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Chris MacLernon, Chief Operating Officer at Colliers International for the EMEA Region in CRE interview

The key risk of the Russian real estate market today is its obscure future. Will the market become even more insular? What new sanctions will be imposed? How far will the East and the West drift apart? Investors ask themselves all these questions and go on sitting on their hands. Yet in case of stabilisation opportunities in terms of capital investments will practically be unlimited, assures Chris McLernon, Chief Operating Officer at Colliers International for the EMEA Region.
– The Russian real estate market has recently found itself amidst a period of immense change, not least as a result socio-political controversy in 2014. The attitude of western companies towards investment into Russia significantly deviated of late, as the imposed sanctions further complicate the relationship between internal and external players. It is an interesting time to take stock and consider how the situation is likely to play out over the coming months, and how Russia’s position in the EMEA’s real estate landscape, stands up to that of other nations.

– I believe, whatever is happening in Russia today, its potential and capacity for growth remains rather of important note for the wider European property scene. True, Russia experiences a challenging period in its history now, but we perceive it as an opportunity to increase our market share and are actively investing in Russian business. Western investors are indeed cautious now and stabilization will take some time. But as stability returns, so too will the investment community. In Russia, compared to some other European nations, there is limited supply in the segment of quality offices, retail centres and industrial facilities, which makes the projected financial performance extremely attractive for international investors. For the time being, however local investors are prevailing. The most critical factor today is uncertainty. Will the market become increasingly closed? What new sanctions will be imposed? How far will the East and the West distance from one other? All these are questions the investment community is asking from the sidelines. In a more stable future market, the potential of capital investments will increase dramatically and move further up the risk curve. Entry to the Russian market is accompanied by risk, but there is a strong case for the potential profitability which could ensue. For now, foreign investors will take a pause; not dismissing this market, but sitting on their hands and preferring other locations in Eastern Europe, such as the Czech Republic, Poland, Hungary and Romania.

– The political crisis in Ukraine also resulted in restricted access to the western capital. What investors will the Russian market work with in the mid-term outlook?

– The influence of socio-political events is not as fearful as the media portrays. However, we should bear in mind that situation around Ukraine has been the most significant conflict in Eastern Europe for several decades. The main impact has been a slowdown in transactional activity and local currency depreciation, which has had a negative effect on tenants, especially in retail. Their core business implies costs denominated in foreign currency (including import of goods and rental rates) and their income is denominated in Russian Rubles. If you look at the current investment deals, the announced intentions of international investors such as Hines and Morgan Stanley, it becomes clear that there is some movement on the market. Take, for example, the recent news that Goldman Sachs is to acquire another 6% stake in the development company O1 Properties, having increased its share to 12%. This acquisition shows that overseas institutional investors see great potential in the Russian real estate market.

– What alternative sources of financing are available on the Russian market: pension funds, venture funds, etc.?

– In the last several months we saw that major Russian non-state pension funds have started to look closely at the investment opportunities in commercial real estate. Recently pension funds have been able to acquire real estate assets through Russian SPV acquisition and given large amounts of accumulated capital to enable them to become one of the major players on the Russian real estate market. Further, more and more private local investors are becoming active in the real estate market in an attempt to diversify their business through low risk profile investments. I also believe that we’ll continue to see a growing influence of Asia and in particular, China. As we have seen in London, Paris, Germany, we could, given proper investment strategy and respective opportunities, see Chinese capital in Russia as well.

– What are your recommendations in regard to short-term investments?

– Due to the unstable geo-political situation, a lot of property owners have tried to dispose of their assets at lucrative prices, making it a good time to be active when others are fearful and a good time to look for good investment cases in the Russian market.

– What segments in Russia are the least “loaded” and the easiest for entry?

– There are empty niches in each of the segments – that’s for sure. The hotel segment deserves a special mention, since it is definitely not overcrowded and has a lot of empty niches – this is evident above all from the prices on quality rooms at hotels. I also believe online retail has great prospects in Russia. This in turn opens new opportunities for industrial real estate. Growth in this market has stunted, but it has serious potential and promises attractive yields.

– Does Colliers International change its strategy in Russia with an eye to the new political and economic context? Does your portfolio of services undergo any changes? Or is everything stable?

– We’ve been in Russia for 20 years and in general we’ve learned to level-off various economic snags in our business during this time. During the past year we initiated a number of structural reforms to be effective even in a challenging situation. Originally we had two businesses in Russia – in Saint Petersburg and in Moscow. Now we have integrated our business to be able to cater to the interests of more than 100 Russian cities, in addition to the two capitals. In the meantime all our systems are integrated within our global network – including all client systems, internal network and our website. Just 5–10 years ago this was a rather isolated office, a self-contained business, but now we are fully integrated. We pin great hopes on Russia. We are expanding the service direction and hunt for the best heads in our sector. Recently we invested in our new office in MIBC Moscow-City.

– Would it be correct to say that the list of your services varies from region to region? Or it is the same range everywhere? Can any services that are not in high demand, say, in the Czech Republic, be popular with your Russian clients?

– We try to provide a full range of services focused above all on the office, industrial and retail sectors. We also want to engage in leasing, investment sales, management, consulting and appraisal. So all the key services related to the above-listed segments are our primary focus.

– If you discussed the Russian market with international investors what would you recommend?

– I believe that if a foreign investor studies the market fundamentals and sees the imbalance of demand and supply or the ample amount of quality assets lacking in the market, this spells excellent opportunities for them. Investors should come and see it for themselves. Besides exciting investment opportunities, the market offers everything necessary for professional business service: consultants, lawyers, tax experts, appraisers, property managers.

– What professional practices, methodologies and technologies do not work properly or are not common on the Russian market for different reasons, as you see it?

– On the whole, the market uses most of the western practices. What this market really lacks is transparent, complete and integrated information on property. In the West buyers and sellers know all details about any particular asset involved in the deal: its former price, current price, why it has changed, what the lease terms are, etc. Transparency facilitates the market understanding in general for investors, and a specific deal in particular. In my opinion, Russia is short of an integrated, transparent and updated database on properties, accessible for broad public. This would be a stride forward for the entire real estate industry. As regards technologies, methodologies and the quality of construction, I believe these have long been here. You know, I was greatly impressed as I walked inside Naberezhnaya Tower in MIBC Moscow-City! Everything is done here at a high level – the top quality of fit-out, repair, facility management. In this sense the real estate market is also subject to globalization.

– Do you like Moscow?

– Yes, very much!

– And what do you like specifically?

– There is an interesting contrast between history and modernity. I’ve always appreciated the balance of local culture and international business. Yesterday I was on a tour of the Red Square and examined St. Basil Cathedral. This is truly unique architecture. At the same time I like MIBC Moscow-City, its innovation and spirit. Russia has a lot of advantages: market size and diversity, signs of economic diversity away from hydrocarbons and banking, long-term development growth capacity in all sectors (especially retail and logistics); large-scale, modern assets, liquid financial markets, solid English-law based legal framework. Disadvantages: different trading bloc and a largely insular market; perception and reality of often autocratic leadership; need for the economy to diversify and open up to external competition. This was starting to happen, but recent political decisions/difficulties have hampered this progress creating inertia amongst the majority of the international investment community. But I hope it is a time issue.