COMMENT: Russian real estate - stirred, not shaken

By bne IntelliNews May 21, 2008

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

Send comments to The Editor

COMMENT: Russian real estate - stirred, not shaken

Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.