Michael Lange of Jones Lang LaSalle -

About half way through 2007, global real estate markets began to show signs of distress. As we all know, unexpected defaults across the US sub-prime mortgage market started to send unpleasant ripples through investor confidence, forcing a lot of property advisors to rise up and deliver compelling speeches about the resilience of their local markets. As necessary as this was from a business point of view, there were in fact a few cases where compelling cases could be made for non-core markets.

In many property markets across the EU, we have in fact seen measurable decreases in investment activity since that time, with property acquisitions weakening in light of the higher cost of debt. But what we've also seen is a number of markets that have been able to show notable resilience against "the crisis." For emerging markets able to swim against this current of financial turmoil, this continues to be a time to make a name for themselves on the global stage.

Asia Pacific property markets have garnered much of the accolades over the past 12 months since the crisis struck and for good reason. Markets in that region largely remain buoyant and investment capital continues to find its way into less and less mature markets, seeking out returns difficult to obtain elsewhere. Second- and third-tier cities in India for instance are quietly becoming hot tickets for very large institutional funds. But one doesn't have to travel to the Far East to capture hidden opportunities.

Russian in

For much of its youthful history, commercial and residential property markets in Russia and the CIS have been overlooked by mainstream investors. Given how well Russia has performed over the last 12 months, the credit crunch might just be the right catalyst to bring in investors who were previously skeptical about the country's opportunities.

For well over a decade, Russian property markets have largely defied classical market dynamics found in both in the EU and the former Eastern Bloc. We have seen stable yet rapid rental growth across all sectors and investment returns that make most emerging markets green with envy. And what's more, though the absolute number of investors (and capital) has been less than markets like Hungary and Poland, Russia has had a very interesting mix of investor type and source of capital. Unlike its neighbours to the west, Russia's investment capital profile looks more like something you would find in Western Europe or North America, with more or less of half of the capital stock coming from domestic or expatriate purchasers.

In looking back at how far Russian property has come, we get a much clearer picture of where Russia is going, particular in light of the current liquidity crisis, and the fallout this is having with other global markets.

If you're a fund manager, pondering the value of getting into or staying in Russian real estate, then you really only have to look at the fundamentals. As simple as that sounds, most analysts will tell you that Russia is once again bucking the European trend. Prime office investment yields have not softened, remaining at a healthy 8.0-8.5%. Investment volumes have clearly shown no sign of a downturn. Quarter-on-quarter growth shows that in the first three months of 2008, total sector investment has more than trebled, with office volumes nearly reaching the totals obtained for the entire year in 2007. Rental rates are also very positive. Prime office in Moscow is now or will very shortly be equal to those found in London ($1300-1500/sqm). Rental rates (particularly for prime office) in Moscow have enjoyed unparalleled growth since the market got on its feet more than a decade ago. If you look for a dip in rates since or because of the credit crisis, you just aren't going to find it. Over the medium term, very conservative analysis will probably tell you that prime office will plateau - but I'm sure we've all heard that one before. In short, commercial property in Russia seems to have buffered the shock nicely.

On the residential side, the picture is much the same. Sales prices for newly built residential space have more than trebled in the last three years, and there is no definitive sign of them coming down. The real question is not whether the Russian markets will weather the credit storm - clearly they will. Rather the question should be how much positive kickback the markets will receive as a result of most other markets falling out of favor (and profitability) with investors.

As we have already painted some pretty broad strokes, I think we could say that like Asia, Russia will likely be seen as a good alternative to core markets (US and EU). We can also say that giving the overwhelming volumes of capital now pushing real estate investment, we could likely see many of these emerging markets undergo a change in investor perception.

Russian real estate is popular. Transaction volumes can attest to this. But for it to be "as popular" as one of the EU's mature markets (Germany or the UK), these volumes need to grow substantially (10 times in some cases). For that to happen a market will have to make its presence felt and leave a good impression. Given how well the country has faired up in this time of crisis, my suspicion is that this will probably be the catalyst capable of transitioning the market to a core market for most institutional funds.

Michael Lange is the CEO of Jones Lang LeSalle in Russia

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