| 17 August 2007 |
 
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The results from the first half of 2007 reveal that Russia is the leading country in Eastern Europe in attracting Foreign Direct Investments into real estate.
Large western investment funds and banks, such as Morgan Stanley, Merrill Lynch, Goldman Sachs, Immoeast, Quinn Group, JER Partners, Rutley Russia, and many others, have announced their plans to invest millions of dollars into commercial and residential real estate in Moscow, St Petersburg and the other big Russian cities.
Along with large potential in all of the real estate market segments, institutional investors are attracted by high yields and shorter, in comparison with the rest of Europe, return on investment periods.
“At the present time, the rates of capitalization in Russia is substantially higher than those in the rest of Europe. Primary yields for Class A offices being purchased by investors are estimated to be 8 to 10,5 per cent, for high quality retail premises – 9 to 11 per cent, industrial – 10 to 12 per cent,” says the Managing Director of Knight Frank Russia and CIS, Jeremy Oates.
Based on market yields Russia is followed by Poland, Czech Republic and Romania. The annual rate of capitalization on these markets varies from 6 to 8 per cent.
Due to the increased investment demand on the Russian real estate market, yields are slowly beginning to compress. Russian legislation, particularly in the area of taxation, significantly influences this process and is different to the legislations in place in other European countries.
“Many Russian developers prefer to keep the ownership of the properties until the situation on the market enables them to demand higher prices. For example, in the office segment of the Moscow market, the sale prices for Class A properties went up by 20 – 30 per cent, and this is an extremely good indicator,” notes Mr. Oates.
“The major problems that face foreign investors in Russia are the lack of completed projects that meet the market requirements, and, the high prices demanded by the owners. In a situation like this, investors often agree to pay higher prices to finish uncompleted projects before they enter the market,” says Mr. Oates.
Investors can enter into projects that are in the earliest stages of development by creating joint enterprises with Russian companies, as an alternative to purchasing uncompleted projects. Such methods are actively practised by a number of investors including Raven Russia, London Regional Property Fund, Quinn Group, TriGranit and others.
“Usually western partners which participate in financing a project, share their experiences and technology, whereas their Russian counterparts take the administrative responsibility of obtaining all the necessary documentation, forming agreements with sub-contractors and so on,” explains Evgeniy Semyonov, Director of Capital Markets at Knight Frank Russia and CIS.
The retail sector of the real estate markets still attracts the highest levels of investment. According to research undertaken by Knight Frank international consultancy, this sector experienced the largest number of transactions in the 2006 – first half of 2007 period.
The main reason for this is the fact that the retail sector remains the most popular one among tenants, which, in turn, is due to the fact that the levels of domestic consumption and real disposable incomes are rising.
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