Tim Gosling in Moscow -

There are questions hanging over more than one sector in the Russian real estate market right now, but one segment remains pretty much a banker: office.

With growth in residential prices thought to have run its course last year - which saw rises of over 90% in some segments - stagnation expected in industrial and warehousing around Moscow thanks to the huge wave of supply over the last couple of years, and the scrapping amongst retail projects in the regions getting tougher, office in Moscow casts a shadow over all.

While the office pipeline figure in the capital may dwarf that of most other cities around the world, the sector is still forced to crane its neck to catch a glimpse of demand, with take-up rising far quicker than projects like Moscow City could ever hope to.

When that massive business centre was but a twinkle in the eye of the city government a decade ago, it was proclaimed as the project to end all tenants' worries, and it's been received wisdom ever since that a balance between supply and demand would be achieved by 2010.

However, over the last 12 months, many have begun to question this - although most are staying firmly on the fence for now. "It's the question everyone's trying to work out," retorts one market observer.

Elena Alpatova of Cushman & Wakefield, Stiles & Riabokobylko, for example, is ready to bet that the market will remain hot for the next couple of years, but more cautious about 2010 and onwards. On the other hand, Pavel Barbashev of Horus Capital - a rapidly growing domestic developer - is one of the few to have made his mind up. "I can't see it. Developers are claiming they'll deliver 3m [square metres] each year to the end of the decade, but to date supply has struggled to hit 1m sqm. Get real!"

The point that everyone does agree on, though, is that there's no risk whatsoever that developers and investors will suffer at the hands of oversupply.

Lies, damned lies and statistics

The crux of the uncertainty is the unreliability of market info. More specifically, development pipeline announcements do not reflect reality, given the numerous barriers to development. This is a long-running trend on the Moscow market, which has done much to corrupt trust and deter tenants from entering pre-lease agreements early, despite the scarcity of quality space. Cushman & Wakefield research reveals that the 307,000 sqm of space delivered in August this year represented no more than 45% of that planned to appear.

The same company predicts that the 1.6m sqm announced for the whole of 2007 will actually fall short by around half a million sqm. With none of the severe restraints developers face likely to drop in the short to mid term, similar project delays look set to continue.

In fact, developers are more likely to see the construction process hurt further, for instance as the current liquidity squeeze challenges leveraged projects. Alpatova also points out that permitting in Moscow has practically ceased for the time being.

That's simply more bad news for tenants in their scrap to secure enough space to base rapidly expanding operations. Annual take-up broke through the 1m sqm ceiling in 2005, and has been climbing ever since. There's little reason to believe this trend is set to drop off either, with the international agencies agreeing that real demand lags take-up by some way.

To that end, in the second half of 2006, the market saw one gigantic leasing deal after another, as the likes of Deloitte, PricewaterhouseCoopers and VimpelCom signed for around 30,000 sqm each. At the same time, leading into 2007, rental rates sky-rocketed to stand at an average of $1,300 per sqm per month in the central business district.

While real estate is overtly cyclical by nature, and anyone forecasting in any market - let alone murky Moscow - is usually on a hiding-to-nothing, it's clear that anyone taking the announcements made by developers at face value will seriously underestimate the legs in the market. For the rest, it's appears no more than a question of whether the end of the decade will prove healthy or hot for Moscow office.

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