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CEE Real Estate Investment Market Surges 22% to €11 Billion in 2013

For the third straight year Russia led the real estate market of Central and Eastern Europe. The total volume of transactions in CEE in 2013 reached €11 billion, with Russian investments accounting for €4.9 billion or 45% of the market, according to Colliers International’s research report “CEE Market Investment Potential: Focus on Russia”. The overwhelming majority of Russian investment deals were transacted on the Moscow market, which offers capitalizations rates that are substantially higher than other CEE markets.
In 2013 the post-crisis recovery continued in CEE markets, and the dominant markets in the region remained Russia (45%), Poland (28%) and the Czech Republic (10%) – continuing the post-crisis trend by accounting for a collective 83% of market activity. In 2011, these three countries accounted for 71% of the market and 87% in 2012.

Last year Russia saw commercial real estate transactions totalling €4.9 billion, with approximately three-fourths of this sum coming in deals of €133 million or more. The country’s largest cities accounted for the lion’s share of the transactions, with Moscow and its immediate suburbs accounting for 89% and St. Petersburg accounting for 4%.

The Colliers International report notes that if 10 years ago the Russian real estate investment market accounted for well under 5% of transactions in CEE, then in the post-crisis years the country’s share of investment transactions has grown to 40-45%. Experts of Colliers International also note that the average deal size in Russia is 2.5 times the average in Poland and Romania and 3 times the average in the Czech Republic.

Several factors contribute to the large deal size in the Moscow region. The first is the size and quality of the properties, which are largely shopping centres, business centres and warehouse complexes serving Russia’s largest consumer market. Additionally, deal size is linked both to debt availability and to the scope and depth of the investment funds actively investing in the Moscow market.

Another key feature of the Russian market is the diverse pool of investors executing deals. The top 10 investors represent 7 different countries: Russia, US, Austria, Czech Republic, Germany, UK and Holland. At the same time, the majority of investors have purchased only one real estate asset in Russia to date and many of them represent new institutional capital.

“While Russia has higher risk factors, real and perceived, this is priced into yields,” notes Damian Harrington, Regional Director of Research for Eastern Europe, Colliers International. “In the office segment, for example, Moscow properties have a discount of 300 bps to the German market and discount of approximately 200 bps compared to such peers as Madrid, Warsaw and Prague. Over time we expect to see these gaps contract.”

Risks are also mitigated through reliance on English law, experts note. Moreover, the property taxation system has become more transparent recently thanks to a transition to calculations based on cadastral value, which more accurately and uniformly reflects market value.

“The long-term trends in Russia and in Europe in general point to an increase in investment in commercial properties. At the European level, commercial real estate yields now have a substantial premium to customary fixed-income instruments, like German bonds,” Harrington explains. “Funds are and will continue to reallocate in favour of commercial real estate investments. And both Russian and foreign investors are well positioned to participate in this, as long-term growth is expected in the retail and logistics segments supported by structural demand on the market.”

The level of saturation of quality retail space in Moscow continues to substantially lag peers in CEE. The Moscow market – Russia’s top retail market – remains well behind European peers in terms of shopping centre volume per capita with only 243 sqm of modern shopping centre facilities per 1000 residents, compared to a European average of between 350 sqm (Western Europe) – 550 sqm (Nordic markets). This suggests significant expansion of both retail and warehousing space is sustainable in Moscow – a doubling of space seems reasonable, taking it to a similar level as St. Petersburg, which is nearly twice (484 sqm) the size of Moscow in per capita terms. However, slower overall economic growth may very well flatten growth in retail and logistics stock.

“In the long-term perspective the Russian market will become comparable in terms of real estate investment volumes to such developed markets as London and Paris. At present it has emerged as the regional leader and its investment volume is comparable to all other Eastern European countries together. Stable macroeconomic indicators, the absence of foreign debt, a fast-growing retail market, an attractive risk-yield balance along with substantial liquidity supported by Russian banks all add up to substantial interest on the part of international and local investors in commercial real estate in Russia. Moreover, Moscow is the Europe’s most populous city and the residents of the Russian capital spend a higher share of their income on goods and services (60% of income compared to 30% in other countries), while saturation of retail space in Moscow remains comparatively low. This explains not only the active development of new shopping centres but also the appearance of a large number of high-class logistics complexes in the Moscow region,” notes Sayan Tsyrenov, Director of the Capital Markets Department, Colliers International Russia.