Large-ticket deals in the works may tip Russian volumes over EUR 6b mark

Commercial property deals of over $3 bn (EUR 2.3 bn) are currently being negotiated in Russia, suggesting year-end transactions may give a big boost to 2012 investment volumes.

With some $5.5 bn of property being traded in the first three quarters, Russia has shown a modest performance so far this year but may still catch up on last year’s record volume of $8.5 bn (EUR 6 bn), according to Tom Devonshire Griffin, head of Russia & CIS at Jones Lang LaSalle. ‘The first quarter of 2012 was one of the weakest since 2005, largely as a result of the European debt issue and the presidential elections. However, there are several big size deals in the works which may well push the investment market to last year’s level,’ he noted. Russian capital has been driving the market, with local investors representing as much as 80% of deals so far this year, versus 58% for the whole of 2011.

International investors might well regain some ground in the final quarter of the year. According to well-informed market sources, Morgan Stanley is cooking up another major deal following the purchase of Galeria in St Petersburg in late 2011. The US investor is expected to close the acquisition of the Metropolis shopping centre in Moscow by the end of the year. The asset, worth some $1.1 bn (EUR 850 mln), is being sold by Russian private equity group Capital Partners. JLL's Tom Devonshire Griffin declined to comment on the rumours. Also in the Russian capital, it is understood that AIG Lincoln is close to clinching a sale of its 65,000-m² White Gardens office development in Moscow for over $1 bn.

Activity is largely being driven by the availability of finance, although at a high cost, Devonshire Griffin noted. ‘The Russian market has almost as much available debt as in the whole of Europe,’ he noted. ‘This is the positive story, while the negative side is that financing is pricey, which is what is keeping yields at the current level.’ Loans are being arranged at 600 basis points over Libor on average, which compares negatively with pre-crisis levels of 200 bps. This means yields for prime office and retail assets are generally around 9%, while logistics yields are as high as 11.5%. Devonshire Griffin: ‘We think logistics is a fantastic story in Russia – the price of it is practically build-cost right now.

Vacancy rates in Moscow are below 1% and supply is literally being absorbed off the market. However, there is not the same investor appetite for logistics as for other commercial assets.’ In terms of asset type, retail made up for just 25% of deals so far this year, while offices represented the bulk of transactional activity.