A toxic mix of economic and political factors have put a brake on real estate investment activity in Russia, where first-half volumes plunged by close to two thirds.

A toxic mix of economic and political factors have put a brake on real estate investment activity in Russia, where first-half volumes plunged by close to two thirds.

JLL analysts have tracked $1.4 bn (just over €1 bn) of transactions in the first six months of 2014, a drop of 59% compared to the same period last year.

The H1 2014 number includes Q2 investment volume of $842 mln, down 36% year-on-year and Q1 investment volumes of $545m, down 73% year-on-year.

'The slowdown in the Russian economy, exchange rate volatility, uncertainty in Ukraine combined with international sanctions against Russia were main concerns amongst market players,' said Tom Mundy, head of research, JLL, Russia and CIS. 'Investors remain cautious which is driving down investment volumes relative to 2013.'

Q1-Q2 2014 investments into the office and hotel segments dominated the market, accounting for 37% and 24% of total volumes respectively. However, the sale of 84.1% of Hotel Company OJSC has significantly increased the share of hotel sector.

MOSCOW
Investors continued to be focused on assets which are located in Moscow, which accounted for 85% of total investment volume in H1 2014. The share of St. Petersburg increased to 8% compared to 5% in the same period of 2013, while Russian regions attracted 7%.

The share of foreign capital came to 18% for H1 2014 versus 59% in the same period in 2013. But this is because of the $1.2 bn Metropolis SEC deal closure in the first half of last year.

JLL said that despite investors’ cautiousness during the second quarter it did see some encouraging signs for the market. For example, Austrian real estate investor and developer Immofinanz is to continue investing in Russian shopping centres, and real estate tycoon Donald Trump has not abandoned plans for business development in Russia, despite the political and economic situation.

'We maintain our Russian real estate investment volume forecast for this year at $3.4 bn because we believe that the recent economic slowdown and exchange rate volatility will continue to influence on demand. In addition, economic sanctions are providing extra business risks, such as increasing costs, reflecting broader concerns amongst foreign investors,' Mundy said.

'On the plus side, we maintain that the Russian commercial real estate market is generally in pretty good health, having restructured well following the 2008 crisis and benefiting from a fundamental undersupply of quality stock. So after the disappointment of 2014, 2015 may prove a very strong year,' he added.