Russia Forum Buzz – Russian Real Estate Sector: Where have We Been, Where do We Go? – a 360 degree view

February 4, 2011

 

Sergey Riabokobylko started the discussion by noting that last year was a turning point for the real estate market in terms of investment deals. Approximately 80% of deals were completed by Russian investors and only 20% by foreign investors.

Tomas Dukala added that foreign investors operate in various markets and Russia is only one of them, so they need to look at Russian in comparison with other markets. Russia looks more attractive than Europe, as it has higher growth and no issues with debt. However, foreign investors are focused on purchasing completed projects, while Russia prefers development deals.

Igor Levit said that investors took a negative view on Russia overall during the crisis and a very negative view on the property market in particular. Before the crisis, property companies were overvalued due to huge demand for this sector. The crisis’ impact was very sharp, apartment sales volumes dropping almost to zero. Developers with the right strategy and moderate debt levels have done relatively well.

Amiran Mutsoev believes that the focus on retail and entertainment centers saved his company during the crisis, as tenants pay a percentage of turnover on top of the fixed rent. During the crisis, people started spending less on expensive goods, but continued visiting malls for entertainment and shopping. As a result, rental income did not suffer much, and low retail space per capita provides potential for future growth.

Sergey Demin agreed that retail property performs well, but projects in all other segments also have a right to live, though careful selection is required. There were two criteria for a developer to successfully make it through the crisis – no change in ownership and no loss of key assets.

Alexander Khaldey remarked that developers are not currently earning such fantastic returns on investments in developments, as was the case before crisis. But high-quality projects in all segments are in demand.

Brian Patterson has had good experience with the Russian property market so far, and believes that high-quality projects have downside protection. There are three key factors to success: good location, high quality and not growing too fast.

Sergey Kuznetsov explained that the construction segment’s contribution to GDP is very large and important, and that residential housing is the largest part. At present, Russia has a very low housing stock per capita and an additional 2 bln m2 of housing stock is required. However, effective demand is only 10% of this amount and is very price elastic. The main goal is to provide a normal return on construction and affordable prices for finished housing simultaneously. This is currently impossible due to the high cost of infrastructure.

In general, the panelists believe that the bottom of the crisis has passed, but the recovery will be slow and will take several years.