Russian real estate to remain 'under pressure' until Q1 2015 - CBRE

The Russian commercial real estate market will find itself under pressure at least untill Q1 2015 regardless of whether the Ukraine crisis is resolved quickly or not, according to the latest research from CBRE.

The research examines three market scenarios: a radical improvement in the geopolitical situation; a continuation of high uncertainty and a worsening of both the geopolitical situation and macroeconomic fundamentals in mid-term period.

Weakened tenant demand exerting downward pressure on Russia property emerges as a feature under all three scenarios. Demand for space during the second quarter was 30-50% below averages levels seen under normal circumstances. The strongest impact is being felt among international companies: in normal situation their market share in demand fluctuated within the 25-30% range, while now it is just around 10-15%.

In the 'high uncertainty' scenario - which assumes continuation of the tit-for-tat sanctions war between Russia and the West - take-up volumes in the office segment in H2 2014 might be around 400,000 to 450,000 m2. In industrial and logistics segment take-up may be around 440,000 m2, CBRE said. The forecasts assume that Russian GDP growth will remain positive.

Such demand levels would be far outstripped by new space coming on the market. Supply in H2 2014 might set up new historical highs, CBRE said, in both industrial and logistics and retail segments combined with extensive new deliveries in offices. According to CBRE 1.4 million m2 of space may be delivered in the industrial and logistics sector, with 320,000 m2 of new retail space up until end-2014. The office sector would see delivery of 800,000 m2 in H2 2014.

CBRE said that an imbalance between supply and demand usually leads initially to an increase in vacancy, but not a decline in rental values. Offices vacancy rates increased from 12% to 14.5% during the second quarter. In industrial and logistics segment which is characterised by structural deficit of supply, this indicator grew up from 3% to 4,8%. Vacancy in retail segment was the most resilient and slightly increased from 2.6% to just 2.9%.

It is 'quite obvious', CBRE said, that vacancy rates will continue their growth against the background of high number of new deliveries and depressed demand.

According to the report's 'high uncertainty' scenario, the office market will witness 16 - 18% vacancy, jumping to 26% for the class A segment, by late 2014 to early 2015. The negative pressure is expected to peak in early 2015, when market will have to absorb large volume of new delivery. After this, the market is expected to start the process of recovery.

Vacancy may reach 8 -10% in the industrial and logistics segment by the end of 2014 . In order to reduce this to 4-5%, developers will have to adjust their delivery plans to 500,000 m2 for 2015. The retail sector may see a vacancy rate of 5-6% of total stock.

COMMENT
The flow of negative news about commercial real estate market indicators in Russia is expected to continue until the second quarter of 2015.

Valentin Gavrilov, director of research for CBRE Russia said that Russian real estate could avoid a substantial dip in terms of vacancy and general market instability if there is positive economic growth in 2015 and steps are taken to improve geopolitical situation. 'In the worst case scenario tenants’ opportunities to secure mid-term low rental rates will not be limited to H1 2015 and will extend further, following a theoretically possible recession in 2015.'