Sanctions will have 'significant impact' on Russian real estate - JLL

The expanded US and EU sanctions against Russia will have a 'significant impact' on the Russian commercial real estate market, JLL has warned.

The adviser outlines three main risks in the August edition of its Pulse report as a result of the sanctions imposed between 16 and 31 July: the cost of debt for Russian state banks will increase; the economy and the ruble currency will come under pressure and Russian real estate companies will be shut out of European equity capital markets.

'The key sanction that concerns us is the limitation on access to US and EU debt markets for state banks. As risk perception remains elevated, the effective closure of the EU as an Initial Public Offering (IPO) and Secondary Public Offering (SPO) destination for Russian companies will also have implications alongside the broad deterioration in the macro-economy,' Tom Mundy, JLL's head of research for Russia and CIS, wrote.

The big unknown that will determine the impact of the sanctions is the question of timing, Mundy said.

'In our view if the sanctions are short-lived and Russia’s relationship with the US and the EU can be resolved or improved over the next few months, and the sanctions lifted before the end of the year, then the impact will be not be too severe. Predictions are challenging given the fluidity of events in Ukraine, however, we remain confident that come Autumn energy issues will take precedence and sanctions will give way to other priorities.'

SHAKY FUNDAMENTALS
JLL cautioned that the longer the sanctions persist the greater the risks to the economy and to the commercial real estate market. Vacancy rates across all segments of the market have been under pressure for some time, and rents have also started to be squeezed. On the other hand Russia, Mundy said, was fortunate to benefit from a huge internal market – certainly in terms of the country's €15 bn retail sector - and significant underpenetration of stock relative to European levels.

'The current sanctions will inevitably cause some dislocation, and some pain, but, assuming they are short-lived – which we believe they will be – we expect investment levels to pick up in 2015, consumer demand pressures to retreat and ultimately, as Russian risk perception moderates, for European IPO markets to open again,' JLL's Mundy wrote.

The Pulse report was drawn up before Russia announced retaliatory sanctions against the US and EU.

Click here to read the full Pulse report (which was drawn up before Russia announced retaliatory sanctions)