of development in the downtown area, new transportation centers, industrial zone rehab, population mobility and Moscow River embankment projects. The overwhelming majority of this construction has been financed by private investment; only 11% of these projects were financed with city funds.

PriceWaterhouseCoopers estimates there is 1.74 square meters of new construction per capita in Moscow at the moment, putting the Russian capital in the top three cities in the world in terms of construction, because of its investments into the subway system. The period between 2011 and 2015 saw more than 34km of new subway built including the addition of 18 new metro stations. Ten new metro stations will be built per year starting in 2016, a feat rivaled only by Shanghai and Beijing in China.

The area known as the Moscow Rust Belt is also reshaping itself with more than 1.2mn square meters of commercial and residential real estate construction currently underway. Moscow is reaching out to new investors with a media campaign that includes adverts in well known international publications such as the Washington Post, to attract more foreign investment. In particular it is interested in attracting financing for the approximately 900km of roads that it wants to build by the year 2035.

Skipping the Bureaucracy

There is a revitalization of foreign interest in Russia that is being driven by the unprecedented reforms to regional level bureaucracy; foreign investors can literally invest in Moscow with nine web clicks, according to the chairwoman of the Moscow Investors Association, Lubov Tsvetkova. Russia has reintroduced itself to the world construction community as a willing partner, and the world has responded by making the country a partner in many new developments and regulatory matters. 

For instance, Moscow has recently been tapped to serve as a pilot region for new building information modeling technologies. Russia will also participate in many new standard construction projects of the International Organization for Standardization. The result will be cutting edge technologies and plenty of international subsidies coming into the country with very little investment required by Russia itself.

Local construction applications exploded on the news of these new initiatives; the Russian construction industry was the first to recognize just how much money new tech could bring into the market. The government was smart enough to realize that it could move the competition to expand Russia into the international construction community. The ducks are now aligned to start another real estate boom.

Steady Returns for Frontier Investors

Many investors compare the new Moscow of today with the market of 2003, when the last construction boom began. But this market is much more mature and sophisticated than the previous one. Private organizations are working with international regulatory bodies much more closely than in 2003, and the Russian government is more seasoned in leveraging its advantages than it was in the rough and tumble of the early noughties. Moscow has benefited from the experience accumulated in the last boom by its political leaders, which will result in a more stable market: investors can be assured their investments will hold their value for much longer.

Russia’s current expansion plans are also thought out well in advance. With building arcs that expand decades into the future, frontier investors can expect plenty of construction to follow up on initial investments, raising the value of the construction projects that are brave enough to build first. In 2003, even without all of the international support, rents in Russia rose over 300%, with real estate values following suit for the next few years.

Max Smetannikov is CEO of MVG, a communications agency based in New York and has been working with Russia for over two decades.

Opinion

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