Western investors retreat from Russian powerhouse

Prospects for western investment in Russia may be waning, but western retailers still dominate the country’s new retail schemes.

European property investment continues to gather momentum, but the outlook for Russia remains grim following the escalation of its conflict with Ukraine. Indeed, Russia is poised to see a 20% decline in investment activity this year amid growing concerns that the turmoil following Russia’s seizure of Crimea may escalate further, JLL's managing director for Russia Charles Boudet told PropertyEU.

The country, which saw a total of $8.5 bn (€6.2 bn) of commercial property transacted in 2013, has reported a feeble start to the year with no major transactions signed so far. As such, investment volumes are likely to come in at $7 bn in 2014, well below previous years’ figures. Although foreign investment represented 45% of total deals last year, up from 17% in 2012, domestic capital is expected to dominate the market again in 2014.

‘After the acquisition by a number of foreign players like Calpers for Metropolis we saw a build-up in confidence last year with several new players looking to enter the market. This situation came to a halt in early 2014 with the uncertainty surrounding Ukraine, and hopefully investors’ plans have only been postponed until the situation improves,’ Boudet noted. Russia’s property market is also suffering from a depreciation of the rouble, which slipped 15% so far this year, he added. 'This is having an impact on retail rents which are denominated in dollars,' Boudet commented, adding that as a result rents are likely to soften in the near term.

NON-WETSERN CAPITAL
Prospects for western investment in Russia may be waning, but the flow of international capital from non-western sources will continue, predicted Nikolay Kazanskiy, managing partner for Russia at Colliers International. ‘We’re still seeing strong interest from investors from China, Israel, the Arab world, Azerbaijan and other republics in Middle Asia. For these investors, Moscow is still an understandable market.’ There is little or no speculative money in Russia, he added. ‘The amount of Chinese capital invested in Russia has doubled since 2008 and is much larger than that of Morgan Stanley. And investors like Hines know this is not a time to leave. They already entered in 1998 and know how to manage their risks. This type of investor will stay.’

In an exclusive interview with PropertyEU at the Mipim real estate fair in Cannes earlier this year, Moscow's deputy mayor Marat Khusnulin likewise downplayed the impact of the Crimean crisis on real estate development and investment in the Russian capital. Western investors may be thinking twice about stepping into Russia due to the conflict in Ukraine, but investors from other corners of the world including China and the Middle East remain interested in the opportunities in Moscow, he maintained. 'The development opportunities are immense. The numbers speak for themselves.'

Khusnulin cited a recent survey by the Moscow Urban Forum, an event held annually by the Moscow city government since 2011 in conjunction with the World Bank and the Urban Land Institute. According to the survey, market demand for real estate is Moscow is very high and prices are rising. There is still a large unused resource, he said, pointing to industrial areas or brownfield sites around the city. 'These Industrial areas occupy about 16% of the city territory, or about 15,000 hectares.' Aside from the residential sector, a strong demand also exists for retail and logistics facilities, he added.

In terms of real estate stock, Russia remains undersupplied, concurred Colliers’ Kazansky. ‘The provision of retail still two times less than it should be for a country of this size. The same is true for industrial property and offices. Economic growth may be slow, but we have a lot of older stock that needs to replaced.’ Kazansky views the outflow of US money as an opportunity for local investors. ‘We’re seeing more deals with Russian investors. Some of them who have been investing outside Russia will go back and buy up some of the bigger assets.’

BUSINESS AS USUAL
While all the major agents are feeling the impact of shrinking deal volume in Russia on their capital markets fees, it is business as usual on other fronts. In early April, JLL announced it has won a mandate from MoscowAMMA Development to lease Avia Park shopping centre, which is being billed as the biggest shopping and entertainment centre in Russia. The 225,000 m2 scheme is currently under construction and scheduled for opening in Q4 2014.

And while western investors may be retreating from Russia, the same is not true of western retailers. Anchor tenants include leading French brands such as hypermarket chain Auchan and sporting goods hypermarket Decathlon, German electronics retailer Media Markt and DIY chain OBI, US home furniture store Hoff and UK department store Debenhams. Western brands such as Adidas, Reebok and Yves Rocher also dominate the Reutov Park shopping centre near Moscow, the first mall in Reutov, where JLL has been appointed as property manager.