Russia bucks European trend as property investment heads for 10-year low

Russian real estate investment plunged almost 60% to just $3.5 bn (€3 bn) last year and will likely drop even further over the next 12 months to the lowest level in 10 years, according JLL analysts.

While most European property markets saw steep increases in investment during 2014, with more of the same expected in 2015, JLL has tentatively forecast a 2015 volume for Russian property of around $3 bn. Last year was already 'tough' with volumes down 57% year-on-year, the property adviser said.

Russia's weak 2014 numbers reflect a particularly modest fourth quarter volume of $609 mln - a decrease of 81% year-on-year. The market moved in line with the macroeconomic environment driven by a weaker oil price and higher cost of debt.

The situation will probably not improve as market uncertainty, especially in relation to the volatility of the rouble, persists. Investors need stability and tend to shy away from taking on risk by buying in a declining market, the analysts warned.

'The Russian real estate investment market reflects the situation in the economy,' said Tom Mundy, head of research for Russia and CIS. 'The economic downturn is the main negative factor. The conflict in Ukraine, foreign policy tension, the volatile exchange rate and low oil prices have accelerated the deterioration of the Russian investment climate. As a result, foreign investors have either cancelled their plans or put them on hold.'

FOREIGN INVOLVEMENT
In 2014 foreigners invested $830 mln in the Russian real estate market, down 78% year-on-year. The main reason for the drop was the closing of large deals in 2013. The share of foreign investors decreased to 24% in 2014 from 45% in 2013. According to JLL analysts’ estimates, local players will continue to dominate the Russian market in 2015 and the share of foreign capital will not exceed 20%.

KING CASH
Limited and expensive financing has caused additional difficulties for local players. 'During the year the investment market will be driven by the availability of financing, so this factor will be constraining in nature. Therefore, we predict an increase of acquisitions with the use of equity,' added Olesya Dzuba, deputy head of research for Russia and CIS.

Citing a potentially 'positive take on the current crisis', JLL said that the lower debt burden faced by developers compared to 2008-2009 will limit the number of distressed sales and foreclosures.

YIELDS
Prime yields continue to react to the current market situation. In Q4, rates in Moscow for prime assets with operating income and debt in place, and both nominated in foreign currency, increased by 50 basis points to 10.0% for offices and 10.25% for shopping centres. For warehouses rates are at 11.75%. According to JLL analysts, more expensive and unavailable debt financing will likely lead to further capitalisation rate increases through 2015.