The inflow of Chinese capital into Russia’s real estate market may see a significant increase this year as Chinese investors find ways of mitigating currency risk.
‘With the prospect of the Chinese yuan weakening amid a tightening of the Federal Reserve’s interest rate, we expect investors to diversify outside of China,” says Head of Research for JLL Russia, Olesya Dzuba. “A number of local deals with foreign players, including Chinese capital, may reach advanced stages by the end of the year.”
For the last five years, approximately 20 percent of real estate investments in Russia have been undertaken by foreign investors. In the first half of this year, foreign companies accounted for 21.4 percent or US$467 million of overall investment volumes and, according to JLL data, approximately 38 percent of that total came from Asian investors.
By the end of this year, Dzuba expects total real estate transaction volumes in Russia to reach about US$4.5 billion – an uptick from 2016’s US$4.3 billion.
“There is a noticeable increase in the presence of foreign investors with more Western, Asian and Middle Eastern companies enquiring about quality Russian assets.”
In June 2017, Chinese company Fosun Group closed its first real estate acquisition in Russia with the agreement to buy office complex Vozdvizhenka Center, known as Voentorg. This transaction, facilitated by JLL, is the first Chinese investment in Russian real estate since 2010 and accounted for a large share of Asian real estate capital inflow for the first half of this year, according to Dzuba.
Asian investors were not particularly active in the Russia’s commercial real estate until 2014 when Western sanctions were put in place over the country’s annexation of the Crimea region. The sanctions forced the government and domestic businesses to focus on attracting capital from Asia and other parts of the world.
As the country recovers from its recent economic downturn, with oil prices and the value of the ruble rising from their lows, foreign investors are beginning to look for potential opportunities. Russia’s real estate yields compare favourably against other cities , according to JLL. Prime yields for real estate in Moscow registered about 10 percent in the first quarter of this year, higher than Hong Kong’s 3.1 percent and 5.7 percent in Shanghai.
As the country emerges from recession, Moscow could potentially join Milan and Sydney in the top global rankings of prime office capital value growth in 2017, according to JLL’s Global Market Perspective report.
Recent market fundamentals have also shown signs of improvement. The vacancy rate is on a downtrend, slipping from 15.5 percent in the fourth quarter of 2016 to 15.1 percent during the first quarter of this year—the lowest since the second quarter of 2014. Prime rents are sitting around US$600–750 (RUB 33,000 – 42,000) per square meter while asking rents for Class A premises are around US$400–670 (RUB 22,000 – 38,000) per square meter.
For the first quarter of this year, completions of office space dropped 63 percent, while a delivery of 63,000 square meters of space was postponed. Despite these delays, JLL maintains that completion in 2017 will hit 542,000 square meters.
While buying interest from foreign investors has increased, Russian buyers have so far dominated market activity primarily because they have a better understanding of the market, says Dzuba.
“Global institutional investors continue to be keen on the country, and while availability of premium grade assets is limited, there are still plenty of opportunities for foreign investors,” she says. “High returns and the overall expectation of economic growth and real estate recovery makes Russia one of the most attractive investment markets from a yield perspective.”
Head of Research, JLL Russia